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VBI Vaccines Inc/BC - Quarter Report: 2021 March (Form 10-Q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2021

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to

 

Commission file number: 001-37769

 

VBI VACCINES INC.

(Exact name of registrant as specified in its charter)

 

British Columbia, Canada   N/A
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

222 Third Street, Suite 2241

Cambridge, Massachusetts

  02142
(Address of principal executive offices)   (Zip Code)

 

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

 

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

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
         
Common Share, no par value per share   VBIV   Nasdaq Capital Market

 

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.

 

Large accelerated filer ☐ Accelerated filer ☐
   
Non-accelerated filer Smaller reporting company
   
  Emerging growth company

 

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.

 

Common Shares, no par value per share   254,195,435
(Class)   Outstanding at May 7, 2021

 

 

 

 
 

 

VBI VACCINES INC.

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED March 31, 2021

 

TABLE OF CONTENTS

 

    Page
     
PART I - FINANCIAL INFORMATION 5
     
Item 1. Condensed Consolidated Financial Statements 5
     
  Condensed Consolidated Balance Sheets - March 31, 2021 (unaudited) and December 31, 2020 5
     
  Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2021 and 2020 (unaudited) 6
     
  Condensed Consolidated Statements of Stockholders’ Equity for three months ended March 31, 2021 and 2020 (unaudited) 7
     
  Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020 (unaudited) 8
     
  Notes to Condensed Consolidated Financial Statements (unaudited) 9
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 23
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 36
     
Item 4. Controls and Procedures 36
     
PART II - OTHER INFORMATION 37
     
Item 1. Legal Proceedings 37
     
Item 1A. Risk Factors 37
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 37
     
Item 3. Defaults Upon Senior Securities 37
     
Item 4. Mine Safety Disclosure 37
     
Item 5. Other Information 37
     
Item 6. Exhibits 38
     
Signatures 39

 

 2 
 

 

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 2020 annual report on the Form 10-K filed with the Securities and Exchange Commission on March 2, 2021. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

 

the timing of, and our ability to, obtain and maintain regulatory approvals for our clinical trials, products, and pipeline candidates;
the timing and results of our ongoing and planned clinical trials for products and pipeline candidates;
the amount of funds we require for our prophylactic and therapeutic pipeline candidates;
the potential benefits of strategic partnership agreements and our ability to enter into strategic partnership arrangements;
the impact of the ongoing COVID-19 pandemic on our clinical studies, research programs, manufacturing, business plan, regulatory review including site inspections, and the global economy;
our ability to effectively execute and deliver our plans related to commercialization, marketing, manufacturing capabilities and strategy;
our ability to maintain a good relationship with our employees;
the suitability and adequacy of our office, manufacturing, and research facilities and our ability to secure term extensions or expansions of leased space;
our ability to manufacture, or to have manufactured, any products we develop at a commercially viable scale to the standards and requirements of regulatory agencies;
the ability of our vendors and suppliers to manufacture and deliver materials that meet regulatory agency and our standards and requirements to meet planned timelines and milestones;
any disruption in the operations of our Rehovot, Israel manufacturing facility where we manufacture all of our clinical and commercial supplies of our 3-antigen prophylactic hepatitis B vaccine and clinical supplies of our hepatitis B immunotherapeutic, VBI-2601;
our compliance with all laws, rules, and regulations applicable to our business and products;
our ability to continue as a going concern;
our history of losses;
our ability to generate revenues and achieve profitability;
emerging competition and rapidly advancing technology in our industry that may outpace our technology;
customer demand for our products and pipeline candidates;
the impact of competitive or alternative products, technologies, and pricing;
general economic conditions and events and the impact they may have on us and our potential customers;
our ability to obtain adequate financing in the future on reasonable terms, as and when we need it;
our ability to implement network systems and controls that are effective at preventing cyber-attacks, malware intrusions, malicious viruses, and ransomware threats;
our ability to secure and maintain protection over our intellectual property;
our ability to maintain our existing licenses with licensors of intellectual property, or obtain new licenses for intellectual property;

 

 3 
 

 

changes to legal and regulatory processes for biosimilar approval and marketing that could reduce the duration of market exclusivity for our products;
our success at managing the risks involved in the foregoing items;
our ability to maintain compliance with the NASDAQ Capital Market’s listing standards; and
other factors discussed in this Form 10-Q.

 

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.

 

 4 
 

 

PART I—FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements

 

VBI Vaccines Inc. and Subsidiaries

 

Condensed Consolidated Balance Sheets

(in thousands, except share amounts)

 

Condensed Consolidated Balance Sheets  March 31,
2021
   December 31,
2020
 
    (unaudited)      
CURRENT ASSETS          
Cash and cash equivalents  $108,226   $93,825 
Short-term investments   25,333    25,276 
Accounts receivable, net   172    77 
Inventory, net   2,165    2,152 
Prepaid expenses   1,086    1,569 
Other current assets   

8,577

    9,142 
Total current assets   

145,559

    132,041 
           
NON-CURRENT ASSETS          
Other long-term assets   782    639 
Property and equipment, net   10,199    10,721 
Right of use assets   1,337    1,554 
Intangible assets, net   62,736    62,156 
Goodwill   2,283    2,261 
Total non-current assets   77,337    77,331 
           
TOTAL ASSETS  $

222,896

   $209,372 
           
CURRENT LIABILITIES          
Accounts payable  $1,668   $3,734 
Other current liabilities   20,390    12,415 
Current portion of deferred revenues   882    255 
Current portion of lease liability   885    944 
Total current liabilities   23,825    17,348 
           
NON-CURRENT LIABILITIES          
Lease liability, net of current portion   462    619 
Long-term debt, net of debt discount   15,940    16,329 
Liabilities for severance pay   542    522 
Deferred revenues, net of current portion   2,118    2,849 
Total non-current liabilities   19,062    20,319 
           
COMMITMENTS AND CONTINGENCIES (NOTE 14)   -      
           
STOCKHOLDERS’ EQUITY          
Common shares (unlimited authorized; no par value) (March 31, 2021 - issued and outstanding 254,195,435; December 31, 2020 - issued and outstanding 247,039,010)   427,048    403,528 
Additional paid-in capital   77,618    75,530 
Accumulated other comprehensive income   1,608    1,265 
Accumulated deficit   

(326,265

)   (308,618)
Total stockholders’ equity   

180,009

    171,705 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $222,896   $209,372 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

 5 
 

 

VBI Vaccines Inc. and Subsidiaries

 

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(in thousands, except share and per share amounts)

 

   2021   2020 
  

Three Months Ended

March 31

 
   2021   2020 
         
Revenues  $301   $415 
           
Operating expenses:          
Cost of revenues   2,412    2,577 
Research and development   

6,839

    3,193 
General and administrative   6,747    4,058 
Total operating expenses   

15,998

    9,828 
           
Loss from operations   

(15,697

)   (9,413)
           
Interest expense, net of interest income (including related party - see Note 9)   (1,812)   (582)
Foreign exchange (loss) gain   (138)   1,637 
Loss before income taxes   

(17,647

)   (8,358)
           
Income tax expense   -    - 
           
NET LOSS  $

(17,647

)  $(8,358)
           
Other comprehensive income (loss)   343    (6,653)
           
COMPREHENSIVE LOSS  $

(17,304

)  $(15,011)
           
Net loss per share of common shares, basic and diluted  $(0.07)  $(0.05)
           
Weighted-average number of common shares outstanding, basic and diluted   251,292,761    178,289,746 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

 6 
 

 

VBI Vaccines Inc. and Subsidiaries

 

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(in thousands, except share amounts)

 

   Number of
Common
Shares
   Share
Capital
   Additional
Paid-in
Capital
   Accumulated
Other
Comprehensive
Income (Loss)
   Accumulated
Deficit
   Total Stockholders’
Equity
 
                         
BALANCE AS OF DECEMBER 31, 2020   247,039,010   $403,528   $75,530   $1,265   $(308,618)  $171,705 
                               
Common shares issued in financing transactions, net of share issuance costs   5,752,068    21,417    -    -    -    21,417 
Common shares issued upon exercise of warrants   34,494    52    -    -    -    52 
Common shares issued upon of conversion of long-term debt   1,369,863    2,000    -    -    -    

2,000

 
Stock-based compensation   -    51    2,088    -    -    2,139 
Net loss   -    -    -    -    

(17,647

)   

(17,647

)
Unrealized holding gains on short-term investments   -    -    -    (54)   -    (54)
Currency translation adjustments   -    -    -    397    -    397 
BALANCE AS OF MARCH 31, 2021   254,195,435   $427,048   $77,618   $1,608   $

(326,265

)  $

180,009

 
                               
BALANCE AS OF DECEMBER 31, 2019   178,257,199   $284,965   $66,430   $(752)  $(262,388)  $88,255 
                               
Stock-based compensation   118,471    131    1,056    -    -    1,187 
Net loss   -    -    -    -    (8,358)   (8,358)
Currency translation adjustments   -    -    -    (6,653)   -    (6,653)
BALANCE AS OF MARCH 31, 2020   178,375,670   $285,096   $67,486   $(7,405)  $(270,746)  $74,431 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

 7 
 

 

VBI Vaccines Inc. and Subsidiaries

 

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

   2021   2020 
   For the Three Months Ended
March 31
 
   2021   2020 
         
CASH FLOWS FROM OPERATING ACTIVITIES          
Net loss  $

(17,647

)  $(8,358)
Adjustments to reconcile net loss to cash and cash equivalents used in operating activities:          
Depreciation and amortization   446    406 
Stock-based compensation   2,139    1,187 
Amortization of debt discount   1,611    239 
Inventory reserve   122   874 
Interest accrued on short-term investments   (111)   - 
Net change in operating working capital items:          
Change in accounts receivable   (100)   62 
Change in inventory   (214)   (468)
Change in prepaid expenses   486    (30)
Change in other current assets   616   188 
Change in other long-term assets   (152)   (4)
Change in operating right of use assets   270    230 
Change in accounts payable   (2,114)   227 
Change in deferred revenues   (103)   (211)
Change in other current liabilities   8,376    (1,761)
Payments made on operating lease liabilities   (269)   (229)
Net cash flows used in operating activities   (6,644)   (7,648)
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchase of property and equipment   (556)   (133)
Net cash flows used in investing activities   (556)   (133)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Proceeds from issuance of common shares for cash   22,113    - 
Share issuance costs   (541)   - 
Proceeds from issuance of common shares for cash, upon exercise of warrants   52    - 
Repayment of long-term debt   -    (600)
Net cash flows provided by (used in) financing activities   21,624    (600)
           
Effect of exchange rates on cash and cash equivalents   (23)   (29)
           
CHANGE IN CASH AND CASH EQUIVALENTS, FOR THE PERIOD   14,401    (8,410)
           
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   93,825    44,213 
           
CASH AND CASH EQUIVALENTS, END OF PERIOD  $108,226   $35,803 
           
Supplementary information:          
Interest paid  $403   $475 
Non-cash investing and financing activities:          
Common shares issued upon conversion of debt   2,000    - 
Capital expenditures included in accounts payable and other current liabilities   119    10 
Share issuance costs included in other current liabilities   155    - 
Unrealized holding gains on short term investment   (54)   - 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

 8 
 

 

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 the wholly-owned subsidiary of VBI US (“VBI Cda”); and SciVac Ltd. an Israeli company (“SciVac”); SciVac Hong Kong Limited (“SciVac HK”) and VBI Vaccines B.V a Netherlands company (“VBI BV”), 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. In addition, the Company has manufacturing facilities located in Rehovot, Israel and research facilities located in Ottawa, Ontario, Canada.

