Notes to Condensed Consolidated Financial Statements
(Tabular amounts in thousands of US Dollars, except share and per share amounts)
1.
Nature of business and future operations
Arbutus Biopharma Corporation (the “Company” or “Arbutus”) is a biopharmaceutical business dedicated to discovering, developing, and commercializing a cure for patients suffering from chronic hepatitis B infection, a disease of the liver caused by the hepatitis B virus (“HBV”). To pursue its strategy of developing a curative combination regimen, the Company has assembled a pipeline of multiple drug candidates with differing and complementary mechanisms of action targeting HBV. These include AB-506, the Company's oral capsid inhibitor currently in a Phase 1a/1b clinical trial, AB-729, the Company's second generation RNA interface ("RNAi") therapeutic candidate, and AB-452, the Company's lead oral RNA destabilizer candidate.
The success of the Company is dependent on obtaining the necessary regulatory approvals to bring its products to market and achieving profitable operations. The Company's research and development activities and 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.
2.
Significant accounting policies
Basis of presentation
These unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial statements and accordingly, do not include all disclosures required for annual financial statements. These statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended
December 31, 2018
included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2018
. 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
March 31, 2019
and the Company's results of operations and cash flows for the three months ended March 31, 2019 and 2018. The results of operations for the
three
months ended
March 31, 2019
and 2018, respectively, 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, 2018
, 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.
Income or loss 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 9, 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. Diluted net loss attributable to common shareholders per share does not differ from basic net loss attributable to common shareholders per share since the effect of the Company’s stock options was anti-dilutive. During the
three
months
ended
March 31, 2019
, potential common shares of approximately
26
million (
three
months ended
March 31, 2018
– approximately
22
million), consisting of the as-if converted number of Preferred Shares and outstanding stock options, were excluded from the calculation of net loss per common share because their inclusion would be anti-dilutive.
The following table sets out the computation of basic and diluted net income (loss) attributable to shareholders per share:
(Expressed in thousands of U.S. dollars, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
Three months ended March 31,
|
|
2019
|
|
2018
|
Numerator:
|
Common Shares
|
Preferred Shares
|
|
Common Shares
|
Preferred Shares
|
Allocation of distributable earnings
|
$
|
—
|
|
$
|
2,715
|
|
|
$
|
—
|
|
$
|
2,336
|
|
Allocation of undistributed loss
|
(25,966
|
)
|
—
|
|
|
(19,765
|
)
|
—
|
|
Allocation of income (loss) attributed to shareholders
|
$
|
(25,966
|
)
|
$
|
2,715
|
|
|
$
|
(19,765
|
)
|
$
|
2,336
|
|
Denominator:
|
|
|
|
|
|
|
Weighted average number of shares - basic and diluted
|
55,740,121
|
|
1,164,000
|
|
|
55,071,964
|
|
1,075,467
|
|
Basic and diluted net income (loss) attributable to shareholders per share
|
$
|
(0.47
|
)
|
$
|
2.33
|
|
|
$
|
(0.36
|
)
|
$
|
2.17
|
|
Equity method investment
The Company accounts for its investment in associated companies in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 323,
Investments - Equity Method and Joint Ventures
("ASC
323"). In accordance with ASC 323, associated companies are accounted for as equity method investments. Results of associated companies are presented on a one-line basis. Investments in, and advances to, associated companies are presented on a one-line basis in the caption “Investment in Genevant” in the Company's Condensed Consolidated Balance Sheets, net of allowance for losses, which represents the Company's best estimate of probable losses inherent in such assets. The Company's proportionate share of any associated companies' net income or loss is presented on a one-line basis in the caption "Equity investment (loss)" in the Company's Condensed Consolidated Statement of Operations. Transactions between the Company and any associated companies are eliminated on a basis proportional to the Company's ownership interest. Financial results of Genevant Sciences Ltd. ("Genevant") are recorded on a one-quarter lag basis.
Revenue recognition
The Company recognizes 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.
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.
Recent accounting pronouncements
From time to time, new accounting pronouncements are issued by the 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.
