ABUS 10-Q Quarter ended March 31, 2015

PART I. FINANCIAL INFORMATION		3
ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)	3
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	20
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	39
ITEM 4.	DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING	39
PART II. OTHER INFORMATION		40
ITEM 1.	LEGAL PROCEEDINGS	40
ITEM 1A.	RISK FACTORS	40
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.	40
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	41
ITEM 4.	MINE SAFETY DISCLOSURES	41
ITEM 5.	OTHER INFORMATION	41
ITEM 6.	EXHIBITS	42

		March 31 2015				December 31 2014
Assets
Current assets:
Cash and cash equivalents		$	232,276			$	72,187
Short-term investments (note 2)			-				39,974
Accounts receivable			4,564				1,903
Accrued revenue			1,595				538
Investment tax credits receivable			79				86
Prepaid expenses and other assets			1,255				1,730
Total current assets			239,769				116,418
Property and equipment			11,925				12,959
Less accumulated depreciation			(10,147	)			(11,199	)
Property and equipment, net of accumulated depreciation			1,778				1,760
Intangible assets (note 3)			389,652				-
Goodwill (note 3)			155,865				-
Total assets		$	787,064			$	118,178
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued liabilities (note 5)		$	14,019			$	9,328
Deferred revenue (note 4)			5,233				5,779
Warrants (note 2)			5,623				5,099
Total current liabilities			24,875				20,206
Deferred revenue, net of current portion (note 4)			7,897				9,937
Contingent consideration (note 8)			4,736				-
Deferred tax liability (note 3)			155,865				-
Total liabilities			193,373				30,143
Stockholders’ equity:
Common shares (note 3 and note 6)
Authorized - unlimited number with no par value
Issued and outstanding: 54,095,921 (December 31, 2014 - 22,438,169)			814,441				290,004
Additional paid-in capital			28,590				26,208
Deficit			(217,853	)			(205,864	)
Accumulated other comprehensive loss			(31,487	)			(22,313	)
Total stockholders' equity			593,691				88,035
Total liabilities and stockholders' equity		$	787,064			$	118,178

Nature of business and future operations (note 1)

Contingencies and commitments (note 8)

See accompanying notes to the condensed consolidated financial statements.

		Three-months ended March 31
		2015				2014
Revenue (note 4)
Collaborations and contracts		$	3,520			$	3,689
Licensing fees, milestone and royalty payments			1,162				741
Total revenue			4,682				4,430
Expenses
Research, development, collaborations and contracts			10,557				8,204
General and administrative			2,716				2,050
Depreciation of property and equipment			120				134
Acquisition costs (note 3)			9,295				-
Total expenses			22,688				10,388
Loss from operations			(18,006	)			(5,958	)
Other income (losses)
Interest income			202				147
Foreign exchange gains			7,038				1,443
Increase in fair value of warrant liability (note 2)			(1,223	)			(13,616	)
Net loss		$	(11,989	)		$	(17,984	)
Loss per common share
Basic and diluted		$	(0.40	)		$	(0.91	)
Weighted average number of common shares
Basic and diluted			30,208,136				19,801,428
Comprehensive loss
Cumulative translation adjustment			(9,174	)			(2,159	)
Comprehensive loss		$	(21,163	)		$	(20,143	)

See accompanying notes to the condensed consolidated financial statements.

		Number of shares				Share capital				Additional paid-in capital				Deficit				Accumulated other comprehensive loss				Total stockholders' equity
Balance, December 31, 2014			22,438,169			$	290,004			$	26,208			$	(205,864	)		$	(22,313	)		$	88,035
Stock-based compensation			-				-				2,934				-				-				2,934
Issuance of common shares pursuant to exercise of options			172,937				1,172				(552	)			-				-				620
Issuance of common shares pursuant to exercise of warrants			11,500				275				-				-				-				275
Issuance of common shares in conjunction with the private offering, net of issuance costs of $9,700,000			7,500,000				142,175				-				-				-				142,175
Issuance of common shares in conjunction with the acquisition of OnCore (note 3)			23,973,315				380,815				-				-				-				380,815
Currency translation adjustment			-				-				-				-				(9,174	)			(9,174	)
Net loss			-				-				-				(11,989	)			-				(11,989	)
Balance, March 31, 2015			54,095,921			$	814,441			$	28,590			$	(217,853	)		$	(31,487	)		$	593,691

