VBI Vaccines Inc/BC - Quarter Report: 2020 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2020

OR

For the transition period from _______ to

Commission file number: 001-37769

VBI VACCINES INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: 617-830-3031

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

VBI VACCINES INC.

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED September 30, 2020

TABLE OF CONTENTS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION
CONTAINED IN THIS REPORT

This quarterly report on Form 10-Q (this “Form 10-Q”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. You can find many (but not all) of these statements by looking for words such as “approximates,” “believes,” “hopes,” “expects,” “anticipates,” “estimates,” “projects,” “intends,” “plans,” “would,” “should,” “could,” “will,” “may,” or other similar expressions in this Form 10-Q. In particular, these include statements relating to future actions; prospective products, applications, customers, and technologies; future performance or results of anticipated products; anticipated expenses; and projected financial results. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition, and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of risks, uncertainties, and assumptions that could cause actual results to differ materially from our historical experience and our present expectations, or projections described under the sections in this Quarterly Report on Form 10-Q entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2019 annual report on the Form 10-K filed with the Securities and Exchange Commission on March 5, 2020. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for us to predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

Unless otherwise stated or the context otherwise requires, the terms “VBI,” “we,” “us,” “our,” and the “Company” refer to VBI Vaccines Inc. and its subsidiaries.

Unless indicated otherwise, all references to the U.S. Dollar, Dollar or $   are to the United States Dollar, the legal currency of the United States of America and all references to € mean Euros, the legal currency of the European Union. We may also refer to NIS, which is the New Israeli Shekel, the legal currency of Israel, and the Canadian Dollar or CAD, which is the legal currency of Canada.

Except for share and per share amounts or as otherwise specified to be in millions, amounts presented are stated in thousands.

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

VBI Vaccines Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share amounts)

See accompanying Notes to Condensed Consolidated Financial Statements

VBI Vaccines Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(in thousands, except share and per share amounts)

See accompanying Notes to Condensed Consolidated Financial Statements

VBI Vaccines Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(in thousands, except share amounts)

See accompanying Notes to Condensed Consolidated Financial Statements

VBI Vaccines Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

See accompanying Notes to Condensed Consolidated Financial Statements

VBI Vaccines Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(in thousands, except share and per share amounts)

1. NATURE OF BUSINESS AND CONTINUATION OF BUSINESS

Corporate Overview

VBI Vaccines Inc. (the “Company” or “VBI”) was incorporated under the laws of British Columbia, Canada on April 9, 1965.

The Company and its wholly-owned subsidiaries, VBI Vaccines (Delaware) Inc., a Delaware corporation (“VBI DE”); VBI DE’s wholly-owned subsidiary, Variation Biotechnologies (US), Inc., a Delaware corporation (“VBI US”); Variation Biotechnologies Inc. a Canadian company and a wholly-owned subsidiary of VBI US (“VBI Cda”); SciVac Ltd. an Israeli company (“SciVac”), and SciVac Hong Kong Limited (“SciVac HK”) are collectively referred to as the “Company,” “we,” “us,” “our,” or “VBI”.

The Company’s registered office is located at Suite 1700, Park Place, 666 Burrard Street, Vancouver, BC V6C 2X8 with its principal office located at 222 Third Street, Suite 2241, Cambridge, MA 02142.

