Notes
to Consolidated Financial Statements
(in thousands except per share amounts)
1.
NATURE OF BUSINESS AND CONTINUATION OF BUSINESS
Corporate
Overview
VBI
Vaccines Inc. (formerly SciVac Therapeutics, 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. (formerly Paulson Capital (Delaware) Corp.), 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”); SciVac Ltd. an Israeli company (“SciVac”); and SciVac USA, LLC. a Florida limited liability company (“SciVac
US”) and wholly owned subsidiary of SciVac, are collectively referred to as the “Company” or “VBI”.
The
Company’s registered office is located at 1200 Waterfront Centre, 200 Burrard Street, Vancouver, Canada V6C 3L6 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.
The
Company operates in one segment and therefore segment information is not presented.
Principal
Operations
VBI
is a commercial-stage, biopharmaceutical company developing next generation vaccines to address unmet needs in infectious disease
and immuno-oncology. We currently manufacture our product, Sci-B-Vac™, a third generation Hepatitis B (“HBV”)
vaccine for adults, children and newborns, which is approved for use in Israel and 14 other countries. Sci-B-Vac™, but has
not yet been approved by the U.S. Food and Drug Administration (the “FDA”) or the European Medicines Agency (the “EMA”).
The Sci-B-Vac™ vaccine has demonstrated safety and efficacy in over 300,000 patients in currently licensed markets. VBI
is nearing the completion of Phase IV clinical study in Israel. The purpose of this study is to confirm a new in-house
reference standard for regulatory and quality control purposes. VBI is currently developing a clinical program to obtain FDA and
EMA market approvals for commercial sale of Sci-B-Vac™ in the United States and the European Union (the “EU”),
respectively. Our wholly-owned subsidiary in Rehovot, Israel, currently manufactures and sells Sci-B-Vac™.
Following
our May 6, 2016 acquisition of VBI DE (Note 5), we are also developing novel technologies that seek to enhance vaccine protection
in large, underserved markets. These include an enveloped “Virus Like Particle” or “eVLP” vaccine platform
that allows for the design of enveloped virus-like particle vaccines that closely mimic the target viruses. VBI is advancing a
pipeline of eVLP vaccines, with lead programs in human cytomegalovirus (“CMV”), an infection that, while common, can
lead to serious complications in babies and people with weak immune systems, and is involved in the progression of glioblastoma
multiforme (“GBM”), which is a form of brain cancer. In September 2016, the Company completed the enrollment and initial
dosing of 128 participants in the Phase I clinical study to evaluate its preventative CMV vaccine candidate. The Phase I study
is designed to assess the safety and tolerability of VBI’s CMV vaccine candidate in 128 healthy CMV-negative adults. The
study will also measure levels of vaccine-induced CMV neutralizing antibodies that may prevent CMV infection. Preliminary results
are anticipated in the first half of 2017.
The
Company is also advancing its LPV™ Thermostability Platform, a proprietary formulation and process that allows vaccines
and biologics to preserve stability, potency, and safety. We may also seek to in-license clinical-stage vaccines that we believe
complement our product portfolio, in addition to technologies that may supplement our therapeutic vaccination efforts in immuno-oncology.
Mergers
On
July 9, 2015, Levon Resources Ltd. (“Levon”), completed a plan of arrangement (the “Levon Merger”) pursuant
to which SciVac Ltd. (“SciVac”), an Israel based company, completed a reverse takeover of Levon. Levon changed its
name from Levon Resources Ltd. to SciVac Therapeutics, Inc. Other than approximately CAD $27 million in cash retained by Levon,
all other assets and liabilities of Levon were transferred or assumed by 1027949 BC Ltd., Levon’s wholly owned subsidiary
(“BC Ltd.”). Additionally, upon consummation of the Levon Merger, each Levon shareholder received 0.5 common shares
of BC Ltd., resulting in the Levon shareholders holding 100% of the issued and outstanding shares of BC Ltd; therefore, the Company
no longer owns any equity interest in BC Ltd.
On
October 26, 2015, the Company entered into a merger agreement pursuant to which it agreed to acquire VBI
DE by way of a merger. On May 6, 2016, the Company completed its acquisition of VBI DE, pursuant to which Seniccav Acquisition
Corporation, a Delaware corporation and a wholly owned subsidiary of the Company, merged with and into VBI DE, with VBI DE
continuing as the surviving corporation and as a wholly-owned subsidiary of the Company (the “VBI-SciVac Merger”).
Upon completion of the VBI-SciVac Merger, the Company (then named “SciVac Therapeutics, Inc.”) changed its name to
“VBI Vaccines Inc.” See Note 5.
Liquidity
and Going Concern
The
Company has a limited operating history and faces a number of risks, including but not limited to, uncertainties regarding 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 has an accumulated deficit of $104,980 as of December 31, 2016 and $81,775 as of December 31, 2015 and cash outflows
from operating activities of $18,517 and $8,863 for the year-ended December 31, 2016 and 2015, respectively.
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 a combination
of existing cash reserves, proceeds from the issuance of equity securities, the issuance of additional debt, and revenues from
potential collaborations, if any. There is no assurance the Company will manage to obtain these sources of financing. 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.
2.
SIGNIFICANT ACCOUNTING POLICIES
Reverse
Stock Split
On
April 29, 2016, the Company completed a reverse stock split of its issued and outstanding shares of common shares at a
ratio of 1 for 40 (the “Share Consolidation”). As a result of the Share Consolidation, the Company’s issued
and outstanding stock decreased from 756,599,439 to approximately 18,915,110 shares of common shares, all with a no par
value. All information related to common shares and earnings per share for prior periods has been retroactively adjusted
to give effect to the Share Consolidation.
Basis
of Consolidation
The
consolidated financial statements include the accounts of VBI and its wholly owned subsidiaries, SciVac, SciVac USA, and from
May 6, 2016 the accounts of VBI DE, VBI US and VBI Cda.
Intercompany
balances and transactions between the Company and its subsidiaries are eliminated in the consolidated financial statements.
F
oreign
currency
The
functional and reporting currency of the Company is
the U.S. dollar. Each of the Company’s subsidiaries determines its own respective functional currency, and this currency
is used to separately measure each entity’s financial position and operating results.
Assets
and liabilities of foreign operations with a different functional currency from that of the Company are translated at the closing
rate at the end of each reporting period. Profit or loss items are translated at average exchange rates for all the relevant periods.
All resulting translation differences are recognized as a component of other comprehensive loss.
Foreign
exchange gains and losses arising from transactions denominated in a currency other than the functional currency of the entity
involved, are included in operating results.
Use
of Estimates
Preparation
of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of
America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual amounts could differ from the estimates made. We continually evaluate
estimates used in the preparation of the consolidated financial statements for reasonableness. Appropriate adjustments, if any,
to the estimates used are made prospectively based upon such periodic evaluation. The significant areas of estimation include
determining the deferred tax valuation allowance, the estimated lives of property and equipment and intangible assets, the inputs
in determining the fair value of equity based awards and warrants issued as well as the values ascribed to assets acquired
and liabilities assumed in the business combination. Actual results may differ from those estimates.
Concentration
of Credit Risk
Financial
instruments that potentially subject us to significant concentrations of credit risk consist principally of cash, and trade accounts
receivable. We place our cash primarily in commercial checking accounts. Commercial bank balances may from time to time exceed
federal insurance limits. The Company has not experienced any losses in such accounts.
Inventory
Inventory
components include all raw materials, work-in-progress and finished goods. Cost is determined on a first-in, first-out basis.
Inventory is valued at the lower of cost or market. The cost of inventories comprises costs to purchase and costs incurred in
bringing the inventories to their present location and condition. Market means current replacement cost, which shall not exceed
net realizable value and shall not be less than net realizable value reduced by an allowance for an approximately normal profit
margin. Net realizable value is the estimated selling price in the ordinary course of business less estimated costs of completion
and estimated costs necessary to make the sale. On an annual basis, the Company evaluates the condition and age of inventories
and makes provisions for slow moving inventories accordingly.
Property
and equipment
Property
and equipment are recorded at cost less accumulated depreciation and amortization.
The
assets are depreciated by the straight-line method, over the estimated useful lives of the related assets as follows.
|
|
Number
of years
|
Furniture
and office equipment
|
|
5-14
|
Machinery
and equipment
|
|
3-7
|
Computers
|
|
2-3
|
Leasehold
improvements
|
|
shorter
of useful life or the term of the lease
|
When
assets are retired or otherwise disposed of, the cost and the related accumulated depreciation is removed from the accounts, and
any resulting gain or loss is recognized in the consolidated statement of operations and comprehensive loss. The cost of
maintenance and repairs is charged to expense as incurred; significant renewals and betterments are capitalized.
Impairment
of long-lived assets
Long-lived
assets, such as property and equipment and finite-lived intangible assets, are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of assets to be held and
used is measured by comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to
be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, then an impairment charge
is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Goodwill
and In-Process Research and Development
The
Company’s intangibles determined to have indefinite useful lives including in-process research and development (“IPR&D”)
and goodwill, are tested for impairment annually, or more frequently if events or circumstances indicate that the assets might
be impaired.
Goodwill
represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired
in a business combination. Such circumstances could include, but are not limited to: (1) a significant adverse change in legal
factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. When evaluating
goodwill for impairment, we may first perform an assessment qualitatively whether it is more likely than not that a reporting
unit’s carrying amount exceeds its fair value, referred to as a “step zero” approach. If, based on the review
of the qualitative factors, we determine it is not more likely than not that the fair value of a reporting unit is less than its
carrying value, we would bypass the two-step impairment test. If we conclude that it is more likely than not that a reporting
unit’s fair value is less than its carrying amount, we would perform the first step (“step one”) of the two-step
impairment test. Step 1 compares the fair value of the Company’s reporting unit to which goodwill was allocated to
its carrying value. If the fair value of the reporting unit exceeds its carrying value, no further analysis is necessary.