The Company adopted ASU No. 2016-02,
Leases
(Topic 842), as of January 1, 2019, using the modified retrospective approach with the effective date transition method (note 8). Accordingly, all periods prior to adoption are presented in accordance with legacy accounting and the Company recorded no retrospective adjustments to the comparative periods presented. In addition, the Company elected the package of practical expedients permitted under the transition guidance within ASC 842, which among other things, allowed the Company to carry forward its historical lease classification. In addition, the Company elected the short term exemption, which allows entities to not capitalize their leases with a term of 12 months or less. Adoption of the new standard resulted in the recording of operating lease right-of-use assets (“ROU assets”) and lease liabilities of approximately
$3.2 million
and
$4.1 million
, respectively, as of January 1, 2019. The standard did not materially impact the Company’s consolidated statements of operations and statements of cash flow.
In November 2018, the FASB issued targeted amendments to ASU No. 2018-18,
Collaborative Arrangements
(Topic 808), and ASU No. 2016-10,
Revenue from Contracts with Customers
(Topic 606), to clarify that certain transactions between parties to collaborative arrangements should be accounted for in accordance with FASB revenue guidance when the counterparty is a customer. This guidance also prohibits the presentation of collaborative arrangements as revenues from contracts with customers if the counterparty is not a customer. This guidance, which is required to be applied retrospectively and is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted, is not expected to have a material impact on the Company’s 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.
|
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
|
|
March 31, 2019
|
Assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
83,969
|
|
|
—
|
|
|
—
|
|
|
$
|
83,969
|
|
Short-term investments
|
26,621
|
|
|
—
|
|
|
—
|
|
|
26,621
|
|
Total
|
$
|
110,590
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
110,590
|
|
Liabilities
|
|
|
|
|
|
|
|
Liability-classified options
|
—
|
|
|
—
|
|
|
$
|
414
|
|
|
$
|
414
|
|
Contingent consideration
|
—
|
|
|
—
|
|
|
3,251
|
|
|
3,251
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,665
|
|
|
$
|
3,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
December 31, 2018
|
Assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
36,942
|
|
|
—
|
|
|
—
|
|
|
$
|
36,942
|
|
Short-term investments
|
87,675
|
|
|
—
|
|
|
—
|
|
|
87,675
|
|
Total
|
$
|
124,617
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
124,617
|
|
Liabilities
|
|
|
|
|
|
|
|
Liability-classified options
|
—
|
|
|
—
|
|
|
$
|
479
|
|
|
$
|
479
|
|
Contingent consideration
|
—
|
|
|
—
|
|
|
3,126
|
|
|
3,126
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,605
|
|
|
$
|
3,605
|
|
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
|
Three months ended March 31, 2018
|
$
|
1,239
|
|
|
$
|
—
|
|
|
$
|
(51
|
)
|
|
$
|
1,188
|
|
Three months ended March 31, 2019
|
$
|
479
|
|
|
$
|
—
|
|
|
$
|
(65
|
)
|
|
$
|
414
|
|
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 Contingent Consideration
|
|
Liability at end of the period
|
Three months ended March 31, 2018
|
$
|
10,424
|
|
|
$
|
(848
|
)
|
|
$
|
9,576
|
|
Three months ended March 31, 2019
|
$
|
3,126
|
|
|
$
|
125
|
|
|
$
|
3,251
|
|
4.
Equity method investment
In April 2018, the Company entered into an agreement with Roivant Sciences Ltd. (“Roivant”), its largest shareholder, to launch Genevant, a company focused on the discovery, development, and commercialization of a broad range of RNA-based therapeutics enabled by the Company's lipid nanoparticle ("LNP") and ligand conjugate delivery technologies. The Company licensed exclusive rights to its LNP and ligand conjugate delivery platforms to Genevant for RNA-based applications outside of HBV. Genevant plans to develop products in-house and pursue industry partnerships to build a diverse pipeline of therapeutics across multiple modalities, including RNAi, mRNA, and gene editing.
Under the terms of the agreement, Roivant contributed $
37.5
million in seed capital to Genevant. The Company retained all rights to its LNP and conjugate delivery platforms for HBV, and is entitled to a tiered low single-digit royalty from Genevant on future sales of products enabled by the delivery platforms licensed to Genevant. The Company also retained the entirety of its royalty entitlement on the commercialization of Alnylam Pharmaceuticals Inc.'s ("Alnylam") Onpattro
™ (Patisiran/ALN-TTR02)
.