Principal Operations

VBI is a commercial-stage, biopharmaceutical company developing a next generation of vaccines to address unmet needs in infectious disease and immuno-oncology. We are advancing the prevention and treatment of hepatitis B, with: (1) the only 3-antigen hepatitis B vaccine, Sci-B-Vac, which is approved for use and commercially available in Israel, and recently completed a pivotal Phase III program in the United States, Europe, and Canada; and (2) VBI-2601 (BRII-179), an immunotherapeutic candidate in development in collaboration with Brii Biosciences Limited (“Brii Bio”) for a functional cure for chronic hepatitis B. Our enveloped virus-like particle (“eVLP”) platform technology enables the development of eVLP vaccines that closely mimic the target virus to elicit a potent immune response. Our lead eVLP program candidates include VBI-1901, a glioblastoma (“GBM”) vaccine immunotherapeutic candidate, VBI-1501, our prophylactic cytomegalovirus (“CMV”) vaccine candidate, and VBI-2900, our prophylactic coronavirus vaccine program. Our coronavirus vaccine program includes both (1) VBI-2901, a trivalent pan-coronavirus vaccine candidate expressing the SARS-CoV-2 (COVID-19), SARS-CoV (SARS), and MERS-CoV (MERS) spike proteins; and (2) VBI-2902, a monovalent vaccine candidate expressing the SARS-CoV-2 (COVID-19) spike protein. We are headquartered in Cambridge, Massachusetts, with research operations in Ottawa, Canada. Our manufacturing site in Rehovot, Israel produces Sci-B-Vac and VBI-2601 while our eVLP vaccine candidates are manufactured using contract development and manufacturing organizations located in the United States and Canada.

The ongoing COVID-19 pandemic has materially negatively affected and continues to affect the global economy, and there is continued severe uncertainty about the duration and intensity of the impacts of the pandemic. As a result, the Company’s business and results of operations have also been adversely affected and could continue to be adversely affected by COVID-19 which has necessitated restricting the number of personnel in the Company’s research laboratories and manufacturing facility at any given point in time, and has slowed recruitment to clinical trials. The extent to which the COVID-19 pandemic will continue to impact our business will depend on future developments, which are highly uncertain and cannot be predicted. We do not yet know the full extent of potential delays or impacts on our business, our clinical studies, our research programs, the recoverability of our assets, and our manufacturing; however, the COVID-19 pandemic may disrupt or delay our business operations, including with respect to efforts relating to potential business development transactions, and it could disrupt the marketplace which could have an adverse effect on our operations.

Liquidity and Going Concern

The Company faces a number of risks, including but not limited to, uncertainties regarding the success of the development and commercialization of its products, demand and market acceptance of the Company’s products, and reliance on major customers. The Company anticipates that it will continue to incur significant operating costs and losses in connection with the development of its products.

The Company had an accumulated deficit of $293,256 as of September 30, 2020 and cash outflows from operating activities of $30,555 for the nine months ended September 30, 2020.

The Company will require significant additional funds to conduct clinical and non-clinical trials, achieve regulatory approvals, and, subject to such approvals, commercially launch its products. The Company plans to finance near term future operations with existing cash and cash equivalents reserves. Additional financing may be obtained from the issuance of equity securities, the issuance of additional debt, structured asset financings, government grants or other subsidies, and/or revenues from potential business development transactions, if any. There is no assurance the Company will manage to obtain these sources of financing, if required. The above conditions raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.

In April 2020, the Company closed an underwritten public offering of 52,272,726 common shares at a price of $1.10 per share for total gross proceeds of $57,500. The Company incurred $3,606 of share issuance costs related to the offering resulting in net cash proceeds of $53,894 and costs related to the issuance of warrants to purchase 705,000 common shares to National Securities Inc. (“National”) or its designees as consideration for National providing financial advisory services in connection with the offering. The warrants issued to National or its designees (“National Warrants”) are exercisable immediately upon issuance and terminate three years following issuance and have an exercise price of $1.50 per share.

In May 2020, the Company refinanced its existing term loan facility with Perceptive Credit Holdings, LP and entered into a Loan and Guaranty Agreement (the “Loan Agreement”) with K2 HealthVentures LLC for net proceeds of $4.5 million. The refinanced long-term debt has a maturity date of June 1, 2024. See Note 8 for more details.

On July 21, 2020, we issued 550,000 common shares upon exercise of warrants at an exercise price of $3.34 for gross proceeds of $1,837.

On July 31, 2020, the Company entered into an Open Market Sale Agreement^SM with Jefferies LLC (“Jefferies”), pursuant to which the Company may offer and sell its common shares having an aggregate price of up to $125 million from time to time through Jefferies, acting as agent or principal (the “ATM Program”). Common shares are offered pursuant to a sales agreement prospectus included in the Company’s automatic shelf registration on Form S-3 filed with the United States Securities and Exchange Commission (“SEC”) on July 31, 2020. During the third quarter of 2020, the Company issued 10,840,334 common shares under the ATM Program, for total gross proceeds of $48,769 at an average price of $4.4988. The Company incurred $1,606 of shares issuance costs related to the common shares issued resulting in net proceeds of $47,163. As of September 30, 2020, approximately $76,231 of common shares remained available for issuance under the ATM Program.

