Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a clinical-stage, biopharmaceutical company focused primarily on developing a cure for people with chronic hepatitis B virus (“HBV”) infection. We are advancing multiple product candidates with distinct mechanisms of action that we believe have the potential to provide a new curative regimen for chronic HBV infection. We have also initiated a drug discovery and development effort for treating coronaviruses, including COVID-19.

Given the biology of HBV, we believe combination therapies are the key to more effective HBV treatment and a potential functional cure. Our product pipeline includes multiple product candidates that target various steps in the viral lifecycle. We believe each of these mechanisms, when administered for a finite duration in combination with existing approved therapies, have the potential to improve upon the standard of care and potentially lead to a functional cure.

Our HBV product pipeline consists of the following programs:

Our two lead product candidates are AB-729, our proprietary subcutaneously-delivered RNAi product candidate that suppresses HBsAg expression, and AB-836, our proprietary next-generation oral capsid inhibitor that suppresses HBV DNA replication. AB-729 is currently in an ongoing Phase 1a/1b clinical trial and we expect AB-836 to progress into a Phase 1a/1b clinical trial in the first half of 2021. In parallel, we are in lead optimization with oral compounds for our PD-L1 program and next-generation HBV RNA destabilizer program. At this time, our coronavirus research program is focused on the discovery and development of new molecular entities that address specific viral targets including the nsp12 viral polymerase and the nsp5 viral protease.

COVID-19 Impact

likely continue to have, a major impact on clinical development, at least in the near-term, include shortages and delays in the supply chain, and prohibitions in certain countries on enrolling subjects in new clinical trials. Future disruptions related to the COVID-19 pandemic could negatively impact our plans and timelines in 2021 and beyond, including enrolling and monitoring subjects in our clinical trials.

Collaborations and Royalty Entitlements

In August 2020, we 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 patients with chronic HBV infection. We and Assembly will share in the costs of the collaboration.

We have a royalty entitlement on ONPATTRO® (Patisiran) (“ONPATTRO”), a drug developed by Alnylam Pharmaceuticals, Inc. (“Alnylam”) under a license agreement with us that incorporates our lipid nanoparticle delivery (“LNP”) technology. In July 2019, we received $20 million in gross proceeds before advisory fees from the sale of this royalty interest to Ontario Municipal Employees Retirement System (“OMERS”), effective as of January 1, 2019. The royalty interest will revert back to us after OMERS receives $30 million in royalty payments from Alnylam. We also have rights to 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 entitlement from Acuitas has been retained by us and was not part of the royalty entitlement sale to OMERS.

As of December 31, 2020, we owned approximately 16% of the common equity of Genevant Sciences Ltd. (“Genevant”), a company we launched with Roivant Sciences, Ltd. and to which we licensed exclusive rights to our lipid nanoparticle ("LNP") and ligand conjugate delivery platforms for RNA-based applications outside of HBV, except to the extent certain rights had already been licensed to other third parties (the “Genevant License”). Under the Genevant License, we are entitled to receive tiered low single-digit royalties on future sales of Genevant products covered by the licensed patents. If Genevant sub-licenses the intellectual property licensed by us to Genevant, we are entitled to receive under the Genevant License, upon the commercialization of a product developed by such sub-licensee, the lesser of (i) twenty percent of the revenue received by Genevant for such sublicensing and (ii) tiered low single-digit royalties on product sales by the sublicensee.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Contingent Consideration

The significant accounting policy that we believe to be most critical in fully understanding and evaluating our financial results relates to our contingent consideration. This accounting policy requires us to make certain estimates and assumptions. We believe that the estimates and assumptions upon which we rely are reasonable, based upon information available to us at the time that these estimates and assumptions are made. Actual results may differ from our estimates. Our critical accounting estimates affect the calculation of our net income or loss.

In connection with the acquisition of Enantigen Therapeutics, Inc. (“Enantigen”) in October 2014, we have obligations to make potential future payments of up to $102.5 million upon the achievement of certain commercial milestones. The sales milestones are tied to the first commercial sales by us of a product indicated for the treatment of HBV. These potential contingent payments are recorded as a liability and remeasured to fair value as of each reporting date. In assessing the fair value of the liability, significant judgments are required to be made by management to estimate the probability of program success, the timing and extent of future product sales, appropriate discount rates, and other estimates and assumptions that could materially affect the determination of fair value. These judgments include the use of, but are not limited to: future forecasts and other macroeconomic indicators that forecast market conditions, the timing and amount of estimated future revenues, market-based discount rates and other market-comparative data. As assumptions related to the probability of program success and timing and amount of potential future product sales are highly uncertain due to the unpredictable nature of product development, management risk adjusts the estimated cash flows to reflect these uncertainties.

RESULTS OF OPERATIONS

The following summarizes our results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2019:

Year Ended December 31,

(in thousands)

Impairment of intangible assets — 43,836

Impairment of goodwill — 22,471

Income tax benefit — 12,656

Dividend accretion of convertible preferred shares (12,123) (11,149)

Net loss attributable to common shares $ (75,868) $ (164,872)

For the fiscal year ended December 31, 2020, our net loss attributable to common shares was $75.9 million, or a loss of $1.00 per basic and diluted common share, as compared to a net loss of $164.9 million, or a loss of $2.89 per basic and diluted common share, for the year ended December 31, 2019.

Revenue

Revenue for the years ended December 31, 2020 and 2019 is summarized in the following table:

Year ended December 31,

(in thousands, except percentages)

Revenue from collaborations and licenses

Gritstone Oncology, Inc. — — % 1,819 30 %

Non-cash royalty revenue

Revenue consists mainly of royalties received from other companies for sales of products that utilize our licensed technologies.

Total revenue increased $0.9 million for the year ended December 31, 2020 compared to 2019, primarily due to a $3.1 million increase in license royalty revenue from Alnylam and Acuitas due to the growth of Alnylam’s sales of ONPATTRO. This increase was partially offset by a $1.8 million decrease in revenue from Gritstone Oncology, Inc. primarily due to a $1.5 million milestone payment received in 2019.