As of March 31, 2019, the Company held an equity interest of approximately
40%
of the common equity of Genevant and accounts for its interest in Genevant using the equity method. The carrying value of the Company's interest in Genevant as of March 31, 2019 was
$17.7 million
. The basis difference between the Company’s carrying value in Genevant and the Company’s share of Genevant's net assets is attributed primarily to indefinite-lived in-process research and development ("IPR&D") (the delivery technology transferred to Genevant). For the three months ended March 31, 2019, the Company recorded equity investment losses of
$4.7 million
for its proportionate share of Genevant’s net loss, recorded on a one-quarter lag basis.
5.
Intangible assets and goodwill
All acquired IPR&D relates to our covalently closed circular DNA ("cccDNA") program and is currently classified as indefinite-lived and is not currently being amortized. IPR&D becomes definite-lived upon the completion or abandonment of the associated research and development efforts, and will be amortized from that time over an estimated useful life based on respective patent terms. Goodwill represents the excess of purchase price over the value assigned to the net tangible and identifiable intangible assets of Arbutus Inc.
The Company evaluates the recoverable amount of intangible assets on an annual basis and performs an annual evaluation of goodwill as of December 31 of each year, unless there is an event or change in the business that could indicate impairment, in which case earlier testing is performed. During the three months ended
March 31, 2019
, the Company did not identify any new indicators of impairment.
6. Accounts payable and accrued liabilities
Accounts payable and accrued liabilities are comprised of the following, in thousands:
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Trade accounts payable
|
$
|
2,344
|
|
|
$
|
3,192
|
|
Research and development accruals
|
3,220
|
|
|
2,716
|
|
Professional fee accruals
|
491
|
|
|
871
|
|
Payroll accruals
|
773
|
|
|
2,341
|
|
Other accrued liabilities
|
—
|
|
|
309
|
|
Total accounts payable and accrued liabilities
|
$
|
6,828
|
|
|
$
|
9,429
|
|
7. Site consolidation
In 2018, the Company substantially completed a site consolidation and organizational restructuring to align its HBV business in Warminster, PA, including a reduction of its global workforce by approximately
35%
and closure of its Burnaby facility. The Company estimates that the total expenses to complete the site consolidation will be approximately
$5.3
million, of which
$4.9 million
has been incurred as of March 31, 2019. Included in the site consolidation plan was the payment of one-time employee termination benefits, employee relocation costs, and site closure costs. The Company ceased using its Burnaby facility as of June 30, 2018 and recognized the remaining committed cost, less sublease income under contract, in site consolidation expenses in 2018.
Site consolidation expenses were as follows, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
2019
|
|
2018
|
Employee severance and relocation
|
|
$
|
77
|
|
|
$
|
1,621
|
|
Facility and other expenses
|
|
40
|
|
|
—
|
|
Total site consolidation expenses
|
|
$
|
117
|
|
|
$
|
1,621
|
|
Site consolidation activity was as follows, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee severance and relocation
|
|
Facility and other expenses
|
|
Total
|
Site consolidation accrual as of December 31, 2018
|
|
$
|
697
|
|
|
$
|
634
|
|
|
$
|
1,331
|
|
Additional accruals
|
|
77
|
|
|
40
|
|
|
117
|
|
Payments and adjustments
|
|
(205
|
)
|
|
(261
|
)
|
|
(466
|
)
|
Site consolidation accrual as of March 31, 2019
|
|
$
|
569
|
|
|
$
|
413
|
|
|
$
|
982
|
|
8. Leases
The Company has
three
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, 2021, and the Company has an option to extend the lease term to April 30, 2027. In connection with the Company's site consolidation in 2018, the Company ceased using its office and laboratory space located in Burnaby, British Columbia, Canada on June 30, 2018. The lease term expires on July 31, 2019 and the Company has subleases with various tenants, including Genevant, for a portion of the Burnaby facility. The Company recognized the remaining lease payments for the Burnaby facility, less sublease income under contract, in site consolidation expenses in 2018. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company adopted the new lease standard (Topic 842) on January 1, 2019 using the modified retrospective basis applied at the effective date of the new standard and elected to utilize a package of practical expedients. 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, which was
9.0%
for the 701 Veterans Circle lease,
7.6%
for the 626 Jacksonville Rd. lease and
5.0%
for the Burnaby lease. The Company recognizes lease expense on a straight-line basis over the remaining lease term.