 

Principal Operations

 

VBI is a biopharmaceutical company driven by immunology in the pursuit of powerful prevention and treatment of disease. Through its innovative approach to virus-like particles (“VLPs”), including a proprietary enveloped VLP (“eVLP”) platform technology, VBI develops vaccine candidates that mimic the natural presentation of viruses, designed to elicit the innate power of the human immune system. VBI is committed to targeting and overcoming significant infectious diseases, including hepatitis B, coronaviruses, and cytomegalovirus (“CMV”), as well as aggressive cancers including glioblastoma (“GBM”). VBI is headquartered in Cambridge, Massachusetts, with research operations in Ottawa, Canada, and a research and manufacturing site in Rehovot, Israel.

 

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.

 

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Liquidity and Going Concern

 

The Company has a limited operating history and 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 $326,265 as of March 31, 2021 and cash outflows from operating activities of $6,644 for the three months ended March 31, 2021.

 

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 future operations with existing cash and cash equivalent reserves. Additional financing may be obtained from the issuance of equity securities, the issuance of additional debt, structured asset financings, 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.

 

On March 9, 2021, the Company and Coalition for Epidemic Preparedness Innovations (“CEPI”) announced a partnership (“CEPI Funding Agreement”) to develop eVLP vaccine candidates against SARS-COV-2 variants, including the B.1.351 variant, also known as 501Y.V2, first identified in South Africa. CEPI will provide up to $33,018 to support the advancement of VBI-2905, a monovalent eVLP candidate expressing the pre-fusion form of the spike protein from the B.1.351 strain, through Phase I clinical development. This funding will also support preclinical expansion of additional multivalent vaccine candidates designed to evaluate the potential breadth of our eVLP technology. The preclinical expansion is intended to develop clinic-ready vaccine candidates capable of addressing emerging variants. See more information on the CEPI Funding Agreement in Note 12.

 

On July 31, 2020, the Company entered into an Open Market Sale AgreementSM 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 three months ended March 31, 2021, the Company issued 5,752,068 common shares under the ATM Program, for total gross proceeds of $22,113 at an average price of $3.84. The Company incurred $696 of share issuance costs related to the common shares issued resulting in net proceeds of $21,417. As of March 31, 2021, $38,202 of common shares remained available for issuance under the ATM Program.

 

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, 2020 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, 2020 (the “2020 10-K”), as filed with the SEC on March 2, 2021.

 

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries: SciVac, SciVac HK, VBI DE, VBI US, VBI Cda, and VBI BV. Intercompany balances and transactions between the Company and its subsidiaries are eliminated in the condensed consolidated financial statements. Certain items previously reported in specific financial statement captions have been reclassified to conform to the current presentation.

 

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.

 

 10 
 

 

Significant Accounting Policies

 

The significant accounting policies used in the preparation of these condensed consolidated financial statements are disclosed in the 2020 10-K, and there have been no changes to the Company’s significant accounting policies during the three months ended March 31, 2021, other than the polices discussed below.

 

CEPI Funding Agreement

 

Cash received in advance from the CEPI Funding Agreement is included in cash and cash equivalents on the condensed consolidated balance sheet, however, it is restricted as to its use until the relevant expenses are incurred. The cash received is recognized as deferred funding, included in other current liabilities on the condensed consolidated balance sheet, and recognized as a reduction in the related expense when incurred. As of March 31, 2021 the amount of cash included in cash and cash equivalents on the condensed consolidated balance sheets is $8,107. See more information on CEPI Funding Agreement in Note 12.

 

3. NEW ACCOUNTING PRONOUNCEMENTS

 

Recently Adopted Accounting Pronouncements

 

None

 

Recently Issued Accounting Standards, not yet Adopted

 

In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which will simplify the accounting for certain financial instruments with characteristics of liabilities and equity, including certain convertible instruments and contracts on an entity’s own equity. Specifically, the new standard will remove the separation models required for convertible debt with cash conversion features and convertible instruments with beneficial conversion features. It will also remove certain settlement conditions that are currently required for equity contracts to qualify for the derivative scope exception and will simplify the diluted earnings per share calculation for convertible instruments. ASU 2020-06 will be effective for fiscal years beginning after December 15, 2021 and interim periods within those fiscal years. Early adoption is permitted but no earlier than fiscal periods beginning after December 15, 2020, including interim periods within those fiscal years. This ASU can be applied either through a modified retrospective method of transition or a fully retrospective method of transition. The Company is currently evaluating the impact this new guidance will have on its condensed consolidated financial statements and related disclosures.

 

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4. INVENTORY, NET

 

Inventory consists of the following:

 

   March 31,
2021
   December 31,
2020
 
Finished goods  $-   $- 
Work-in-process   505    390 
Raw materials   1,660    1,762 
Inventory, net  $2,165   $2,152 

 

5. OTHER CURRENT ASSETS

 

Other current assets consisted of the following:

 

   March 31,
2021
   December 31,
2020
 
Government receivables  $

6,096

   $7,830 
Other current assets   2,481    1,312 
Total other current assets  $8,577   $9,142 

 

6. INTANGIBLE ASSETS AND GOODWILL

 

     March 31, 2021 
  

Gross

Carrying
Amount

   Accumulated
Amortization
   Cumulative
Impairment
Charge
   Cumulative
Currency
Translation
   Net Book
Value
 
Patents  $669   $(606)  $-   $39   $102 
In Process Research & Development (“IPR&D”) assets   61,500    -    (300)   1,434    62,634 
   $62,169   $(606)  $(300)  $1,473   $62,736 

 

       December 31, 2020 
   Gross
Carrying
Amount
   Accumulated
Amortization
   Cumulative
Impairment
Charge
   Cumulative
Currency
Translation
   Net Book
Value
 
Patents  $669   $(590)  $-   $44   $123 
IPR&D assets   61,500    -    (300)   833    62,033 
   $62,169   $(590)  $(300)  $877   $62,156 

 

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, 2020 relates to currency translation adjustments which increased by $601 for the three-month period ended March 31, 2021.

 

       March 31, 2021 
  

Gross

Carrying

Amount

  

Cumulative

Impairment
Charge

  

Cumulative
Currency

Translation

   Net Book
Value
 
Goodwill  $8,714   $(6,292)  $(139)  $2,283 

 

       December 31, 2020 
   Gross
Carrying
Amount
  

Cumulative

Impairment
Charge

  

Cumulative
Currency

Translation

   Net Book
Value
 
Goodwill  $8,714   $(6,292)  $(161)  $2,261 

 

The change in carrying value for goodwill from December 31, 2020 relates to currency translation adjustments which increased by $22 for the three-month period ended March 31, 2021.

 

 12 
 

 

7. OTHER CURRENT LIABILITIES

 

Other current liabilities consisted of the following:

 

   March 31,
2021
   December 31,
2020
 
Accrued research and development expenses (including clinical trial accrued expenses)  $6,423   $5,842 
Accrued professional fees   2,080    1,547 
Payroll and employee-related costs   1,918    3,844 
Deferred government grants   1,417    825 
Deferred funding   8,107    - 
Other current liabilities   445    357 
Total other current liabilities  $20,390   $12,415 

 

8. 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 10, Stockholders’ Equity and Additional Paid-in Capital.

 

The following potentially dilutive securities outstanding at March 31, 2021 and 2020 have been excluded from the computation of diluted weighted average shares outstanding, as they would be antidilutive:

 

   March 31,
2021
   March 31,
2020
 
Warrants   3,163,172    2,618,824 
Stock options and restricted stock units   18,139,335    10,894,792 
K2 conversion feature   1,369,863    - 
    22,672,370    13,513,616 

 

 13 
 

 

9. LONG-TERM DEBT

 

As of March 31, 2021, and December 31, 2020, the long-term debt is as follows:

 

   March 31,
2021
   December 31,
2020
 
Long-term debt, net of debt discount of $3,450 ($5,061 at December 31, 2020)  $15,940   $16,329 
Less: current portion, net of debt discount of $0 ($0 at December 31, 2020)   -    - 
Long-term debt  $15,940   $16,329 

 

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 originally had 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”) until the maturity date of June 1, 2024. On February 3, 2021, pursuant to the Loan Agreement, the Lenders, converted $2 million of the secured term loan into 1,369,863 common shares at a conversion price of $1.46. The Lenders have the ability to convert an additional $2 million at the Lenders’ option.

 

The Administrative Agent has determined that sufficient Second Tranche Milestones have been satisfied to enable the Company to request draw down of the Second Tranche Term Loan up to the Second Tranche Maximum Amount (as such terms are defined in the Loan Agreement). The Company and the Lenders are in the process of amending the Loan Agreement to extend the Second Tranche Availability Period.

 

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 original 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 original secured term loan principal 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 initial debt discount is $6,169.

 

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 March 31, 2021, including the $1,390 final payment discussed above, is $19,390. 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 March 31, 2021 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. The effective interest rate on the remaining loan of $18,000, excluding the final payment, is 18.14%.

 

 14 
 

 

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 March 31, 2021.

 

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.

 

The total initial debt discount related to the Loan Agreement with K2 HealthVentures LLC and the term loan facility with Perceptive Credit Holdings, LP is $6,169 and $4,018, respectively. As of March 31, 2021, and December 31, 2020, the unamortized debt discount was $3,450 and $5,061 respectively. The debt discount is being charged to interest expense, net of interest income in the condensed consolidated statement of operations and comprehensive loss using the effective interest method over the term of the debt.

 

During the three months ended March 31, 2021, as a result of the conversion of term loan to common shares, $1,161 of additional interest accretion was recognized in interest expense, net of interest income in the condensed consolidated statement of operations and comprehensive loss.

 

At March 31, 2021 and December 31, 2020, the fair value of our outstanding debt, which is considered level 3 in the fair value hierarchy, is estimated to be $18,921 and $20,117, respectively.