The royalty interest for ONPATTRO from Alnylam 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 back to us. OMERS has assumed the risk of collecting up to $30 million of future royalty payments from Alnylam and we are not obligated to reimburse OMERS if they fail to collect any such future royalties. During the term of this agreement, we recognize non-cash royalty revenue related

to the sales of ONPATTRO. From the inception of the royalty sale through December 31, 2020, the Company has recorded an aggregate of $5.1 million of non-cash royalty revenue for royalties earned by OMERS. The royalty interest for ONPATTRO from Acuitas was not part of the royalty sale to OMERS and we have retained the rights to receive those royalties. Revenue contracts are described in more detail in “Item 1. Business.”

Operating expenses

Operating expenses for the years ended December 31, 2020 and 2019 are summarized in the following table:

Year ended December 31,

(in thousands, except percentages)

Change in fair value of contingent consideration 473 1 % (173) — %

Site consolidation 64 — % 156 — %

Impairment of intangible assets — — % 43,836 29 %

Impairment of goodwill — — % 22,471 15 %

Arbitration — — % 6,266 4 %

Research and development

Research and development expenses consist primarily of personnel expenses, fees paid to clinical research organizations and contract manufacturers, consumables and materials, consulting, and other third party expenses to support our clinical and pre-clinical activities, as well as a portion of stock-based compensation and general overhead costs.

Research and development expenses decreased $10.1 million in 2020 compared to 2019 due primarily to the October 2019 decision to discontinue development of AB-506, our prior generation capsid inhibitor product candidate and higher expenses for AB-729 during 2019 for preclinical studies and drug product supply in preparation for our Phase 1a/1b clinical trial which commenced in the second quarter of 2019. These decreases were partially offset by an increase in expenses associated with development of our lead capsid inhibitor product candidate (AB-836), including preclinical studies and drug product supply in preparation for our Phase 1a/1b clinical trial, which is expected to initiate in the first half of 2021.

A significant portion of our research and development expenses are not tracked by project, as they benefit multiple projects or our overall technology platform.

General and administrative

General and administrative expenses decreased $3.0 million in 2020 compared to 2019, due primarily to severance related to the departure of our former President and Chief Executive Officer in June 2019. In accordance with the terms of his legacy employment agreement, our former President and Chief Executive Officer received $2.3 million of cash severance and we recognized $1.1 million of non-cash stock-based compensation expense for the accelerated vesting of his stock options in 2019. In addition, legal fees decreased $1.1 million in 2020 compared to 2019 due primarily to the settlement of an arbitration case with the University of British Columbia (“UBC”) in September 2019. These decreases in general and administrative expenses in 2020 compared to 2019 were partially offset by increases in employee compensation and insurance premiums.

Change in fair value of contingent consideration

In October 2014, Arbutus Inc., our wholly-owned subsidiary, acquired all of the outstanding shares of 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 us 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.

In general, increases in the fair value of the contingent consideration are related to the progress of our programs as they get closer to triggering these contingent payments. In 2020, the fair value of our contingent consideration liability increased $0.5 million related to the passage of time. In 2019, the fair value of our contingent consideration liability decreased by $0.2 million after we re-evaluated the timing of the future sales milestones following the discontinuation of the AB-506 program.

Site consolidation charges

In February 2018, we announced a site consolidation and organizational restructuring to better align our HBV business in Warminster, PA, including closing our Burnaby, Canada facility. Most of the employee-related site consolidation expenses were expensed ratably over the period that employees provided services, which was substantially completed in 2018. Total site consolidation expenses were $5.0 million, which was fully recognized as of December 31, 2020.

Impairment of intangible assets and goodwill

In 2019, we recorded a $43.8 million non-cash impairment expense to reduce the carrying value of its in-process research and development (“IPR&D”) intangible assets to zero. We also recognized a corresponding income tax benefit of $12.7 million in 2019 related to the decrease in our deferred tax liability related to the IPR&D intangible assets. The impairment was due to a decision to delay indefinitely the further development of our cccDNA program while we focus on our other development programs.

Also during 2019, we recorded a $22.5 million non-cash impairment to reduce the carrying amount of our goodwill asset to zero. Due to a sustained decrease in our share price in the months leading-up to the assessment, our market capitalization was reduced below the book value of our net assets and we concluded that the fair value of our single reporting unit was below its carrying amount by an amount in excess of the carrying amount of the goodwill asset.

We did not record any impairments during 2020.

Arbitration

In the third quarter of 2019, the arbitrator in the arbitration proceedings between UBC and us issued his decision, awarding UBC approximately $5.9 million, which included interest of approximately $2.6 million. An award for costs and attorneys’ fees is still to be determined. We recorded expense of $6.3 million in 2019, consisting of $5.9 million for the award (including interest) and $0.4 million for an estimate of a potential award for costs and attorney’s fees.

This arbitration concerned certain early work on lipid nanoparticle delivery systems and related inventions undertaken by us and assigned to UBC. These inventions were subsequently licensed back to us by UBC under a license agreement, initially entered into in 1998 and subsequently amended in 2001, 2006 and 2007. We have granted sublicenses under the UBC license to Alnylam as well as other third parties.

On December 18, 2020, UBC delivered to us a notice of arbitration alleging that under its cross license with us, it is due royalties of $2.0 million plus interest arising from our sale to OMERS of part of our royalty interest on future global net sales of ONPATTRO, currently being sold by Alnylam.

Other income (losses)

Other income (losses) for the years ended December 31, 2020 and 2019 are summarized in the following table:

Year ended December 31,

(in thousands, except percentages)

Foreign exchange gain (loss) (124) 2 % 41 — %

Interest income

Interest income decreased $1.4 million in 2020 compared to 2019 due primarily to a general decline in market interest rates.

Interest expense

Interest expense increased $1.9 million in 2020 compared to 2019 due primarily to the non-cash amortization of discount and issuance costs related to the sale of a portion of our ONPATTRO royalty interest to OMERS in July 2019.