If the carrying amount of the reporting unit exceeds its fair value, Step 2 must be completed to quantify the amount of impairment.
Step 2 calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding
goodwill, of the reporting unit, from the fair value of the reporting unit as determined in Step 1. The implied fair value of
goodwill determined in this step is compared to the carrying value of goodwill. If the implied fair value of goodwill is less
than the carrying value of goodwill, an impairment loss, equal to the difference, is recognized. The Company has established August
31
st
as the date for its annual impairment test of goodwill.
The
costs of rights to IPR&D projects acquired in an asset acquisition are expensed in the consolidated statements
of operations unless the project has an alternative future use. These costs include initial payments incurred prior to
regulatory approval in connection with research and development agreements that provide rights to develop, manufacture,
market and/or sell pharmaceutical products.
IPR&D
acquired in a business combination is capitalized as an intangible asset and tested for impairment at least annually until commercialization,
after which time the IPR&D is amortized over its estimated useful life. The impairment test compares the carrying amount
of the IPR&D asset to its fair value. If the carrying amount exceeds the fair value of the asset, such excess is recorded
as an impairment loss.
Other
Intangible Assets
The
Company’s other intangible assets include patents with finite lives. These assets obtained are recorded at
cost less accumulated amortization and any impairment losses.
Amortization
is calculated over the cost of the asset less its residual value. The Company amortizes intangible assets with finite lives on
a straight-line basis over their estimated useful lives as follows:
Patents
|
remaining
life of patents 10 years
|
Research
and development
All
costs of research and development are expensed as incurred.
Revenue
recognition
The
Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or service has been performed
and completed, the sales price is fixed or determinable and collectability of the sales price is reasonably assured.
Liabilities
for severance pay
The
Company’s liability for severance pay is calculated in accordance with Israeli law based on the most recent salary
paid to employees and the length of employment in the Company. The Company records its obligation with respect of employee severance
payments as if it was payable at each balance sheet date. The Company has recorded a liability
for
severance pay of $356 and $344 as of December 31, 2016 and 2015, respectively.
Income
taxes
Deferred
tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and
liabilities using enacted tax rates which will be in effect when the differences reverse. The Company provides a valuation allowance
against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax asset
will be realized.
The
Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will
be sustained on examination by the taxing authorities based on the technical merits of the position. The benefit is measured as
the largest amount that is more likely than not to be realized upon ultimate settlement. The Company does not have any unrecognized
tax benefit or accrued penalties and interest as at December 31, 2016 and 2015. If such matters were to arise, the Company would
recognize interest and penalties related to income tax matters in income tax expense.
The
Company’s claim for Scientific Research and Experimental Development (SR&ED) deductions and related investment tax credits
for income tax purposes are based upon management’s interpretation of the applicable legislation in the Income Tax Act (Canada).
These amounts are subject to review and acceptance by the Canada Revenue Agency and may be subject to adjustment.
Fair
value measurements of financial instruments
Accounting
guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (the exit price)
in an orderly transaction between market participants at the measurement date. The accounting guidance outlines a valuation framework
and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related
disclosures. In determining fair value, the Company uses quoted prices and observable inputs. Observable inputs are inputs that
market participants would use in pricing the asset or liability based on market data obtained from independent sources.
The
fair value hierarchy is broken down into three levels based on the source of inputs as follows:
Level
1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities.
Level
2 — Valuations based on observable inputs and quoted prices in active markets for similar assets and liabilities.
Level
3 — Valuations based on inputs that are unobservable and models that are significant to the overall fair value measurement.
Financial
instruments recognized in the consolidated balance sheet consist of cash, accounts receivable and 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 and long-term deposits approximate their respective fair values.
At
December 31, 2016, the fair value of our outstanding debt is estimated to be approximately $15,012. The
Company had no outstanding debt at December 31, 2015.
In
determining the fair value of the long-term debt as of December 31, 2016 the Company used the following assumptions:
|
|
2016
|
|
Long-term
debt:
|
|
|
|
|
Interest
rate
|
|
|
12.0
|
%
|
Discount
rate
|
|
|
13.5
|
%
|
Expected
time to payment in months
|
|
|
35
|
|
Loss
per share
Basic
loss per share is computed by dividing net loss by the weighted average number of shares outstanding during the period. Diluted
loss per share is computed by dividing net loss by the weighted average number of shares outstanding and the impact of all dilutive
potential shares. There is no dilutive effect on the earnings per share for all periods presented.
Operating
leases
Operating
lease payments are recognized as an expense on a straight-line basis over the lease term, except where another systematic basis
is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising
under operating leases are recognized as an expense in the period in which they are incurred.
Stock-based
compensation
The
Company accounts for share-based awards to employees and directors in accordance with the provisions of ASC 718,
Compensation—Stock Compensation. Under ASC 718, share-based awards are valued at fair value on the date of grant and
that fair value is recognized over the requisite service period. The Company values its stock options using the Black-Scholes
option pricing model.
The
Company accounts for share-based payments to non-employees issued in exchange for services based upon the fair value of the equity
instruments issued, in conformity with authoritative guidance issued by the FASB. Compensation expense for stock options issued
to non-employees is calculated using the Black-Scholes option pricing model and is recorded over the service performance period.
Options subject to vesting are required to be periodically remeasured over their service performance period until the measurement
date, when service is completed.
3.
NEW ACCOUNTING PRONOUNCEMENTS
Recently
Adopted Accounting Pronouncements
Income
Taxes
In
November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,”
which requires deferred tax liabilities and assets to be classified as noncurrent in a classified statement of financial position.
We early adopted the provisions of this ASU prospectively in the fourth quarter of 2015, and it did not have a material impact
on our consolidated financial statements.
Consolidation
In
February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis,”
which amends current consolidation guidance including changes to both the variable and voting interest models used by companies
to evaluate whether an entity should be consolidated. The requirements from ASU 2015-02 were effective for the Company beginning
January 1, 2016. Our adoption of ASU 2015-02 in the first quarter of 2016 did not have a material impact on our consolidated financial
statements.
In
September 2015, the FASB issued ASU No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period
Adjustments,” which replaces the requirement that an acquirer in a business combination account for measurement period adjustments
retrospectively with a requirement that an acquirer recognize adjustments to the provisional amounts that are identified during
the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 requires that the acquirer
record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other
income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed
at the acquisition date. Our early adoption of ASU 2015-16 in the third quarter of 2016 did not have a significant impact
on our consolidated financial statements.
Inventory
In
July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” which
changes the measurement principle for entities that do not measure inventory using the last-in, first-out (“LIFO”)
or retail inventory method from the lower of cost or market to lower of cost and net realizable value. ASU 2015-11 is effective
for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted.
Our adoption of ASU 2015-11 in the last quarter of 2016 did not have a material impact on our consolidated financial statements.
Presentation
of Financial Statements—Going Concern
In
August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements—Going Concern
(Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”).
ASU 2014-15 provides guidance on management’s responsibility in evaluating whether there are conditions or events, considered
in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year
after the date that the financial statements are issued (or within one year after the date that the financial statements are available
to be issued when applicable). ASU 2014-15 also provides guidance related to the required disclosures as a result of management’s
evaluation. The amendments in ASU 2014-15 are effective for the annual period ending after December 15, 2016, and for annual
periods and interim periods thereafter. Our adoption of ASU 2014-15 in the last quarter of 2016 resulted in the disclosure
included in Note 1.
Recently
Issued Accounting Standards, not yet Adopted
Leases
In
February 2016 the FASB issued ASU 2016-02: Leases. The ASU introduces a lessee model that results in most leases impacting
the balance sheet. The new standard also aligns many of the underlying principles of the new lessor model with those in ASC
606, the FASB’s new revenue recognition standard (e.g., those related to evaluating when profit can be recognized). Furthermore,
the ASU addresses other concerns related to the current leases model. For example, the ASU eliminates the requirement in current
U.S. GAAP for an entity to use bright-line tests in determining lease classification. The update is Effective for fiscal years
beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the
impact this new guidance will have on its consolidated financial statements and related disclosures.
Revenue
from Contracts with Customers
In
May 2014, The FASB issued Accounting Standards Update No. 2014-09
,
Revenue from Contracts with Customers (Topic 606) (“ASU
2014-09”). ASU 2014-09 outlines a single comprehensive model to use in accounting for revenue arising from contracts with
customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 also requires
entities to disclose sufficient information, both quantitative and qualitative, to enable users of financial statements to understand
the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. An entity should
apply the amendments in this ASU using one of the following two methods: 1. Retrospectively to each prior reporting period presented
with a possibility to elect certain practical expedients, or, 2. On a modified retrospective basis with the cumulative
effect of initially applying ASU 2014-09 recognized at the date of initial application. If an entity elects the latter transition
method, it also should provide certain additional disclosures. For a public entity, the ASU as amended is effective for
annual periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early application
is permitted for periods beginning after December 15, 2016. Given the Company’s current level of revenue, we do not expect
a significant impact from the adoption of this new accounting guidance on our consolidated financial statements and footnote disclosures.
Stock
Compensation
In
March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718),” which simplifies several
aspects of the accounting for share-based payment award transactions, including the income tax consequences, classification of
awards as either equity or liabilities, classification on the statement of cash flows and accounting for forfeitures. ASU No.
2016-09 will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years,
with early adoption permitted. The Company does not expect that the adoption of this ASU will have a material impact on its consolidated
financial statements.