On July 3, 2020, the Company and the National Research Council of Canada (“NRC”) signed a contribution agreement as represented by its Industrial Research Assistance Program (“IRAP”) whereby the NRC agrees to contribute up to CAD $1,000 for the transfer and scale-up of the technical production process for our prophylactic coronavirus vaccine program. Grants of CAD $235 are recognized in the statement of operations and comprehensive loss for the three and nine months ended September 30, 2020.

On September 16, 2020, the Company and Her Majesty the Queen in Right of Canada as represented by the Minister of Industry (“ISED”) signed a contribution agreement (the “Contribution Agreement”) for a contribution from the Strategic Innovation Fund (“SIF”) whereby ISED agrees to contribute up to CAD $55,976 to support the development of the Company’s coronavirus vaccine program, through Phase II clinical studies, for a period commencing on April 15, 2020 and ending in or before the first quarter of 2022. Grants of CAD $731 are recognized in the statement of operations and comprehensive loss for the three and nine months ended September 30, 2020. In connection with execution of the Contribution Agreement, the Company obtained a consent of K2 HealthVentures LLC, as administrative agent for the lenders and a lender, pursuant to the Loan Agreement. Pursuant to the consent, certain events of default that result in contributions made under the Contribution Agreement in excess of $500 becoming due and payable could result in an event of default under the Loan Agreement. See Note 8 for more details on the Loan Agreement.

Financial instruments recognized in the condensed consolidated balance sheet consist of cash and cash equivalents, short-term investments, accounts receivable, other current assets, accounts payable, and other current liabilities. The Company believes that the carrying value of its current financial instruments approximates their fair values due to the short-term nature of these instruments. The Company does not hold any derivative financial instruments.

The carrying amounts of the Company’s long-term assets approximate their respective fair values.

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Consolidation

The Company’s fiscal year ends on December 31 of each calendar year. The accompanying unaudited condensed consolidated financial statements have been prepared in U.S. dollars (“USD”) and pursuant to the rules and regulations of the SEC, for interim reporting. Accordingly, certain information and footnote disclosures normally included in the financial statements prepared in accordance with United States of America generally accepted accounting principles (“U.S. GAAP”), have been condensed or omitted pursuant to such rules and regulations. The December 31, 2019 consolidated balance sheet in this document was derived from the audited consolidated financial statements. The condensed consolidated financial statements and notes included in this quarterly report on Form 10-Q (this “Form 10-Q”) does not include all of the disclosures required by U.S. GAAP and should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 10-K”), as filed with the SEC on March 5, 2020.

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries: VBI DE, VBI US, VBI Cda, SciVac, and SciVac HK. Intercompany balances and transactions between the Company and its subsidiaries are eliminated in the condensed consolidated financial statements.

In the opinion of management, these condensed consolidated financial statements include all adjustments and accruals of a normal and recurring nature necessary to fairly state the results of the periods presented. The results for the periods presented are not necessarily indicative of results to be expected for the full year or for any future periods.

Significant Accounting Policies

The significant accounting policies used in the preparation of these condensed consolidated financial statements are disclosed in the 2019 10-K, and there have been no changes to the Company’s significant accounting policies during the nine months ended September 30, 2020, other than the polices discussed below.

Cash and cash equivalents

Cash and cash equivalents include cash investments in interest-bearing accounts and term deposits which can readily be redeemed for cash or are issued for terms of three months or less from the date of acquisition.

Short-term investments

Short-term investments consist of redeemable short-term investments held with Schedule 1 Canadian banks for maturity terms greater than 3 months but less than a year from the date of acquisition. Short-term investments were initially classified as available for sale and were measured at fair value whereby unrealized holding gains or losses on these investments are reported in other comprehensive income or loss and accrued interest income was recognized in interest expense, net of interest income in the condensed consolidated statement of operations and comprehensive loss.