 

Interest expense, net of interest income recorded in the three months ended March 31, 2021 and 2020 was as follows:

 

   2021   2020 
  

Three months ended

March 31

 
   2021   2020 
Interest expense  $389   $475 
Amortization of debt discount   1,611    239 
Interest income   (188)   (132)
Total interest expense, net of interest income  $1,812   $582 

 

Interest expense and amortization of debt discount for the three months ended March 31, 2021 does not include any amounts incurred to a related party. Interest expense and amortization of debt discount for the three months ended March 31, 2020 was fully incurred to a related party.

 

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

 

   Principal
payments on
Loan Agreement
and final payment
 
Remaining 2021  $- 
2022   4,215 
2023   8,980 
2024   6,195 
Total  $19,390 

 

 15 
 

 

10. STOCKHOLDERS’ EQUITY AND ADDITIONAL PAID-IN CAPITAL

 

Stock option plans

 

The Company’s stock option plans are approved by and administered by the 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

 

The 2006 VBI US Stock Option Plan (the “2006 Plan”), was approved by and was previously administered by the VBI US board of directors which designated eligible participants to be included under the 2006 Plan, and designated the number of options, exercise price and vesting period of the new options. The 2006 Plan was not approved by the stockholders of VBI US. The 2006 Plan was superseded by the 2014 Plan (as defined below) following the PLCC Merger and no further options will be issued under the 2006 Plan. As of December 31, 2020, there were 989,813 options outstanding under the 2006 Plan.

 

2014 Equity Incentive Plan

 

On May 1, 2014, the VBI DE board of directors adopted the VBI Vaccines Inc. 2014 Equity Incentive Plan (the “2014 Plan”). The 2014 Plan was approved by the VBI DE’s shareholders on July 14, 2014. No further options will be issued under the 2014 Plan. As of March 31, 2021, there were 521,242 options outstanding under the 2014 Plan.

 

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 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 March 31, 2021, there were 16,523,250 options outstanding and 105,030 RSUs unvested under the 2016 Plan.

 

 16 
 

 

The aggregate number of common shares remaining available for issuance for awards under the 2016 Plan totaled 5,920,455 at March 31, 2021.

 

Activity related to stock options is as follows:

   Number of
Stock
Options
   Weighted
Average
Exercise Price
 
Balance outstanding at December 31, 2020   12,507,541   $2.38 
           
Granted   5,540,000   $3.15 
Forfeited   (13,236)  $2.25 
           
Balance outstanding at March 31, 2021   18,034,305   $2.62 
           
Exercisable at March 31, 2021   7,028,418   $2.66 

 

Information relating to RSUs is as follow:

   Number of
Stock Awards
   Weighted
Avg Fair Value
at Grant Date
 
Unvested shares outstanding at December 31, 2020   129,356   $1.62 
           
Vested   (24,326)  $2.03 
           
Unvested shares outstanding at March 31, 2021   105,030   $1.52 

 

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:

 

   2021   2020 
Volatility   97.13%   90.12%
Risk free interest rate   0.54%   1.54%
Expected term in years   5.85    5.77 
Expected dividend yield   0.00%   0.00%
Weighted average fair value per option  $2.40   $1.04 

 

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 months ended March 31, 2021 and 2020 was as follows:

  

Three months ended

March 31

 
   2021   2020 
Research and development  $428   $244 
General and administrative   1,690    933 
Cost of revenues   21    10 
Total stock-based compensation expense  $2,139   $1,187 

 

 17 
 

 

Warrants

 

Activity related to the warrants is as follows:

   Number of
Warrants
   Weighted
Average
Exercise Price
 
Balance outstanding at December 31, 2020   3,197,666   $2.23 
           
Exercised   (34,494)  $1.50 
           
Balance outstanding at March 31, 2021   3,163,172   $2.24 

 

11. REVENUES AND DEFERRED REVENUE

 

Revenue is comprised of the following:

  

Three months ended

March 31

 
   2021   2020 
Product revenues  $167   $180 
R&D service revenues   134    235 
Total revenue  $301   $415 

 

The following table presents revenues expected to be recognized in the future related to performance obligations, based on current estimates, that are unsatisfied at March 31, 2021:

   Total  

Current

portion to

March 31,
2022

  

Remaining

portion

thereafter

 
Product revenues  $469   $-   $469 
R&D service revenues   2,531    882    1,649 
Total  $3,000   $882   $2,118 

 

The following table presents changes in the deferred revenue balance for the three months ended March 31, 2021:

 

Balance at December 31, 2020  $3,104 
      
Recognition of deferred revenue   (128)
Currency translation   24 
      
Balance at March 31, 2021  $3,000 
      
Short Term  $882 
Long Term  $2,118 

 

Collaboration and License Agreement – Brii Bio

 

On December 4, 2018, we entered into a Collaboration and License Agreement with Brii Biosciences Limited (“Brii Bio”) (the “Collaboration and License Agreement”), amended on April 8, 2021, whereby:

 

  The Company and Brii Bio agreed to collaborate on the development of a hepatitis B recombinant protein-based immunotherapeutic in the licensed territory, which consists of China, Hong Kong, Taiwan, and Macau (collectively, the “Licensed Territory”), and to conduct a Phase Ib/IIa collaboration clinical trial for the purpose of comparing VBI-2601 (BRII-179), which is a recombinant protein-based immunotherapeutic developed by VBI for use in treating chronic hepatitis B, with a novel composition developed jointly with Brii Bio (either being the “Licensed Product”); and,
     
  The Company granted Brii Bio an exclusive royalty-bearing license to perform studies, regulatory and other activities, as may be required to obtain and maintain marketing approval of the Licensed Product in the Licensed Territory and to commercialize the Licensed Product for the diagnosis and treatment of hepatitis B in the Licensed Territory.

 

 18 
 

 

Pursuant to the Collaboration and License Agreement, the Company is responsible for the R&D services and Brii Bio is responsible for costs relating to the clinical trials for the Licensed Territory.

 

The initial consideration of the Collaboration and License Agreement consisted of a $11,000 non-refundable upfront payment. As part of the Collaboration and License Agreement, the Company and Brii Bio entered into a stock purchase agreement. Under the terms of the stock purchase agreement, the Company issued to Brii Bio 2,295,082 shares of its common stock valued at $3,626 (based on the Company’s common stock price on December 4, 2018). The remaining $7,374, deemed to be the initial transaction price, was allocated to two performance obligations: i) the VBI-2601 (BRII-179) license, and ii) R&D services. The R&D services were allocated $4,737 of the transaction price using an estimated selling price based on an expected cost plus a margin approach and the remaining transaction price of $2,637 was allocated to the VBI-2601 (BRII-179) license using the residual method.

 

In addition, the Company is also eligible to receive an additional $117,500 in potential regulatory and sales milestone payments, along with royalties on commercial sales in the Licensed Territory. Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. Therefore, no variable consideration was included in the initial transaction price and no such amounts have been recognized to date.

 

The R&D Services will be satisfied over time as services are rendered using the “cost-to-cost” input method as this method represents the most accurate depiction of the transfer of services based on the types of costs expected to be incurred. As of March 31, 2021, R&D services related to Brii Bio that remain unsatisfied are $2,331, out of the $3,000 total deferred revenue.

 

Upon termination of the Collaboration and License Agreement prior to the end of the term, there is no obligation for refund and any amounts in deferred revenue related to unsatisfied performance obligations will be immediately recognized.

 

12. COLLABORATION ARRANGEMENTS

 

GlaxoSmithKline Biologicals S.A. (“GSK”)

 

On September 10, 2019, the Company entered into a Clinical Collaboration Agreement (“Collaboration Agreement”) pursuant to which we will investigate the use of GSK’s proprietary AS01B adjuvant system in our ongoing study of VBI-1901. As a result of the Collaboration Agreement, a second study arm was added to Part B of the ongoing Phase Ib/IIa clinical study to accommodate the AS01B adjuvant.

 

This relationship is considered a collaborative relationship and not a customer relationship and is therefore accounted for outside the scope of ASC Topic 606. Costs associated with the second study arm will be expensed as incurred in Research and Development expenses; costs for the three months ended March 31, 2021 are $256. Costs for the three months ended March 31, 2020 were de-minimis.

 

National Research Council of Canada (“NRC”)

 

On March 31, 2020, the Company announced a collaboration with the NRC, Canada’s largest federal research and development organization, to develop a pan-coronavirus vaccine candidate, targeting COVID-19, SARS, and MERS. The NRC and the Company are collaborating to evaluate and select promising coronavirus vaccine candidates. The collaboration combines the Company’s viral vaccine expertise, eVLP technology platform, and modified coronavirus antigens with the NRC’s proprietary SARS-CoV-2 antigens and assay development capabilities to select the most immunogenic vaccine candidate for further development.

 

On December 21, 2020, we signed an amendment to the collaboration agreement with the NRC to broaden the scope of collaboration to include certain pre-clinical evaluations, bioprocess optimization, technology transfer, and the performance of additional scale up work. The amendment also extended the expiry date of the agreement to March 15, 2022.

 

This relationship is considered a collaborative relationship and not a customer relationship and is therefore accounted for outside the scope of ASC Topic 606. Costs associated with the collaboration will be expensed as incurred in Research and Development expenses; costs for the three months ended March 31, 2021 are $158. Costs for the three months ended March 31, 2020 were $0.

 

CEPI

 

On March 9, 2021, the Company and CEPI announced the CEPI Funding Agreement, to develop eVLP vaccine candidates against SARS-COV-2 variants, including the B.1.351 variant, also known as 501Y.V2, first identified in South Africa. CEPI will provide up to $33,018 to support the advancement of VBI-2905, a monovalent eVLP candidate expressing the pre-fusion form of the spike protein from the B.1.351 strain, through Phase I clinical development. This funding will also support preclinical expansion of additional multivalent vaccine candidates designed to evaluate the potential breadth of our eVLP technology. The preclinical expansion is intended to develop clinic-ready vaccine candidates capable of addressing emerging variants.

 

Under the terms of the CEPI Funding Agreement, among other things, the Company and CEPI agreed on the importance of global equitable access to any vaccines produced pursuant to the CEPI Funding Agreement. Any such vaccines, if approved, are expected to be procured and allocated through global mechanisms under discussion as part of the Access to COVID-19 Tools (ACT) Accelerator, an international initiative launched by the World Health Organization (“WHO”), Gavi the Vaccine Alliance, CEPI, and other global non-governmental organizations and governmental leaders in 2021.

 

 19 
 

 

This relationship is considered a collaborative relationship and not a customer relationship and is therefore accounted for outside the scope of ASC Topic 606. Costs associated with the collaboration will be expensed as incurred in Research and Development expenses; costs for the three months ended March 31, 2021 are $157. As of March 31, 2021 the Company received cash of $8,285 and recognized $157 as a reduction in expenses. As of March 31, 2021, the Company had $8,107 recorded as deferred funding, recorded in other current liabilities on the condensed consolidated balance sheet.