During the three months ended March 31, 2019, the Company incurred total operating lease expenses of
$0.4 million
, which included lease expenses associated with fixed lease payments of
$0.3 million
, and variable payments associated with common area maintenance and similar expenses of
$0.1 million
. For the period ended March 31, 2018, the straight-line fixed expense for leases was
$0.3 million
. Sublease income for the three months ended March 31, 2019 was
$0.1 million
(
nil
in 2018).
Weighted average remaining lease term and discount rate were as follows:
|
|
|
|
|
|
As of
|
|
|
March 31, 2019
|
Weighted average remaining lease term
|
|
7.2
|
Weighted average discount rate
|
|
8.7%
|
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, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
2019
|
|
2018
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
312
|
|
|
$
|
—
|
|
Right-of-use assets obtained in exchange for lease obligations
|
|
$
|
3,248
|
|
|
$
|
—
|
|
Maturities of lease liabilities were as follows, in thousands:
|
|
|
|
|
|
|
|
As of March 31, 2019
|
April through December 2019
|
|
$
|
745
|
|
2020
|
|
657
|
|
2021
|
|
677
|
|
2022
|
|
581
|
|
2023
|
|
598
|
|
Thereafter
|
|
2,038
|
|
Total Lease Payments
|
|
$
|
5,296
|
|
Less: interest
|
|
(1,425
|
)
|
Present value of lease payments
|
|
$
|
3,871
|
|
9. Stockholders' equity and stock-based compensation
Open Market Sale Agreement
In December 2018, the Company entered into an Open Market Sale Agreement (“Sale Agreement”) with Jefferies LLC, under which it may issue and sell common shares, from time to time, for an aggregate sales price of up to
$50.0 million
. The Company did
no
t sell any shares under the Sale Agreement during 2018. For the three months ended March 31, 2019, the Company issued
614,401
common shares pursuant to the Sale Agreement, resulting in gross proceeds of approximately
$2.7 million
.
Series A participating convertible preferred shares
In October 2017, the Company entered into a subscription agreement with Roivant for the sale of
1,164,000
Preferred Shares to Roivant for gross proceeds of
$116.4
million. The Preferred Shares are non-voting and are convertible into common shares at an initial conversion price of
$7.13
per share. The purchase price for the Preferred Shares plus an amount equal to
8.75%
per annum, compounded annually, will be subject to mandatory conversion into approximately
23
million common shares on October 16, 2021 (subject to limited exceptions in the event of certain fundamental corporate transactions relating to Arbutus’ capital structure or assets, which would permit earlier conversion at Roivant’s option). After conversion of the Preferred Shares into common shares, based on the number of common shares outstanding on March 31, 2019, Roivant would hold approximately
49%
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).
10.
Collaborations, contracts and licensing agreements
Revenue contracts are described in detail in the Overview section of Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2018 Form 10-K.
In 2012, the Company entered into a license agreement with Alnylam that entitles Alnylam to develop and commercialize products with the Company's LNP technology. Alnylam's Onpattro
TM
program, which represents the most clinically advanced application of LNP technology, was approved by the U.S. Food and Drug Administration ("FDA") and the European Medicines Agency ("EMA") during the third quarter of 2018 and was launched immediately upon approval in the US. The Company is entitled to tiered low to mid single-digit royalty payments on net sales of Onpattro
TM
and received its first royalty payment in the fourth quarter of 2018.
Revenue for the three months ended March 31, 2019 consists primarily of royalties on net sales of Alnylam's Onpattro
TM
, as well as royalties on net sales of Spectrum Pharmaceuticals, Inc.'s ("Spectrum") Marqibo
®
and services provided to Gritstone Oncology, Inc. ("Gritstone"). Revenue for the three months ended
March 31, 2018
consisted primarily of revenue earned under our license agreement with Gritsone, including the earned portion of an upfront license fee and services provided to Gritstone.
11. 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
$7,179,000
(
C$9,256,000
). As at
March 31, 2019
, a cumulative contribution of
$2,773,000
(
C$3,668,000
) had been received and the Company does not expect any further funding under this agreement. 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-siRNA oligonucleotide product candidates covered by the funding under the agreement. These royalties are payable until a certain cumulative payment amount is achieved or until a pre-specified date. In addition, until a cumulative amount equal to the funding actually received under the agreement has been paid to TPC, the Company agreed to pay
2.5%
royalties on any royalties the Company receives from Spectrum for licensing Marqibo®. For the three months ended
March 31, 2019
, the Company earned royalties on Marqibo® sales in the amount of
$31,000
(three months ended
March 31, 2018
–
$22,000
) resulting in
$1,000
being recorded by the Company as royalty payable to TPC (
March 31, 2018
-
$1,000
). The cumulative amount paid or accrued as of
March 31, 2019
was
$26,000
, therefore the remaining contingent amount due to TPC is
$2,747,000
(
C$3,668,000
).