		Three months ended March 31
		2015				2014
OPERATING ACTIVITIES
Net income (loss) for the period		$	(11,989	)		$	(17,984	)
Items not involving cash:
Depreciation of property and equipment			120				134
Stock-based compensation - research, development, collaborations and contract expenses			2,157				848
Stock-based compensation - general and administrative expenses			777				340
Unrealized foreign exchange (gains) losses			(7,057	)			(59	)
Change in fair value of warrant liability			1,223				13,616
Net change in non-cash operating items:
Accounts receivable			(2,886	)			(1,409	)
Accrued revenue			(1,126	)			(208	)
Deferred expenses			-				55
Prepaid expenses and other assets			221				482
Accounts payable and accrued liabilities			2,008				1,051
Deferred revenue			(1,291	)			12,289
Net cash provided by (used in) operating activities			(17,843	)			9,155
INVESTING ACTIVITIES
Disposition of short-term investments			37,363				-
Cash acquired through acquisition of OnCore (note 3)			324				-
Acquisition of property and equipment			(141	)			(335	)
Net cash provided by (used) in investing activities			37,546				(335	)
FINANCING ACTIVITIES
Proceeds from issuance of common shares, net of issuance costs			142,175				56,477
Issuance of common shares pursuant to exercise of options			620				1,924
Issuance of common shares pursuant to exercise of warrants			25				888
Net cash provided by financing activities			142,820				59,289
Effect of foreign exchange rate changes on cash and cash equivalents			(2,434	)			(2,469	)
Increase in cash and cash equivalents			160,089				65,640
Cash and cash equivalents, beginning of period			72,187				68,717
Cash and cash equivalents, end of period		$	232,276			$	134,357
Supplemental cash flow information
Non-cash transactions:
Acquisition of OnCore exclusing cash acquired		$	381,618				-

See accompanying notes to the condensed consolidated financial statements.

1. Nature of business and future operations

2. Significant accounting policies

•

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.

Contingent consideration is a liability assumed by the Company from its acquisition of OnCore – see note 3 and 8. The fair value as at March 31, 2015 is preliminary and the Company is currently undertaking a valuation assessment of the contingent consideration.

		Level 1				Level 2				Level 3				December 31, 2014
Assets
Cash and cash equivalents		$	72,187				-				-			$	72,187
Guaranteed investment certificates			39,974				-				-				39,974
Total		$	112,161				-				-			$	112,161
Liabilities
Warrants			-				-			$	5,099			$	5,099
Financial instrument			-				-				-				-
Total			-				-			$	5,099			$	5,099

		Liability at beginning of the period				Opening liability of warrants issued in the period				Fair value of warrants exercised in the period				Increase in fair value of warrants				Foreign exchange (gain) loss				Liability at end of the period
Three months ended March 31, 2014		$	5,379				-			$	(5,955	)		$	13,616			$	216			$	12,824
Three months ended March 31, 2015		$	5,099				-			$	(250	)		$	1,223			$	(449	)		$	5,623

Warrant Pricing assumptions

		March 31, 2015				December 31, 2014
Dividend yield			0.00	%			0.00	%
Expected volatility			98.68	%			85.22	%
Risk-free interest rate			0.49	%			1.00	%
Expected average term (years)		0.6				0.5
Fair value of warrants outstanding (per warrant)		$	14.54			$	12.80
Aggregate fair value of warrants outstanding		$	5,623			$	5,099
Number of warrants outstanding			386,750				398,250

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASC 606). The standard is intended to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS by creating a new Topic 606, Revenue from Contracts with Customers. This guidance supersedes the revenue recognition requirements in ASC 605, Revenue Recognition, and supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition – Construction-Type and Production-Type Contracts. The core principle of the accounting standard is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those good or services. The amendments should be applied by either (1) retrospectively to each prior reporting period presented; or (2) retrospectively with the cumulative effect of initially applying this ASU recognized at the date of initial application. In April 2015, the FASB voted to propose a deferral of the effective date of the ASU by one year. The new guidance would be effective for fiscal years beginning after December 15, 2017 instead of December 15, 2016, which for the Company means January 1, 2018. Entities are permitted to adopt in accordance with the original effective date if they choose. The Company has not yet determined the extent of the impact of adoption.