On September 30, 2020 we re-assessed the classification of our short-term investment and we determined that the short-term investment shall be classified as held to maturity. The transfer on September 30, 2020 occurred at fair value with the unrealized holding gains remaining in other comprehensive income or loss. The unrealized holding gains will be amortized over the remaining life of the security until April 2021.

Our short-term investments are considered level 2 in the fair value hierarchy. The fair value of the short-term investment was determined using the market approach method and the inputs include comparable market interest rates at September 30, 2020.

Government Grants

Government grants are recognized in the statement of operations and comprehensive loss in the same period as the relevant expenses, in compliance with the agreement, as a reduction in the related expense or reduce the carrying value of the asset being acquired.

3. NEW ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

Intangibles – Goodwill and Other, Internal-Use Software

In August 2018, the FASB issued ASU 2018-15: Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customers’ accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Accordingly, the amendments require an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. Our adoption of this ASU, effective January 1, 2020, was applied prospectively and did not have a material impact on our condensed consolidated financial statements and the related footnote disclosures.

Recently Issued Accounting Standards, not yet Adopted

None

4. INVENTORY, NET

Inventory is stated at the lower of cost or market and consists of the following:

SCHEDULE OF INVENTORY 

5. INTANGIBLE ASSETS AND GOODWILL

The Company’s intangible assets determined to have indefinite useful lives including In-Process Research and Development (“IPR&D”) and goodwill, are tested for impairment annually, or more frequently if events or circumstances indicate that the assets might be impaired. Such circumstances could include but are not limited to: (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. The Company has established August 31st as the date for its annual impairment test of IPR&D and goodwill.

The costs of rights to IPR&D projects acquired in an asset acquisition are expensed in the consolidated statements of operations unless the project has an alternative future use. These costs include initial payments incurred prior to regulatory approval in connection with research and development agreements that provide rights to develop, manufacture, market and/or sell pharmaceutical products.

The IPR&D assets, which consist of the CMV and GBM programs, were acquired in a business combination, capitalized as an intangible asset and are tested for impairment at least annually until commercialization, after which time the IPR&D will be amortized over its estimated useful life. The impairment test compares the carrying amount of the IPR&D asset to its fair value. If the carrying amount exceeds the fair value of the asset, such excess is recorded as an impairment loss. There was no IPR&D impairment determined as a result of the Company’s annual testing on August 31, 2020. The fair value of the IPR&D assets included in the impairment test was determined using the income approach method and is considered Level 3 in the fair value hierarchy. Some of the more significant estimates and assumptions inherent in the estimate of the fair value of IPR&D assets include the amount and timing of costs to develop the IPR&D into viable products, the amount and timing of future cash inflows, the discount rate and the probability of technical and regulatory success applied to the cash flows. The discount rate used was 11% and the cumulative probability of technical and regulatory success to achieve approval to market the products ranged from approximately 6% to 17%.

SCHEDULE OF INTANGIBLE ASSETS INCLUDING CUMULATIVE IMPAIRMENT AND CUMULATIVE CURRENCY TRANSLATION 

The Company amortizes intangible assets with finite lives on a straight-line basis over their estimated useful lives.

The change in carrying value for IPR&D assets from December 31, 2019 relates to currency translation adjustments which decreased by $1,541 for the nine-month period ended September 30, 2020.

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. When evaluating goodwill for impairment, we may first perform an assessment qualitatively whether it is more likely than not that a reporting unit’s carrying amount exceeds its fair value, referred to as a “step zero” approach. Subsequently (if necessary, after step zero), if the carrying value of a reporting unit exceeded its fair value an impairment would be recorded. We would perform our goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. There was no goodwill impairment determined as a result of the Company’s annual testing on August 31, 2020. The fair value of the Company, which consists of a single reporting unit, included in the impairment test was determined using the closing market stock price of VBI as of August 31, 2020.