 

Brii Biosciences Limited

 

On December 4, 2018, we entered into a License Agreement with Brii Bio, as described in Note 11.

 

13. GOVERNMENT GRANTS

 

Grants recognized in research and development expenses in the consolidated statement of operations and comprehensive loss are as follows:

 

Industrial Research Assistance Program (“IRAP”)

 

On July 3, 2020, the Company and the NRC signed a contribution agreement as represented by its 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.

 

For the three months ended March 31, 2021 the Company recognized $0 as a reduction in expenses. As of March 31, 2021, the Company had $396 recorded as deferred government grants, recorded in other current liabilities on the condensed consolidated balance sheet.

 

Strategic Innovation Fund (“SIF”)

 

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 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.

 

For the three months ended March 31, 2021 the Company recognized $2,688 as a reduction in expenses. As of March 31, 2021, the Company had $1,021 recorded as deferred government grants, recorded in other current liabilities on the condensed consolidated balance sheet.

 

 20 
 

 

14. COMMITMENTS AND CONTINGENCIES

 

Legal Proceedings

 

From time to time, the Company may be involved in certain claims and litigation arising out of the ordinary course and conduct of business. Management assesses such claims and, if it considers that it is probable that an asset had been impaired or a liability had been incurred and the amount of loss can be reasonably estimated, provisions for loss are made based on management’s assessment of the most likely outcome.

 

On September 13, 2018, two civil claims were brought in the District Court of the central district in Israel naming our subsidiary SciVac as a defendant. In one claim, two minors, through their parents, allege, among other things: defects in certain batches of our 3-antigen prophylactic HBV vaccine discovered in July 2015; that our 3-antigen prophylactic HBV vaccine was approved for use in children and infants in Israel without sufficient evidence establishing its safety; that SciVac failed to provide accurate information about our 3-antigen prophylactic HBV vaccine to consumers; and that each child suffered side effects from the vaccine. The claim was filed together with a motion seeking approval of a class action on behalf of 428,000 children vaccinated with our 3-antigen prophylactic HBV vaccine in Israel from April 2011 and seeking damages in a total amount of NIS 1,879,500,000 (not in thousands) ($563,737). The second claim is a civil action brought by two minors and their parents against SciVac and the Israel Ministry of Health alleging, among other things, that SciVac marketed an experimental, defective, hazardous or harmful vaccine; that our 3-antigen prophylactic HBV vaccine was marketed in Israel without sufficient evidence establishing its safety; and that our 3-antigen prophylactic HBV vaccine was produced and marketed in Israel without approval of a western regulatory body. The claim seeks damages for past and future losses and expenses as well as punitive damages.

 

SciVac believes these matters to be without merit and intends to defend these claims vigorously.

 

The District Court has accepted SciVac’s motion to suspend reaching a decision on the approval of the class action pending the determination of liability under the civil action. Preliminary hearings for the trial of the civil action began on January 15, 2020, with subsequent preliminary hearings held on May 13, 2020 and December 3, 2020 to discuss document disclosure. The next preliminary hearing is scheduled to be held on September 13, 2021.

 

Operating leases

 

The Company has entered into various non-cancelable lease agreements for its office, lab, and manufacturing facilities, which are classified as operating leases. The office facility lease agreement in the United States expires on April 30, 2023, with no option to extend. Our manufacturing facility lease agreement expires on January 31, 2022, which includes one five-year option to extend until January 31, 2027. The lease agreement for our research facility in Canada, which comprises office and laboratory space, has a term ending on December 31, 2022 with the option to extend the term for one additional period of three years and a term ending April 30, 2023 for the additional space leased during 2020.

 

Options to extend are not recognized as part of the lease liabilities or recognized as right to use assets. There are no residual value guarantees, no variable lease payments, and no restrictions or covenants imposed by leases. The discount rate used in measuring the lease liabilities and right of use assets was determined by reviewing our incremental borrowing rate at the initial measurement date.

 

Lease cost:     
Operating lease costs:     
Three months ended March 31, 2021  $343 
Three months ended March 31, 2020   288 

 

Other information:     
Weighted average remaining lease term   1.88 years 
Weighted average discount rate   12%

 

Operating lease costs are included in general and administrative (“G&A”) expenses in the statement of operation and comprehensive loss.

 

 21 
 

 

The following table summarizes future undiscounted cash payments reconciled to the lease liabilities:

 

Year ending December 31:  2021 
Remaining 2021  $802 
2022   523 
2023   125 
Total  $1,450 
Effect of discounting   (103)
Total lease liability  $1,347 
Less: current portion   (885)
Long term lease liability  $462 

 

15. SEGMENT INFORMATION

 

The Company’s Chief Executive Officer (“CEO”) has been identified as the chief operating decision maker. The CEO evaluates the performance of the Company and allocates resources based on the information provided by the Company’s internal management system at a consolidated level. The Company has determined that it has only one operating segment.

 

Revenues from external customers are attributed to geographic areas based on location of the contracting customers:

 

  

Three Months Ended

March 31,

 
   2021   2020 
Israel  $169   $132 
China / Hong Kong   128    231 
Europe   4    52 
   $301   $415 

 

There was no revenue attributed to our country of domicile, Canada, for the three months ended March 31, 2021 and 2020.

 

 22 
 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the related notes included elsewhere in this Form 10-Q and with our audited consolidated financial statements included in our 2020 10-K as filed with the SEC.

 

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

 

Overview

 

VBI Vaccines Inc. (“VBI”) is a biopharmaceutical company driven by immunology in the pursuit of powerful prevention and treatment of disease. Through its innovative approach to virus-like particles (“VLPs”), including a proprietary enveloped VLP (“eVLP”) platform technology, VBI develops vaccine candidates that mimic the natural presentation of viruses, designed to elicit the innate power of the human immune system. VBI is committed to targeting and overcoming significant infectious diseases, including hepatitis B (“HBV”), coronaviruses, and cytomegalovirus (“CMV”), as well as aggressive cancers including glioblastoma (“GBM”). VBI is headquartered in Cambridge, Massachusetts, with research operations in Ottawa, Canada, and a research and manufacturing site in Rehovot, Israel.

 

Product Pipeline – Lead Program Candidates

 

VBI’s pipeline is comprised of vaccine and immunotherapeutic candidates developed by virus-like particle technologies to target two distinct, but often related, disease areas – infectious disease and oncology. We prioritize the development of candidates for disease targets that are challenging, underserved, and where the human immune system, when powered and stimulated appropriately, can be a formidable opponent.

 

VLP vaccines are a type of sub-unit vaccine, in which only the portions of viruses critical for eliciting an immune response are presented to the body. Because of their structural similarity to viruses presented in nature, including their particulate nature and repetitive structure, VLPs can stimulate potent immune responses. VLPs can be customized to present any protein antigen, including multiple antibody and T cell targets, making them, we believe, ideal technologies for the development of both prophylactic and therapeutic vaccines. However, only a few antigens self-assemble into VLPs, which limit the number of potential targets. Notably, the HBV envelope antigens are among those that are able to spontaneously form orderly VLP structures. VBI’s proprietary eVLP platform technology expands the list of potentially-viable target indications for VLPs by providing a stable core (Gag Protein) and lipid bilayer (the “envelope”). It is a flexible platform that enables the synthetic manufacture of an “enveloped” VLP, or “eVLP”, which looks structurally and morphologically similar to the virus, with no infectious material.

 

Indication   Program   Technology   Current Status
Prophylactic Candidates            
● Hepatitis B (“HBV”)  

3-antigen Vaccine

(Israel brand name Sci-B-Vac®)

  VLP  

BLA and MAA Accepted;

Approved in Israel

● Cytomegalovirus (“CMV”)   VBI-1501   eVLP   Phase I Completed
● COVID-19   VBI-2902   eVLP   Ongoing Phase I
● COVID-19 (B.1.351 Variant)   VBI-2905   eVLP   Pre-Clinical
● Pan-coronavirus   VBI-2901   eVLP   Pre-Clinical
Therapeutic Candidates            
● Hepatitis B (“HBV”)   VBI-2601   VLP   Ongoing Phase II
● Glioblastoma (“GBM”)   VBI-1901   eVLP   Ongoing Phase I/IIa

 

A summary of these programs and recent developments follows.

 

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Prophylactic Pipeline

 

3-antigen HBV Vaccine Candidate

 

A scientifically-differentiated approach to HBV vaccination, our 3-antigen HBV vaccine candidate expresses all three surface antigens of HBV – pre-S1, pre-S2, and S. Published data demonstrate pre-S1 antigens induce key neutralizing antibodies that block virus receptor binding, and T cell responses to pre-S1 and pre-S2 antigens can further boost responses to the S antigen. Our 3-antigen HBV vaccine is further distinguished from other commercially available HBV vaccines because it is produced in mammalian cells (Chinese hamster ovary “CHO” cells) rather than in yeast.

 

Our 3-antigen HBV vaccine is approved for use and commercially available in Israel, under the brand name Sci-B-Vac®, and successfully completed its pivotal Phase III studies in the United States, Europe, and Canada in January 2020 but is still an investigational candidate in such countries and has not yet been approved for commercialization by the applicable regulatory authorities (e.g., FDA, EMA, MHRA, and Health Canada, each defined below). This Phase III program consisted of two Phase III studies – PROTECT and CONSTANT – designed to assess efficacy and safety of VBI’s 3-antigen HBV vaccine candidate compared with Engerix-B®, a single-antigen HBV vaccine, and lot-to-lot manufacturing consistency of three consecutive lots of VBI’s vaccine candidate. As announced in June 2019 and January 2020, results from these two studies showed VBI’s 3-antigen vaccine candidate achieved: (1) non-inferiority of seroprotection rate (SPR) in all adults age 18 and older (VBI: 91.4% vs. Engerix-B: 76.5%); (2) superiority (as defined in the clinical protocol) of SPR in adults age 45 and older (VBI: 89.4% vs. Engerix-B: 73.1%); (3) higher SPR and anti-HBs titers at all time points across all subgroup populations, regardless of age, diabetic status, and BMI; (4) a safety profile consistent with the known safety profile of the vaccine and comparable to that of Engerix-B; and (5) manufacturing consistency.

 

The completed Phase III studies support the regulatory submissions to the United States Food and Drug Administration (“FDA”); the European Medicines Agency (“EMA”); the United Kingdom Medicines and Healthcare products, Regulatory Agency (“MHRA”); and Health Canada. We submitted our Marketing Authorization Application (“MAA”) to the EMA on November 23, 2020, which was accepted for review on December 22, 2020, and the Biologics License Application (“BLA”) to the FDA on November 30, 2020, which was accepted for review on January 29, 2021. As part of the review process, the FDA has set a Prescription Drug User Fee Act (PDUFA) target action date of November 30, 2021. However, there is no guarantee that FDA will be able to meet these deadlines or that our BLA will be approved in a timely manner, if at all. The submissions to UK and Health Canada are in process and we expect to complete those regulatory filings in 2021.