3. Merger with OnCore Biopharma, Inc. (“OnCore”)

The transaction has been accounted for using the acquisition method based on ASC 805, Business Combinations, on the basis that Tekmira is the acquirer, based on managements’ analysis and evaluation of the form of the acquisition, the relative contribution and rights of the predecessor groups post-closing, and the relative number of shares issued by the Company on acquisition of OnCore. Under the acquisition method, the consideration transferred is measured at the market price as at the acquisition date. The excess of the purchase price over the preliminary value assigned to the net assets acquired has been recorded as goodwill. Acquisition costs are expensed as incurred. The company recorded $9,295,000 of acquisition costs for the three-months ended March 31, 2015.

The Company issued a total of 23,973,315 common shares with a total value of $381,942,000 as consideration, which is comprised of 20,347,906 common shares issued without subjects and 3,625,412 common shares issued subject to repurchase provision. The fair value of the common shares issued without subjects has been determined to be the Company’s NASDAQ closing price of $18.26 on the date prior to the acquisition’s consummation, March 4, 2015. The total fair value of the common shares issued subject to repurchase provision has been determined to be $66,196,000, using the Black-Scholes pricing model with assumed risk-free interest rate of 0.74%, volatility of 81%, a zero dividend yield and an expected life of 4 years. Of the total fair value, $9,262,000 has been attributed as pre-combination service and included as part of the total acquisition consideration. The post-combination attribution of $56,934,000 will be recognized as compensation expense over the period of expiry of repurchase provision rights through to August 2018. The Company has included $1,205,000 compensation expense related to the expiration of repurchase provision rights from the acquisition date through to March 31, 2015.

Based on the preliminary fair values above, an amount of $155,865,000 has been allocated to goodwill attributable to synergies expected to arise after the Company’s acquisition of OnCore. Goodwill increased from the preliminary estimate of nil to $155,865,000 due to revision in the estimate of deferred tax liability. The full amount of the goodwill has been assigned to Tekmira, which is the reporting unit management has determined the goodwill to be associated with. The goodwill is not expected to be deductible for tax purposes.

4. Collaborations, contracts and licensing agreements

		Three months ended March 31
		2015				2014
Collaborations and contracts
DoD (a)		$	3,045			$	3,240
Monsanto (b)			248				243
BMS (d)			-				206
Dicerna (e)			227				-
Total research and development collaborations and contracts			3,520				3,689
Licensing fees, milestone and royalty payments
Monsanto licensing fees and milestone payments (b)			842				545
Acuitas milestone payments (c)			-				150
Dicerna licensing fee (e)			263				-
Spectrum royalty payments (f)			57				46
Total licensing fees, milestone and royalty payments			1,162				741
Total revenue		$	4,682			$	4,430

		March 31, 2015				December 31, 2014
DoD (a)		$	222			$	313
Monsanto current portion (b)			3,888				4,245
Dicerna current portion (e)			1,123				1,221
Deferred revenue, current portion			5,233				5,779
Monsanto long-term portion (b)			6,965				8,666
Dicerna long-term portion (e)			932				1,271
Total deferred revenue		$	13,130			$	15,716

(c) License and collaboration with Alnylam Pharmaceuticals, Inc. (“Alnylam”) and Acuitas Therapeutics Inc. (“Acuitas”, formerly AlCana Technologies Inc.)

		March 31, 2015				December 31, 2014
Trade accounts payable		$	7,242			$	2,044
Research and development accruals			3,417				2,391
License fee accruals			-				250
Professional fee accruals			1,746				1,294
Deferred lease inducements			335				250
Payroll accruals			28				2,873
Other accrued liabilities			1,251				226
		$	14,019			$	9,328

The Company entered into a Technology Partnerships Canada ("TPC") agreement with the Canadian Federal Government on November 12, 1999.  Under this agreement, TPC agreed to fund 27% of the costs incurred by the Company, prior to March 31, 2004, in the development of certain oligonucleotide product candidates up to a maximum contribution from TPC of $7,179,000 (C$9,323,000).  As at March 31, 2015, a cumulative contribution of $2,923,000 (C$3,702,000) has been received and the Company does not expect any further funding under this agreement.  In return for the funding provided by TPC, the Company agreed to pay royalties on the share of future licensing and product revenue, if any, that is received by the Company on certain non-siRNA oligonucleotide product candidates covered by the funding under the agreement.  These royalties are payable until a certain cumulative payment amount is achieved or until a pre-specified date.  In addition, until a cumulative amount equal to the funding actually received under the agreement has been paid to TPC, the Company agreed to pay 2.5% royalties on any royalties the Company receives for Marqibo. For the three months ended March 31, 2015, the Company earned royalties on Marqibo sales in the amount of $57,000 (three months ended March 31, 2014 – $46,000) (see note 4(f)), resulting in $1,000 being recorded by the Company as royalty payable to TPC (March 31, 2014 - $1,000). The cumulative amount paid or accrued up to March 31, 2015 was $1,000, resulting in the contingent amount due to TPC being $2,916,000 (C$3,694,000).