Equity investment loss

In July 2020, we participated in the recapitalization of Genevant, led by Roivant, with an equity investment of $2.5 million. We determined that this $2.5 million additional investment in Genevant was funding prior losses and recorded the amount as an equity investment loss in 2020. Due to our loss of significant influence with respect to Genevant as a result of the recapitalization, we discontinued the use of equity method accounting for our interest in Genevant in 2020. Following the recapitalization, we account for our 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 future observable price changes in orderly transactions for identical or similar Genevant securities. As of December 31, 2020, the carrying value of our investment in Genevant was zero and we owned approximately 16% of the common equity of Genevant.

The equity investment losses for 2019 reflected our proportionate share of Genevant’s net results under the equity method of accounting on a one-quarter lag basis of $14.9 million and a $7.6 million impairment charge to reduce the carrying value of our investment in Genevant to zero. The impairment was due to uncertainty surrounding the recovery of the remaining carrying value of our investment in Genevant.

Foreign exchange gains (losses)

In connection with our site consolidation to Warminster, PA, our Canadian dollar-denominated expenses and cash balances have decreased significantly now that a majority of our business transactions are based in the United States. We continue to incur expenses and hold some cash balances in Canadian dollars, and as such, we will remain subject to risks associated with foreign currency fluctuations. During the year ended December 31, 2020, we recorded foreign exchange losses of $0.1 million. During the year ended December 31, 2019, we recorded foreign exchange gains of less than $0.1 million.

Income tax benefit

For the year ended December 31, 2019, we recorded an income tax benefit of $12.7 million related to the decrease of our deferred tax liability associated with impairments of our IPR&D intangible assets.

LIQUIDITY AND CAPITAL RESOURCES

Since our incorporation, we have financed our operations through the sales of equity, debt, revenues from research and development collaborations and licenses with corporate partners, a royalty monetization, interest income on funds available for investment, and government contracts, grants and tax credits.

As of December 31, 2020, we had cash and cash equivalents of $52.3 million and investments in marketable securities of $71.0 million, totaling $123.3 million. We had no outstanding debt as of December 31, 2020.

Sources of Liquidity

In December 2018, we entered into an Open Market Sale Agreement (“Sale Agreement”) with Jefferies LLC (“Jefferies”), under which we could issue and sell our common shares, from time to time, for an aggregate sales price of up to $50.0 million. In December 2019, we entered into an amendment to the Sale Agreement with Jefferies (the “2019 Amendment”) in connection with the filing of a shelf registration statement on Form S-3 (File No. 333-235674), filed with the SEC on December 23, 2019 (the “Shelf Registration Statement”). The 2019 Amendment revised the original Sale Agreement to reflect that we may sell our common shares, from time to time, for an aggregate sales price of up to $50.0 million, under the Shelf Registration Statement. During July 2020, we fully utilized the remaining availability under the Sale Agreement, as amended by the 2019 Amendment. In August 2020, we entered into a new amendment to the Sale Agreement (the “2020 Amendment”) with Jefferies. Pursuant to the 2020 Amendment, we can issue and sell common shares, from time to time, for an aggregate sales price of up to an additional $75.0 million under the Sale Agreement. During 2020, we issued 24,728,368 common shares under the Sale Agreement, as amended, resulting in net proceeds of approximately $86.3 million. From January 1, 2021 through March 3, 2021, we received an additional $24.3 million of net proceeds from the issuance of our common shares under the Sale Agreement, as amended, and as of March 3, 2021 there was approximately $16.4 million available under the Sale Agreement, as amended.

In August 2020, we filed a new $200 million shelf registration statement on Form S-3 (File No. 333-248467), which was declared effective by the SEC on October 22, 2020 (the “New Shelf Registration Statement”). As of March 4, 2021, we have not sold any securities under the New Shelf Registration Statement.

Additionally, we have a royalty entitlement on ONPATTRO, a drug developed by Alnylam that incorporates our LNP technology and was approved by the FDA and the EMA during the third quarter of 2018 and was launched by Alnylam immediately upon approval in the United States. In July 2019, we sold a portion of this royalty interest 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 us. 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. If this royalty entitlement reverts to us, it has the potential to provide an active royalty stream or to be otherwise monetized again in full or in part. In addition to the royalty from the Alnylam LNP license agreement, we are also receiving a second, lower royalty interest on global net sales of ONPATTRO originating from a settlement agreement and subsequent license agreement with Acuitas. The royalty from Acuitas has been retained by us and was not part of the royalty sale to OMERS.

Cash requirements

At December 31, 2020 we held an aggregate of $123.3 million in cash, cash equivalents and investments in marketable securities. From January 1, 2021 through March 3, 2021, we received an additional $24.3 million of net proceeds from the issuance of common shares under the ATM program. We believe that our cash resources will be sufficient to fund our operations through the third quarter of 2022 based on our expectation of a net cash burn between $70 million and $75 million in 2021. In the future, substantial additional funds will be required to continue with the active development of our pipeline products and technologies. In particular, our funding needs may vary depending on a number of factors including:

•the effects of the COVID-19 pandemic on our business, the medical community and the global economy;

•revenue earned from our legacy collaborative partnerships and licensing agreements, including potential royalty payments from Alnylam’s ONPATTRO;

•revenue earned from ongoing collaborative partnerships, including milestone and royalty payments;

•the extent to which we continue the development of our product candidates, add new product candidates to our pipeline, or form collaborative relationships to advance our product candidates;

•delays in the development of our product candidates due to pre-clinical and clinical findings;

•our decisions to in-license or acquire additional products, product candidates or technology for development, in particular for our HBV therapeutics programs;

•our ability to attract and retain corporate partners, and their effectiveness in carrying out the development and ultimate commercialization of our product candidates;

•whether batches of drugs that we manufacture fail to meet specifications resulting in delays and investigational and remanufacturing costs;

•the decisions, and the timing of decisions, made by health regulatory agencies regarding our technology and products;

•competing technological and market developments; and

•costs associated with prosecuting and enforcing and defending our patent claims and other intellectual property rights, including litigation and arbitration arising in the course of our business activities.