Cash
Flow Classification
The
FASB issued ASU 2016-15, an accounting standard that affects the classification of certain cash receipts and cash payments on
the statement of cash flows. The standard provides guidance on eight issues: debt prepayment or extinguishment costs, settlement
of zero-coupon bonds or bonds issued at a discount with insignificant cash coupon, contingent consideration payments made after
a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life
insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions,
separately identifiable cash flows and applying the predominance principle. The standard is effective for public business entities
for fiscal years beginning after December 15, 2017 including interim periods within those fiscal years. All entities may early
adopt the standard for annual and interim periods only if they adopt all issues at the same time.
The
FASB issued ASU 2016-18, an accounting standard that requires companies to include cash and cash equivalents that have restrictions
on withdrawal or use in total cash and cash equivalents on the statement of cash flows. The standard does not define restricted
cash or restricted cash equivalents, but companies will need to disclose the nature of the restrictions. The standard is effective
for public business entities for fiscal years beginning after December 15, 2017 including interim periods within those fiscal
years. If a company early adopts the amendments in an interim period, it should reflect adjustments as of the beginning of the
fiscal year that includes that interim period.
The
Company is currently assessing the impact that adopting this new accounting guidance will have on its consolidated financial statements
and footnote disclosures.
Accounting
for Income Taxes on Intercompany Transfers
The
FASB recently issued ASU 2016-16, an accounting standard that requires the seller and buyer to recognize at the transaction date
the current and deferred income tax consequences of intercompany asset transfers. The FASB expects the new standard to cause volatility
in companies’ effect tax rates, particularly for those that transfer intangible assets to subsidiaries. The standard is
effective for public business entities for fiscal years beginning after December 15, 2017 including interim periods within those
fiscal years. The Company is currently assessing the impact that adopting this new accounting guidance will have on its consolidated
financial statements and footnote disclosures.
4.
RECONCILIATION BETWEEN IFRS AND U.S. GAAP
Beginning
January 1, 2016, the Company changed its accounting from IFRS to U.S. GAAP. The change was made retrospectively for all periods
presented. The change to U.S. GAAP included the adoption of any relevant accounting pronouncements effective for the fiscal years
ended prior to January 1, 2016.
Effective
January 1, 2016 the Company adopted U.S. GAAP as its accounting framework. Prior to that date the Company presented its consolidated
financial statements in accordance with International Financial Accounting Standards, as issued by the International Accounting
Standards Board (“IFRS”). The adoption of U.S. GAAP has been applied retroactively. The following are the significant
reconciling items between IFRS and U.S. GAAP.
a.
Acquisition of IPR&D
On
July 9, 2015, the Company completed a license agreement (the “CLS License Agreement”) with CLS Therapeutics Limited,
a Guernsey company (“CLS”), pursuant to which CLS has granted to the Company, an exclusive, worldwide, perpetual and
fully paid-up license (including the right to a sublicense) to all of CLS’ patents, know-how and related improvements with
respect to the Deoxyribonuclease enzyme (“DNASE”), including the exclusive right to research, develop, manufacture,
have manufactured, use, sell, offer for sale, import, export, market and distribute products with respect to DNASE for all indications
(collectively, the “Licensed Technology”). Pursuant to the CLS License Agreement, the Company agreed to issue to CLS
3,685,076 common shares, with a fair value of $13,814 at the date of the acquisition. On May 5, 2016, contemporaneously with
and as a condition of the VBI-SciVac Merger, the Company sublicensed all rights obtained to an affiliate of OPKO Health Inc. in
exchange
for a royalty based on net sales.
The
fair value of the intangible asset was recognized as $13,814, being the fair value of the shares issued on acquisition, and the
net carrying amount as at December 31, 2015 was $12,797 under IFRS. Under U.S. GAAP, as the acquired IPR&D had no alternative
future use, it would have to be expensed. As a result of conforming to U.S GAAP, the Company wrote off the December 31, 2015
carrying amount of $12,797 pursuant to ASC 730 and reversed previously recognized amortization expense of $1,017 for the total
acquisition fair value of $13,814 as a R&D expense at the date of acquisition, net of the translation impact on the statement
of comprehensive loss.
b.
Accounting for the residual amount in reverse acquisition
On
July 9, 2015, as a result of the reverse takeover transaction, under IFRS, the Company recognized a listing expense of $1,353,
which reflects the difference between the fair value of the Company’s common shares deemed to have been issued to Levon’s
shareholders and Levon’s net assets acquired. According to U.S. GAAP, as the net assets acquired consisted of cash,
this difference should be treated as a capital reduction. As a result, the Company recognized a reduction from common shares
and additional paid-in capital in the amount $1,353 with a corresponding decrease in net loss during the year ended December
31, 2015.
c.
Liability for severance pay
Under
IFRS, the Company measured its obligation for severance pay using the ‘projected unit credit method which is an actuarial
based method. Under U.S. GAAP, the Company measures this obligation as the amount payable at each balance-sheet date. In accordance
with IFRS, the obligation was previously shown on a net basis whereas under U.S. GAAP the amount is now shown on a gross basis.
5.
CONSUMMATION OF MERGER
On
May 6, 2016 (the “Closing Date”), the Company completed its acquisition of VBI DE. Pursuant to the Merger Agreement,
a wholly owned subsidiary of the Company merged with and into VBI DE, with VBI DE continuing as the surviving corporation and
as a wholly owned subsidiary of the Company.
At
the effective time of the Merger (the “Effective Time”), each issued and outstanding share of VBI DE’s common
stock, par value $0.0001 per share (“VBI DE Common Shares”), was converted into the right to receive
common shares of the Company, having no par value per share (“Common Shares”), in the ratio of 0.520208 Common Shares
for each share of VBI DE Common Shares (the “Exchange Ratio”). The Exchange Ratio gives effect to the 1:40
share consolidation of Common Shares effected on April 29, 2016. In addition, each outstanding option or warrant to purchase a
share of VBI DE Common Shares was converted into an option or warrant to purchase, on the same terms and conditions, a
number of Common Shares (rounded down to the nearest whole share) equal to the product of (i) the number of shares of VBI DE Common
Shares subject to such option or warrant multiplied by (ii) the Exchange Ratio at an exercise price per share computed
by dividing the per share exercise price under each such option or warrant by the Exchange Ratio and rounding up to the nearest
cent.
The
foregoing description of the Merger Agreement is only a summary and is qualified in its entirety by reference to the full text
of the Merger Agreement, which is attached as Annex A to the Company’s Registration Statement on Form F-4 (File No. 333-
208761), originally filed with the Securities and Exchange Commission on December 23, 2015, as amended (the “F-4”).
The
consideration was approximately $67.5 million and consisted of approximately (i) $63.5 million in the Company’s Common
Shares relative portion of the (13,781,783 shares) the value of which was based on the closing price of the Common
Shares on May 6, 2016 or $4.61, (ii) $3 million representing the relative portion of the fair value of the
Company’s options for the purchase of Common Shares issued to VBI DE employees attributable to past service
periods and (iii) $0.9 million representing the fair value of the Company’s Common Share warrants issued to VBI DE
warrant holders.
The
options and warrants were valued based on the Black-Scholes model with the following assumptions:
|
|
Options
|
|
|
Warrants
|
|
Outstanding
|
|
$
|
2,104,312
|
|
|
$
|
363,771
|
|
Weighted
average exercise price
|
|
|
4.50
|
|
|
|
4.13
|
|
Volatility
|
|
|
80.0
|
%
|
|
|
80.0
|
%
|
Risk-free
interest rate
|
|
|
1.29
|
%
|
|
|
0.93
|
%
|
Expected
dividend rate
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected
life (years)
|
|
|
5.3
|
|
|
|
3.2
|
|
The
fair value of the assets acquired and liabilities assumed was based on management estimates. The significant intangible assets
to be recognized in the valuation is in-process research and development assets (“IPR&D”) related to
four primary products all of which have been determined to have indefinite lives until the underlying development programs are
completed. Acquired IPR&D represents the fair value assigned to research and development assets that we acquire as part of
business combinations, and which have not been completed at the date of acquisition. The acquired IPR&D is capitalized as
an intangible asset and tested for impairment at least annually until commercialization, after which time the IPR&D is amortized
over its estimated useful life. We utilize a discounted probable future cash flow model on a project-by-project basis to value
acquired IPR&D. Significant assumptions used in the model include the period in which material net cash inflows from significant
projects are expected to commence, cash inflows to be generated from these assets and expense levels as well as
an appropriate risk adjusted discount rate applied to the projected cash flows.
Current
assets
|
|
$
|
3,308
|
|
Property
and equipment
|
|
|
138
|
|
Identifiable
intangible assets - IPR&D
|
|
|
61,500
|
|
Total
assets acquired
|
|
|
64,946
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
(1,505
|
)
|
Long-term
deferred tax liability
|
|
|
(2,300
|
)
|
Long-term
debt
|
|
|
(2,361
|
)
|
Total
liabilities assumed
|
|
|
(6,166
|
)
|
|
|
|
|
|
Net
identifiable assets acquired
|
|
$
|
58,780
|
|
Goodwill
|
|
|
8,714
|
|
Total
purchase consideration
|
|
$
|
67,494
|
|
The
purchase price exceeded the fair value of the net identifiable assets acquired by $8,714, which was recorded as goodwill.
The
intangible assets and goodwill relate to VBI Cda. From the acquisition date until December 31, 2016 the carrying value of IPR&D
and goodwill has decreased due to currency translation adjustments of $2,311 and $329 respectively.
The
consolidated results of operations do not include any results of operations related to the acquired business on or prior
to May 6, 2016, the date of the acquisition. Approximately $10,517 of the consolidated net loss for the year ended December
31, 2016 relates to the acquired business since May 6, 2016. The Company’s unaudited pro-forma results for the years
ended December 31, 2016 and 2015 reflect the historical financial information of the Company and the acquired companies
assuming the acquisition had occurred on January 1, 2015.
