Notes
to Condensed Consolidated Financial Statements
(Unaudited)
(in
thousands, except per share amounts)
1.
|
NATURE
OF BUSINESS AND CONTINUATION OF BUSINESS
|
Corporate
Overview
VBI
Vaccines Inc. (formerly SciVac Therapeutics, Inc.) and its subsidiaries (collectively referred to as the “Company,”
“we,” “us,” “our” or “VBI”) was incorporated under the laws of British Columbia,
Canada on April 9, 1965.
The Company has the following wholly-owned
subsidiaries, VBI Vaccines (Delaware) Inc., a Delaware corporation (“VBI DE”); VBI DE’s wholly-owned subsidiary,
Variation Biotechnologies (US), Inc., a Delaware corporation (“VBI US”); Variation Biotechnologies, Inc. a Canadian
company (“VBI Cda”) and the wholly-owned subsidiary of VBI US; SciVac Ltd. an Israeli company (“SciVac”);
and SciVac USA, LLC. a Florida limited liability company (“SciVac US”) and the wholly owned subsidiary of SciVac.
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, Massachusetts 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
We
are a commercial stage biopharmaceutical company developing next generation vaccines to address unmet needs in infectious disease
and immuno-oncology. VBI’s first marketed product is Sci-B-Vac™, a hepatitis B (“HBV”) vaccine that mimics
all three viral surface antigens of the hepatitis B virus. Sci-B-Vac™ is approved for use in Israel and 14 other countries.
Recently, VBI completed a post-marketing Phase IV clinical study in Israel to confirm a new in-house reference standard for regulatory
and quality control purposes. Sci-B-Vac™ has not yet been approved by the U.S. Food and Drug Administration (the “FDA”),
the European Medicines Agency (the “EMA”) or Health Canada (“HC”). VBI is currently developing a Phase
III clinical program to obtain FDA, EMA, and HC market approvals for commercial sale of Sci-B-Vac™ in the United States,
Europe, and Canada, respectively. Our wholly-owned subsidiary, SciVac Ltd., manufactures Sci-B-Vac™ in Rehovot, Israel.
Following our merger with VBI DE on May 6,
2016 (the “VBI-SciVac Merger”), we are also advancing our two platform technologies – our Enveloped Virus-Like
Particle (“eVLP”) platform technology and our Lipid Particle Vaccine (“LPV”) technology. Our eVLP platform
technology enables the development of enveloped virus-like particle vaccines that closely mimic the target virus to elicit a potent
immune response. We are advancing a pipeline of eVLP vaccines, with lead programs in both infectious disease, with our congenital
cytomegalovirus (“CMV”) vaccine, and in immuno-oncology, with our therapeutic glioblastoma multiforme (“GBM”
or “glioblastoma”) vaccine candidate. Our LPV thermostability technology is a proprietary formulation of lipids and
process that allows vaccines and biologics to preserve stability, potency, and safety at temperatures outside of the most common
cold chain storage requirements of 2
o
C to 8
o
C.
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
$113,618 as of March 31, 2017 and cash outflows from operating activities of $8,244 for the three months ended March 31,
2017.
The
Company will require significant additional funds to conduct clinical and non-clinical studies, 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 report of our independent
registered public accounting firm on our consolidated financial statements for the year ended December 31, 2016 contains an explanatory
paragraph regarding our ability to continue as a going concern. The condensed 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
|
Basis
of Presentation and Consolidation
The Company’s fiscal year ends on December
31 of each calendar year. The accompanying unaudited condensed consolidated financial statements have been prepared in U.S. dollars
(“USD”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”),
the instructions to Form 10-Q and the provisions of Regulation S-X pertaining to financial statements. Accordingly, certain information
and footnote disclosures normally included in the financial statements prepared in accordance United States of America generally
accepted accounting principles (“U.S. GAAP”), have been condensed or omitted pursuant to such rules and regulations.
The preparation of financial statements in conformity with 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 condensed
consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results
could differ from these estimates and are not necessarily indicative of the results to be expected for any future period or the
entire fiscal year. The December 31, 2016 consolidated balance sheet in this document was derived from the audited consolidated
financial statements and does not include all of the disclosures required by U.S. GAAP. The condensed consolidated financial statements
and notes included in this quarterly report on Form 10-Q (this “Form 10-Q”) should be read in conjunction with the
financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016
(the “2016 10-K”), as filed with the SEC on March 20, 2017.
The condensed consolidated financial statements
include the accounts of the Company 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
condensed consolidated financial statements.
In the opinion of management, these condensed
consolidated financial statements include all adjustments and accruals of a normal and recurring nature necessary to fairly state
the results of the periods presented. The results for periods are not necessarily indicative of results to be expected for the
full year or for any future periods.
Significant
Accounting Policies
The significant accounting policies used in
the preparation of these condensed consolidated financial statements are disclosed in the 2016 10-K, and there have been no changes
to the Company’s significant accounting policies during the three months ended March 31, 2017.