We intend to seek funding to maintain and advance our business from a variety of sources including public or private equity or debt financing, potential monetization transactions, collaborative or licensing arrangements with pharmaceutical companies and government grants and contracts. There can be no assurance that funding will be available at all or on acceptable terms to permit further development of our research and development programs. Further, the continued spread of COVID-19 has also led to severe disruption and volatility in the global capital markets, which could increase our cost of capital and adversely affect our ability to access the capital markets in the future.

If adequate funding is not available, we may be required to delay, reduce or eliminate one or more of our research or development programs or reduce expenses associated with our non-core activities. We may need to obtain funds through arrangements with collaborators or others that may require us to relinquish most or all of our rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise seek if we were better funded. Insufficient financing may also mean failing to prosecute our patents or relinquishing rights to some of our technologies that we would otherwise develop or commercialize.

Cash Flows

The following table summarizes our cash flow activities for the periods indicated:

Year ended December 31,

(in thousands)

Net change in operating items 431 (2,225)

Net cash used in operating activities $ (51,441) $ (71,006)

Net cash provided by (used in) investing activities (14,909) 28,338

Net cash provided by financing activities 86,746 37,457

Effect of foreign exchange rate changes on cash and cash equivalents 56 68

Increase (decrease) in cash and cash equivalents $ 20,452 $ (5,143)

Cash and cash equivalents, beginning of period 31,799 36,942

Cash and cash equivalents, end of period $ 52,251 $ 31,799

Net cash used in operating activities in 2020 decreased $19.6 million compared to 2019 due primarily to (i) a decrease in research and development payments of approximately $10.1 million, which was due primarily to the October 2019 decision to

discontinue development of AB-506, our prior generation capsid inhibitor product candidate, and (ii) higher spend on AB-729 during 2019 for preclinical studies and drug product supply in preparation for our Phase 1a/1b clinical trial which commenced in the second quarter of 2019. The decrease in cash used in operating activities in 2020 compared to 2019 was also due to the payment of a $5.9 million arbitration award to UBC in 2019 and a $2.3 million cash severance payment to our former President and Chief Executive Officer in 2019.

Net cash from investing activities in 2020 decreased by $43.2 million compared to 2019 due primarily to the timing of maturities and acquisitions of investments in marketable securities.

Net cash from financing activities in 2020 increased $49.3 million compared to 2019. Cash provided by financing activities in 2020 consisted primarily of $86.3 million of proceeds from sales of common shares under the Sale Agreement, as amended. Cash provided by financing activities in 2019 consisted primarily of $18.5 million of net proceeds from the sale a portion of our future royalties from sales of ONPATTRO and $18.6 million of proceeds from sales of common shares under the Sale Agreement, as amended.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

RECENT ACCOUNTING PRONOUNCEMENTS

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies that we adopt as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations upon adoption.

Please refer to note 2 to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K for a description of recent accounting pronouncements applicable to our business.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

Report of Independent Registered Public Accounting Firm 61

Notes to Consolidated Financial Statements 67

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, 2020 and 2019, and the related consolidated statements of operations and comprehensive loss, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, 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.

Valuation of contingent consideration liability

/s/ Ernst & Young LLP

We have served as the Company's auditor since 2019.

Philadelphia, Pennsylvania

March 4, 2021

ARBUTUS BIOPHARMA CORPORATION

Consolidated Balance Sheets

(Expressed in thousands of US Dollars, except share and per share amounts)

Assets

Current assets:

Investments in marketable securities, current 71,017 59,035

Prepaid expenses and other current assets 3,124 1,790

Property and equipment, net of accumulated depreciation 6,927 8,676

Other non-current assets 44 293

Liabilities and stockholders' equity

Current liabilities:

Accounts payable and accrued liabilities $ 8,901 $ 7,235

Liability-classified options 250 253

Lease liability, current 390 340

Liability related to sale of future royalties 19,554 18,992

Stockholders' equity

Preferred shares

Authorized: unlimited number without par value

Common shares

Authorized: unlimited number without par value

Accumulated other comprehensive loss (48,171) (48,229)

Total liabilities and stockholders' equity $ 137,080 $ 105,535

See accompanying notes to the consolidated financial statements.

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,

Revenue

Collaborations and licenses $ 3,519 $ 4,355

Operating expenses

Change in fair value of contingent consideration 473 (173)

Impairment of intangible assets — 43,836

Impairment of goodwill — 22,471

Other income (loss)

Foreign exchange gain (loss) (124) 41

Income tax benefit — 12,656

Items applicable to preferred shares

Dividend accretion of convertible preferred shares (12,123) (11,149)

Net loss attributable to common shares $ (75,868) $ (164,872)

Loss per share

Basic and diluted $ (1.00) $ (2.89)

Weighted average number of common shares

Comprehensive income (loss)

Unrealized gain on available-for-sale securities $ 14 $ —

Currency translation adjustments 44 (59)

See accompanying notes to the consolidated financial statements.

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

Stock-based compensation — — — — 7,204 — — 7,204

Currency translation adjustment — — — — — — (59) (59)

Accretion of accumulated dividends on Preferred Shares 12,123 (12,123) —

Certain fair value adjustments to liability stock option awards 18 18

Unrealized gain on available-for-sale securities 14 14

Currency translation adjustment 44 44

See accompanying notes to the consolidated financial statements.