These
unaudited pro-forma results have been prepared for comparative purposes only and do not purport to be indicative of what the
combined Company’s results would have been had the acquisition occurred on January 1, 2015,
nor
do they project the future results of operations of the combined Company.
(in
thousands, except per share data)
|
|
2016
|
|
|
2015
|
|
Revenue
|
|
$
|
578
|
|
|
$
|
1,343
|
|
Net
loss
|
|
|
(28,583
|
)
|
|
|
(35,763
|
)
|
Net
loss per share – basic and diluted
|
|
$
|
(0.82
|
)
|
|
$
|
(1.29
|
)
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding,
basic and diluted
|
|
|
34,825,705
|
|
|
|
27,736,402
|
|
Name
Change and Exchange Listings
At
the Effective Time, the Company’s name was changed to “VBI Vaccines Inc.” and on the Closing Date the Company
received approval for the listing of Common Shares on The Nasdaq Capital Market.
The
Common Shares commenced trading on The Nasdaq Capital Market at the opening of trading on May 9, 2016 under the Company’s
new name and the ticker symbol “VBIV.”
Prior
to the Merger, the Company’s Common Shares were listed on the Toronto Stock Exchange (the “TSX”) under the symbol
“VAC”. Following the Effective Time of the Merger, the Common Shares began to trade on the TSX under the new symbol,
“VBV.”
6.
PROPERTY AND EQUIPMENT
|
|
2016
|
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
Book
Value
|
|
|
|
|
|
|
|
|
|
|
|
Machinery
and equipment
|
|
$
|
1,430
|
|
|
$
|
(539
|
)
|
|
$
|
891
|
|
Furniture
and office equipment
|
|
|
67
|
|
|
|
(20
|
)
|
|
|
47
|
|
Computer
equipment and software
|
|
|
254
|
|
|
|
(83
|
)
|
|
|
171
|
|
Leasehold
improvements
|
|
|
1,980
|
|
|
|
(1,239
|
)
|
|
|
741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,731
|
|
|
$
|
(1,881
|
)
|
|
$
|
1,850
|
|
|
|
2015
|
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
Book
Value
|
|
|
|
|
|
|
|
|
|
|
|
Machinery
and equipment
|
|
$
|
1,099
|
|
|
$
|
(256
|
)
|
|
$
|
843
|
|
Furniture
and office equipment
|
|
|
45
|
|
|
|
(7
|
)
|
|
|
38
|
|
Computer
equipment and software
|
|
|
116
|
|
|
|
(22
|
)
|
|
|
94
|
|
Leasehold
improvements
|
|
|
1,630
|
|
|
|
(855
|
)
|
|
|
775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,890
|
|
|
$
|
(1,140
|
)
|
|
$
|
1,750
|
|
Depreciation
and amortization expense for the years ended December 31, 2016 and 2015 was $540 and $428, respectively.
7.
INVENTORY, NET
Inventory
is stated at the lower of cost or market and consists of the following:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
$
|
93
|
|
|
$
|
4
|
|
Work-in-process
|
|
|
203
|
|
|
|
347
|
|
Raw
materials
|
|
|
534
|
|
|
|
965
|
|
|
|
$
|
830
|
|
|
$
|
1,316
|
|
During
the year ended December 31, 2016, the Company recorded a provision of approximately $341 for inventory largely related to excess
raw materials which are no longer expected to be used in the manufacturing process.
8.
INTANGIBLES
|
|
2016
|
|
|
|
Gross
Carrying
amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Book
Value
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
656
|
|
|
$
|
(338
|
)
|
|
$
|
318
|
|
In-process
research and development assets
|
|
|
59,189
|
|
|
|
-
|
|
|
|
59,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
59,845
|
|
|
$
|
(338
|
)
|
|
$
|
59,507
|
|
|
|
|
2015
|
|
|
|
|
Gross
Carrying
amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Book
Value
|
|
Patents
|
|
|
$
|
654
|
|
|
$
|
(268
|
)
|
|
$
|
386
|
|
The
Company amortizes intangible assets with finite lives on a straight-line basis over their estimated useful lives.
Amortization
expenses for the years ended December 31, 2016 and 2015 amounted to $66 and $64, respectively. Amortization is expected to be
approximately $58 per year for each of the next five years. These amounts do not include any amortization related to the IPR&D
assets, which will not begin amortizing until the Company commercializes its products. Future costs incurred to extend the
life of the patents will be expensed.
9.
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 shares 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. These potentially dilutive securities
are more fully described in Note 13, Stockholders’ Equity and Additional Paid-in Capital.
The
following potentially dilutive securities outstanding at December 31, 2016 and 2015 have been excluded from the computation of
diluted weighted average shares outstanding, as they would be antidilutive:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
2,068,824
|
|
|
|
-
|
|
Stock
options
|
|
|
2,807,277
|
|
|
|
-
|
|
|
|
|
4,876,101
|
|
|
|
-
|
|
10.
LONG-TERM DEBT
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Long-term
debt, net of deferred financing costs and unamortized debt discount based on an imputed interest rate of 20.5% of $3,344
at December 31, 2016
|
|
$
|
11,956
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Less:
current portion
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,956
|
|
|
$
|
-
|
|
As
a result of the Merger, the Company through VBI DE assumed a term loan facility with Perceptive Credit Holdings, LP (the “Lender”)
in the amount of $6 million (the “Facility”), with an initial advance of $3 million drawn down on prior to the Merger.
As of the merger date the Company assumed an amount of $2,361 in the Facility. On December 6, 2016, the Company amended
the Facility (the “Amended Facility”) and raised an additional $13.2 million which was combined with the remaining
balance from the facility of $1,800. The total principal outstanding at December 31, 2016, including the $300 exit fee discussed
below, is $15.3 million. Borrowings under the Amended Facility are secured by all of VBI assets. The principal on the facility
accrues interest at an annual rate equal to the greater of (a) one-month LIBOR (subject to a 5.00% cap) or (b) 1.00%, plus the
Applicable Margin. The Applicable Margin will be 11.00%. The first eighteen months are interest only. The interest rate as of
December 31, 2016 was 12%. Upon the occurrence, and during the continuance, of an event of default, the Applicable Margin, defined
above, will be increased by 4.00% per annum. This term loan facility matures December 6, 2019 and includes both financial and
non-financial covenants, including a minimum cash balance requirement.
In
connection with the Amended Facility, on December 6, 2016 the Company issued to the lender two tranches of warrants. The
first tranche to purchase 363,771 shares of the Company’s common shares at an exercise price of $4.13 and the
second tranche was a warrant to purchase 1,341,282 shares of the Company’s common shares at an exercise price of
$3.355. The total proceeds attributed to the warrants was $2,793 based on the relative fair value of the warrants as
compared to the sum of the fair values of the warrants and debt. This resulted in the debt being issued at a discount.
See Note 13 for further disclosures related to these warrants. The Company incurred $360 of debt issuance costs and is
required to pay an exit fee of $300 upon full repayment of the debt resulting in additional debt discount. The total
debt discount of $3,453 is being charged to interest expense using the effective interest method over the term of the debt.
As of December 31, 2016, the unamortized debt discount is $3,344. The Company recorded $109 of interest expense related to
the amortization of the debt discount during the year ended December 31, 2016.
The
following table summarizes the future payments that the Company expects to make for long-term debt:
Year
ending
December 31,
|
|
|
|
2017
|
|
$
|
-
|
|
2018
|
|
|
1,600
|
|
2019
|
|
|
13,700
|
|
|
|
$
|
15,300
|
|
11.
DEFERRED REVENUE AND RELATED PARTY TRANSACTIONS
Prior
to the Merger, one of the Company’s directors was also the chairman of the board of Kevelt AS (“Kevelt”), a
wholly owned subsidiary of OAO Pharmsynthez (“Pharmsynthez”), a shareholder of the Company and was also the chairman
of the board of Pharmsynthez. Following the Merger, in accordance with the merger agreement, this director resigned. Therefore,
the related party deferred revenue balances at July 9, 2015 of $2,961 were reclassified to non-related party deferred revenue
following the Merger and following the termination from Kevelt, described below, we further reclassified $2,492 to other current
liabilities.
