Arbutus Biopharma Corp 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Ernst & Young, LLP, Independent Registered Public Accounting Firm - PCAOB ID: 42 70 Consolidated Balance Sheets at December 31, 202 1 and 20 20 72 Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2021 and 2020 73 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2021 and 2020 74 Consolidated Statements of Cash Flows for the Years Ended December 31, 2021 and 2020 75 Notes to Consolidated Financial Statements 76 69 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Arbutus Biopharma Corporation Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Arbutus Biopharma Corporation (the Company) as of December 31, 2021 and 2020, and the related consolidated statements of operations and comprehensive loss, stockholders' equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 70 Valuation of contingent consideration liability Description of the Matter As discussed in Note 10 to the consolidated financial statements, the Company’s contingent consideration liability, which consists of sales-based milestones and royalties, resulting from the acquisition of Enantigen in 2014, is remeasured to its estimated fair value each reporting period. As of December 31, 2021, the contingent consideration liability was $5.3 million. Auditing the valuation of the contingent consideration liability was complex and highly judgmental due to the significant estimation required in determining the fair value. In particular, the fair value estimate was sensitive to significant assumptions such as the probability of successfully commercializing a treatment for the hepatitis B virus, the timing and amount of future revenues related to commercial sales, and the discount rate. These assumptions are affected by expectations about future industry, regulatory, market or economic conditions and are forward-looking and inherently uncertain. How We Addressed the Matter in Our Audit To test the estimated fair value of the contingent consideration liability, we performed audit procedures that included, among others, assessing the terms of the arrangement, evaluating the methodology used, and testing the significant assumptions discussed above used by the Company in its analysis. We also compared the significant assumptions to current industry, market and economic trends to corroborate the Company’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the contingent consideration liability that would result from changes in the significant assumptions. /s/ Ernst & Young LLP We have served as the Company's auditor since 2019. Philadelphia, Pennsylvania March 3, 2022 71 ARBUTUS BIOPHARMA CORPORATION Consolidated Balance Sheets (Expressed in thousands of US Dollars, except share and per share amounts) December 31, 2021 December 31, 2020 Assets Current assets: Cash and cash equivalents $ 109,282 $ 52,251 Investments in marketable securities, current 46,035 71,017 Accounts receivable 899 1,312 Prepaid expenses and other current assets 4,445 3,124 Total current assets 160,661 127,704 Property and equipment, net of accumulated depreciation 5,983 6,927 Investments in marketable securities, non-current 35,688 — Right of use asset 2,092 2,405 Other non-current assets 61 44 Total assets $ 204,485 $ 137,080 Liabilities and stockholders' equity Current liabilities: Accounts payable and accrued liabilities $ 10,838 $ 9,151 Lease liability, current 383 390 Total current liabilities 11,221 9,541 Liability related to sale of future royalties 16,296 19,554 Contingent consideration 5,298 3,426 Lease liability, non-current 2,231 2,593 Total liabilities 35,046 35,114 Stockholders' equity Preferred shares Authorized: unlimited number without par value Issued and outstanding: 0 (December 31, 2020: 1,164,000 ) — 149,408 Common shares Authorized: unlimited number without par value Issued and outstanding: 144,987,736 (December 31, 2020: 89,678,722 ) 1,286,636 985,939 Additional paid-in capital 65,485 60,751 Deficit ( 1,134,347 ) ( 1,045,961 ) Accumulated other comprehensive loss ( 48,335 ) ( 48,171 ) Total stockholders' equity 169,439 101,966 Total liabilities and stockholders' equity $ 204,485 $ 137,080 See accompanying notes to the consolidated financial statements. 72 ARBUTUS BIOPHARMA CORPORATION Consolidated Statements of Operations and Comprehensive Loss (Expressed in thousands of US Dollars, except share and per share amounts) Year ended December 31, 2021 2020 Revenue Collaborations and licenses $ 4,880 $ 3,519 Non-cash royalty revenue 6,108 3,395 Total revenue 10,988 6,914 Operating expenses Research and development 65,502 49,338 General and administrative 17,136 14,845 Change in fair value of contingent consideration 1,872 473 Site consolidation — 64 Total operating expenses 84,510 64,720 Loss from operations ( 73,522 ) ( 57,806 ) Other income (loss) Interest income 127 741 Interest expense ( 2,857 ) ( 4,011 ) Equity investment loss — ( 2,545 ) Foreign exchange gain (loss) 5 ( 124 ) Total other loss ( 2,725 ) ( 5,939 ) Net loss $ ( 76,247 ) $ ( 63,745 ) Items applicable to preferred shares Dividend accretion of convertible preferred shares ( 12,139 ) ( 12,123 ) Net loss attributable to common shares $ ( 88,386 ) $ ( 75,868 ) Loss per share Basic and diluted $ ( 0.83 ) $ ( 1.00 ) Weighted average number of common shares Basic and diluted 106,242,452 75,835,378 Comprehensive income (loss) Unrealized (loss) gain on available-for-sale securities $ ( 164 ) $ 14 Currency translation adjustments — 44 Comprehensive loss $ ( 76,411 ) $ ( 63,687 ) See accompanying notes to the consolidated financial statements. 73 ARBUTUS BIOPHARMA CORPORATION Consolidated Statement of Stockholders’ Equity (Expressed in thousands of US 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 at 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 — 12,123 — — — ( 12,123 ) — — Stock-based compensation — — — — 6,145 — — 6,145 Certain fair value adjustments to liability stock option awards — — — — 18 — — 18 Issuance of common shares pursuant to the Open Market Sales Agreement — — 24,728,368 86,297 — — — 86,297 Issuance of common shares pursuant to exercise of options — — 170,040 1,107 ( 658 ) — — 449 Unrealized gain on available-for-sale securities — — — — — — 14 14 Currency translation adjustment — — — — — — 44 44 Net loss — — — ( 63,745 ) — ( 63,745 ) Balance at December 31, 2020 1,164,000 $ 149,408 89,678,722 $ 985,939 $ 60,751 $ ( 1,045,961 ) $ ( 48,171 ) $ 101,966 Accretion of accumulated dividends on Preferred Shares — 12,139 — — — ( 12,139 ) — — Conversion of Preferred Shares into Common Shares ( 1,164,000 ) ( 161,547 ) 22,833,922 161,547 — — — — Stock-based compensation — — — — 6,385 — — 6,385 Certain fair value adjustments to liability stock option awards — — — — 263 — — 263 Issuance of common shares pursuant to the Open Market Sales Agreement — — 31,571,036 134,665 — — — 134,665 Issuance of common shares pursuant to exercise of ESPP options — — 196,335 817 ( 356 ) — — 461 Issuance of common shares pursuant to exercise of options — — 707,721 3,668 ( 1,558 ) — — 2,110 Unrealized loss on available-for-sale securities ( 164 ) ( 164 ) Net loss — — — — — ( 76,247 ) — ( 76,247 ) Balance at December 31, 2021 — $ — 144,987,736 $ 1,286,636 $ 65,485 $ ( 1,134,347 ) $ ( 48,335 ) $ 169,439 See accompanying notes to the consolidated financial statements. 