ARBUTUS BIOPHARMA CORPORATION

Consolidated Statements of Cash Flows

(Expressed in thousands of US Dollars, except share and per share amounts)

Year ended December 31,

OPERATING ACTIVITIES

Non-cash items:

Deferred income tax benefit — (12,661)

Loss on sale of property and equipment — 20

Stock-based compensation expense 6,161 6,799

Unrealized foreign exchange gains (56) (68)

Change in fair value of contingent consideration 473 (173)

Impairment of intangible assets — 43,836

Impairment of goodwill — 22,471

Net accretion and amortization of investments in marketable securities 210 (275)

Net change in operating items:

Prepaid expenses and other assets (752) 1,606

Accounts payable and accrued liabilities 1,666 (3,314)

Net cash used in operating activities (51,441) (71,006)

INVESTING ACTIVITIES

Purchase of investments in marketable securities (85,578) (58,759)

Disposition of investments in marketable securities 73,398 87,675

Investment in Genevant (2,500) —

Proceeds from sale of property and equipment — 11

Acquisition of property and equipment (229) (589)

Net cash provided by (used in) investing activities (14,909) 28,338

FINANCING ACTIVITIES

Proceeds from sale of future royalties, net — 18,549

Issuance of common shares pursuant to exercise of options 449 307

Net cash provided by financing activities 86,746 37,457

Effect of foreign exchange rate changes on cash and cash equivalents 56 68

Increase (decrease) in cash and cash equivalents $ 20,452 $ (5,143)

Cash and cash equivalents, beginning of period $ 31,799 $ 36,942

Cash and cash equivalents, end of period $ 52,251 $ 31,799

Supplemental cash flow information

Preferred shares dividends accrued $ (12,123) $ (11,149)

See accompanying notes to the consolidated financial statements.

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 (the “Company” or “Arbutus”) is a clinical-stage, biopharmaceutical company primarily focused on developing a cure for people with chronic hepatitis B virus (“HBV”) infection. The Company is advancing multiple product candidates with distinct mechanisms of action that it believes have the potential to provide a new curative regimen for chronic HBV infection. The Company has also initiated a drug discovery and development effort for treating coronaviruses, including COVID-19.

The Company’s two lead product candidates are AB-729, the Company’s proprietary subcutaneously-delivered RNA interference (“RNAi”) product candidate that suppresses HBsAg expression, and AB-836, the Company’s proprietary next-generation oral capsid inhibitor that suppresses HBV DNA replication. AB-729 is currently in an ongoing Phase 1a/1b clinical trial and the Company expects AB-836 to progress into a Phase 1a/1b clinical trial in the first half of 2021.

Liquidity

At December 31, 2020, the Company had an aggregate of $123.3 million in cash, cash equivalents and investments in marketable securities. From January 1, 2021 through March 3, 2021, the Company received an additional $24.3 million of net proceeds from the issuance of common shares under the ATM program. The Company believes that its cash resources will be sufficient to fund its operations through the third quarter of 2022.

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 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

In December 2019, an outbreak of a novel strain of coronavirus (COVID-19) was identified in Wuhan, China. This virus continues to spread globally, has been declared a pandemic by the World Health Organization and has spread to nearly every country in the world. The impact of this pandemic has been, and will likely continue to be, extensive in many aspects of society. The pandemic has resulted in and will likely continue to result in significant disruptions to businesses. A number of countries and other jurisdictions around the world have implemented extreme measures to try and slow the spread of the virus. These measures include the closing of businesses and requiring people to stay in their homes, the latter of which raises uncertainty regarding the ability to travel to hospitals in order to participate in clinical trials. Additional measures that have had, and will likely continue to have, a major impact on clinical development, at least in the near-term, include shortages and delays in the supply chain, and prohibitions in certain countries on enrolling subjects in new clinical trials. Future disruptions related to the COVID-19 pandemic could negatively impact the Company’s plans and timelines in 2021 and beyond, including enrolling and monitoring subjects in its clinical trials.

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. 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, 2020, 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. Monetary 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.

Investment in Genevant

As the result of a recapitalization of Genevant Sciences Ltd. (“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 a similar Genevant securities. As of December 31, 2020, 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 recognition

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.

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.

Leases

As of January 1, 2019, the Company adopted FASB’s Accounting Standards Update 2016-02, Leases (ASC 842), which generally requires the recognition of operating and financing lease liabilities with corresponding right-of-use assets on the balance sheet. The Company adopted the new standard using the modified retrospective basis applied at the effective date of the new standard and elected to utilize a package of practical expedients. 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

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 (“Preferred Shares”), as further described in note 13, that meet the definition of participating securities. The Company’s 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 for the years ended December 31, 2020 and 2019, since the effect of the Company’s stock options and convertible preferred stock is anti-dilutive. For the year ended December 31, 2020, potential common shares of 10.7 million pertaining to stock options outstanding and approximately 21.1 million pertaining to if-converted preferred shares for a total of approximately 31.8 million shares were excluded from the calculation of net loss attributable to common shareholders, per share because their inclusion would be anti-dilutive. A total of approximately 28.4 million potential common shares and if-converted preferred shares were excluded from the calculation for the year ended December 31, 2019.

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,

(in thousands, except share and per share amounts)

Numerator:

Allocation of distributable earnings $ — $ —

Allocation of net loss attributed to common shareholders $ (75,868) $ (164,872)

Denominator:

See note 13 and note 14 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

We measure and recognize compensation expense for all share-based compensation arrangements based on estimated fair values. We use 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, we use 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 seven years for directors and executives, based on our 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.

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 accounts for Preferred Shares under ASC 480 – Distinguishing Liabilities from Equity (“ASC 480”), which provides guidance for equity instruments with conversion features. The Company classifies 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 cannot be cash-settled and the redemption features, which include a fixed conversion ratio with predetermined timing and proceeds, are within the Company’s control. The Company accrues 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.

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

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 11), the Company uses a probability weighted assessment of the likelihood the milestones would be met and the estimated timing of such payments, and then the potential contingent payments were discounted to their present value using a probability adjusted discount rate that reflects the early stage nature of the development program, time to complete the program development, and overall biotech indices. The Company determined the fair value of the contingent consideration was $3.4 million as of December 31, 2020 and the increase of $0.5 million has been recorded within operating expenses in the statement of operations and comprehensive loss for the year ended December 31, 2020. The assumptions used in the discounted cash flow model are level 3 inputs as defined above. The Company assessed the sensitivity of the fair value measurement to changes in these unobservable inputs, and determined that changes within a reasonable range would not result in a materially different assessment of fair value.