 

On December 7, 2020, we announced a partnership for the commercialization of our 3-antigen HBV vaccine with Syneos Health (“Syneos”), who was selected for their robust and innovative commercialization experience and deep vaccine expertise, including successful partnerships with leading vaccine manufacturers.

 

VBI-2900: Coronavirus Vaccine Program (VBI-2901, VBI-2902, VBI-2905)

 

In response to the ongoing SARS-CoV-2 (COVID-19) pandemic, VBI initiated development of a prophylactic coronavirus vaccine program. Coronaviruses are enveloped viruses by nature which we believe make them a prime target for VBI’s flexible enveloped virus-like particle (eVLP) platform technology.

 

On March 31, 2020, we announced a collaboration with the National Research Council of Canada (“NRC”), Canada’s largest federal research and development organization, to develop a coronavirus vaccine candidate. The collaboration combines VBI’s viral vaccine expertise, eVLP technology platform, and coronavirus antigens with the NRC’s uniquely designed SARS-CoV-2 antigens and assay development capabilities to select the most immunogenic vaccine candidate for further development. On December 21, 2020, we signed an amendment to the collaboration agreement with the NRC to broaden the scope of collaboration to include certain pre-clinical evaluations, bioprocess optimization, technology transfer, and the performance of additional scale up work. The amendment also extended the expiry date of the agreement to March 15, 2022.

 

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On July 3, 2020, we and the NRC as represented by its Industrial Research Assistance Program (“IRAP”) signed a contribution agreement whereby the NRC agreed to contribute up to CAD $1,000 for the transfer and scale-up of the technical production process for our prophylactic coronavirus vaccine program.

 

On August 5, 2020, we announced that VBI Cda had been awarded up to a CAD$55,976 contribution from the Strategic Innovation Fund (“SIF”), established by the Government of Canada, to support the Company’s coronavirus vaccine development program through Phase II clinical studies. This award is governed by the terms of a Contribution Agreement (the “Contribution Agreement”), dated September 16, 2020, with Her Majesty The Queen in Right of Canada, as represented by the Minister of Industry, pursuant to which our subsidiary, Variation Biotechnologies Inc., is obligated to develop a novel, broadly reactive coronavirus vaccine against COVID-19, SARS, and MERS, and/or a monovalent vaccine targeting only COVID-19 through Phase II studies. We agreed to complete such project in or before the first quarter of 2022, which will be conducted exclusively in Canada, except as permitted otherwise under certain circumstances.

 

On August 26, 2020, we announced data from three pre-clinical studies conducted to enable selection of optimized clinical candidates for our coronavirus vaccine program. As a result of these studies, VBI selected two vaccine candidates, with the goal of bringing forward candidates that add meaningful clinical and medical benefit to those already approved – be it as a one-dose administration and/or providing broader protection against known and future mutated strains of COVID-19: (1) VBI-2901, a multivalent pan-coronavirus vaccine candidate expressing the COVID-19, SARS, and MERS spike proteins; and (2) VBI-2902, a monovalent vaccine candidate expressing an optimized “prefusion” form of the COVID-19 spike protein. A Phase I/II study of the first of the two candidates (VBI-2902) initiated in March 2021, with initial data from Phase I of the study expected by the end of the second quarter of 2021. Work is ongoing to further optimize and manufacture VBI-2901, with the anticipation that a Phase I/II study will begin later in 2021. On December 21, 2020, we signed an amendment to the collaboration agreement with the NRC to broaden the scope of collaboration to include certain pre-clinical evaluations, bioprocess optimization, technology transfer, and the performance of additional scale up work. The amendment also extended the expiry date of the agreement to March 15, 2022.

 

Since early in the pandemic SARS-CoV-2 variants started to emerge and certain of these variants have been identified as having a significant public health impact. In December 2020, South Africa reported to WHO a new variant of SARS-CoV-2 named B.1.351, also known as 501Y.V2. The B.1.351 variant is associated with a higher viral load and increased transmissibility, and may be less sensitive to neutralizing antibody responses elicited by currently available COVID-19 vaccines. On March 9, 2021, the Company and CEPI announced a partnership (“CEPI Funding Agreement”) to develop eVLP vaccine candidates against SARS-COV-2 variants, including the B.1.351 variant. CEPI will provide up to $33,018 to support the advancement of VBI-2905, a monovalent eVLP candidate expressing the pre-fusion form of the spike protein from the B.1.351 strain, through Phase I clinical development. This funding will also support preclinical expansion of additional multivalent vaccine candidates designed to evaluate the potential breadth of our eVLP technology. The preclinical expansion is intended to develop clinic-ready vaccine candidates capable of addressing emerging variants.

 

VBI-1501: Prophylactic CMV Vaccine Candidate

 

CMV may cause severe infections in newborn children (congenital CMV) and may also cause serious infections in people with weakened immune systems, such as solid organ or bone marrow transplant recipients. Our prophylactic CMV vaccine candidate uses the eVLP platform to express a modified form of the CMV glycoprotein B (“gB”) antigen and is adjuvanted with alum, an adjuvant used in FDA-approved products.

 

Following the successful completion of the Phase I study in May 2018, and positive discussions with Health Canada, we announced plans for a Phase II clinical study evaluating VBI-1501 on December 20, 2018. We received similarly positive guidance from the FDA in July 2019. The Phase II study is expected to assess the safety and immunogenicity of dosages of VBI-1501 up to 20µg with alum. We are currently evaluating the timing of the Phase II study.

 

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Therapeutic Pipeline

 

VBI-2601: HBV Immunotherapeutic Candidate

 

VBI-2601 (BRII-179) is our novel, recombinant, protein-based immunotherapeutic candidate in development for the treatment of chronic HBV infection, a disease that affects more than 250 million people worldwide. Chronic HBV infection can lead to cirrhosis of the liver, hepatocellular cancer, and other liver disease, making it a life-threatening global health problem. VBI-2601 (BRII-179) is formulated to induce broad immunity against HBV virus, including T-cell immunity which plays an important role in controlling HBV infection.

 

VBI-2601 (BRII-179) is in an ongoing Phase Ib/IIa study in patients with chronic HBV infection, which initiated enrollment in November 2019, and is being conducted by our partner Brii Biosciences Limited (“Brii Bio”) pursuant to a Collaboration and License Agreement (“License Agreement”) announced on December 6, 2018. The Phase Ib/IIa study is a randomized, controlled study designed to assess the safety, tolerability, antiviral and immunological activity of VBI-2601 (BRII-179). The study is designed as a two-part dose-escalation study assessing different dose levels of VBI-2601 (BRII-179) with and without an immunomodulatory adjuvant and enrolled 46 patients. The study is being conducted at multiple study sites in New Zealand, Australia, Thailand, South Korea, Hong Kong SAR, and China.

 

On November 18, 2020, we announced interim data from the low-dose cohorts, which achieved human proof-of-concept, demonstrating restoration of both antibody and T cell responses in chronically-infected HBV patients. The data showed 1) potent re-stimulation of T cell responses to HBV surface antigens in 67% (n=6/9) and 78% (n=7/9) of evaluable patients in the low-dose VBI-2601 unadjuvanted and adjuvanted study arms, respectively; and 2) antibody responses against HBV surface antigens in 60% of evaluable patients (n=6/10) in the unadjuvanted cohort and in 67% (n=6/9) in the adjuvanted cohort. The low-dose, with and without the adjuvant, was well-tolerated with no safety signals observed.

 

On April 12, 2021, we announced additional data from Phase Ib/IIa clinical study for 33 evaluable patients across all study arms that suggest: 1) VBI-2601 (BRII-179) is well tolerated at all dose levels with and without the adjuvant with no significant adverse events identified; 2) restimulation of T cell responses to HBV surface antigens, including S, Pre-S1 and Pre-S2, in greater than 50% of the evaluable patients from all VBI-2601 (BRII-179) cohorts compared to no detectable response in the control arm; 3) the T cell responses and antibody responses were comparable across the 20µg and 40µg unadjuvanted study arms; and 4) T cell response rates between the adjuvanted and unadjuvanted cohorts were also comparable.

 

Based on the acceptable safety profile and vaccine-induced adaptive immune responses observed to-date, the high dose (40 µg) of VBI-2601 (BRII-179), both with and without IFN-α, was selected to progress into a Phase II combination study of VBI-2601 (BRII-179) and BRII-835 (VIR-2218), a novel small interfering ribonucleic acid (siRNA) therapeutic candidate designed to inhibit expression of HBV proteins. Patient dosing for the study initiated in April 2021. Brii Bio has led the design and implementation of this functional cure proof-of-concept study with the support of VBI and Vir Biotechnology (“VIR”), and is the sponsor of the Phase II study. This study will be conducted at sites in Australia, China, Taiwan, Hong Kong Special Administrative Region of China, South Korean, New Zealand, Singapore, and Thailand.

 

VBI-1901: Glioblastoma

 

Our cancer vaccine immunotherapeutic program, VBI-1901, targets CMV proteins present in tumor cells. CMV is associated with a number of solid tumors including GBM, breast cancer, and pediatric medulloblastoma.

 

In January 2018, we initiated dosing in a two-part, multi-center, open-label Phase I/IIa clinical study of VBI-1901 in 38 patients with recurrent GBM. Phase I (Part A) of the study was a dose-escalation phase that defined the safety, tolerability, and optimal dose level of VBI-1901 adjuvanted with granulocyte-macrophage colony-stimulating factor (GM-CSF) in recurrent GBM patients with any number of prior recurrences. In December 2018, this phase completed enrollment of 18 patients across three dose cohorts, the highest of which (10 µg) was selected as the optimal dose level to test in the Phase IIa portion (Part B) of the study. Phase IIa of the study, which initiated enrollment in July 2019, is a subsequent extension of the 10µg dose level cohort. This phase is a two-arm study that enrolled 20 first-recurrent GBM patients to receive 10µg of VBI-1901 in combination with either GM-CSF or GlaxoSmithKline Biologicals S.A. (“GSK”) proprietary adjuvant system, AS01, as immunomodulatory adjuvants. AS01 is provided pursuant to a Clinical Collaboration and Support Study Agreement (“Collaboration Agreement”) we entered into with GSK on September 10, 2019. Enrollment of the 10 patients in the VBI-1901 with GM-CSF arm was completed in March 2020 and enrollment of the 10 patients in the VBI-1901 with AS01 was completed in October 2020.