74 ARBUTUS BIOPHARMA CORPORATION Consolidated Statements of Cash Flows (Expressed in thousands of US Dollars, except share and per share amounts) Year ended December 31, 2021 2020 OPERATING ACTIVITIES Net loss $ ( 76,247 ) $ ( 63,745 ) Non-cash items: Depreciation 1,753 1,978 Stock-based compensation expense 6,424 6,161 Unrealized foreign exchange gains ( 5 ) ( 56 ) Change in fair value of contingent consideration 1,872 473 Net equity investment loss — 2,545 Non-cash royalty revenue ( 6,108 ) ( 3,395 ) Non-cash interest expense 2,850 3,957 Net accretion and amortization of investments in marketable securities 999 210 Net change in operating items: Accounts receivable 413 ( 108 ) Prepaid expenses and other assets ( 1,025 ) ( 752 ) Accounts payable and accrued liabilities 1,911 1,666 Lease liabilities ( 369 ) ( 375 ) Net cash used in operating activities ( 67,532 ) ( 51,441 ) INVESTING ACTIVITIES Purchase of investments in marketable securities ( 82,219 ) ( 85,578 ) Disposition of investments in marketable securities 70,350 73,398 Investment in Genevant — ( 2,500 ) Acquisition of property and equipment ( 809 ) ( 229 ) Net cash used in investing activities ( 12,678 ) ( 14,909 ) FINANCING ACTIVITIES Issuance of common shares pursuant to exercise of options 2,110 449 Issuance of common shares pursuant to exercise of ESPP options 461 — Issuance of common shares pursuant to the Open Market Sales Agreement 134,665 86,297 Net cash provided by financing activities 137,236 86,746 Effect of foreign exchange rate changes on cash and cash equivalents 5 56 Increase in cash and cash equivalents $ 57,031 $ 20,452 Cash and cash equivalents, beginning of period $ 52,251 $ 31,799 Cash and cash equivalents, end of period $ 109,282 $ 52,251 Supplemental cash flow information Preferred shares dividends accrued $ ( 12,139 ) $ ( 12,123 ) See accompanying notes to the consolidated financial statements. 75 ARBUTUS BIOPHARMA CORPORATION Notes to Consolidated Financial Statements (Tabular amounts in thousands of US Dollars, except share and per share amounts) 1. Organization 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 other coronaviruses. In HBV, the Company is developing an RNA interference (“RNAi”) therapeutic, oral capsid inhibitor, oral PD-L1 inhibitor, and oral RNA destabilizer that it intends to combine to provide 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 December 31, 2021, the Company had an aggregate of $ 191.0 million in cash, cash equivalents and investments in marketable securities. In January 2022, the Company received a $ 40 million upfront payment and a $ 15 million equity investment from Qilu Pharmaceuticals Co., Ltd. (“Qilu”) as part of a technology transfer and exclusive licensing agreement to develop and commercialize AB-729 in China. The Company had no outstanding debt as of December 31, 2021. 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 The impact of the COVID-19 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. Measures implemented around the world in attempts to slow the spread of COVID-19 have had, and will likely continue to have, a major impact on clinical development, at least in the near-term, including shortages and delays in the supply chain and prohibitions in certain countries on enrolling patients in new clinical trials. While the Company has been able to progress with its clinical and pre-clinical activities to date, it is not possible to predict if the COVID-19 pandemic will materially impact the Company’s plans and timelines in the future. 76 2. Significant accounting policies Basis of presentation and principles of consolidation These consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and include the accounts of Arbutus Biopharma Corporation and its two wholly-owned subsidiaries, Arbutus Biopharma, Inc. and Arbutus Biopharma U.S. Holdings, Inc. All intercompany balances and transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the current year presentation, such as the reclassification of depreciation expense to research and development and general and administrative expenses. In February 2021, Arbutus Biopharma US Holdings, Inc. merged into Arbutus Biopharma, Inc. with Arbutus Biopharma, Inc. continuing its legal existence and Arbutus Biopharma US Holdings, Inc. ceasing to exist. Use of estimates The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions about future events that affect the reported amounts of assets, liabilities, revenue, expenses and contingent liabilities as of the end or during the reporting period. Actual results could significantly differ from those estimates. Significant estimates in the accompanying consolidated financial statements impact contingent consideration, income tax recoveries, stock-based compensation, clinical trial accruals and the sale of future royalties liability. Cash and cash equivalents Cash and cash equivalents are all highly liquid instruments with an original maturity of three months or less when purchased. Cash equivalents are recorded at cost plus accrued interest. The carrying value of these cash equivalents approximates their fair value. Investments in marketable securities The Company’s short-term investments consist of marketable securities that have original maturities exceeding three months and remaining maturities of less than one year. The Company classifies investments with remaining maturities of one year or longer as non-current. These investments are accounted for as available-for-sale securities and are reported at fair value, with unrealized gains and losses reported in other comprehensive loss, until their disposition. Realized gains and losses from the sale of marketable securities, if any, are calculated using the specific-identification method, and are recorded as a component of other income or loss. The Company reviews its available-for-sale securities at each period end to determine if they remain available-for-sale based on the Company’s current intent and ability to sell the security if it is required to do so. Declines in value judged to be other-than-temporary are included in interest income or expense in the Company’s statements of operations and comprehensive loss. As of December 31, 2021, the recorded value of the Company’s investments in marketable securities was deemed to be recoverable in all respects. All investments are governed by the Company’s Investment Policy approved by the Company’s board of directors. Foreign currency translation and functional currency conversion The Company’s functional currency is the United States dollar. M onetary assets and liabilities denominated in foreign currencies are translated into United States dollars using exchange rates in effect at the balance sheet date. Opening balances related to non-monetary assets and liabilities are based on prior period translated amounts, and non-monetary assets and non-monetary liabilities are translated at the approximate exchange rate prevailing at the date of the transaction. Revenue and expense transactions are translated at the approximate exchange rate in effect at the time of the transaction. Foreign exchange gains and losses are included in the statement of operations and comprehensive loss as foreign exchange gains. 77 Investment in Genevant As the result of a recapitalization of Genevant in July 2020, Arbutus’ ownership interest in Genevant decreased to approximately 16 %. Due to Arbutus’ loss of significant influence with respect to Genevant as a result of the recapitalization, Arbutus discontinued the use of the equity method of accounting for its interest in Genevant. Ownership interests that do not confer the ability to exercise significant influence are accounted for at fair value, except when the investment does not have a readily-determinable fair value. In that case, the investment is carried at cost, less any impairment. The carrying value is subsequently adjusted to fair value based on any observable price changes. Following the recapitalization, Arbutus 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 similar Genevant securities. As of December 31, 2021, the carrying value of Arbutus’ investment in Genevant was zero and Arbutus owned approximately 16 % of the common equity of Genevant. See note 5 for more information. Property and equipment Property and equipment is recorded at cost less impairment losses and accumulated depreciation. The Company records depreciation using the straight-line method over the estimated useful lives of the capital assets as follows: Useful Life (Years) Laboratory equipment 5 Computer and office equipment 2 to 5 Furniture and fixtures 5 Leasehold improvements are depreciated over their estimated useful lives but in no case longer than the lease term, except where lease renewal is reasonably assured. Property and equipment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If