SCHEDULE OF GOODWILL 

The change in carrying value for goodwill from December 31, 2019 relates to currency translation adjustments which decreased by $56 for the nine-month period ended September 30, 2020.

6. OTHER CURRENT LIABILITIES

Other current liabilities consisted of the following:

SCHEDULE OF OTHER CURRENT LIABILITIES 

7. LOSS PER SHARE OF COMMON SHARES

Basic loss per share is computed by dividing net loss applicable to common stockholders by the weighted average number of common shares outstanding during each period. Diluted loss per share includes the effect, if any, from the potential exercise or conversion of securities, such as warrants, and stock options, which would result in the issuance of incremental shares of common shares unless such effect is anti-dilutive. In computing the basic and diluted net loss per share applicable to common stockholders, the weighted average number of shares remains the same for both calculations due to the fact that when a net loss exists, dilutive shares are not included in the calculation as their effect would be anti-dilutive. These potentially dilutive securities are more fully described in Note 9, Stockholders’ Equity and Additional Paid-in Capital.

The following potentially dilutive securities outstanding at September 30, 2020 and 2019 have been excluded from the computation of diluted weighted average shares outstanding, as they would be antidilutive:

SCHEDULE OF ANTIDILUTIVE WEIGHTED AVERAGE SHARES OUTSTANDING 

8. LONG-TERM DEBT

As of September 30, 2020, and December 31, 2019, the long-term debt is as follows:

SCHEDULE OF LONG-TERM DEBT 

On May 22, 2020, the Company (along with its subsidiary VBI Cda) entered into the Loan Agreement with K2 HealthVentures LLC and any other lender from time to time party thereto (the “Lenders”) pursuant to which we received the first tranche secured term loan of $20 million (the “First Tranche Term Loan”). The Lenders agreed to make available the following additional tranches subject to the following conditions and upon the submission of a loan request by the Company: (1) up to $10 million available between January 1, 2021 and April 30, 2021 upon achievement of certain milestones (the “Second Tranche Term Loan”), (2) $10 million available between the closing date and December 31, 2021, subject to achievement of a certain U.S. Food and Drug Administration approval (the “Third Tranche Term Loan”), and (3) a final tranche of up to $10 million that can be made available any time prior to June 30, 2022, subject to the advance of the Third Tranche Term Loan, satisfactory review by the administrative agent of our financial and operating plan, and approval by the Lenders’ investment committee (the “Fourth Tranche Term Loan”). Pursuant to the Loan Agreement, the Lenders have the ability to convert, at the Lenders’ option, up to $4 million of the secured term loan into common shares of the Company at a conversion price of $1.46 per share (“K2 conversion feature”).

In connection with the Loan Agreement, on May 22, 2020, the Company issued the Lenders a warrant to purchase up to 625,000 common shares (the “K2 Warrant”) at an exercise price of $1.12 (the “Warrant Price”). The number of common shares issuable pursuant to the K2 Warrant, at any given time, is determined by the aggregate principal amount of the loans advanced at that time pursuant to the Loan Agreement multiplied by 3.5% and divided by the Warrant Price. If the full $50 million available in all K2 tranches is advanced pursuant to the Loan Agreement, up to 1,562,500 common shares will be issuable pursuant to the K2 Warrant. The K2 Warrant may be exercised either for cash or on a cashless “net exercise” basis and expires on May 22, 2030.

The total proceeds attributed to the K2 Warrant was $1,181 based on the relative fair value of the K2 Warrant as compared to the sum of the fair values of the K2 Warrant, K2 conversion feature and debt. The effective conversion price of the K2 conversion feature of $1.52 was determined to be less than the fair value of the underlying common stock at the date of commitment, resulting in a beneficial conversion feature (“BCF”) at that date. The intrinsic value of the BCF was $2,577 and recorded to additional paid-in capital. The K2 warrant and the K2 conversion feature resulted in the debt being issued at a discount. The Company also incurred $1,021 of debt issuance costs and is required to make a final payment equal to 6.95% of the aggregate secured term loan principal outstanding on the maturity date of the term loan, or upon earlier prepayment of the term loans in accordance with the Loan Agreement, resulting in an additional discount of $1,390. The total debt discount is $6,169. See Note 9 for more detail on assumptions used in the valuation of the K2 Warrant.