The following 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, 2020 (in thousands)

Assets

Cash and cash equivalents $ 52,251 $ — $ — $ 52,251

Investments in marketable securities 71,017 — — 71,017

Liabilities

Liability-classified options $ — $ — $ 250 $ 250

Level 1 Level 2 Level 3 Total

As of December 31, 2019 (in thousands)

Assets

Cash and cash equivalents $ 31,799 $ — $ — $ 31,799

Investments in marketable securities 59,035 — — 59,035

Liabilities

Liability-classified options $ — $ — $ 253 $ 253

The following table presents the changes in fair value of the Company’s liability-classified stock option awards:

(in thousands)

The following table presents the changes in fair value of the Company’s contingent consideration:

(in thousands)

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, 2020 (in thousands)

Cash equivalents

US government agency bonds — — — —

Investments in marketable securities

(1) Gross unrealized gain (loss) is pre-tax.

Amortized Cost Gross Unrealized Gain(1) Gross Unrealized Loss(1) Fair Value

As of December 31, 2019 (in thousands)

Cash equivalents

Money market fund $ 4,106 $ — $ — $ 4,106

US government agency bonds 1,511 — — 1,511

Investments in marketable securities

(1) Gross unrealized gain (loss) is pre-tax.

There were no realized gains or losses for the year ended December 31, 2020 or 2019.

5. Investment in Genevant

In April 2018, the Company entered into an agreement with Roivant Sciences Ltd. (“Roivant”), its largest shareholder, to launch Genevant Sciences Ltd. (“Genevant”), a company focused on the discovery, development, and commercialization of a broad range of RNA-based therapeutics enabled by the Company’s lipid nanoparticle (“LNP”) and ligand conjugate delivery technologies. The Company licensed exclusive rights to its LNP and ligand conjugate delivery platforms to Genevant for RNA-based applications outside of HBV, except to the extent certain rights had already been licensed to other third parties (the “Genevant License”). The Company retained all rights to its LNP and conjugate delivery platforms for HBV. Under the Genevant License, the Company is entitled to receive tiered low single-digit royalties on future sales of Genevant products covered by the licensed patents. If Genevant sub-licenses the intellectual property licensed by the Company to Genevant, the Company is entitled to receive under the Genevant License, upon the commercialization of a product developed by such sub-licensee, the lesser of (i) twenty percent of the revenue received by Genevant for such sublicensing and (ii) tiered low single-digit royalties on product sales by the sublicensee.

On July 23, 2020, the United States Patent and Trademark Office before the Patent Trial and Appeal Board ("PTAB") announced its decision in Moderna Therapeutics, Inc.'s (“Moderna”) challenge of the validity of U.S. Patent 8,058,069 ("the ‘069 Patent"). In this decision, the PTAB determined no challenged claims were unpatentable. On September 23, 2020, Moderna appealed the ‘069 Patent decision to the Federal Circuit Court of Appeals. Moderna filed its opening brief in that appeal on February 23, 2021, and the Company’s responsive brief is due on May 4, 2021. While the Company is the patent holder, this patent has been licensed to Genevant. The ‘069 Patent was included in the exclusive rights licensed by the Company to Genevant under the Genevant License.

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, 2020, the carrying value of the Company’s investment in Genevant was zero and the Company owned approximately 16% of the common equity of Genevant. During 2019, the Company recorded non-cash equity losses of $22.5 million related to Genevant. Equity losses for 2019 included $14.9 million of losses for the Company’s proportionate share of Genevant’s net losses and a $7.6 million impairment charge to reduce the carrying value of the Company’s investment in Genevant to zero. The impairment was due to uncertainty surrounding the recovery of the Company’s remaining carrying value in 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, 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 Company subleased a portion of the Burnaby facility to various tenants, including Genevant, until the lease expired on July 31, 2019. The Company recognized the remaining lease payments for the Burnaby facility, less sublease income under contract, in site consolidation expenses in 2018.

The Company adopted ASU No. 2016-02, Leases (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 for the

applicable lease, 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 year ended December 31, 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. For the twelve months ended December 31, 2019, the Company incurred total operating lease expense of $1.2 million, which included fixed lease payments of $0.9 million, and variable payments of $0.3 million. Sublease income for the Company’s Burnaby site, which closed during that year, was $0.2 million for the twelve months ended December 31, 2019.

Weighted average remaining lease term and discount rate were as follows:

Weighted-average remaining lease term (years) 6.1

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:

(in thousands)

Future minimum lease payments under operating leases that have remaining terms as of December 31, 2020 are as follows:

(in thousands)

Total lease payments $ 3,894

Less: interest (911)

Present value of lease payments $ 2,983

7. Property and equipment

The Company’s property and equipment balances as of the years ended December 31, 2020 and 2019 are as follows:

Cost Accumulated depreciation Net book value

December 31, 2020 (in thousands)

Computer hardware and software 324 (235) 89

Cost Accumulated depreciation Net book value

December 31, 2019 (in thousands)

During 2019, the Company closed its Burnaby facility and the lease expired according to its terms on July 31, 2019. In connection with the facility closure, the Company disposed of $3.4 million of equipment, furniture and leasehold improvements. Most of the disposed assets were fully depreciated. The aggregate net book value of the disposed assets was less than $0.1 million.

8. Intangible assets and goodwill

All IPR&D intangible asset balance related to the Company’s cccDNA program. During 2019, the Company recorded a $43.8 million non-cash impairment expense to reduce the carrying value of its IPR&D intangible assets to zero. The Company also recognized a corresponding income tax benefit of $12.7 million related to the decrease in its deferred tax liability related to the IPR&D intangible assets. The impairment was due to a decision to delay indefinitely the further development of the Company’s cccDNA program while the Company focuses on its other development programs.

The Company’s goodwill balance represented the excess of purchase price over the value assigned to the net tangible and identifiable intangible assets in connection with the business combination that formed Arbutus. During 2019, the Company assessed its changes in circumstances to determine if it was more likely than not that the fair value of its single reporting unit was below its carrying amount. Due to a sustained decrease in the Company’s share price during that time frame, the Company’s market capitalization was reduced below the book value of its net assets and the Company concluded that the fair value of its single reporting unit was below its carrying amount in excess of the carrying value of goodwill. As a result, the Company recorded a $22.5 million non-cash impairment expense to reduce the carrying value of its goodwill asset to zero in 2019.