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Short-term
deferred revenue
|
|
$
|
34
|
|
|
$
|
-
|
|
Short-term
deferred revenue – related party
|
|
|
-
|
|
|
|
1,583
|
|
Long-term
deferred revenue
|
|
|
669
|
|
|
|
200
|
|
Long-term
deferred revenue – related party
|
|
|
-
|
|
|
|
1,378
|
|
|
|
$
|
703
|
|
|
$
|
3,161
|
|
i.
|
On
April 26, 2013, SciVac entered into a Development and Manufacturing Agreement (“DMA”) with Kevelt, pursuant to which
SciVac agreed to develop the manufacturing process for the production of clinical and commercial quantities of certain materials
in drug substance form for an aggregate amount of $4,279. The original term of the DMA was for a period of one year commencing
April 26, 2013, but pursuant to the terms of the DMA, the term automatically renews thereafter for successive additional one-year
periods, unless the parties fail to agree on the terms applicable to any renewal term and either party provides at least 30 days
prior written notice of non-renewal to the other. On July 30, 2016, the Company received a letter of termination from Kevelt,
in part containing a request for refund of $2.5 million it had previously transferred to the Company. The Company reclassified
this amount to other current liabilities as of June 30, 2016. The Company has evaluated the DMA with respect to the termination,
applied deferred costs, deposits and estimated effort incurred to-date related to the project and has proposed a settlement to
Kevelt of approximately $800.
|
|
|
|
On March 13, 2017, the Company
received a new demand letter from Kevelt’s Israeli legal counsel, which, among other things, reiterated the previous demands
but adding that if the Company does not respond within 7 days, it will commence arbitration proceedings in accordance with the
terms of the DMA. On March 15, 2017, the Company’s legal counsel responded to Kevelt’s attorneys stating: (i) it received
the letter of demand; (ii) the Company is gathering the requisite documentation evidencing SciVac’s calculations and (iii)
the Company’s legal counsel, will send a detailed response upon examination of said documentation. The Company’s
representatives are preparing the documentation clearly evidencing the amounts that Kevelt did not include in its calculations,
which will to be sent to Kevelt’s attorneys as appendix to the response letter.
|
|
|
On December 10, 2015, the Company entered into a Settlement Agreement and three separate Termination Agreements (which formed appendices thereto) with Pharmsynthez, to put into order the outstanding agreements and understandings between the parties. Further to this Settlement Agreement, the following agreements remain in force (in addition to the Termination Agreements):
|
ii.
|
On
December, 29, 2014, SciVac entered into an exclusive distribution agreement with Pharmsynthez, pursuant to which SciVac appointed
Pharmsynthez as the exclusive distributor of Sci-B-Vac™ in the Russian Federation for a term of five years. The term
of the agreement will automatically continue at the expiration of the initial term, unless either party provides written notice
to the other party at least 90 days prior to the termination of the initial term. The agreement provides that Pharmsynthez
must purchase certain minimum quantities of Sci-B-Vac™ per each quarter during the term of the agreement, and failure
to do so will entitle SciVac to either terminate Pharmsynthez’s exclusivity rights or terminate the agreement. Further
to the abovementioned Settlement Agreement, the aggregate amount of $468 already remitted to SciVac by Pharmsynthez is to
be credited against future orders of products by Pharmsynthez in accordance with the terms and conditions of the Distribution
Agreements. The deposit has been classified as long-term deferred revenue in December 31, 2015 and 2016. During the years
ended December 31, 2016 and 2015, no revenue was recognized
with respect to this contract.
|
|
|
iii.
|
SciVac
entered into a material transfer agreement with OJSC Pharmsynthez and Ferring International Center S.A. (“Ferring”),
dated as of April 30, 2014, pursuant to which SciVac and Pharmsynthez agreed to provide rhDNase I material to Ferring for research
purposes.
|
|
|
iv.
|
SciVac
entered into a services agreement with OPKO Biologics Ltd. (“OPKO Bio”), a wholly-owned subsidiary of OPKO Health,
Inc., a related party shareholder of the Company, dated as of March 15, 2015 as amended on January 25, 2016, pursuant to which
SciVac agreed to provide certain aseptic process filling services to OPKO Bio. The terms of the service agreements are based
on market rates and comparable to other non-related party service agreements.
|
|
|
Year
ended
December
31
|
|
|
|
2016
|
|
|
2015
|
|
Services
revenues from related parties:
|
|
|
|
|
|
|
|
|
OPKO
Bio
|
|
$
|
90
|
|
|
$
|
140
|
|
Kevelt
|
|
|
-
|
|
|
|
129
|
|
|
|
$
|
90
|
|
|
$
|
269
|
|
Deferred
revenue from related parties:
|
|
|
|
|
|
|
Kevelt
|
|
$
|
-
|
|
|
$
|
2,493
|
|
Pharmsynthez
|
|
|
-
|
|
|
|
468
|
|
|
|
$
|
-
|
|
|
$
|
2,961
|
|
v.
|
During the year
ended December 31, 2015, the Company recorded $1,128 of related party interest
expense, all of which was paid by December 31, 2015. There was no related party interest
expense recorded during the year ended December 31, 2016.
|
12.
EMPLOYEE BENEFITS
Defined
contribution plan
The
Company operates a defined contribution retirement benefit plan for all qualifying employees in accordance with Israeli law. The
assets of the plan are held separately from those of the Company in funds under the control of trustees.
The
total expense recognized for the years ended December 31, 2016 and 2015 was $139 and $97, respectively, and represents contributions
payable to these plans by the Company at rates specified in the rules of the plan.
For
VBI DE and VBI Cda employees, the respective companies contribute up to 1.5% of the employee’s salary to a retirement benefit,
which based on a 25% match of participating employee contributions
Defined
benefit plan
Israel’s
labor laws and the Law “severance pay, 1963” (the “Law”), require the Company to pay severance pay to
employees during dismissal, disability and retirement. Legal retirement age now stands at 64 for women and 67 for men. Thus, under
the plan, an employee who was employed by the Company for at least one year (and in the circumstances defined by the law) and
was involuntarily terminated by the Company after the said period is entitled to severance pay. The rate of compensation
listed in the law is the employee’s final monthly salary for each year of employment.
Under
the program, the Company is obligated to deposit amounts at the rate fixed by Law (since January 1, 2008), to ensure the
accrual of such a severance pay due to the employee as described above. The rate required by law is 8.33% of
the employees salary, which is deposited in a pension fund/insurance severance fund.
The
2016 and 2015 general and administrative expenses include $120 and $7, respectively, of severance payments pursuant to the
aforementioned statutory or contractual obligations.
13.
STOCKHOLDERS’ EQUITY AND ADDITIONAL PAID-IN CAPITAL
Authorized
Unlimited
number of common shares without par value.
Common
shares reverse stock split
On
May 9, 2016, the Company effected a 1-for-40 reverse split of its common shares.
Common
shares issuances
All
figures as to the numbers of common shares have been retroactively restated to reflect the legal capital of the Company
at the exchange ratio of 1 SciVac ordinary share to 2,193.50 common shares of Levon.
|
i)
|
On
April 20, 2015, the Company entered into a license agreement (the “CLS License Agreement”) with CLS Therapeutics
Limited, a Guernsey company (“CLS”), pursuant to which CLS has granted to the Company, effective as of the completion
of the reverse merger with Levon Resources Ltd. on July 9, 2015, (Note 1) an exclusive, worldwide, perpetual and fully paid-up
license (including the right to sublicense) to all of CLS’ patents, know-how and related improvements with respect to
the Deoxyribonuclease enzyme (“DNASE”), including the exclusive right to research, develop, manufacture, have
manufactured, use, sell, offer for sale, import, export, market and distribute products with respect to DNASE for all indications
(collectively, the “Licensed Technology”). Pursuant to the CLS License Agreement, SciVac Ltd. agreed to
issue to CLS 3,685,075 of its common shares.
|
|
|
|
|
ii)
|
On
July 8, 2015, Levon issued 567,457 common shares to various advisors for services provided to it in connection
with the Levon Merger. The fair value of the shares was recognized as an expense in the amount of $2,127.
|
|
|
|
|
iii)
|
The
Company received loans from its shareholders and their affiliates in the amount of
approximately $2,025 during the year ended December 31, 2015. These loans either were
non-interest bearing or had an interest rate of 4.5% per annum. The loans were repayable
within one year from date of receipt but were automatically extended for an additional
year unless otherwise agreed between the parties. In 2015, the Company calculated the
fair value of these loans in the amount of $1,501 using an effective interest rate of
approximately 15%. The differences between the principal amount of the loan and their
fair value in the amount of $522, was expensed over the term of the loan in 2015, and was
recorded as an increase in equity of $393, net of $129 in income taxes.
|
|
|
|
|
|
On July 9, 2015, as part of the Levon Merger,
certain related party loans and capital notes plus accrued interest were assigned from SciVac Ltd. to Levon. These loans with
a carrying value of $10,611 were deemed to be converted into 1,874,507 common shares.
|
|
|
|
|
iv)
|
On
July 9, 2015, when the Levon Merger was completed 5,977,262 shares of the Levon’s common shares
were issued to SciVac Ltd. shareholders with a fair value of $20,872. See Note 1.
|
|
|
|
|
v)
|
On
May 6, 2016, the Company completed the VBI-SciVac Merger pursuant to which the company issued 13,781,783 shares of the Company’s
common shares to VBI DE’s shareholders. See Note 5.
|
|
|
|
|
vi)
|
Equity
Financings:
|
|
a.
|
On
June 20, 2016, the Company closed an equity private placement. Under the terms of the financing, the Company sold an aggregate
of 3,269,688 of its common shares at a price of approximately $4.16 per share for total gross proceeds of approximately $13.6
million. The Company incurred $23 of issuance costs.
|
|
|
|
|
|
Contemporaneously
with the December 2016 transaction discussed below, an additional 77,787 common shares were issued pursuant to an anti-dilution
provision included in the share purchase agreement.
|
|
|
|
|
b.
|
On
December 6, 2016, the Company raised $10.6 million in an equity financing transaction with Perceptive Life Sciences Master
Fund Ltd. and Titan-Perc Ltd. Under the terms of the equity financing, the Company sold an aggregate of 3,475,000 of its common
shares at a price of $3.05 per share in a private placement to the investors for total gross proceeds of approximately
$10.6 million. The Company has and will continue to use the proceeds of the private placement for working capital and general
corporate purposes, including the continued development of its growing vaccine pipeline. The securities sold in the private
placement have not been registered under the Securities Act of 1933, as amended, and may not be resold absent registration
under or exemption from such Act. The Company incurred $77 of issuance costs.
|
|
vii)
|
On
June 14, 2016, the Company granted 762,500 stock awards pursuant to the 2016 Plan. On June 22, 2016, 25% of these stock awards
vested and the Company issued 194,561 shares of the Company’s common shares (out of which 27,746 common
shares were withheld for payroll tax withholding purposes). Twenty-five percent of unvested stock awards vest on
each anniversary over the next three years. During 2016, an additional 11,998 shares of common shares were vested and
issued to employees.
|
|
|
|
|
viii)
|
On
September 23, 2016, the Company granted an additional 227,500 stock awards pursuant to the 2016 Plan. Pursuant to Israeli
tax requirements, these awards were issued to a Trustee on behalf of SciVac employees, whereby 25% of these stock awards vested
on the grant date and the balance vest based on 25% on each anniversary over the next three years.
|
|
|
|
|
ix)
|
23,814
stock options were exercised during the year ended December 31, 2016.
|
|
|
|
|
x)
|
In
2016, the Company issued 69,000 common shares of the Company to three consultants for services provided to the Company’s
shareholders in connection with their respective consulting agreements. The fair value of the expense was recognized as $219.
|
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 at December 31, 2016, there were 1,320,016 options outstanding under the 2006 Plan.