such a review should indicate that the carrying amount of long-lived assets is not recoverable, then such assets are written down to their fair values. Revenue from collaborations and licenses 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, development and manufacturing services. Under such agreements, the Company is generally eligible to receive non-refundable upfront payments, funding for research, development and manufacturing services, milestone payments, and royalties. The Company’s collaboration agreements fall under the scope of 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 606 for some aspects, including for the delivery of a good or service (i.e., a unit of account). ASC 606, Revenue From Contracts with Customers (“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 78 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. Leases The Company accounts for its leases under ASC 842, Leases , which generally requires the recognition of operating and financing lease liabilities with corresponding right-of-use assets on the balance sheet. See note 6 for more information. Research and development costs Research and development costs include compensation and benefits for research and development employees, an allocation of overhead expenses and costs associated with materials and supplies used in clinical trials and research and development, outside contracted services including clinical and pre-clinical study costs, legal, regulatory compliance and fees paid to consultants or outside parties for research and development activities performed on the Company’s behalf. Such costs are charged to expense in the period in which they are incurred. Research and development costs that are paid in advance of performance or receipt are recorded as prepaid expense and are amortized over the period that the services are performed. 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 years ended December 31, 2021 and 2020, since the effect of including potential common shares would be anti-dilutive. For the year ended December 31, 2021, potential common shares of 11.4 million pertaining to outstanding stock options were excluded from the calculation of net loss attributable to common shareholders, per share. A total of approximately 31.8 million outstanding stock options and if-converted Series A participating convertible preferred shares (“Preferred Shares”) were excluded from the calculation for the year ended December 31, 2020. On October 18, 2021, the Company’s outstanding Preferred Shares were converted into 22,833,922 common shares. Prior to that date, the Company followed the two-class method when computing net loss attributable to common shareholders per share as the Preferred Shares, as further described in note 12, met the definition of participating securities. The Company’s Preferred Shares entitled the holders to participate in dividends but did not require the holders to participate in losses of the Company. Accordingly, net losses attributable to holders of the Company’s common shares were not allocated to holders of the Preferred Shares. 79 The following table sets out the computation of basic and diluted net loss attributable to common shareholders per share: For the year ended December 31, 2021 2020 (in thousands, except share and per share amounts) Numerator: Allocation of distributable earnings $ — $ — Allocation of undistributable loss ( 88,386 ) ( 75,868 ) Allocation of net loss attributed to common shareholders $ ( 88,386 ) $ ( 75,868 ) Denominator: Weighted average number of common shares - basic and diluted 106,242,452 75,835,378 Basic and diluted net loss attributable to common shareholders per share $ ( 0.83 ) $ ( 1.00 ) See note 12 and note 13 for more information about the Company’s common shares. Deferred income taxes Income taxes are accounted for using the asset and liability method of accounting. Deferred income taxes are recognized for the future income tax consequences attributable to differences between the carrying values of assets and liabilities and their respective income tax bases and for loss carry-forwards. Deferred income tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the periods in which temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax laws or rates is included in earnings in the period that includes the enactment date. When realization of deferred income tax assets does not meet the more-likely-than-not criterion for recognition, a valuation allowance is provided. Stock-based compensation The Company measures and recognizes compensation expense for all share-based compensation arrangements based on estimated fair values. The Company uses the Black-Scholes option valuation model to estimate the fair value of stock options at the date of grant. The Black-Scholes option valuation model requires the input of subjective assumptions to calculate the value of stock options. For those assumptions, the Company uses historical data and other information to estimate the expected price volatility and risk free interest rate for all awards. The expected life of stock options granted are estimated to be five years for employees and six years for directors and executives, based on the Company’s historical experience. Assumptions on the dividend yield are based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. Expense is recognized over the vesting period for all awards and commences at the grant date for time-based awards and upon the Company’s determination that the achievement of such performance conditions is probable for performance-based awards. Forfeitures are recognized as they occur. For the Company’s Employee Stock Purchase Plan, the fair value of the right to acquire stock at a discounted price under the plan is calculated using the Black-Scholes valuation model. Expense is recognized over the period the employee contributes to the plan through payroll deductions. The Company accounts for liability-classified stock option awards (“liability options”) under ASC 718 - Compensation - Stock Compensation (“ASC 718”), under which awards of options that provide for an exercise price that is not denominated in: (a) the currency of a market in which a substantial portion of the Company’s equity securities trades, (b) the currency in which the employee’s pay is denominated, or (c) the Company’s functional currency, are required to be classified as liabilities. As of January 1, 2016, the Company changed its functional currency to US dollars, which resulted in certain stock option awards with exercise prices denominated in Canadian dollars having an exercise price that is not denominated in the Company’s functional currency. As such, the historic equity classification of these stock option awards changed to liability classification effective January 1, 2016. The change in classification resulted in reclassification of these awards from additional paid-in capital to a liability. 