9. Accounts payable and accrued liabilities

Accounts payable and accrued liabilities are comprised of the following:

(in thousands)

Research and development accruals 1,653 1,433

Professional fee accruals 679 809

Site consolidation accrual — 137

Other accrued liabilities 9 144

10. 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.

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 16%. 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, 2020, the Company has recorded an aggregate of $5.1 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, 2020, the Company recognized non-cash royalty revenue of $3.4 million and $4.0 million of related non-cash interest expense. During the year ended December 31, 2019, the Company recognized non-cash royalty revenue of $1.7 million and related non-cash interest expense of $2.1 million.

The table below shows the activity related to the net liability for the years ended December 31, 2020 and December 31, 2019:

Twelve Months Ended December 31,

(in thousands)

Initial recognition of liability — 30,000

Debt discount and issuance costs — (11,451)

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.

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 $7.2 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, 2020 and 2019, the Company earned royalties on Marqibo sales in the amount of $0.3 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, 2020 was less than $0.1 million, resulting in the contingent amount due to TPC being $2.7 million (C$3.7 million).

Arbitration with the University of British Columbia

Certain early work on lipid nanoparticle delivery systems and related inventions was undertaken at the University of British Columbia (“UBC”), as well as by Arbutus 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 his decision for the second phase of the arbitration, awarding UBC $5.9 million, which includes interest of approximately $2.6 million. The Company paid the $5.9 million award to UBC in September 2019 and recorded a charge of $6.3 million, consisting of $5.9 million for the award (including interest) and $0.4 million for an estimate of a potential award for costs and attorneys’ fees. An award for costs and attorneys’ fees is still to be determined.

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. The Company does not believe that any royalties are due to UBC and the Company intends to vigorously contest UBC’s allegation.

Stock Purchase Agreement with Enantigen

In October 2014, Arbutus Inc., our wholly-owned subsidiary, acquired all of the outstanding shares of Enantigen Therapeutics, Inc. (“Enantigen”) pursuant to a stock purchase agreement. 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 $3.4 million as of December 31, 2020.

12. Collaborations, contracts and licensing agreements

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 chronic HBV infection. The Company and Assembly will share in the costs of the collaboration. The Company incurred $0.2 million of costs related to the collaboration during the year ended December 31, 2020 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 its AB-729 compound.

Alnylam Pharmaceuticals, Inc. and Acuitas Therapeutics, Inc.

The Company has two royalty entitlements to Alnylam’s global net sales of ONPATTRO.

In 2012, the Company entered into a license agreement with Alnylam that entitles Alnylam to develop and commercialize products with the Company’s LNP technology. Alnylam’s ONPATTRO, which represents the first approved application of the Company’s LNP technology, was approved by the United States Food and Drug Administration (“FDA”) and the European Medicines Agency (“EMA”) during the third quarter of 2018 and was launched by Alnylam immediately upon approval in the United States. 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. See note 10 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 Oncology, Inc. (“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.

Acrotech Biopharma LLC and Spectrum Pharmaceuticals, Inc.

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 TM (Optisomal Vinorelbine) and Brakiva TM (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 are summarized in the following table:

Year ended December 31,

(in thousands)

Revenue from collaborations and licenses

Acuitas Therapeutics, Inc. $ 3,259 $ 1,931

Gritstone Oncology, Inc. — 1,819

Acrotech Biopharma, LLC 269 605

Non-cash royalty revenue

Alnylam Pharmaceuticals, Inc. 3,386 1,656

13. 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

In December 2018, the Company entered into an Open Market Sale Agreement (“the Sale Agreement”) with Jefferies LLC

(“Jefferies”), under which it could issue and sell common shares, from time to time, for an aggregate sales price of up to $50 million. In December 2019, the Company entered into an amendment to the Sale Agreement with Jefferies (the “2019 Amendment”) in connection with the filing of a shelf registration statement on Form S-3 (File No. 333-235674), filed with the SEC on December 23, 2019 (the “Shelf Registration Statement”). The 2019 Amendment revised the original Sale Agreement to reflect that the Company could sell its common shares, without par value, from time to time, for an aggregate sales price of up to $50 million, under the Shelf Registration Statement. In July 2020, the Company fully utilized the remaining availability under the Sale Agreement, as amended by the 2019 Amendment. In August 2020, the Company entered into a new amendment to the Sale Agreement (the “2020 Amendment”) with Jefferies. Pursuant to the 2020 Amendment, the Company can issue and sell common shares, from time to time, for an aggregate sales price of up to $75 million under the Sale Agreement, as amended.

For the year ended December 31, 2020, the Company issued 24,728,368 common shares pursuant to the Sale Agreement, resulting in net proceeds of approximately $86.3 million. From January 1, 2021 through March 3, 2021, the Company received an additional $24.3 million of net proceeds from the issuance of 5.8 million common shares under the ATM program.

For the year ended December 31, 2019, the Company issued 9,138,232 common shares pursuant to the Sale Agreement, resulting in net proceeds of approximately $19.5 million.

Series A Preferred Shares

On October 2, 2017, the Company announced that it 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 are non-voting and are convertible into common shares at a conversion price of $7.13 per share (which represents 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, will be subject to mandatory conversion into approximately 23 million common shares on October 18, 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). Assuming conversion of the Preferred Shares into common shares, based on the number of common shares outstanding on December 31, 2020 Roivant would hold 33% of the Company’s common shares. Roivant has agreed to a four year lock-up period for this investment and its existing holdings in Arbutus. Roivant has 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 on October 16, 2017, and the remaining amount of $66.4 million closed on January 12, 2018 following regulatory and shareholder approvals.

The Company records the Preferred Shares wholly as 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 share capital, and an increase to deficit (see statement of stockholder’s equity).

14. Stock-based compensation

Awards outstanding and available for issuance

During the year ended December 31, 2020, 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, 2020, the aggregate number of shares authorized for awards under all Plans was 15,790,202. As of December 31, 2020, the Company had 10,669,776 options outstanding and 3,161,471 awards available for issuance under the Plans.

The Company issues new common shares of stock to settle options exercised.