Under the stock purchase agreement, OnCore agreed to pay up to a total of $21,000,000 to Enantigen’s selling stockholders upon the achievement of certain triggering events related to Enantigen’s two programs in pre-clinical development related to HBV therapies. The first triggering event is the enrollment of first patient in Phase 1b clinical trial in HBV patients, which the Company does not expect to occur in the next twelve-month period.

The regulatory milestone payments have an estimated fair value of approximately $4,736,000 and have been treated as contingent consideration payable in the preliminary purchase price allocation (note 3), based on information available including OnCore’s valuation at the date of its acquisition of Enantigen, using 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 of 17.7% (reflecting the early stage nature of the development program, time to complete the program development, and overall biotech indices).

As part of its acquisition of OnCore on March 4, 2015 as described in note 3, the other non-current liabilities assumed by the Company included the contingent consideration of $4,736,000 related to OnCore’s acquisition of Enantigen. The Company is currently undertaking valuation assessments of assets acquired and liabilities assumed from OnCore, which includes a valuation assessment of the contingent consideration.

In partial consideration for this license, OnCore paid a license initiation fee of $150,000 and issued warrants to Blumberg and Drexel. Under this license agreement, OnCore also agreed to pay up to $3,500,000 in development and regulatory milestones per licensed compound series, up to $92,500,000 in sales performance milestones per licensed product, and royalties in the mid-single digits based upon the proportionate net sales of licensed products in any commercialized combination. The Company is obligated to pay Blumberg and Drexel a double digit percentage of all amounts received from the sub-licensees, subject to customary exclusions.

In October 2014, OnCore entered into a research collaboration and funding agreement with Blumberg under which the Company will provide $1,000,000 per year of research funding for three years, renewable at our option for an additional three years, for Blumberg to conduct research projects in HBV and liver cancer pursuant to a research plan to be agreed upon by the parties. Blumberg has exclusivity obligations to Tekmira with respect to HBV research funded under the agreement. In addition, we have the right to match any third party offer to fund HBV research that falls outside the scope of the research being funded under the agreement. Blumberg has granted us the right to obtain an exclusive, royalty bearing, worldwide license to any intellectual property generated by any funded research project. If the Company elects to exercise our right to obtain such a license, the Company will have a specified period of time to negotiate and enter into a mutually agreeable license agreement with Blumberg. This license agreement will include the following pre negotiated upfront, milestone and royalty payments: an upfront payment in the amount of $100,000; up to $8,100,000 upon the achievement of specified development and regulatory milestones; up to $92,500,000 upon the achievement of specified commercialization milestones; and royalties at a low single to mid-single digit rates based upon the proportionate net sales of licensed products from any commercialized combination.

In partial consideration for this license, OnCore paid NeuroVive a license fee of $1,000,000. The Company is also obligated to pay up to $47,000,000 in clinical development and regulatory milestones per indication and up to $102,500,000 in sales performance milestones per licensed product and indication. If we are acquired by a third party in a transaction that meets certain criteria, then we or our acquiror will be obligated to pay all remaining development, regulatory and sales milestone payments, regardless of whether the applicable milestone events have been achieved, for each licensed product that entered clinical development before such acquisition. We agreed to pay NeuroVive tiered royalties in the mid-single to low-double digit range based upon the proportionate gross sales of patented licensed products from any commercialized combination. If the Company terminates this license agreement in its entirety for convenience prior to the first commercial sale of any licensed product, we will be obligated to pay NeuroVive a termination fee of $2,000,000.

In partial consideration for this license, upon closing of the Cytos Agreement, the Comapny will be obligated to pay Cytos up to a total of $67,000,000 for each of the six licensed compound series upon the achievement of specified development and regulatory milestones; for hepatitis and each additional licensed viral infection, up to a total of $110,000,000 upon the achievement of specified sales performance milestones; and tiered royalty payments in the high-single to low-double digits, based upon the proportionate net sales of licensed products in any commercialized combination.