80 Liability options are re-measured to their fair values at each reporting date with changes in the fair value recognized in share-based compensation expense or additional paid-in capital until settlement or cancellation. Under ASC 718, when an award is reclassified from equity to liability, if at the reclassification date the original vesting conditions are expected to be satisfied, then the minimum amount of compensation cost to be recognized is based on the grant date fair value of the original award. Fair value changes below this minimum amount are recorded in additional paid-in capital. Preferred Shares The Company accounted for its Preferred Shares under ASC 480 – Distinguishing Liabilities from Equity (“ASC 480”), which provides guidance for equity instruments with conversion features. The Company classified the Preferred Shares in its consolidated balance sheet wholly as equity, with no bifurcation of conversion feature from the host contract, given that the Preferred Shares could not be cash-settled and the redemption features, which included a fixed conversion ratio with predetermined timing and proceeds, were within the Company’s control. The Company accrued for the 8.75 % per annum compounding accrual at each reporting period-end date as an increase to share capital, and an increase to deficit. The Company’s Preferred Shares were converted into 22,833,922 common shares on October 18, 2021. Segment information The Company operates in a single reporting segment. Substantially all of the Company’s revenues to date were earned from customers or collaborators based in the United States. Substantially all of the Company’s premises, property and equipment are located in the United States. Comprehensive loss Comprehensive loss is comprised of net loss, the impact of foreign currency translation adjustments and adjustments for the change in unrealized gains and losses on investments in available-for-sale marketable securities. The Company displays comprehensive loss and its components in the consolidated statements of operations and comprehensive loss, net of tax effects if any. Concentrations of Credit Risk Financial instruments which potentially subject the Company to credit risk consist primarily of cash, cash equivalents and marketable securities. The Company holds these investments in highly rated financial institutions, and, by policy, limits the amounts of credit exposure to any one financial institution. These amounts at times may exceed federally insured limits. The Company has not experienced any credit losses in such accounts and does not believe it is exposed to any significant credit risk on these funds. The Company has no off-balance sheet concentrations of credit risk, such as foreign currency exchange contracts, option contracts or other hedging arrangements. Recent accounting pronouncements In June 2016, the Financial Accounting Standards Board (“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 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 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 81 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. To determine the fair value of the contingent consideration (note 10), 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 $ 5.3 million as of December 31, 2021 and the increase of $ 1.9 million has been recorded within operating expenses in the statement of operations and comprehensive loss for the year ended December 31, 2021. 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 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 December 31, 2021 (in thousands) Assets Cash and cash equivalents $ 109,282 $ — $ — $ 109,282 Investments in marketable securities — 81,723 — 81,723 Total $ 109,282 $ 81,723 $ — $ 191,005 Liabilities Liability-classified options $ — $ — $ 26 $ 26 Contingent consideration — — 5,298 5,298 Total $ — $ — $ 5,324 $ 5,324 82 Level 1 Level 2 Level 3 Total As of December 31, 2020 (in thousands) Assets Cash and cash equivalents $ 52,251 $ — $ — $ 52,251 Investments in marketable securities — 71,017 — 71,017 Total $ 52,251 $ 71,017 $ — $ 123,268 Liabilities Liability-classified options $ — $ — $ 250 $ 250 Contingent consideration — — 3,426 3,426 Total $ — $ — $ 3,676 $ 3,676 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 Decrease in fair value of liability Liability at end of the period (in thousands) Year ended December 31, 2021 $ 250 $ ( 96 ) $ ( 128 ) $ 26 Year ended December 31, 2020 $ 253 $ — $ ( 3 ) $ 250 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) Year ended December 31, 2021 $ 3,426 $ 1,872 $ 5,298 Year ended December 31, 2020 $ 2,953 $ 473 $ 3,426 83 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 December 31, 2021 (in thousands) Cash equivalents Money market fund $ 62,836 $ — $ — $ 62,836 Total $ 62,836 $ — $ — $ 62,836 Investments in marketable securities US government agency bonds $ 21,198 $ — $ ( 39 ) $ 21,159 US government bonds 60,675 — ( 111 ) 60,564 Total $ 81,873 $ — $ ( 150 ) $ 81,723 (1) Gross unrealized gain (loss) is pre-tax. Amortized Cost Gross Unrealized Gain (1) Gross Unrealized Loss (1) Fair Value As of December 31, 2020 (in thousands) Cash equivalents Money market fund $ 13,703 $ — $ — $ 13,703 US treasury bills 2,000 — — 2,000 Total $ 15,703 $ — $ — $ 15,703 Investments in marketable securities Us government agency bonds $ 11,550 $ 7 $ — $ 11,557 US treasury bills 21,990 2 — 21,992 US government bonds 37,463 6 ( 1 ) 37,468 Total $ 71,003 $ 15 $ ( 1 ) $ 71,017 (1) Gross unrealized gain (loss) is pre-tax. There were no realized gains or losses for the year ended December 31, 2021 or 2020. 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 a broad range of RNA-based therapeutics enabled by the Company’s LNP and ligand conjugate delivery technologies. The Company licensed 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. 84 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). On July 31, 2020, Roivant recapitalized Genevant through an equity investment and conversion of previously issued convertible debt securities held by Roivant. The Company participated in the recapitalization of Genevant with an investment of $ 2.5 million. The Company determined that this $ 2.5 million additional investment in Genevant represented the funding of prior losses and accordingly, the Company recorded the amount as an equity investment loss on the Condensed Consolidated Statements of Operations and Comprehensive Loss in 2020. Following the recapitalization, the Company owned approximately 16 % of the common equity of Genevant. In connection with the recapitalization, Genevant, the Company and Roivant entered into an Amended and Restated Shareholders Agreement that provides Roivant with substantial control of Genevant. The Company has a non-voting observer seat on Genevant’s Board of Directors. Due to the Company’s loss of significant influence with respect to Genevant as a result of the recapitalization, the Company discontinued the use of the equity method of accounting for its interest in Genevant. Following the recapitalization, 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. The Company’s entitlement to receive future royalties or sublicensing revenue under the Genevant License was not impacted by the recapitalization. As of December 31, 2021, 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. Leases The Company has two operating leases for office and laboratory space. The Company’s corporate headquarters is located at 701 Veterans Circle, Warminster, Pennsylvania. The lease expires on April 30, 2027, and the Company has the option of extending the lease for two further five-year terms. The Company also leases office space located at 626 Jacksonville Rd, Warminster, Pennsylvania under a lease that expires on December 31, 2022, and the Company has an option to extend the lease term to April 30, 2027. The Company accounts for its leases under ASC 842, Leases . Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company determines if an arrangement is a lease at inception. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease right-of-use assets and lease liabilities are recognized based on the present value of lease payments over the lease term. The leases do not provide an implicit rate so in determining the present value of lease payments, the Company utilized its incremental borrowing rate for the applicable lease, which was 9.0 % for the 701 Veterans Circle lease and 7.6 % for the 626 Jacksonville Rd. lease. The Company recognizes lease expense on a straight-line basis over the remaining lease term. During each of the years ended December 31, 2021 and 2020, the Company incurred total operating lease expenses of $ 0.7 million, which included lease expenses associated with fixed lease payments of $ 0.6 million, and variable payments associated with common area maintenance and similar expenses of $ 0.1 million. 