Upon receipt of additional funds under the Loan Agreement, additional common shares will be issuable pursuant to the K2 Warrant as determined by the principal amount of the additional funds advanced multiplied by 3.5% and divided by the Warrant Price, and the final payment will increase by 6.95% of the funds advanced.

The total principal amount of the loan under the Loan Agreement outstanding at September 30, 2020, including the $1,390 final payment discussed above, is $21,390. The principal amount of the loan made under the Loan Agreement accrues interest at an annual rate equal to the greater of (a) 8.25% or (b) prime rate plus 5.00%. The interest rate as of September 30, 2020 was 8.25%. The Company is required to pay only interest until July 1, 2022. If there is no Event of Default (as defined in the Loan Agreement) and a Third Tranche Term Loan of $10 million is made upon the achievement of a certain milestone then the interest only period is extended to January 1, 2023.

Upon the occurrence of an Event of Default, and during the continuance of an Event of Default, the applicable rate of interest, described above, will be increased by 5.00% per annum. The secured term loan maturity date is June 1, 2024, and the Loan Agreement includes both financial and non-financial covenants. The Company was in compliance with these covenants as of September 30, 2020.

The obligations under the Loan Agreement are secured on a senior basis by a lien on substantially all of the assets of the Company and its subsidiaries other than intellectual property. The subsidiaries of the Company, other than VBI Cda and SciVac HK, are guarantors of the obligations of the Company and VBI Cda under the Loan Agreement. The Loan Agreement also contains customary events of default.

Approximately $14.5 million of the proceeds received were used to repay the Company’s existing loan facility with Perceptive Credit Holdings, LP, a related party (“Perceptive”), which was due on June 30, 2020. The early repayment resulted in a loss on extinguishment of debt of $84, which is included in interest expense, net of interest income on the condensed consolidated statement of operations and comprehensive loss.

On May 6, 2016, the Company through VBI US assumed a term loan facility with Perceptive in the amount of $6,000 (the “Facility”). On December 6, 2016, the Company amended the Facility (the “Amended Credit Facility”) and raised Perceptive commitment amount to $13,200, which was combined with the remaining balance from the Facility of $1,800. In connection with the Amended Credit Facility, on December 6, 2016, the Company issued to Perceptive two warrants; the first warrant to purchase 363,771 shares of the Company’s common shares at an exercise price of $4.13, and the second warrant to purchase 1,341,282 shares of the Company’s common shares at an exercise price of $3.355. The total proceeds attributed to the warrants was $2,793 based on the relative fair value of the warrants as compared to the sum of the fair values of the warrants and debt. This resulted in the debt being issued at a discount. The Company incurred $360 of debt issuance costs and was required to pay an exit fee of $300 upon full repayment of the debt resulting in additional debt discount. Following the Amended Credit Facility and the warrant issuance, the total debt discount was $3,453.

On July 17, 2018, the Company amended the Amended Credit Facility (the “Second Amendment”) to extend the period the Company was required to pay only the interest on the loan from May 31, 2018 to December 31, 2018 and to extend the expiration date of certain warrants to purchase 363,771 common shares issued to Perceptive with an original expiration date of July 25, 2019 to December 6, 2021. The Company accounted for this as a debt modification, and as a result of the extension of the warrant expiration date in connection with the Second Amendment, the debt discount was increased by $386. This amount represents the incremental fair value of the modified warrants.

On January 31, 2019, the Company further amended the Amended Credit Facility (the “Third Amendment”) to i) extend the period the Company was required to pay only the interest on the loan from December 31, 2018 to January 31, 2020, ii) extend the maturity of the term loan to June 30, 2020, and iii) reduce the exercise price on certain warrants to purchase common shares issued to Perceptive to $2.75 from $4.13 for 363,771 warrants issued on July 25, 2014, and for 363,771 warrants issued on December 6, 2016, and from $3.355 for 1,341,282 warrants issued on December 6, 2016. The Company has accounted for this as a debt modification, and as a result of the amendment to the exercise price in connection with the Third Amendment, the debt discount was increased by $179. This amount represents the incremental fair value of the modified warrants.