Under the 2016 and 2011 Plans, 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 or the prior day and the term may not exceed 10 years. Options granted generally vest over three or 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.

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, 2020:

Stock Options Outstanding Vested Stock Options Non-Vested Stock Options

The intrinsic value of options exercised under the Arbutus Plans during 2020 and 2019 are $0.3 million and less than $0.1 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, 2020:

Options outstanding and expected to vest

Number of stock options outstanding 10,391,676

Weighted-average exercise price $ 4.53

Weighted-average term remaining 6.7 years

Vested stock options

Number of vested stock options 6,384,386

Weighted-average exercise price $ 5.11

Weighted-average term remaining 5.5 years

The assumptions used in the Black-Scholes option-pricing for grants made during the years ended December 31, 2020 and 2019 are as follows:

Expected average option term 6.2 years 7.3 years

Expected volatility 80.2 % 75.9 %

Expected dividends — % — %

Risk-free interest rate 1.2 % 2.27 %

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, 2020:

Stock Options Vested and Outstanding

Number Weighted-Average Exercise Price

Options forfeit, canceled or expired (5,000) $ 3.02

The intrinsic value of liability-classified options exercised during 2020 was less than $0.1 million.

The following table summarizes additional information related to the Company’s liability-classified stock options as of December 31, 2020:

Options outstanding and expected to vest

Intrinsic value (in $000s) $ 158

Weighted-average term remaining 0.9 years

Liability options are re-measured to their fair values at each reporting date, using the Black-Scholes valuation model.

The weighted average Black-Scholes option-pricing assumptions and the resultant fair values as of December 31, 2020 and December 31, 2019, are presented in the following table:

Expected average option term 0.9 years 1.6 years

Expected dividends — % — %

Risk-free interest rate 0.11 % 1.59 %

Weighted-average fair value per share $ 1.30 $ 1.11

Total fair value of vested liability-classified options (in $000s) $ 250 $ 253

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, 2020:

Stock Options Vested and Outstanding

Options forfeit, canceled or expired — — $ —

The intrinsic value of options exercised under the OnCore plan during each of 2020 and 2019 was $0.1 million.

The following table summarizes additional information related to the OnCore stock options as of December 31, 2020:

Vested stock options

Intrinsic value (in $000s) $ 241

Weighted-average term remaining 3.8 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 period. The initial offering period under the ESPP is September 1, 2020 through August 31, 2021 with purchase dates set on February 26, 2021 and August 31, 2021. All 1,500,000 common shares remained available for future issuance under the ESPP at December 31, 2020. For the year ended December 31, 2020, the Company recognized $0.2 million 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

(in thousands)

During the year ended December 31, 2019, the Company recognized $1.1 million of non-cash stock-based compensation expense for the accelerated vesting stock options, related to the departure of the Company’s former President and Chief Executive Officer in June of 2019.

At December 31, 2020, there remains $7.8 million of unearned compensation expense related to unvested equity employee stock options to be recognized as expense over a weighted-average period of approximately 2.3 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.

15. 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. 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% (2019 - 27%) to the loss before income taxes as shown in the following tables:

Year ended December 31,

(in thousands)

Difference due to change in tax rate on opening deferred taxes — 8,356

Adjustment to prior year 390 (525)

Permanent and other differences 622 3,458

Change in valuation allowance - other 12,033 19,078

Difference due to income taxed at foreign rates 3,716 (3,343)

Stock-based compensation 450 523

Impairment of goodwill — 4,719

Income tax expense (recovery) $ — $ (12,656)

As of December 31, 2020, the Company has investment tax credits available to reduce Canadian federal income taxes of $8.0 million, versus $10.0 million as of December 31, 2019, which expire between 2030 and 2037, and provincial income taxes of $2.6 million, versus $4.5 million as of December 31, 2019, which expire between 2024 and 2027. In addition, the Company has research and development credits of $3.9 million as of December 31, 2020, and $3.9 million as of December 31, 2019, which expire between 2031 and 2038 and which can be used to reduce future taxable income in the United States.

As of December 31, 2020, the Company had scientific research and experimental development expenditures of $58.6 million available for indefinite carry-forward, versus the $60.6 million it had as of December 31, 2019. The Company also had net operating losses of $175.6 million as of December 31, 2020 and $164.9 million as of December 31, 2019, 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, 2020 and December 31, 2019, 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 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 $1.8 million and $61.9 million in pre-tax domestic and foreign losses, respectively, for the year ended December 31, 2020. The Company generated $27.1 million and $139.3 million in pre-tax domestic and foreign losses, respectively, for the year ended December 31, 2019.

Significant components of the Company’s deferred tax assets and liabilities are shown below:

As of December 31,

(in thousands)

Deferred tax assets (liabilities):

Book amortization in excess of tax (737) (914)

Tax value in excess of accounting value in lease inducements 627 705

Federal investment tax credits 5,872 7,325

Provincial investment tax credits 2,644 4,535

Equity accounted for investment 3,375 3,038

Net deferred tax assets (liabilities) $ — $ —

16. Related party transactions

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 Condensed Consolidated Statements of Operations and Comprehensive Loss in 2020. See note 5 for further details.

Genevant purchased certain administrative and transitional services from the Company totaling less than $0.1 million and $0.1 million during 2020 and 2019, respectively. 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.

In addition, Genevant had a sublease for 17,900 square feet in the Company’s Burnaby facility. Sublease income, including management fee reimbursements, from Genevant was $0.2 million in 2019 the last year under the Burnaby facility lease, which was netted against site consolidation costs in the income statement.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

Our management, including our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Annual Report on Form 10-K. Based upon that evaluation, our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer), concluded that, as of December 31, 2020, our disclosure controls and procedures were effective to provide reasonable assurance that (a) the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (b) such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Management’s Annual Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO 2013”).

Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

ABUS US Equity

ABUS · 10-K · period ended 2020-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Item 8. Financial Statements and Supplementary Data

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A. Controls and Procedures

ABUS US Equity☆

ABUS · 10-K · period ended 2020-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Item 8. Financial Statements and Supplementary Data

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A. Controls and Procedures

ABUS US Equity