85 Weighted average remaining lease term and discount rate were as follows: As of December 31, 2021 Weighted-average remaining lease term (years) 5.2 Weighted average discount rate 9.0 % The Company did not include options to extend its lease terms as part of its ROU asset and lease liabilities. Supplemental cash flow information related to the Company’s operating leases was as follows: 2021 2020 (in thousands) Cash paid for amounts included in the measurement of lease liabilities $ 650 $ 657 Future minimum lease payments under operating leases that have remaining terms as of December 31, 2021 are as follows: As of December 31, 2021 (in thousands) 2022 $ 641 2023 598 2024 616 2025 635 2026 654 Thereafter 134 Total lease payments $ 3,278 Less: interest ( 664 ) Present value of lease payments $ 2,614 7. Property and equipment The Company’s property and equipment balances as of the years ended December 31, 2021 and 2020 are as follows: Cost Accumulated depreciation Net book value December 31, 2021 (in thousands) Lab equipment $ 6,408 $ ( 5,178 ) $ 1,230 Leasehold improvements 8,563 ( 3,883 ) 4,680 Computer hardware and software 386 ( 313 ) 73 $ 15,357 $ ( 9,374 ) $ 5,983 Cost Accumulated depreciation Net book value December 31, 2020 (in thousands) Lab equipment $ 5,669 $ ( 4,369 ) $ 1,300 Leasehold improvements 8,555 ( 3,017 ) 5,538 Computer hardware and software 324 ( 235 ) 89 $ 14,548 $ ( 7,621 ) $ 6,927 86 Depreciation expense for the years ended December 31, 2021 and 2020 was $ 1.8 million and $ 2.0 million , respectively. 8. Accounts payable and accrued liabilities Accounts payable and accrued liabilities are comprised of the following: December 31, 2021 December 31, 2020 (in thousands) Trade accounts payable $ 3,174 $ 2,994 Payroll accruals 4,279 3,566 Research and development accruals 2,371 1,653 Professional fee accruals 983 679 Liability options 26 250 Other accrued liabilities 5 9 Total $ 10,838 $ 9,151 9. 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, an RNA interference therapeutic currently being sold by Alnylam. ONPATTRO utilizes Arbutus’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 Arbutus is not obligated to reimburse OMERS if they fail to collect any such future royalties. From the inception of the royalty sale through December 31, 2021, an aggregate of $ 11.2 million of royalties have been earned by OMERS. 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. Management 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 December 31, 2021, the Company has recorded an aggregate of $ 11.2 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 year ended December 31, 2021, the Company recognized non-cash royalty revenue of $ 6.1 million and $ 2.9 million of related non-cash interest expense. During the year ended December 31, 2020, the Company recognized non-cash royalty revenue of $ 3.4 million and related non-cash interest expense of $ 4.0 million. 87 The table below shows the activity related to the net liability for the years ended December 31, 2021 and December 31, 2020: Twelve Months Ended December 31, 2021 2020 (in thousands) Net liability related to sale of future royalties - beginning balance $ 19,554 $ 18,992 Non-cash royalty revenue ( 6,108 ) ( 3,395 ) Non-cash interest expense 2,850 3,957 Net liability related to sale of future royalties - ending balance $ 16,296 $ 19,554 In addition to the royalty from the Alnylam 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. 10. 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 for Marqibo, a chemotherapy product sold by Acrotech Biopharma LLC (“Acrotech”). For the years ended December 31, 2021 and 2020, the Company earned royalties on Marqibo sales in the amount of $ 0.2 million in each period. The resulting royalties payable by the Company to TPC were not material in either period. The cumulative amount paid or accrued up to December 31, 2021 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 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. In November 2014, UBC filed a demand for arbitration against the Company which alleged entitlement to unpaid royalties. In August 2019, the arbitrator issued its decision for the second phase of the arbitration, awarding UBC $ 5.9 million, which included interest of approximately $ 2.6 million. The Company paid the $ 5.9 million award to UBC in September 2019 and paid an additional $ 0.2 million for costs and attorneys’ fees in March 2021, and this matter is now fully resolved. 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 are currently scheduled to begin on April 25, 2022. The Company does not believe that any royalties are due to UBC and the Company intends to vigorously contest UBC’s allegation. 88 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 Arbutus 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’ milestone payment obligations. Certain other development milestones related to the acquisition were tied to programs which are no longer under development by Arbutus, 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 statement of operations and comprehensive loss (note 3). The fair value of the contingent consideration was $ 5.3 million as of December 31, 2021. 11. Collaborations and royalty entitlements Collaborations Qilu Pharmaceuticals Co, Ltd. In December 2021, the Company entered into a technology transfer and exclusive licensing agreement (the “License Agreement”) with Qilu, pursuant to which the Company granted Qilu an exclusive (except as to certain retained rights), sublicensable, royalty-bearing license, under certain intellectual property owned by the Company, to develop, manufacture and commercialize 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 on January 5, 2022 and agreed to pay the Company milestone payments totaling up to $ 245 million, net of withholding taxes, upon the achievement of certain technology transfer, development, regulatory and commercialization milestones. Qilu also 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 will be established between the Company and Qilu to coordinate and review the development, manufacturing and commercialization plans. Both parties also agreed to negotiate in good faith the terms and conditions of 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. 89 The License Agreement falls under the scope of ASC Topic 808, Collaborative Arrangements, (“ASC 808”) as both parties are active participants in the arrangement that are exposed to significant risks and rewards. While this arrangement is in the scope of ASC 808, the Company analogizes to ASC 606 for some aspects of this arrangement, including for the delivery of a good or service (i.e., a unit of account). Revenue recognized by analogizing to ASC 606 will be recorded as revenue from collaborations and licenses on the consolidated statements of operations as the Company satisfies its performance obligations under the License Agreement which is expected to begin in 2022. Assembly Biosciences, Inc. In August 2020, the Company entered into a clinical collaboration agreement with Assembly Biosciences, Inc. (“Assembly”) to evaluate AB-729 in combination with Assembly’s lead HBV core inhibitor (capsid inhibitor) candidate vebicorvir (“VBR”) and standard-of-care NA therapy for the treatment of subjects with HBV infection. The Company and Assembly will share in the costs of the collaboration. The Company incurred $ 2.6 million and $ 0.2 million of costs related to the collaboration during the years ended December 31, 2021 and 2020, respectively and reflected those costs in research and development in the statements of operations and comprehensive loss. Except to the extent necessary to carry out Assembly’s responsibilities with respect to the collaboration trial, the Company has not provided any license grant to Assembly for use of AB-729. Vaccitech plc In July 2021, the Company entered into a clinical collaboration agreement with Vaccitech plc (“Vaccitech”) to evaluate AB-729 followed by Vaccitech’s VTP-300, a proprietary T cell stimulating therapeutic vaccine, in NrtI-suppressed patients with cHBV. The Company is responsible for managing this Phase 2a proof-of-concept clinical trial, subject to oversight by a joint development committee comprised of representatives from the Company and Vaccitech. The Company and Vaccitech retain full rights to their respective product candidates and will split all costs associated with the clinical trial. The Company