2013
Stock Incentive Plan
The
2013 Equity Incentive Plan (the “2013 Plan”) was approved by and was previously administered by the VBI DE board of
directors which designated eligible participants to be included under the 2013 Plan, and designated the number of options, exercise
price and vesting period of the new options was approved by the VBI DE shareholders on November 8, 2013. No further options will
be issued under the 2013 Plan. As at December 31, 2016, there were 4,613 options outstanding under the 2013 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 at December 31, 2016, there were 734,524 options outstanding under the 2014 Plan.
2016
VBI Equity Incentive Plan
The
2016 VBI Equity Incentive Plan (the “2016 Plan”) is a rolling incentive plan that sets the number of common shares
issuable under the 2016 Plan, together with any other security-based compensation arrangement of the Company, at a maximum of
10% of the aggregate common shares issued and outstanding on a non-diluted basis at the time of any grant under the 2016 Plan.
The 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 following the VBI-SciVac Merger 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. The aggregate number of shares of common shares remaining available for issuance for awards under this plan total
907,325 at December 31, 2016. The principal features of the 2016 Plan are as follows:
Eligible
Participants
Eligible
participants include individuals employed (including services as a director) by the Company or its affiliates, including a service
provider, who, by the nature of his or her position or job is, in the opinion of the Board, in a position to contribute to the
success of the Company (“Eligible Persons”).
Reservation
of Shares
The
aggregate number of Common Shares reserved for issuance to any one participant under the 2016 VBI Equity Incentive Plan, together
with all other security-based compensation arrangements must not exceed 5% of the total number of issued and outstanding Common
Shares on a non-diluted basis.
The
maximum number of Common Shares (a) issued to insiders within any one year period; and (b) issuable to insiders at any time, under
the 2016 VBI Equity Incentive Plan, when combined with all of the Company’s other security-based compensation arrangements,
must not exceed 10% of the total number of issued and outstanding Common Shares.
Options
and Stock Appreciation Rights
The
Company may grant options to Eligible Persons on such terms and conditions consistent with the 2016 VBI Equity Incentive Plan.
The exercise price for an option must not be less than 100% of the “market price,” as that term is defined in the
2016 Plan, based on a 5- day volume weighted average trading price per Common Share, on the date of grant of such option.
With
respect to Tandem Stock Appreciation Rights attached to an option, which allows the holder, upon vesting of the option and Tandem
SAR, to choose to exercise the stock appreciation right or to exercise the option, the exercise price is the exercise price applicable
to the option (as explained above) to which the Tandem SAR relates, subject to adjustment provisions under the 2016 VBI Equity
Incentive Plan. For Stand-Alone SARs, a SAR that is granted without reference to any related Company options, the base price must
not be less than 100% of the market price on the date of grant of such Stand-Alone SAR. Stock appreciation rights (and in the
case of Tandem SARs, the related options) will be settled by payment in cash or Common Shares or a combination thereof, with an
aggregate value equal to the product of (a) the excess of the market price on the date of exercise over the exercise price or
base price under the applicable stock appreciation right, multiplied by (b) the number of stock appreciation rights exercised
or settled. The Company has not issued any SARs under this plan at December 31, 2016 and 2015.
Under
the 2016 VBI Equity Incentive Plan unless otherwise designated by the Board of Directors, 25% of the options will vest on each
of the first four anniversaries of the grant date. The term of options will be for a maximum of 10 years, unless exercised or
terminated earlier in accordance with the terms of the 2016 VBI Equity Incentive Plan or the applicable grant agreement.
Upon
a participant’s termination of employment due to death, or in the case of disability: (a) the outstanding options that were
granted prior to the year that includes the participant’s death or disability that have not become vested prior to such
date will continue to vest and, upon vesting, be exercisable during the 36-month period following such date; and (b) the outstanding
options that have become vested prior to the participant’s death or disability will continue to be exercisable during the
36-month period following such date.
In
the case of a participant’s termination of employment or contract for services without cause: (a) the outstanding options
that have not become vested prior to the participant’s termination will continue to vest and, upon vesting, be exercisable
during the 120-day period following such date; and (b) the outstanding options that have become vested prior to the participant’s
termination will continue to be exercisable during the 120-day period following such date.
In
the case of a participant’s termination due to resignation (including voluntary withdrawal of services by a non-employee
participant): (a) the outstanding options that have not become vested prior to the date of notice of resignation will be forfeited
and cancelled as of such date; and (b) the outstanding options that have become vested prior to the date of notice of resignation
will continue to be exercisable during the 90-day period following such date.
In
the case of a participant’s termination of employment or contract for services for cause, any and all then outstanding unvested
options granted to such participant will be immediately forfeited and cancelled, without any consideration therefor, as of the
date such notice of termination is given.
Share
Units
The
Board of Directors may grant share units, which include RSUs and PSUs, to Eligible Persons on such terms
and conditions consistent with the 2016 VBI Equity Incentive Plan.
The
Board will determine the grant value and the valuation date for each grant of share units. The number of share units to be covered
by each grant will be determined by dividing the grant value for such grant by the market value of a Common Share as at the valuation
date, rounded up to the next whole number.
Share
units subject to a grant will vest as specified in the grant agreement governing such grant, provided that the participant is
employed on the relevant vesting date. RSUs and PSUs will be settled upon, or as soon as reasonably practicable following the
vesting thereof, subject to the terms of the grant agreement. In all events, RSUs and PSUs will be settled on or before the
earlier of the 90th day following the vesting date and the date that is 2 ½ months after the end of the year in which
the vesting occurred. Settlement will be made by way of issuance of one Common Share for each RSU or PSU, a cash payment
equal to the market value of the RSUs or PSUs being settled, or a combination thereof. If the share units would be settled
within a blackout period, such settlement will be postponed until the earlier of the 6th trading day following the end of
such blackout period and the otherwise applicable date of settlement as determined in accordance with the
settlement provision set out above. The Company has not issued any PSUs under this plan at December 31, 2016 and 2015. All
RSUs issued under the plan at December 31, 2016 contain no cash settlement provision. The Company had not issued any RSUs
under this plan at December 31, 2015.
If
and when cash dividends are paid with respect to Common Shares to shareholders of record during the period from the grant date
to the date of settlement of the RSUs or PSUs, a number of dividend equivalent RSUs or PSUs, as applicable, will be credited to
the share unit account of such participant.
In
the event a participant’s employment is terminated due to resignation, share units that have not vested prior to the date
of resignation will not vest and all such Common Shares will be forfeited immediately.
In
the case of a participant’s termination due to death, or in the case of disability, all share units granted prior to the
year that includes the participant’s death or disability, that have not vested prior to the participant’s death or
disability will vest at the end of the vesting period and in the case of PSUs, subject to the achievement of applicable performance
conditions and the adjustment of the number of PSUs that vest to reflect the extent to which such performance conditions were
achieved.
In
the event a participant’s employment or contract for services is terminated without cause, prior to the end of a vesting
period relating to such participant’s grant, the number of RSUs or PSUs, respectively, as determined by their respective
formula set out in the 2016 VBI Equity Incentive Plan will become vested at the end of the vesting period.
In
the event a participant’s employment is terminated for cause, share units that have not vested prior to the date of the
termination for cause will not vest and all such share units will be forfeited immediately.
Restricted
Stock
Restricted
stock means Common Shares that are subject to restrictions on such participant’s free enjoyment of the Common Shares granted,
as determined by the Board of Directors. Notwithstanding the restrictions, the participant will receive dividends paid on the
restricted stock, will receive proceeds of the restricted stock in the event of any change in the Common Shares and will be entitled
to vote the restricted stock during the restriction period.
The
participant will not have rights to sell, transfer or assign, or otherwise dispose of the shares of restricted stock or any interest
therein while the restrictions remain in effect. Grants of restricted stock will be forfeited if the applicable restriction does
not lapse prior to such date or occurrence of such event or the satisfaction of such other criteria as is specified in the grant
agreement.
Stock-based
compensation expense
The
table below provides information, as of December 31, 2016, regarding the 2006 Plan, the 2013 Plan, the 2014 Plan and the 2016 Plan under which our equity securities are authorized for issuance to officers,
directors, employees, consultants, independent contractors and advisors.