The total debt discount related to the Loan Agreement of $6,169 is being charged to interest expense using the effective interest method over the term of the debt.

At September 30, 2020 and December 31, 2019, the fair value of our outstanding debt, which is considered level 3 in the fair value hierarchy, is estimated to be approximately $17,644 and $15,272, respectively.

Interest expense, net of interest income recorded in the three and nine months ended September 30, 2020 and 2019 was as follows:

SCHEDULE OF INTEREST EXPENSE 

Interest expense and amortization of debt discount for the three months ended September 30, 2020 does not include any amounts incurred to a related party.

Interest expense and amortization of debt discount for the nine months ended September 30, 2020 includes $723 and $461, respectively, incurred to a related party.

Interest expense and amortization of debt discount for the three and nine months ended September 2019 was fully incurred to a related party.

The following table summarizes the future principal payments due under long-term debt:

SCHEDULE OF FUTURE PRINCIPAL OF LONG-TERM DEBT 

9. STOCKHOLDERS’ EQUITY AND ADDITIONAL PAID-IN CAPITAL

Stock option plans

The Company’s stock option plans are approved by and administered by the Company’s Board and its Compensation Committee. The Board designates, in connection with recommendations from the Compensation Committee, eligible participants to be included under the plan, and designates the number of options, exercise price, and vesting period of the new options.

2006 VBI US Stock Option Plan

No further options will be issued under the 2006 VBI US Stock Option Plan (the “2006 Plan”). As of September 30, 2020, there were 993,666 options outstanding under the 2006 Plan.

2013 Equity Incentive Plan

No further options will be issued under the 2013 Equity Incentive Plan (the “2013 Plan”). As of September 30, 2020, there were no options outstanding under the 2013 Plan.

2014 Equity Incentive Plan

No further options will be issued under the 2014 Equity Incentive Plan (the “2014 Plan”). As of September 30, 2020, there were 521,242 options outstanding under the 2014 Plan.

2016 VBI Incentive Plan

The 2016 VBI Equity Incentive Plan (the “2016 Plan”) is a rolling incentive plan that sets the number of common shares issuable under the 2016 Plan, together with any other security-based compensation arrangement of the Company, at a maximum of 10% of the aggregate common shares issued and outstanding on a non-diluted basis at the time of any grant under the 2016 Plan. The 10% maximum is inclusive of options granted under all equity incentive plans. The 2016 Plan is an omnibus equity incentive plan pursuant to which the Company may grant equity and equity-linked awards to eligible participants in order to promote the success of the Company by providing a means to offer incentives and to attract, motivate, retain, and reward persons eligible to participate in the 2016 Plan. Grants under the 2016 Plan include a grant or right consisting of one or more options, stock appreciation rights (“SARs”), restricted share units (“RSUs”), performance share units (“PSUs”), shares of restricted stock or other such award as may be permitted under the 2016 Plan. As of September 30, 2020, there were 10,896,937 options and 168,452 stock awards outstanding under the 2016 Plan.

The aggregate number of common shares remaining available for issuance for awards under the 2016 Plan total 10,321,347 at September 30, 2020.

Activity related to stock options is as follows:

SCHEDULE OF STOCK OPTIONS ACTIVITY

Information relating to RSUs is as follow:

SCHEDULE OF RESTRICTED STOCK UNITS 

In determining the amount of stock-based compensation the Company used the Black-Scholes option pricing model to establish the fair value of options granted by applying the following weighted average assumptions:

SCHEDULE OF FAIR VALUE OF OPTIONS GRANTED BY USING BLACK-SCHOLES OPTION PRICING ASSUMPTIONS 

The fair value of the options is recognized as an expense on a straight-line basis over the vesting period and forfeitures are accounted for when they occur. The total stock-based compensation expense recorded in the three and nine months ended September 30, 2020 and 2019 was as follows:

SCHEDULE OF STOCK-BASED COMPENSATION EXPENSE