Arbitration with the University of British Columbia
Certain early work on LNP delivery systems and related inventions was undertaken by the Company and assigned to the University of British Columbia ("UBC"). These inventions were subsequently licensed back to the Company by UBC under a license agreement, initially entered into in 1998 and subsequently amended in 2001, 2006 and 2007. The Company has granted sublicenses under the UBC license to Alnylam. Alnylam has in turn sublicensed back to the Company under the licensed UBC patents for discovery, development and commercialization of siRNA products. Certain sublicenses were also granted to other parties.
On November 10, 2014, UBC filed a notice of arbitration against the Company and on January 16, 2015, filed a Statement of Claim, which alleges entitlement to
$3,500,000
in allegedly unpaid royalties based on publicly available information, and an unspecified amount based on non-public information. UBC also seeks interest and costs, including legal fees. 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 alleges UBC wrongly licensed to a third party. The proceedings have been 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
$3,500,000
originally claimed to seek
$10,900,000
in alleged unpaid royalties, plus interest arising from payments as early as 2008. No finding was made as to whether any licensing fees are due to UBC under these agreements; this was the subject of the second phase of arbitration that took place from April 10, 2019 to April 16, 2019. The decision for this phase of the arbitration is expected in the second half of 2019. 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 Arbutus. A schedule for the third phase of the arbitration has not yet been set.
Arbitration and related matters are costly and may divert the attention of the Company's management and other resources that would otherwise be engaged in other activities. The Company continues to dispute UBC's allegations, and is seeking license payments for wrongfully licensed patent application, and an exclusive worldwide license to said application. However, arbitration is subject to inherent uncertainty and an arbitrator could rule against the Company. The Company has not recorded an estimate of the possible loss associated with this arbitration, due to the uncertainties related to both the likelihood and amount of any possible loss or range of loss. Costs related to the arbitration are recorded by the Company as incurred.
License Agreements between Enantigen and Blumberg and Drexel
In October 2014, Arbutus Inc. acquired all of the outstanding shares of Enantigen Therapeutics, Inc. (“Enantigen”) pursuant to a stock purchase agreement. Through this transaction, Arbutus Inc. acquired a HBV surface antigen secretion inhibitor program and a capsid assembly inhibitor program.
Under the stock purchase agreement, Arbutus Inc. agreed to pay up to a total of
$21,000,000
to Enantigen’s selling shareholders 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 amount paid 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 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. The contingent consideration for this acquisition is a financial liability and measured at its fair value at each reporting period, with any changes in fair value from the previous reporting period recorded in the statement of operations and comprehensive loss (see note 2).
Under the stock purchase agreement, Enantigen must also fulfill its obligations as they relate to the
three
patent license agreements with The Baruch S. Blumberg Institute ("Blumberg") and Drexel University ("Drexel"). Pursuant to each patent license agreement, Enantigen is obligated to pay Blumberg and Drexel up to approximately
$500,000
in development and regulatory milestones per licensed product, royalties in the low single-digits, and a percentage of revenue it receives from its sub-licensees.
The Baruch S. Blumberg Institute and Drexel University
In February 2014, Arbutus Inc. entered into a license agreement with Blumberg and Drexel that granted an exclusive (except as to certain know-how and subject to retained non-commercial research rights), worldwide, sub-licensable license to
three
different compound series: cccDNA formation inhibitors, capsid assembly inhibitors and hepatocellular carcinoma inhibitors. During 2018, the Company returned rights to the cccDNA formation inhibitors and hepatocellular carcinoma inhibitors to Blumberg.
In partial consideration for this license, Arbutus Inc. paid a license initiation fee of
$150,000
and issued warrants to Blumberg and Drexel. The warrants were subsequently exercised in 2014. Under this license agreement, Arbutus Inc. also agreed to pay
up to
$3,500,000
in development and regulatory milestones per licensed compound series, up to
$92,500,000
in sales performance milestones per licensed product, and royalties in the mid-single digits based upon the proportionate net sales of licensed products in any commercialized combination. The Company is obligated to pay Blumberg and Drexel a double-digit percentage of all amounts received from the sub-licensees, subject to customary exclusions.