Plan
Category
|
|
Number
of
securities
to be
issued
upon
exercise
of
outstanding
awards
|
|
|
Weighted
average
exercise
price
|
|
|
|
|
|
|
|
|
2006
Plan
|
|
|
1,320,016
|
|
|
$
|
4.05
|
|
2013
Plan
|
|
|
4,613
|
|
|
$
|
7.31
|
|
2014
Plan
|
|
|
734,524
|
|
|
$
|
5.28
|
|
2016
Plan
|
|
|
748,124
|
|
|
$
|
3.85
|
|
Total
|
|
|
2,807,277
|
|
|
$
|
4.32
|
|
Activity
related to stock options is as follows:
|
|
Number
of Stock Options
|
|
|
Weighted
Average Exercise Price
|
|
|
|
|
|
|
|
|
Balance outstanding
at January 1, 2015 and December 31, 2015
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Adopted
Option Plans
|
|
|
2,104,312
|
|
|
$
|
4.50
|
|
Granted
|
|
|
108,750
|
|
|
$
|
3.61
|
|
Exercised
|
|
|
(23,814
|
)
|
|
$
|
2.50
|
|
Forfeited
|
|
|
(21,345
|
)
|
|
$
|
3.57
|
|
|
|
|
|
|
|
|
|
|
Balance
outstanding at December 31, 2016
|
|
|
2,167,903
|
|
|
$
|
4.45
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2016
|
|
|
1.289.286
|
|
|
$
|
4.40
|
|
|
|
|
|
|
|
|
|
|
Options
expected to vest at December 31, 2016
|
|
|
878,617
|
|
|
$
|
4.52
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
Exercise
Price
|
|
|
Number
Of
Options
|
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
|
Number
Of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
2.50 - $ 3.49
|
|
|
|
232,975
|
|
|
|
5.42
|
|
|
|
203,382
|
|
|
$
|
2.60
|
|
$
3.50 - $ 4.49
|
|
|
|
867,943
|
|
|
|
5.13
|
|
|
|
495,603
|
|
|
$
|
4.11
|
|
$
4.50 - $ 5.49
|
|
|
|
997,060
|
|
|
|
5.53
|
|
|
|
517,674
|
|
|
$
|
4.87
|
|
$
5.50+
|
|
|
|
89,925
|
|
|
|
5.22
|
|
|
|
72,627
|
|
|
$
|
8.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,167,903
|
|
|
|
5.34
|
|
|
|
1,289,286
|
|
|
$
|
4.40
|
|
Information
relating to restricted stock units is as follow:
|
|
|
Number
of
Stock Awards
|
|
|
Weighted
Avg
Fair Value
at Grant Date
|
|
|
|
|
|
|
|
|
|
Unvested
shares outstanding at January 1, 2015 and December 31, 2015
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
990,000
|
|
|
$
|
3.88
|
|
Vested
|
|
|
|
(263,434
|
)
|
|
$
|
3.88
|
|
Forfeited
|
|
|
|
(87,192
|
)
|
|
$
|
3.87
|
|
|
|
|
|
|
|
|
|
|
|
Unvested
shares outstanding at December 31, 2016
|
|
|
|
639,374
|
|
|
$
|
3.88
|
|
The
intrinsic value of vested options, unvested options and exercised options were not significant for all periods presented. The
weighted average grant date fair value of stock options granted in 2016 was $2.30. The weighted average grant date fair
value of stock awards granted in 2016 was $3.88.
Stock
options are issued with exercise prices equal to the underlying share’s fair value on the date of grant, subject to a four-year
vesting period as follows: 25% at the first anniversary of the grant date and 2.083% on the last day of each month for the 36
months thereafter until 100% vested with a contractual term of 10 years.
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:
|
|
2016
|
|
|
|
|
|
Volatility
|
|
|
79.2%
- 88.0%
|
|
Risk
free interest rate
|
|
|
1.18%-1.44%
|
|
Expected
term in years
|
|
|
6.3
|
|
Expected
dividend yield
|
|
|
0%
|
|
Weighted average
fair value per option
|
|
|
$3.09
|
|
The
fair value of the options expected to vest is recognized as an expense on a straight-line basis over the vesting period. The total
stock-based compensation expense recorded in the years ended December 31, 2016 and 2015 was as follows:
|
|
Year
Ended December 31, 2016
|
|
|
|
|
|
Research
and development
|
|
$
|
637
|
|
General
and administrative
|
|
|
1,665
|
|
Total
stock-based compensation expense
|
|
$
|
2,302
|
|
The
risk-free rate was based on rates provided by the U.S. Treasury with a term equal to the expected life of the option. The Company
does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the
limited period of time its equity shares have been publicly traded. As a result, the Company uses the simplified method to determine
the expected term of stock options.
The
volatility was based on an average of volatility rates of a pool of public pharmaceutical or biotechnology companies that
are at a comparable stage of development and the Company’s recent historic volatility.
There
is $4,664 of unrecognized compensation from all equity awards as at December 31, 2016. This expense will be recognized
over a weighted average period of 2.4 years.
The
number of restricted stock awards vested during the year ended December 31, 2016 includes 27,746 shares withheld or
repurchased by the Company on behalf of employees to satisfy $105 of tax obligations relating to the vesting of such shares.
Such shares
were immediately retired by the Company.
Warrants
The
warrants issued on December 6, 2016, as part of the facility described in Note 10, entitle the Lender to purchase:
|
●
|
1,341,282 common shares with
an exercise price of $3.355 per share which is equal to the price per share of
the common shares paid by investors in the December PIPE;
|
|
|
|
|
●
|
an
additional 363,771 common shares with an exercise price of $4.13; and,
|
|
|
|
|
●
|
the
warrants are exercisable at any time on or prior to the fifth anniversary of their issue date.
|
The
value attributed to the warrants issued on December 6, 2016 was based on the Black-Scholes option pricing model determined by
applying the following assumptions:
Volatility
|
|
|
85
|
%
|
Risk
free interest rate
|
|
|
1.35
|
%
|
Expected
dividend yield
|
|
|
-
|
%
|
Expected
term in years
|
|
|
3
|
|
Activity
related to the warrants is as follows:
|
|
Number
of
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
Balance
outstanding at January 1, 2015 and December 31, 2015
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Issued
as part of
business combination
|
|
|
363,771
|
|
|
|
4.13
|
|
Issued
|
|
|
1,705,053
|
|
|
|
3.52
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Balance
outstanding at December 31, 2016
|
|
|
2,068,824
|
|
|
$
|
3.63
|
|
14.
INCOME TAXES
Components
of the Company’s loss from continuing operations before income taxes are as follows:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
(4,225
|
)
|
|
$
|
(262
|
)
|
Canada
|
|
|
(7,913
|
)
|
|
|
(4,828
|
)
|
Israel
|
|
|
(12,847
|
)
|
|
|
(21,232
|
)
|
Total
|
|
$
|
(24,985
|
)
|
|
$
|
(26,322
|
)
|
The
components of the income tax (provision)
benefits are as follows:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Current Tax
|
|
|
|
|
|
|
|
|
Canada
|
|
$
|
-
|
|
|
$
|
-
|
|
Israel
|
|
|
(5
|
)
|
|
|
(2
|
)
|
|
|
|
(5
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
Deferred Tax
|
|
|
|
|
|
|
|
|
Canada
|
|
|
1,785
|
|
|
|
-
|
|
Israel
|
|
|
-
|
|
|
|
131
|
|
|
|
|
1,785
|
|
|
|
131
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
Canada
|
|
|
1,785
|
|
|
|
-
|
|
Israel
|
|
|
(5
|
)
|
|
|
129
|
|
|
|
$
|
1,780
|
|
|
$
|
129
|
|
The
Company operates in U.S., Israel and Canadian tax jurisdictions. Its income is subject to varying rates of tax, and losses incurred
in one jurisdiction cannot be used to offset income taxes payable in another. A reconciliation of the income tax rate with the
Company’s effective tax rate and income tax provisions are as follows:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
24,985
|
|
|
$
|
26,322
|
|
|
|
|
|
|
|
|
|
|
Canadian statutory tax rate
|
|
|
26
|
%
|
|
|
26
|
%
|
Expected recovery of income tax
|
|
|
6,496
|
|
|
|
6,844
|
|
Research and development tax credits
|
|
|
139
|
|
|
|
-
|
|
Change in valuation allowance
|
|
|
(5,054
|
)
|
|
|
(6,741
|
)
|
Difference between Canadian and foreign tax rates
|
|
|
560
|
|
|
|
-
|
|
Other
|
|
|
373
|
|
|
|
-
|
|
Change in tax rates
|
|
|
-
|
|
|
|
26
|
|
Stock based compensation
|
|
|
(734
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
$
|
1,780
|
|
|
$
|
129
|
|
The income tax benefit for the
year ended December 31, 2016 related to the deferred tax assets recorded for the increase in net operating loss carry
forwards in the acquired company subsequent to the VBI-SciVac Merger. In 2015, the income tax benefit related to the deemed
interest on the related party loans.
The
Canadian statutory income tax rate of approximately 26% is comprised of federal income tax at approximately 15% and provincial
income tax at approximately 11%. The Israel statuary income rate is approximately 25%. The US statutory income tax rate is approximately
40%.
As
of December 31, 2016 and 2015, the Company has U.S. federal net operating loss carryovers (“NOLs”) of approximately
$30.8 million and $0.3 million, respectively, including $29 million related to the acquisition of VBI, available to offset
taxable income which expire beginning in 2026. The NOL’s related to the acquisition of VBI may be subject to limitations
under Internal Revenue Code Section 382 and similar state income tax provisions should there be a greater than 50% ownership change
as determined under the regulations. The Company plans on undertaking a detailed analysis of any historical and/or current Section
382 ownership changes that may limit the utilization of the net operating loss carryovers.
As
of December 31, 2016 and 2015, the Company also has Canadian net operating loss carryovers of approximately $31.0 million
and $1.4 million, respectively, available to offset future taxable income which expire beginning in 2024. As at December 31, 2016
and 2015, the Company also has Israel net operating loss carryovers of approximately $32.0 million and $21.1 million, respectively,
which can be carried forward indefinitely.
At
December 31, 2016 and 2015, the Company has $3.7 million and $0, respectively, of investment tax credits available to carry
forward and reduce future years’ Canadian income taxes which expire beginning in 2026.