 

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Data from the ongoing Phase IIa portion of the study was announced throughout 2020, with the latest data presented in November 2020 at the Society for Neuro-Oncology (SNO) 2020 Annual Meeting. This data showed two partial responses (“PRs”) and two stable disease (“SD”) observed in the VBI-1901 plus GM-CSF vaccinated group, resulting in a disease control rate of 40% (n=4/10). A 56% disease control rate was achieved in the group vaccinated with VBI-1901 plus AS01, with 5 stable disease observations (n=5/9). Presumed pseudoprogression was observed in both vaccinated groups, defined as immune infiltration into the tumor which appears initially as tumor growth but later subsides resulting in tumor growth stabilization and/or shrinkage.

 

VBI-1901 continues to be safe and well tolerated at all doses tested, with no safety signals observed.

 

Based on the data seen to-date, VBI is exploring a randomized, controlled, clinical study with registration potential for the next phase of development, which, subject to approval from regulatory bodies, is expected to begin in the fourth quarter of 2021.

 

In addition to the lead program candidates described above, we may also seek to in-license clinical-stage vaccines or vaccine-related technologies that we believe complement our product and pipeline portfolio, in addition to technologies that may supplement our therapeutic and preventative vaccination efforts in both immuno-oncology and infectious disease.

 

At present, our operations are focused on:

 

preparing for commercialization of our 3-antigen prophylactic HBV vaccine candidate in the United States, Europe, and Canada, where we may obtain regulatory approval;
   
conducting the Phase I/IIa clinical study of our GBM vaccine immunotherapeutic candidate, VBI-1901;
   
conducting the Phase I clinical study of our prophylactic COVID-19 vaccine candidate, VBI-2902;
   
continuing our development and scaling-up production processes for our three prophylactic coronavirus vaccine candidates VBI-2901, VBI-2902 and VBI-2905 using a Contract Development and Manufacturing Organization (“CDMO”) located in Canada;
   
seeking regulatory approval to conduct clinical trials of VBI-2905;
   
developing VBI-2601 (BRII-179), our protein-based immunotherapeutic candidate for treatment of chronic HBV, in collaboration with Brii Bio;
   
ensuring our recently modernized manufacturing facility in Rehovot, Israel obtains all required regulatory approvals;
   
preparing marketing authorization applications for our 3-antigen prophylactic HBV vaccine candidate in the United Kingdom and Canada;
   
preparation for further development of VBI-1501, our preventative CMV vaccine candidate;
   
continuing the research and development (“R&D”) of our pipeline candidates, including the exploration and development of new pipeline candidates;
   
implementing operational, financial, and management information systems, including through third party partners, to support our commercialization activities;
   
maintaining, expanding, and protecting our intellectual property portfolio; and
   
developing our internal systems and processes for regulatory affairs and compliance.

 

VBI’s revenue generating activities have been the sale of our 3-antigen prophylactic HBV vaccine in markets where it is approved or available on a named patient basis where it is not approved, though those markets have generated a limited number of sales to-date, various business development transactions, and R&D services generating fees. VBI has incurred significant net losses and negative operating cash flows since inception and expects to continue incurring losses and negative cash flows from operations as we carry out planned clinical, regulatory, R&D, sales, and manufacturing activities with respect to the advancement of our 3-antigen prophylactic HBV vaccine and new pipeline candidates. As of March 31, 2021, VBI had an accumulated deficit of approximately $326.3 million and stockholders’ equity of approximately $180.0 million. Our ability to maintain our status as an operating company and to realize our investment in our In Process Research & Development (“IPR&D”) assets, which consist of our CMV and GBM programs, is dependent upon obtaining adequate cash and cash equivalents to finance our clinical development, manufacturing, our administrative overhead and our research and development activities, and ultimately to profitably monetize our IPR&D. We plan to finance near term future operations with existing cash and cash equivalents reserves. We expect that we will need to secure additional financing to finance our business plans, which may be a combination of proceeds from the issuance of equity securities, the issuance of additional debt, structured asset financings, government or non-governments organization grants or subsidies, and revenues from potential business development transactions, if any. There is no assurance we will manage to obtain these sources of financing, if required. These factors raise substantial doubt about our ability to continue as a going concern. The accompanying financial statements have been prepared assuming that we will continue as a going concern. The 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 we be unable to continue as a going concern.

 

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We have incurred operating losses since inception, have not generated significant product sales revenue and have not achieved profitable operations. We incurred net losses of $17,647 for the three months ended March 31, 2021, and we expect to continue to incur substantial losses in future periods. We anticipate that we will continue to incur substantial operating expenses as we continue our research and development, clinical studies, and as we take steps to commercialize our products. These include expenses related to the focus of our operations highlighted above.

 

In addition, we have incurred and will continue to incur significant expenses as a public company, which subjects us to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the rules and regulations of the NASDAQ Capital Market, and the Canadian securities regulators.

 

Long Term Debt

 

On May 22, 2020, we (along with our subsidiary VBI Cda) entered into a Loan and Guaranty Agreement (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 us: (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. FDA 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 originally had 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”). On February 3, 2021, pursuant to the Loan Agreement, the Lenders, converted $2 million of the secured term loan into 1,369,863 common shares at a conversion price of $1.46. The Lenders have the ability to convert an additional $2 million at the Lenders’ option.

 

The Administrative Agent has determined that sufficient Second Tranche Milestones have been satisfied to enable the Company to request draw down of the Second Tranche Term Loan up to the Second Tranche Maximum Amount (as such terms are defined in the Loan Agreement). The Company and the Lenders are in the process of amending the Loan Agreement to extend the Second Tranche Availability Period.

 

In connection with the Loan Agreement, on May 22, 2020, we 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 original 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.

 

As a result of the K2 Warrant and K2 conversion feature, the debt was issued at a discount of $3,758. We also incurred $1,021 of debt issuance costs and are required to make a final payment equal to 6.95% of the aggregate original secured term loan principal 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 initial debt discount is $6,169.

 

The total principal amount of the loan under the Loan Agreement outstanding at March 31, 2021, including the $1,390 final payment discussed above, is $19,390. 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 March 31, 2021 was 8.25%. We are 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 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.

 

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Research and Development Services

 

Pursuant to an agreement with the Israel Innovation Authority (formerly the Office of the Chief Scientist of Israel), we are required to make services available for the biotechnology industry in Israel. These services include relevant activities for development and manufacturing of therapeutic proteins according to international standards and Good Manufacturing Practice (“GMP”) quality level suitable for toxicological studies in animals. Service activities include analytics/bio analytics methods for development and process development of therapeutic proteins starting with a candidate clone through manufacturing.

 

These R&D services are primarily marketed to the Israeli research community in academia and Israeli biotechnology companies in the life sciences industry lacking the infrastructure or experience in the development and production of therapeutic proteins to the standards and quality required for clinical trials for human use. During the three months ended March 31, 2021, we provided services to biotechnology companies including analytical development.

 

In addition, pursuant to the License Agreement with Brii Bio we provide R&D services to Brii Bio as part of the development of VBI-2601 (BRII-179).


Modernization and Capacity Increases of Our Manufacturing Facility

 

In 2018, we temporarily closed our manufacturing facility in Rehovot, Israel, for modernization and capacity increase. We re-commenced operations in May 2019 and the review of the modernization and the capacity increase by the Israeli Ministry of Health (“IMoH”) occurred in December of 2019. We received our certificate of GMP compliance from the IMoH on January 27, 2020. In addition to the GMP compliance certification, the IMoH will also need to review and approve the process validation submission, and provide approval for us to sell our 3-antigen prophylactic HBV vaccine manufactured at the modernized facility. We increased the capacity of our manufacturing facility to be able to supply commercial quantities of our 3-antigen prophylactic HBV vaccine candidate upon FDA, and/or EMA, and/or MHRA, and/or Health Canada approval, and to supply clinical supplies of VBI-2601 (BRII-179).

 

Third Party License and Assignment Agreements

 

We currently are dependent on licenses from third parties for certain of our key technologies, including the license granted pursuant to an agreement between Savient Pharmaceuticals Inc. and SciGen Ltd dated June 2004, as subsequently amended (the “Ferring License Agreement”) and a license from L’Universite Pierre et Marie Curie, now Sorbonne Université (“UPMC”), Institut National de la Santé et de la Recherche Médicale (“INSERM”) and L’école Normale Supérieure de Lyon. Under the Ferring License Agreement, we are committed to pay Ferring royalties equal to 7% of net sales (as defined therein) of HBsAg “Product” (as defined therein). Under an Assignment Agreement between FDS Pharm LLP and SciGen Ltd., dated February 14, 2012 (the “SciGen Assignment Agreement”), we are required to pay royalties to SciGen Ltd. equal to 5% of net sales (as defined in the Ferring License Agreement) of Product. Under the Ferring License Agreement and the SciGen Assignment Agreement, we originally were to pay royalties on a country-by-country basis until the date 10 years after the date of commencement of the first royalty year in respect of such country. In April 2019, we exercised our option to extend the Ferring License Agreement in respect of all the countries that still make up the territory for an additional 7 years by making a one-time payment to Ferring of $100. Royalties under the Ferring License Agreement and SciGen Assignment Agreement will continue to be payable for the duration of the extended license periods. Under our license agreement with UPMC and other licensors relating to eVLP technology, we have an exclusive license to a family of patents that is expected to expire in the United States in 2022 and 2021 in other countries. Under this agreement, we are required to pay UPMC between 0.75% to 1.75% of net sales and certain lump-sum milestone payments. UPMC is also a co-owner of the patent family covering our VBI-1501 CMV vaccine and we are currently negotiating extension of our existing license to cover this patent family. During the three months ended March 31, 2021, we made a milestone payment of €50 and as of March 31, 2021, we are obligated to make another milestone payment of €150; both related to our prophylactic coronavirus vaccine program.

 

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Financial Overview

 

Overall Performance

 

The Company had net losses of $17,647 and $8,358 for the three months ended March 31, 2021 and 2020, respectively. We had an accumulated deficit of $326,265 at March 31, 2021. We had $108,226 of cash and cash equivalents and $25,333 of short-term investments and net working capital of $121,734 as of March 31, 2021.

 

Revenues

 

Revenues consist of R&D services revenue recognized as part of the License Agreement with Brii Bio and revenues related to the sale of products and other R&D services.

 

Cost of revenues

 

Cost of revenues consist primarily of costs incurred for manufacturing our 3-antigen prophylactic HBV vaccine, which includes cost of materials, consumables, supplies, contractors, and manufacturing salaries.

 

Research and Development Expenses

 

R&D expenses, net of government grants and funding arrangements consist primarily of costs incurred for the development of our 3-antigen prophylactic HBV vaccine; VBI-1901, our GBM vaccine immunotherapeutic candidate; VBI-1501, our CMV vaccine candidate; VBI-2601 (BRII-179), our hepatitis B immunotherapeutic candidate; and VBI-2900, our coronavirus vaccine program, which include:

 

  the cost of acquiring, developing, and manufacturing clinical study materials, and other consumables and lab supplies used in our pre-clinical studies;
     
  expenses incurred under agreements with contractors or CDMOs or Contract Research Organizations to advance the vaccines into and through completion of clinical studies; and
     
  employee-related expenses, including salaries, benefits, travel, and stock-based compensation expense.