incurred $ 0.5 million of costs related to the collaboration, net of Vaccitech’s 50 % share, during the year ended December 31, 2021 and reflected those net costs in research and development in the statements of operations and comprehensive loss. Antios Therapeutics, Inc. In June 2021, the Company entered into a clinical collaboration agreement with Antios Therapeutics, Inc. (“Antios”) to evaluate a triple combination of AB-729, Antios’ proprietary active site polymerase inhibitor nucleotide (ASPIN), ATI-2173, and Viread (tenofovir disoproxil fumarate), a nucleos(t)ide reverse transcriptase inhibitor which is currently approved by the FDA, for the treatment of patients with cHBV. Antios is responsible for the costs of adding a single cohort to its clinical trial. The Company is responsible for the manufacture and supply of AB-729, the cost of which is not material. X-Chem, Inc. and Proteros biostructures GmbH In March 2021, the Company entered into a discovery research and license agreement with X-Chem, Inc. (“X-Chem”) and Proteros biostructures GmbH (“Proteros”) to focus on the discovery of novel inhibitors targeting the SARS-CoV-2 nsp5 main protease (M pro ). The agreement is designed to accelerate the development of pan-coronavirus agents to treat COVID-19 and potential future coronavirus outbreaks. This collaboration brought together the Company’s expertise in the discovery and development of antiviral agents with X-Chem’s industry leading DNA-encoded library (DEL) technology and Proteros’ protein sciences, biophysics and structural biology capabilities and provides important synergies to potentially identify safe and effective therapies against coronaviruses including SARS-CoV-2. The collaboration allows for the rapid screening of one of the largest small molecule libraries against M pro (an essential protein required for the virus to replicate itself) and the use of state-of-the-art structure guided methods to rapidly optimize M pro inhibitors, which the Company could potentially progress to clinical candidates. The agreement provides for payments by the Company to X-Chem and Proteros upon satisfaction of certain development, regulatory and commercial milestones, as well as royalties on sales. Through this collaboration, the Company has identified and obtained a worldwide exclusive license to several molecules that inhibit M pro , a validated target for the treatment of COVID-19 and potential future coronavirus outbreaks. The Company incurred $ 1.9 million of costs related to the collaboration during the year ended December 31, 2021 and reflected those costs in research and development in the statements of operations and comprehensive loss. 90 Royalty Entitlements 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 Pharmaceuticals, Inc. (“Alnylam”) that entitles Alnylam to develop and commercialize products with the Company’s LNP technology. Alnylam’s ONPATTRO, which represents the first approved application of the Company’s LNP technology, was launched by Alnylam in 2018. Under the terms of this license agreement, the Company is entitled to tiered royalty payments on global net sales of ONPATTRO ranging from 1.00 % - 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 this royalty entitlement on future global net sales of ONPATTRO will revert back to the Company. OMERS has assumed the risk of collecting up to $ 30.0 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. If this royalty entitlement reverts to the Company, it has the potential to provide an active royalty stream or to be otherwise monetized again in full or in part. From the inception of the royalty sale through December 31, 2021, an aggregate of $ 11.2 million of royalties have been earned by OMERS. See note 9 for further details. The Company also has rights to a second, lower royalty interest on global net sales of ONPATTRO originating from a settlement agreement and subsequent license agreement with Acuitas. This royalty entitlement from Acuitas has been retained by the Company and was not part of the royalty entitlement sale to OMERS. Gritstone Oncology, Inc. On October 16, 2017, the Company entered into a license agreement with Gritstone that granted them worldwide access to its portfolio of proprietary and clinically validated LNP technology and associated intellectual property to deliver Gritstone’s self-replicating, non-mRNA, RNA-based neoantigen immunotherapy products. Gritstone paid the Company an upfront payment, and will make payments for achievement of development, regulatory, and commercial milestones and royalties. As a result of the Company’s agreement with Genevant (see note 5 for details), from April 11, 2018 going forward, Genevant is entitled to 50 % of the revenues earned by the Company from Gritstone. The Company is the agent in this arrangement and records revenue on a net basis. Milestone payments that are not within the control of the Company or the licensee, such as those that require regulatory approvals, are not considered probable of being achieved until those approvals are received. The Company did not receive any payments from Gritstone during the years ended December 31, 2021 or 2020. Acrotech Biopharma LLC In May 2006, the Company signed a number of agreements with Talon Therapeutics, Inc. (“Talon,” formerly Hana Biosciences, Inc.) that granted Talon worldwide licenses to certain of its LNP technology (the “Talon License Agreement”) for three of Talon’s chemotherapy products, Marqibo®, Alocrest ™ (Optisomal Vinorelbine) and Brakiva ™ (Optisomal Topotecan). In 2012, Talon received approval for Marqibo from the FDA for the treatment of adult patients with Philadelphia chromosome negative acute lymphoblastic leukemia in second or greater relapse or whose disease has progressed following two or more anti-leukemia therapies. Marqibo is a liposomal formulation of the chemotherapy drug, vincristine. In 2012, the Company received a milestone payment of $ 1.0 million based on the FDA’s approval of Marqibo and receives royalty payments based on Marqibo’s commercial sales. There are no further milestones related to Marqibo but the Company is eligible to receive total milestone payments of up to $ 18.0 million on Alocrest and Brakiva. Talon was acquired by Spectrum Pharmaceuticals, Inc. in July 2013, who subsequently sold the license of Marqibo to Acrotech in January 2019. The acquisitions and license sale did not affect the terms of the license between Talon and the Company. Revenues from the Company’s royalty entitlements are summarized in the following table: 91 Year ended December 31, 2021 2020 (in thousands) Revenue from collaborations and licenses Acuitas Therapeutics, Inc. $ 4,675 $ 3,259 Acrotech Biopharma, LLC 205 269 Non-cash royalty revenue Alnylam Pharmaceuticals, Inc. 6,108 3,386 Total revenue $ 10,988 $ 6,914 12. Shareholders’ equity Authorized share capital The Company’s authorized share capital consists of an unlimited number of common shares and 1,164,000 preferred shares without par value. Open Market Sale Agreement The Company has an Open Market Sale Agreement with Jefferies LLC (“Jefferies”) dated December 20, 2018, as amended by Amendment No. 1, dated December 20, 2019, Amendment No. 2, dated August 7, 2020 and Amendment No. 3, dated March 4, 2021 (as amended, the “Sale Agreement”), under which the Company may issue and sell common shares, from time to time, under a shelf registration statement on Form S-3 (File No. 333-248467), filed with the SEC on August 28, 2020 (the “Registration Statement”). On March 4, 2021, the Company filed a prospectus supplement with the SEC (the “March 2021 Prospectus Supplement”) in connection with the offering of up to an additional $ 75.0 million of the Company’s common shares pursuant to the Sale Agreement under the Registration Statement, which the Company fully utilized during 2021. On October 8, 2021, the Company filed a prospectus supplement with the SEC (the “October 2021 Prospectus Supplement”) in connection with the offering of up to an additional $ 75.0 million of the Company’s common shares pursuant to the Sale Agreement under