In November 2014, Arbutus Inc. entered into an additional license agreement with Blumberg and Drexel pursuant to which it received an exclusive (subject to retained non-commercial research rights), worldwide, sub-licensable license under specified patents and know-how controlled by Blumberg and Drexel covering epigenetic modifiers of cccDNA and stimulator of interferon genes (“STING”) agonists. During 2018, the Company returned rights to the epigenetic modifiers of cccDNA and STING agonists to Blumberg. In consideration for these exclusive licenses, Arbutus Inc. made an upfront payment of
$50,000
.
Research Collaboration and Funding Agreement with Blumberg
In October 2014, Arbutus Inc. acquired all of the outstanding shares of Enantigen pursuant to a stock purchase agreement. Through this transaction, Arbutus Inc. acquired a HBV surface antigen secretion inhibitor program and a capsid assembly inhibitor program. Under the stock purchase agreement, the Company agreed to pay up to a total of
$1,000,000
per year of research funding for
three
years, renewable at the Company’s option for an additional
three
years, for Blumberg to conduct research projects in HBV and liver cancer. Blumberg has exclusivity obligations to the Company with respect to HBV research funded under the agreement. In addition, the Company has the right to match any third party offer to fund HBV research that falls outside the scope of the research being funded under the agreement. Blumberg has granted the Company the right to obtain an exclusive, royalty-bearing, worldwide license to any intellectual property generated by any funded research project. If the Company elects to exercise the right to obtain such a license, it will have a specified period of time to negotiate and enter into a mutually agreeable license agreement with Blumberg. This license agreement will include the following pre-negotiated upfront, milestone, and royalty payments: an upfront payment in the amount of
$100,000
; up to
$8,100,000
upon the achievement of specified development and regulatory milestones; up to
$92,500,000
upon the achievement of specified commercialization milestones; and royalties at a low-single to mid-single digit rates based upon the proportionate net sales of licensed products from any commercialized combination.
In June 2016, the Company entered into an amended and restated research collaboration and funding agreement with Blumberg, primarily to: (i) increase the annual funding amount to Blumberg from
$1,000,000
to
$1,100,000
; (ii) extend the initial term through to October 29, 2018; (iii) provide an option for the Company to extend the term past October 29, 2018 for
two
additional
one
year terms; and (iv) expand our exclusive license under the agreement to include the sole and exclusive right to obtain and exclusive, royalty-bearing, worldwide, and all-fields license under Blumberg's rights in certain other inventions described in the agreement. The amended agreement expired in October 2018, at the end of its initial term.
In November 2018, the Company entered into a new
two
-year master services agreement with Blumberg that expires in November 2020. The new agreement replaces all rights and obligations of the prior research collaboration and funding agreements, as amended. Under the new agreement, Blumberg will perform specific research activities based upon statements of work and the Company will no longer provide a fixed amount of funding to Blumberg. As of March 31, 2019, the Company has executed statements of work with Blumberg for an aggregate cost of
$750,000
under this new agreement. Intellectual property that is generated during the research activities is the Company's exclusive property and all financial obligations for it to utilize the intellectual property are satisfied in the upfront cost of the research activities. Under the terms of the new agreement, the Company retains all rights to any inventions arising from performance of the agreement and no license is granted to Blumberg and Drexel, nor are milestones for said inventions due to Blumberg and Drexel.
12.
Related Party Transactions
During the three months ended March 31, 2019, the Company purchased certain research and development services from Genevant. These services are billed at agreed hourly rates and reflective of market rates for such services. The total cost of these services was
$33,000
and
$0
for the
three
months ended
March 31, 2019
and 2018, respectively, and are included in the Condensed Consolidated Statements of Operations under research, development, collaborations and contracts expenses.
Conversely, Genevant purchased certain administrative and transitional services from the Company during the three months ended March 31, 2019 totaling
$164,000
, which was netted against research and development expenses in the Condensed Consolidated Statements of Operations. In addition, Genevant has a sublease for
17,900
square feet in the Company's Burnaby facility. Sublease income from Genevant for the three months ended March 31, 2019 of
$62,000
was netted against site consolidation costs and lease liability (see notes 7 and 8).