 

We expense R&D costs when we incur them.

 

General and Administrative (“G&A”) Expenses

 

G&A expenses consist principally of salaries and related costs for executive and other administrative personnel and consultants, including stock-based compensation, impairment charges, and travel expenses. Other general and administrative expenses include professional fees for legal, patent protection, consulting and accounting services, commercialization costs, travel and conference fees, board of directors meeting costs, scientific and commercial advisory board meeting costs, rent, maintenance of facilities, depreciation, office supplies, information technology costs and expenses, insurance, and other general expenses. G&A expenses are expensed when incurred.

 

We expect that our general and administrative expenses will increase in the future as a result of adding employees and scaling our operations commensurate with advancing clinical candidates, commercializing products, and continuing to support a public company infrastructure. These increases will likely include increased costs for insurance, hiring of additional personnel, board committees, outside consultants, investor relations, lawyers, and accountants, among other expenses.

 

Interest Expense, net of interest income

 

Interest expense is associated with our long-term debt as discussed in Note 9 of the Notes to the Condensed Consolidated Financial Statements.

 

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Results of Operations

 

Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31, 2020

 

All dollar amounts stated below are in thousands, unless otherwise indicated.

 

    Three months ending
March 31
             
    2021     2020     Change $     Change %  
Revenues   $ 301     $ 415     $ (114 )     (27 )%
                                 
Expenses:                                
Cost of revenues     2,412       2,577       (165 )     (6 )%
Research and development     6,839       3,193       3,646       114 %
General and administration     6,747       4,058       2,689       66 %
Total operating expenses     15,998       9,828       6,170       63 %
                                 
Loss from operations     (15,697 )     (9,413 )     (6,284 )     67 %
                                 
Interest expense, net of interest income     (1,812 )     (582 )     (1,230 )     211 %
Foreign exchange (loss) gain     (138 )     1,637       (1,775 )     (108 )%
Loss before income taxes     (17,647 )     (8,358 )     (9,289 )     111 %
                                 
Income tax expense     -       -       -       - %
                                 
NET LOSS   $

(17,647

)   $ (8,358 )   $ (9,289 )    

111

%

 

Revenues

 

Revenues for the three months ended March 31, 2021 decreased by $114 or 27% due to a decrease in R&D services revenue for VBI-2601, our hepatitis B immunotherapeutic candidate, being developed in collaboration with Brii Bio, as fewer manufacturing and non-clinical research services were required in the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

 

 31 
 

 

Revenues by Geographic Region

 

   Three months ending
March 31
         
   2021   2020   $ Change   % Change 
Revenue in Israel  $169   $132   $37    28%
Revenues in China / Hong Kong   128    231    (103)   (45)%
Revenue in Europe   4    52    (48)   (92)%
Total Revenues  $301   $415   $(114)   (27)%

 

Cost of Revenues

 

Cost of revenues for the three months ended March 31, 2021 was $2,412 as compared to $2,577 for the three months ended March 31, 2020. The decrease in the cost of revenues of $165 or 6% is due to a decrease in R&D services as discussed above.

 

Research and Development Expenses

 

R&D expenses for the three months ended March 31, 2021 were $6,839 as compared to $3,193 for the three months ended March 31, 2020. The increase in R&D expenses of $3,646 or 114%, is a result of an increase in R&D expenses related to: 1) our prophylactic coronavirus vaccine candidates, as during the three months period ended March 31, 2020, we were in the very early stages of development for these candidates; and 2) regulatory costs related to the BLA submission for the 3-antigen prophylactic HBV vaccine candidate.

 

General and Administrative Expenses

 

G&A expenses for the three months ended March 31, 2021 were $6,747 as compared to $4,058 for the three months ended March 31, 2020. The G&A expense increase of $2,689 or 66%, is a result of the increase in pre-commercial activities as potential regulatory approval approaches, increased insurance costs, and increased labor costs.

 

 32 
 

 

Loss from Operations

 

The net loss from operations for the three months ended March 31, 2021 was $15,697 as compared to $9,413 for the three months ended March 31, 2020. The $6,284 increase in the net loss from operations resulted from the items discussed above.

 

Interest Expense, net of interest income

 

The interest expense, net of interest income increased by $1,230 for the three months ended March 31, 2021, compared to the three months ended March 31, 2020, largely resulting from the conversion of $2,000 of the secured term loan to common shares, which resulted in $1,161 of additional interest accretion being recognized in interest expense, net of interest income in the condensed consolidated statement of operations and comprehensive loss. 

 

Foreign Exchange Gain (Loss)

 

The foreign exchange loss of $138 for the three months ended March 31, 2021 and the foreign exchange gain of $1,637 for the three months ended March 31, 2020 are a result of the changes in the foreign currency exchange rates (NIS and CAD) in which the foreign currency transactions were denominated for each of those periods.

 

Net Loss

 

Net loss of $17,647 for the three months ended March 31, 2021 compared to $8,358 for the three months ended March 31, 2020 is a result of the items discussed above.

 

Liquidity and Capital Resources

 

   March 31,
2021
   December 31,
2020
   $ Change   % Change 
                 
Cash and cash equivalents  $108,226   $93,825   $14,401    15%
Current Assets   

145,559

    132,041    

13,518

    10%
Current Liabilities   23,825    17,348    6,477    37%
Working Capital   121,734    114,693    7,041    6%
Accumulated Deficit  $

(326,265

)  $(308,618)  $

(17,647

)   6%

 

As of March 31, 2021, we had cash and cash equivalents of $108,226 as compared to $93,825 as of December 31, 2020. As of March 31, 2021, we had working capital of $121,734 as compared to working capital of $114,693 at December 31, 2020. Working capital is calculated by subtracting current liabilities from current assets.

 

The report of our independent registered public accounting firm on our consolidated financial statements for the year ended December 31, 2020 contains an explanatory paragraph regarding our ability to continue as a going concern. VBI has incurred significant net losses and negative operating cash flows since inception and expects to continue incurring losses and negative cash flows from operations as we carry out our planned clinical, regulatory, R&D, sales, and manufacturing activities with respect to the advancement of our 3-antigen prophylactic HBV vaccine candidate and new pipeline candidates. As of March 31, 2021, VBI had an accumulated deficit of approximately $326.3 million and stockholders’ equity of approximately $180.0 million.

 

During the first quarter of 2021, the Company issued 5,752,068 common shares under the ATM Program, for total gross proceeds of $22,113 at an average price of $3.84. The Company incurred $696 of shares issuance costs related to the common shares issued resulting in net proceeds of $21,417.

 

On February 3, 2021, pursuant to the Loan Agreement, the Lenders, converted $2,000 of the secured term loan into 1,369,863 common shares at a conversion price of $1.46.

 

On March 9, 2021, the Company and CEPI announced a partnership, the CEPI Funding Agreement, to develop eVLP vaccine candidates against SARS-COV-2 variants, including the B.1.351 variant, also known as 501Y.V2, first identified in South Africa. CEPI will provide up to $33,018 to support the advancement of VBI-2905, a monovalent eVLP candidate expressing the pre-fusion form of the spike protein from the B.1.351 strain, through Phase I clinical development. This funding will also support preclinical expansion of additional multivalent vaccine candidates designed to evaluate the potential breadth of our eVLP technology. The preclinical expansion is intended to develop clinic-ready vaccine candidates capable of addressing emerging variants.

 

Our ability to maintain our status as an operating company and to realize our investment in our IPR&D assets is dependent upon obtaining adequate cash and cash equivalents to finance our clinical development, manufacturing, our administrative overhead and our research and development activities. We plan to finance near term future operations with existing cash and cash equivalents reserves. We expect that we will need to secure additional financing to finance our business plans, which may be a combination of proceeds from the issuance of equity securities, the issuance of additional debt, structured asset financings, government grants or subsidies, and revenues from potential business development transactions, if any. There is no assurance we will manage to obtain these sources of financing. The accompanying financial statements have been prepared assuming that we will continue as a going concern; however, the above conditions raise substantial doubt about our ability to do so. The 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 we be unable to continue as a going concern. Our long-term success and ability to continue as a going concern is dependent upon obtaining sufficient capital to fund the research and development of our products, to bring about their successful commercial release, to generate revenue, and, ultimately, to attain profitable operations, or, alternatively, to advance our products and technology to such a point that they would be attractive candidates for acquisition by others in the industry.

 

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We will require additional funds to conduct clinical and non-clinical trials, achieve regulatory approvals, and, subject to such approvals, commercially launch our products, and will need to secure additional financing in the future to support our operations and to realize our investment in our IPR&D assets. We base this belief on assumptions that are subject to change, and we may be required to use our available cash and cash equivalent resources sooner than we currently expect. Our actual future capital requirements will depend on many factors, including the progress and results of our ongoing clinical trials, the duration and cost of discovery and preclinical development, laboratory testing and clinical trials for our pipeline candidates, the timing and outcome of regulatory review of our products, obtaining regulatory approvals for our recently modernized manufacturing facility in Rehovot, Israel, product sales outside of Israel, the costs involved in preparing, filing, prosecuting, maintaining, defending, and enforcing patent claims and other intellectual property rights, the number and development requirements of other pipeline candidates that we pursue, and the costs of commercialization activities, including product marketing, sales, and distribution.

 

We expect to finance our future cash needs through public or private equity offerings, potential additional proceeds from the long-term debt from the Lenders pursuant to the Loan Agreement, debt financings, government grants or subsidies, structured asset financings, or business development transactions. In addition to the First Tranche Term Loan, the Lenders agreed to make available subject to the conditions discussed above and upon the submission of a loan request by the Company, the Second Tranche Term Loan, the Third Tranche Term Loan, and the Fourth Tranche Term Loan. Pursuant to the Contribution Agreement, we will receive up to CAD $55,976 as a government grant to support the development of the Company’s coronavirus vaccine program, though Phase II clinical studies, and pursuant to the CEPI Funding Agreement, we will receive up to $33,018 in funding to support the development of the Company’s coronavirus vaccine program, specifically SARS-COV-2 variants. We may need to raise additional funds more quickly if one or more of our assumptions prove to be incorrect or if we choose to expand our product development efforts more rapidly than we presently anticipate. We may also decide to raise additional funds even before we need them if the conditions for raising capital are favorable. Additional equity, debt, structured asset financing, government grants or subsidies, or business development transactions may not be available on acceptable terms, if at all. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate our R&D programs, reduce our planned commercialization efforts or obtain funds through arrangements with collaborators or others that may require us to relinquish rights to certain pipeline candidates that we might otherwise seek to develop or commercialize independently.