the Registration Statement. During the years ended December 31, 2021 and 2020, the Company issued 31,571,036 and 24,728,368 common shares, respectively, under the Sale Agreement, as amended, resulting in net proceeds of approximately $ 134.7 million and $ 86.3 million, respectively. As of December 31, 2021, there was approximately $ 52.3 million remaining available under the October 2021 Prospectus Supplement. Series A Preferred Shares In October 2017, the Company entered into a subscription agreement with Roivant for the sale of Preferred Shares to Roivant for gross proceeds of $ 116.4 million. The Preferred Shares were non-voting and were convertible into common shares at a conversion price of $ 7.13 per share (which represented a 15 % premium to the closing price of $ 6.20 per share). The purchase price for the Preferred Shares plus an amount equal to 8.75 % per annum, compounded annually, was subject to mandatory conversion into common shares on October 18, 2021, at which time the Preferred Shares were converted into 22,833,922 common shares and both the lockup and standstill periods that Roivant had previously agreed to expired. Immediately following the conversion, Roivant owned approximately 27 % of the Company’s outstanding common shares as of December 31, 2021. 92 The Company recorded the Preferred Shares wholly as equity with no bifurcation of conversion feature from the host contract, given that the Preferred Shares could not be cash settled and the redemption features were within the Company’s control, which included a fixed conversion ratio with predetermined timing and proceeds. The Company accrued for the 8.75 % per annum compounding coupon at each reporting period end date as an increase to share capital, and an increase to deficit (see statement of stockholder’s equity). 13. Stock-based compensation Awards outstanding and available for issuance During the year ended December 31, 2021, the Company had stock options outstanding under the following plans (collectively, the “Plans”): the 2016 Omnibus Share and Incentive Plan (the “2016 Plan”), the 2011 Omnibus Share Compensation Plan (the “2011 Plan”); the 2019 inducement grant; and the OnCore Option Plan. As of December 31, 2021, the aggregate number of shares authorized for awards under all Plans was 24,790,202 . As of December 31, 2021, the Company had 11,410,574 options outstanding and 9,519,084 awards available for issuance under the Plans. The Company issues new common shares of stock to settle options exercised. The 2011 Plan expired in June 2021. Under the 2016 Plan, the Company’s board of directors may grant options, and other types of awards, to employees, directors and consultants of the Company. The exercise price of the options is determined by the Company’s board of directors but will be at least equal to the closing market price of the common shares on the date of grant and the term may not exceed 10 years. Options granted generally vest over four years for employees and for directors’ initial grants, and immediately for directors’ annual grants. In June 2019, the Company provided an inducement grant of 1,112,000 options to its newly hired Chief Executive Officer. These options were awarded in a separate plan as non-qualified awards and are governed by the substantially the same terms as the 2016 Plan. Hereafter, information on options governed by the 2016 Plan, the 2011 Plan and inducement grant (the “Arbutus Plans”) is presented on a consolidated basis as the terms of the plans are similar. Information on the OnCore Option Plan is presented separately. 93 Stock options under the Arbutus Plans Equity-classified stock options under the Arbutus Plans The following table summarizes activity related to the Company’s equity-classified stock options, including its performance options, for the year ended December 31, 2021: Stock Options Outstanding Vested Stock Options Non-Vested Stock Options Number Weighted-Average Exercise Price Number Number Weighted-Average Grant-Date Fair Value Balance as of December 31, 2020 10,391,676 $ 4.53 6,384,386 4,007,290 $ 2.51 Options granted 3,531,050 $ 4.17 — 3,531,050 $ 3.06 Options exercised ( 637,721 ) $ 3.13 ( 637,721 ) — $ — Options forfeited, canceled or expired ( 1,975,031 ) $ 6.54 ( 1,698,338 ) ( 276,693 ) $ 2.84 Options vested — $ — 2,496,021 ( 2,496,021 ) $ 2.88 Balance as of December 31, 2021 11,309,974 $ 4.14 6,544,348 4,765,626 $ 2.71 The intrinsic value of options exercised under the Arbutus Plans during 2021 and 2020 are $ 0.2 million and $ 0.3 million, respectively. The following table summarizes additional information related to the Company’s equity-classified stock options, including its performance options, as of December 31, 2021: As of December 31, 2021 Options outstanding and expected to vest Number of stock options outstanding 11,309,974 Weighted-average exercise price $ 4.14 Intrinsic value (in $000s) $ 5,117 Weighted-average term remaining 7.6 years Vested stock options Number of vested stock options 6,544,348 Weighted-average exercise price $ 4.43 Intrinsic value (in $000s) $ 3,233 Weighted-average term remaining 6.9 years The assumptions used in the Black-Scholes option-pricing for grants made during the years ended December 31, 2021 and 2020 are as follows: December 31, 2021 December 31, 2020 Expected average option term 5.6 years 6.2 years Expected volatility 93.4 % 80.2 % Expected dividends — % — % Risk-free interest rate 0.67 % 1.2 % The Company considers all available information when estimating the fair value of its stock option grants. 94 Liability-classified stock options under the Arbutus Plans Due to the change in the Company’s functional currency as of January 1, 2016, certain stock option awards with exercise prices denominated in Canadian dollars changed from equity classification to liability classification (see note 2). The following table summarizes activity related to the Company’s liability-classified stock options for the year ended December 31, 2021: Stock Options Vested and Outstanding Number Weighted-Average Exercise Price Balance as of December 31, 2020 197,500 $ 6.00 Options exercised ( 70,000 ) $ 1.62 Options forfeit, canceled or expired ( 107,500 ) $ 7.65 Balance as of December 31, 2021 20,000 $ 12.98 All of the outstanding liability-classified options are vested and the intrinsic value of those options exercised during 2021 was less than $ 0.1 million. The weighted average term remaining for the liability-classified options is 2.1 years as of December 31, 2021 and the fair value was less than $ 0.1 million. Liability options are re-measured to their fair values at each reporting date, using the Black-Scholes valuation model. OnCore Option Plan The Company has reserved shares for the future exercises of OnCore stock options that were granted prior to the merger in 2015. The Company is not permitted to grant any further options under the OnCore Option Plan. The following table summarizes activity related to the OnCore stock options for the year ended December 31, 2021: Stock Options Vested and Outstanding Number of OnCore Options Number of Equivalent Company Common Shares Weighted-Average Exercise Price Balance as of December 31, 2020 80,035 80,600 $ 0.56 Options exercised — — $ — Options forfeit, canceled or expired — — $ — Balance as of December 31, 2021 80,035 80,600 $ 0.56 The following table summarizes additional information related to the OnCore stock options as of December 31, 2021: As of December 31, 2021 Vested stock options Intrinsic value (in $000s) $ 183 Weighted-average term remaining 2.8 years Employee Stock Purchase Plan In May 2020, the Company’s stockholders approved the 2020 Employee Stock Purchase Plan (ESPP) which became effective on May 28, 2020. A total of 1,500,000 common shares were reserved for issuance under the ESPP. Company employees contribute funds via payroll deductions, which are used to buy Company common shares at a discount of up to 15 % based on the lower of the price at the start of the offering period and at the end of the relevant purchase period within such offering 95 period. The