As
of December 31, 2016 and 2015, the Company has unclaimed research and development expenses in Canada of approximately $14.4
million and $0, respectively, which are available to offset future taxable income indefinitely. The deferred tax asset
(liability) consists of the following:
|
|
2016
|
|
|
2015
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating losses
|
|
$
|
28,722
|
|
|
$
|
5,676
|
|
Research
and development tax credits
|
|
|
7,392
|
|
|
|
-
|
|
Property
and equipment
|
|
|
807
|
|
|
|
-
|
|
Reserves
and other
|
|
|
265
|
|
|
|
852
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets
|
|
|
37,186
|
|
|
|
5,768
|
|
Valuation
allowance
|
|
|
(21,929
|
)
|
|
|
(5,768
|
)
|
Deferred
tax liabilities:
|
|
|
15,257
|
|
|
|
-
|
|
Intangible
assets
|
|
|
(15,685
|
)
|
|
|
-
|
|
Net
deferred tax liability
|
|
$
|
(428
|
)
|
|
$
|
-
|
|
As
of December 31, 2016 and 2015, the Company had a valuation allowance of $22 million and $5.8 million, respectively.
This valuation allowance includes $11.1 million related to US tax losses that are unrecognized deferred tax assets which
were acquired from VBI.
At
December 31, 2016, the Company had NOL’s aggregating approximately $94,312. The NOL’s are available to reduce taxable
income of future years expire as follows:
|
|
|
U.S.
|
|
|
Canada
|
|
|
Israel
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2024
|
|
|
$
|
-
|
|
|
$
|
451
|
|
|
$
|
-
|
|
|
$
|
451
|
|
2025
|
|
|
|
-
|
|
|
|
1,405
|
|
|
|
-
|
|
|
|
1,405
|
|
2026
|
|
|
|
10
|
|
|
|
3,542
|
|
|
|
-
|
|
|
|
3,552
|
|
2027
|
|
|
|
446
|
|
|
|
4,105
|
|
|
|
-
|
|
|
|
4,551
|
|
2028
|
|
|
|
718
|
|
|
|
1,589
|
|
|
|
-
|
|
|
|
2,307
|
|
2029
|
|
|
|
672
|
|
|
|
2,976
|
|
|
|
-
|
|
|
|
3,648
|
|
2030
|
|
|
|
2,556
|
|
|
|
964
|
|
|
|
-
|
|
|
|
3,520
|
|
2031
|
|
|
|
3,617
|
|
|
|
1,192
|
|
|
|
-
|
|
|
|
4,809
|
|
2032
|
|
|
|
2,962
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,962
|
|
2033
|
|
|
|
3,126
|
|
|
|
1,392
|
|
|
|
-
|
|
|
|
4,518
|
|
2034
|
|
|
|
5,685
|
|
|
|
5,214
|
|
|
|
-
|
|
|
|
10,899
|
|
2035
|
|
|
|
4,922
|
|
|
|
2,907
|
|
|
|
-
|
|
|
|
7,829
|
|
2036
|
|
|
|
6,040
|
|
|
|
5,643
|
|
|
|
-
|
|
|
|
11,683
|
|
No
expiration
|
|
|
|
-
|
|
|
|
-
|
|
|
|
32,178
|
|
|
|
32,178
|
|
Total
losses
|
|
|
$
|
30,754
|
|
|
$
|
31,380
|
|
|
$
|
32,178
|
|
|
$
|
94,312
|
|
15.
Commitments and
CONTINGENCIES
Licensing
(a)
|
In
connection with the acquisition of the ePixis technology, VBI also agreed to make certain contingent payments as follows:
|
Upon
the completion of a “Successful Technology Transfer”, as defined in the Sale and Purchase Agreement (“SPA”),
to a contract manufacturing organization, VBI paid €102 (approximately $110 and referred to as the “Transfer Payment”)
to the Sellers during the second quarter of 2015. The Transfer Payment related to the achievement of the first milestone, which
occurred during the three months ended June 30, 2015. The Transfer Payment was not recognized as a liability in the Company’s
prior financial statements because the probability of payment had previously been deemed remote.
The
Company is committed to make further contingent payments pursuant to defined milestones in the SPA depending on whether there
continue to exist any issued and valid claims on the acquired patents. Contingent payments include:
|
●
|
Upon
first approval in the U.S. or the European Union: €500 to €1,000;
|
|
|
|
|
●
|
Upon
commercialization when cumulative net sales equals or exceeds:
|
|
|
|
|
|
○
|
€25,000:
€750 to €1,500; and,
|
|
|
|
|
|
|
○
|
€50,000:
€1,000 to €2,000;
|
|
|
|
|
|
●
|
Upon
commercialization by one or more sublicenses when cumulative net sales equals or exceeds:
|
|
|
|
|
|
○
|
€25,000:
€375 to €750;
|
|
|
|
|
|
|
○
|
€50,000:
€375 to €750;
|
|
|
|
|
|
|
○
|
€75,000:
€500 to €1,000;
|
|
|
|
|
|
|
○
|
€100,000:
€500 to €1,000,
|
|
|
|
|
|
|
○
|
VBI
will be obligated to pay to the Sellers the balance still owing on the total €3,500 when either cumulative net sales
of €50,000 by VBI or €100,000 by VBI and its sublicensees is achieved.
|
The
Company is further committed to pay all costs of protecting the patents and making contingent payments to the licensor of the
acquired patents pursuant to defined milestones in an amendment to the related license agreement which include: royalty fees ranging
between 0.75% and 1.75% depending on the level of net sales; and, lump sum payments ranging from €50 to €1,000 depending
on the stage of clinical development and ultimately commercial approval. Additionally, 5% to 25% of any sublicensing fees depending
on stage of clinical development are also payable to the licensor.
Except
for the Transfer Payment, which became due upon successful technology transfer to a contract manufacturing organization, the events
obliging the Company to make these payments have not yet occurred and the probability of them occurring is not probable;
consequently, no amounts are accrued in respect of these contingencies.
(b)
|
The
Company’s manufactured and marketed product, Sci-B-Vac™, is a recombinant third generation hepatitis B vaccine
whose sales and territories are governed by the Ferring License Agreement (“License Agreement”). Under
the License Agreement the Company is committed to pay Ferring royalties equal to 7% of net sales (as defined therein). Royalty
payments of $6, and $21 were recorded in cost of revenues for the years ended December 31, 2016, and 2015, respectively.
In addition, the Company is committed to pay 30% of any and all non-royalty consideration, in any form, received by Company
from such sub-licensees (other than consideration based on net sales for which a royalty is due under the License Agreement),
provided that the payment of 30% shall not apply to a grant of rights in or relating to: (i) the territory “(Territory”)as
such term was defined prior to an amendment dated January 24, 2005; or (ii) the Berna Territory (as defined in therein).
|
The
Company is to pay Ferring the above-mentioned royalties on a country-by-country basis until the date which is ten (10) years after
the date of commencement of the first royalty year in respect of such country (“License Period”). Upon expiry of the
full term of the first License Period having commenced, the Company shall have the option to extend the License Agreement in respect
of all the countries that still make up the Territory (as defined in the License Agreement) (as from the respective date of expiry)
for an additional seven (7) years by payment to Ferring of a one-time lump sum payment of $100. Royalties will continue to be
payable for the duration of the extended License Periods. When the license has been in effect for, and elapsed after, a seventeen
(17) year License Period with respect to a country in the Territory, the Company shall thereafter have a royalty-free license
to market (as defined in the License Agreement) in such country and when all the License Periods have expired in each country
in the Territory, a royalty-free license to manufacture the product in India and the People’s Republic of China.
(c)
|
Under
an Assignment and Assumption Agreement, the Company is required to pay of royalties to SciGen Singapore equal to 5% of Net
Sales. Royalty payments of $4 and $15 were recorded in cost of revenues for the years ended December 31, 2016, and
2015, respectively.
|
Legal
Proceedings
Fro
m
time to time, the Company may be involved in certain claims and litigation arising out of the ordinary course 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. The Company believes that they maintain adequate insurance coverage for any such litigation matters arising
in the normal course of business.
See Note 11, for the dispute with Kevelt
with regard to the DMA.
16.
OPERATING LEASES
The
Company has entered into various non-cancelable lease agreements for its office, lab and manufacturing facilities. These arrangements
expire at various times through 2027. Rent expense for the years ended December 31, 2016 and 2015 was $541 and $223, respectively.
The
future annual minimum payments under these leases is as follows:
Year
ending
December 31
|
|
|
|
|
|
|
|
2017
|
|
$
|
744
|
|
2018
|
|
|
642
|
|
2019
|
|
|
637
|
|
2020
|
|
|
417
|
|
2021
|
|
|
417
|
|
Thereafter
|
|
|
35
|
|
Total
|
|
$
|
2,892
|
|
17.
REVENUE BY GEOGRAPHIC REGION
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Revenue
in Israel
|
|
$
|
320
|
|
|
$
|
534
|
|
Revenue
in Asia
|
|
|
4
|
|
|
|
8
|
|
Revenue
in Europe
|
|
|
224
|
|
|
|
413
|
|
Total
|
|
$
|
548
|
|
|
$
|
955
|
|
18.
PROPERTY AND EQUIPMENT, NET BY GEOGRAPHIC REGION
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Property
and equipment in Israel
|
|
$
|
1,708
|
|
|
$
|
1,750
|
|
Property
and equipment in North America
|
|
|
142
|
|
|
|
-
|
|
Total
|
|
$
|
1,850
|
|
|
$
|
1,750
|
|
19
.
SUBSEQUENT EVENTS
On
January 26, 2017, the Company granted 303,500 stock options and 39,500 stock awards to existing employees, directors and an eligible
service provider pursuant to the 2016 Plan. The granted options vest on a monthly basis over 48 months and automatically
expire on January 26, 2027.