 

To the extent we raise additional capital by issuing equity securities or obtaining borrowings convertible into equity, ownership dilution to existing stockholders will result and future investors may be granted rights superior to those of existing stockholders. The incurrence of indebtedness or debt financing would result in increased fixed obligations and could also result in covenants that would restrict our operations. Our ability to obtain additional capital may depend on prevailing economic conditions and financial, business, and other factors beyond our control. The ongoing COVID-19 pandemic has caused an unstable economic environment globally. Disruptions in the global financial markets may adversely impact the availability and cost of credit, as well as our ability to raise money in the capital markets. Current economic conditions have been, and continue to be, volatile. Continued instability in these market conditions may limit our ability to access the capital necessary to fund and grow our business.

 

The Company’s long-term success and ability to continue as a going concern is dependent upon obtaining sufficient capital to fund the research and development of its products, to bring about their successful commercial release, to generate revenue and, ultimately, to attain profitable operations or, alternatively, to advance its products and technology to such a point that they would be attractive candidates for acquisition by others in the industry.

 

To date, the Company has been able to obtain financing as and when it was needed; however, there is no assurance that financing will be available in the future, or if it is, that it will be available at acceptable terms.

 

Net cash used in Operating Activities

 

The Company incurred net losses of $17,647 and $8,358 in the three months ended March 31, 2021 and 2020, respectively. The Company used $6,644 and $7,648 in cash for operating activities during the three months ended March 31, 2021 and 2020, respectively. The decrease in cash outflows is largely a result of the change in operating working capital, notably the cash received in advance from the CEPI Funding Agreement, offset by an increase in net loss.

 

 34 
 

 

Net cash used in Investing Activities

 

Cash flows used in investing activities increased from $133 for the three months ended March 31, 2020 to $556 for the three months ended March 31, 2021. The investing activities for the three months ended March 31, 2021 and March 31, 2020 were for routine purchases of property and equipment.

 

Net cash provided by Financing Activities

 

Net cash flows in financing activities increased from cash used of $600 for the three months ended March 31, 2020 to cash provided of $21,624 during the three months ended March 31, 2021. This increase is due to the common shares issued as part of the ATM Program.

 

Off-Balance Sheet Arrangements

 

As of March 31, 2021, we have no off-balance sheet transactions, arrangements, obligations (including contingent obligations), or other relationships with unconsolidated entities or other persons that have, or may have, a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

 

Critical Accounting Policies and Estimates

 

There have been no changes to our critical accounting policies during the three months ended March 31, 2021. Critical accounting policies and the significant accounting estimates made in accordance with such policies are regularly discussed with the Audit Committee of the Company’s board of directors. Those policies are discussed under “Critical Accounting Policies” in our “Management’s Discussion and Analysis of the Financial Condition and Results of Operations” included in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020, as well as in our consolidated financial statements and the footnotes thereto, included in the Annual Report on Form 10-K.

 

Trends, Events and Uncertainties

 

As with other companies that are in the process of commercializing novel pharmaceutical products, we will need to successfully manage normal business and scientific risks. Research and development of new technologies is, by its nature, unpredictable. We cannot assure you that our technology will be adopted, that we will ever earn revenues sufficient to support our operations, or that we will ever be profitable. In addition, the impact of the ongoing COVID-19 pandemic and its resurgence is currently indeterminable and rapidly evolving, and has adversely affected and may continue to adversely affect our operations and the global economy. Furthermore, other than as discussed in this report, we have no committed source of financing and may not be able to raise money as and when we need it to continue our operations. If we cannot raise funds as and when we need them, we may be required to severely curtail, or even to cease, our operations.

 

 35 
 

 

Other than as discussed above and elsewhere in this Form 10-Q, we are not aware of any trends, events or uncertainties that are likely to have a material effect on our financial condition.

 

Recent Accounting Pronouncements

 

See Note 3 of Notes to the Condensed Consolidated Financial Statements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer and Head of Business Development (our principal financial and accounting officer), the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Form 10-Q as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer and Head of Business Development have concluded that, as of the end of the period covered by this Form 10-Q, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer and Head of Business Development, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

There has been no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the fiscal quarter ended March 31, 2021, that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 36 
 

 

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time, we may be involved in certain claims and litigation arising out of the ordinary course and conduct of business. Management assesses such claims and, if it considers that it is probable that an asset had been impaired or a liability had been incurred and the amount of loss can be reasonably estimated, provisions for loss are made based on management’s assessment of the most likely outcome.

 

On September 13, 2018, two actions were brought in the District Court of the central district in Israel naming our subsidiary SciVac as a defendant. In one claim, two minors, through their parents, allege among other things, defects in certain batches of our 3-antigen prophylactic HBV vaccine discovered in July 2015; that our 3-antigen prophylactic HBV vaccine was approved for use in children and infants in Israel without sufficient evidence establishing its safety; that SciVac failed to provide accurate information about our 3-antigen prophylactic HBV vaccine to consumers and that each child suffered side effects from the vaccine. The claim was filed together with a motion seeking approval of a class action on behalf of 428,000 children vaccinated with our 3-antigen prophylactic HBV vaccine in Israel from April 2011 and seeking damages in a total amount of NIS 1,879,500,000 (not in thousands) ($563,737). The second claim is a civil action brought by two minors and their parents against SciVac and the Israel Ministry of Health alleging, among other things, that SciVac marketed an experimental, defective, hazardous or harmful vaccine; that our 3-antigen prophylactic HBV vaccine was marketed in Israel without sufficient evidence establishing its safety; and that our 3-antigen prophylactic HBV vaccine was produced and marketed in Israel without approval of a western regulatory body. The claim seeks damages for past and future losses and expenses as well as punitive damages.

 

SciVac believes these matters to be without merit and intends to defend these claims vigorously.

 

The District Court has accepted SciVac’s motion to suspend reaching a decision on the approval of the class action pending the determination of liability under the civil action. Preliminary hearings for the trial of the civil action began on January 15, 2020, with subsequent preliminary hearings held on May 13, 2020 and December 3, 2020 to discuss document disclosure. The next preliminary hearing is scheduled to be held on September 13, 2021.

 

Item 1A. Risk Factors

 

The following description of risk factors includes any material changes to risk factors associated with our business, financial condition and results of operations previously disclosed in “Item 1A. Risk Factors” of our annual report on Form 10-K for the fiscal year ended December 31, 2020, as filed with the SEC on March 2, 2021. Our business, financial condition and operating results can be affected by a number of factors, whether currently known or unknown, including but not limited to those described below, any one or more of which could, directly or indirectly, cause our actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect our business, financial condition, operating results, and stock price.

 

The following discussion of risk factors contains forward-looking statements. These risk factors may be important to understanding other statements in this Form 10-Q. The following information should be read in conjunction with the condensed consolidated financial statements and related notes in Part I, Item 1, “Financial Statements” and Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10- Q.

 

Risks Related to Our Product Development

 

The FDA and corresponding foreign regulatory agencies may require additional information, clinical trial data, or manufacturing changes, for our 3-antigen prophylactic HBV vaccine candidate before granting regulatory approval, if regulatory approval is granted at all.

 

We submitted the BLA to the FDA and the MAA to the EMA in the fourth quarter of 2020 for our 3-antigen HBV vaccine candidate, which have subsequently been accepted for review by the regulatory authorities. Our registration and commercial timelines for such vaccine candidate depend on further discussions with the FDA and corresponding foreign regulatory agencies. They could have requirements and requests for additional data, beyond what is included in the submissions, completion of additional clinical trials, including a request to increase the size of the safety data set, or changes to the manufacturing process or our manufacturing facility. Any such requirements or requests could:

 

  adversely affect our ability to timely and successfully commercialize or market our 3-antigen prophylactic HBV vaccine candidate in the United States, Europe, Canada, and other jurisdictions where our vaccine is not currently approved;
     
  result in significant additional costs;
     
  potentially diminish any competitive advantages for our 3-antigen prophylactic HBV vaccine candidate;
     
  potentially limit the markets for our 3-antigen prophylactic HBV vaccine candidate;
     
  adversely affect our ability to enter into collaborations or receive milestone payments or royalties from potential collaborators;
     
  cause us to abandon the further development of our 3-antigen prophylactic HBV vaccine candidate or certain of our pipeline candidates to comply with requests by the FDA or other jurisdictions where it is not currently approved; or
     
  limit our ability to obtain additional financing on acceptable terms, if at all.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

a) Sales of Unregistered Securities

 

There have been no unregistered sales of securities during the period covered by this Form 10-Q that have not been previously reported in a current report on Form 8-K. We have not made any purchases of our own securities during the time period covered by this Form 10-Q.

 

c) Issuer Purchases of Equity Securities

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosure

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

See the Exhibit Index following the signature page to this Form 10-Q for a list of exhibits filed or furnished with this Form 10-Q, which Exhibit Index is incorporated herein by reference.

 

 37 
 

 

EXHIBIT INDEX

 

Exhibit
No.
  Description
     
10.1+*   Amendment to Consulting Agreement with F. Diaz-Mitoma Professional Corporation, effective July 1, 2020.
     
10.2*[#]   Funding Agreement, by and between Variation Biotechnologies Inc., a Canadian federal corporation and a wholly-owned subsidiary of VBI Vaccines Inc., and the Coalition for Epidemic Preparedness Innovations, dated as of March 9, 2021.
     
10.3*   Amendment to the Collaboration and License Agreement with Brii Bioscience, effective April 8, 2021.
     
31.1*   Certificate of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
     
31.2*   Certification of Principal Financial and Accounting Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
     
32.1**   Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
     
32.2**   Certification of Principal Financial and Accounting Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
     
101.INS*   Inline XBRL Instance Document.
     
101.SCH*   Inline XBRL Taxonomy Extension Schema Document.
     
101.CAL*   Inline XBRL Taxonomy Extension Calculation Linkbase Document.
     
101.DEF*   Inline XBRL Taxonomy Extension Definition Linkbase Document.
     
101.LAB*   Inline XBRL Taxonomy Extension Labels Linkbase Document.
     
101.PRE*   Inline XBRL Taxonomy Extension Presentation Linkbase Document.
     
104*   Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

 

+ Indicates a management contract or compensatory plan.

 

* Filed herewith.

 

** Furnished herewith.

 

# Certain portions of this exhibit have been redacted pursuant to Item 601(b)(10)(iv) of Regulation S-K. The omitted information is (i) not material and (ii) would likely cause competitive harm to the Company if publicly disclosed. The Company agrees to furnish supplementally an unredacted copy of the exhibit to the SEC upon its request.

 

 38 
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: May 10, 2021 VBI VACCINES INC.
     
  By: /s/ Jeffrey Baxter
   

Jeffrey Baxter

President & Chief Executive Officer

(Principal Executive Officer)

     
  By: /s/ Christopher McNulty
    Christopher McNulty
    Chief Financial Officer and Head of Business Development
    (Principal Financial and Accounting Officer)

 

 39