initial offering period under the ESPP was September 1, 2020 through August 31, 2021 with purchase dates set on February 26, 2021 and August 31, 2021, with subsequent offering periods beginning on September 1 and ending on August 31. A total of 196,335 ESPP shares were issued under the plan and the balance remaining for issuance under the ESPP plan is 1,303,665 at December 31, 2021. For the years ended December 31, 2021 and 2020, the Company recognized $ 0.3 million and $ 0.2 million, respectively, of stock-based compensation expense related to the ESPP. The fair value of the right to acquire stock at a discounted price under the ESPP is calculated using the Black-Scholes valuation model and recorded as stock-based compensation. Expense is recognized over the period the employee contributes to the plan through payroll deductions. Stock-based compensation expense Total stock-based compensation expense was comprised of: (1) vesting of options awarded to employees under the Arbutus and OnCore Plans calculated in accordance with the fair value method as described above; (2) fair value adjustments for the Company’s liability-classified stock options; and (3) amortization of compensation cost related to the ESPP. The Company recognizes forfeitures as they occur, and the effects of forfeitures are reflected in stock-based compensation expense. Stock-based compensation has been recorded in the consolidated statement of operations and comprehensive income (loss) as follows: Year Ended December 31, 2021 2020 (in thousands) Research and development $ 2,777 $ 3,090 General and administrative 3,647 3,071 Total $ 6,424 $ 6,161 At December 31, 2021, there remained $ 11.6 million of unearned compensation expense related to unvested equity employee stock options to be recognized as expense over a weighted-average period of approximately 2.7 years . For the year ended December 31, 2020, the Company recognized $ 0.3 million of performance based stock compensation expense, which is included in the table above. There was no performance based stock compensation expense in 2021. 14. Income taxes The Company is subject to taxation and files income tax returns in Canadian federal and provincial, United States federal and several state jurisdictions. The United States Internal Revenue service is currently examining the Company’s federal tax return for 2018 and the Canada Revenue Agency is currently examining the Company’s Canadian tax returns for 2018 and 2019. The outcome of tax audits cannot be predicted with certainty, however the Company believes that an adequate provision has been made for any adjustments that may result from the examination. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs. Income tax (benefit) expense varies from the amounts that would be computed by applying the combined Canadian federal and provincial income tax rate of 27 % (2020 - 27 %) to the loss before income taxes as shown in the following tables: 96 Year ended December 31, 2021 2020 (in thousands) Computed taxes (benefits) at Canadian federal and provincial tax rates $ ( 23,864 ) $ ( 17,211 ) Adjustment to prior year ( 1,041 ) 390 Permanent and other differences 4,292 622 Change in valuation allowance - other 15,928 12,033 Federal and Provincial ITCs applied ( 611 ) — Difference due to income taxed at foreign rates 4,840 3,716 Stock-based compensation 456 450 Income tax expense (recovery) $ — $ — As of December 31, 2021, the Company had investment tax credits available to reduce Canadian federal income taxes of $ 7.4 million, versus $ 8.0 million as of December 31, 2020, which expire between 2030 and 2037, and provincial income taxes of $ 2.1 million, versus $ 2.6 million as of December 31, 2020, which expire between 2024 and 2027. The investment tax credits are accounted for under a flow-through method. In addition, the Company had research and development credits of $ 3.8 million as of December 31, 2021, and $ 3.9 million as of December 31, 2020, which expire between 2031 and 2038 and which can be used to reduce future taxable income in the United States. As of December 31, 2021, the Company had scientific research and experimental development expenditures of $ 62.8 million available for indefinite carry-forward, versus the $ 58.6 million it had as of December 31, 2020. The Company also had net operating losses of $ 177.7 million as of December 31, 2021 and $ 175.6 million as of December 31, 2020, which are due to expire between 2028 and 2038 and which can be used to offset future taxable income in Canada. As of December 31, 2021 and December 31, 2020, the Company had $ 11.7 million of net operating losses due to expire in 2035 which can be used to offset future taxable income in the United States. Future use of a portion of the United States loss carryforwards are subject to limitations under Internal Revenue Code Section 382. United States net operating loss carryforwards arising in 2019 and future periods have an indefinite carryforward period. As of December 31, 2021 and December 31, 2020, the Company had $ 197.8 million and $ 124.6 million, respectively, of total regular net operating losses which can be used to offset future taxable income in the United States. As a result of ownership changes occurring on October 1, 2014 and March 4, 2015, the Company’s ability to use these losses may be limited. Losses incurred to date may be further limited if a subsequent change in control occurs. The Company generated $ 7.7 million and $ 80.7 million in pre-tax domestic and foreign losses, respectively, for the year ended December 31, 2021. The Company generated $ 1.8 million and $ 61.9 million in pre-tax domestic and foreign losses, respectively, for the year ended December 31, 2020. 97 Significant components of the Company’s deferred tax assets and liabilities are shown below: As of December 31, 2021 2020 (in thousands) Deferred tax assets (liabilities): Non-capital losses carryforwards $ 90,255 $ 74,351 Research and development deductions 16,968 15,812 Book amortization in excess of tax ( 634 ) ( 737 ) Revenue recognized for tax purposes in excess of revenue recognized for accounting purposes 4,400 5,279 Tax value in excess of accounting value in lease inducements 549 627 Federal investment tax credits 5,301 5,872 Provincial investment tax credits 2,119 2,644 Equity accounted for investment 3,375 3,375 Federal R&E credits 3,741 3,897 Deductible stock options 3,309 2,457 Other 1,341 1,218 Total deferred tax assets $ 130,724 $ 114,795 Valuation allowance ( 130,724 ) ( 114,795 ) Net deferred tax assets (liabilities) $ — $ — 15. Related party transactions Pursuant to a financing and related subscription agreement, the Company issued Roivant the Preferred Shares in October 2017. On October 18, 2021, the Preferred Shares were converted into 22,833,922 common shares. Immediately following the conversion, Roivant owned approximately 27 % of the Company’s outstanding common shares. See note 12 for further details. On July 31, 2020, Genevant was recapitalized through an equity investment and conversion of previously issued convertible debt securities held by Roivant. Arbutus participated in the recapitalization of Genevant with an investment of $ 2.5 million. Arbutus determined that this $ 2.5 million additional investment in Genevant represented the funding of prior losses and accordingly, the Company recorded the amount as an equity investment loss on the Consolidated Statements of Operations and Comprehensive Loss in 2020. As of December 31, 2021, the carrying value of the Company’s investment in Genevant was zero and the Company owned approximately 16 % of the common equity of Genevant. See note 5 for further details. During each of the years ended December 31, 2021 and 2020, Genevant purchased certain administrative and transitional services from the Company totaling less than $ 0.1 million. These services were billed at agreed hourly rates and reflective of market rates for such services and these costs were netted in research and development in the income statement. 98 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.