Foreign
currency
The
functional and reporting currency of the Company is the USD. 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 accumulated 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 condensed consolidated financial
statements in conformity with 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 condensed 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 condensed 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.
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.
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 condensed 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 liabilities approximate their respective fair values.
At
March 31, 2017 and December 31, 2016, the fair value of our outstanding debt is estimated to be approximately $15,419 and $15,012,
respectively.
In
determining the fair value of the long-term debt as of March 31, 2017 and December 31, 2016 the Company used the following assumptions:
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
Interest
rate
|
|
|
12.0
|
%
|
|
|
12.0
|
%
|
Discount rate
|
|
|
11.5
|
%
|
|
|
13.5
|
%
|
Expected time to
payment in months
|
|
|
32
|
|
|
|
35
|
|
3.
|
NEW
ACCOUNTING PRONOUNCEMENTS
|
Recently
Adopted Accounting Pronouncements
Stock Compensation
In March 2016, the Financial Accounting Standards
Board (the “FASB”) issued Accounting Standards Update (the “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 is effective for fiscal years beginning after December 15,
2016, including periods within those fiscal years. Our adoption of this ASU in the first quarter of 2017 did not have a material
impact on our condensed 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 periods within those fiscal years.
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.
Our adoption of these ASUs in the first quarter
of 2017 did not have a material impact on our condensed consolidated financial statements.
Recently
Issued Accounting Standards, not yet Adopted
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 financial
statements and footnote disclosures.
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 by requiring reporting entities
to recognize lease assets and lease liabilities for substantially all lease arrangements. 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 our financial statements
and related 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’ effective 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. While the Company continues
to assess the potential impact of this standard, the adoption of this standard is not expected to have a material impact on our
financial statements.
Recognition
and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued ASU 2016-01,
“Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial
Liabilities”. This update will change the income statement impact of equity investments held by an entity; disclosures related
to fair value of financial instruments and presentation of financial assets and liabilities. ASU 2016-01 is effective for fiscal
years beginning after December 15, 2017, including interim periods within those fiscal years. Entities must apply the standard
using a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. Except for certain
early application guidance, early adoption is not permitted. The Company is currently assessing the impact that adopting this
new ASU will have on our financial statements and footnote disclosures.
Simplifying
the Test for Goodwill Impairment
In
January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment” which has eliminated Step 2 from the goodwill impairment test. Under Step 2, an entity had to perform
procedures to determine the fair value at the impairment testing date of its assets and liabilities following the procedure that
would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under the
amendments in this update, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit
with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds
the reporting unit’s fair value. An entity still has the option to perform the qualitative assessment for a reporting unit
to determine if the quantitative impairment test is necessary. ASU 2017-04 is effective for fiscal years beginning after December
15, 2019, including interim periods within those fiscal years. Early adoption is permitted for interim or annual goodwill impairment
tests performed on testing dates after January 1, 2017. While the Company continues to assess the potential impact of this standard,
the adoption of this standard is not expected to have a material impact on its financial statements.
|
|
March
31, 2017
|
|
|
|
Gross
Carrying
amount
|
|
|
Accumulated
Amortization
|
|
|
Currency
Translation
|
|
|
Net
Book
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
669
|
|
|
$
|
(349
|
)
|
|
$
|
17
|
|
|
$
|
337
|
|
IPR&D
assets
|
|
|
61,500
|
|
|
|
-
|
|
|
|
(1,860
|
)
|
|
|
59,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
62,169
|
|
|
$
|
(349
|
)
|
|
$
|
(1,843
|
)
|
|
$
|
59,977
|
|
|
|
December
31, 2016
|
|
|
|
Gross
Carrying
amount
|
|
|
Accumulated
Amortization
|
|
|
Currency
Translation
|
|
|
Net
Book
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
669
|
|
|
$
|
(334
|
)
|
|
$
|
(4
|
)
|
|
$
|
331
|
|
IPR&D
assets
|
|
|
61,500
|
|
|
|
-
|
|
|
|
(2,324
|
)
|
|
|
59,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
62,169
|
|
|
$
|
(334
|
)
|
|
$
|
(2,328
|
)
|
|
$
|
59,507
|
|
The
Company amortizes intangible assets with finite lives on a straight-line basis over their estimated useful lives.
Amortization
related to the IPR&D assets relate to the May 6, 2016 VBI-SciVac Merger and will not begin amortizing until the Company commercializes
its products. Future costs incurred to extend the life of the patents will be expensed.
5.
|
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 as their effect would be anti-dilutive. These potentially dilutive
securities are more fully described in Note 8, Stockholders’ Equity and Additional Paid-in Capital.
The
following potentially dilutive securities outstanding at March 31, 2017 and 2016 have been excluded from the computation of diluted
weighted average shares outstanding, as they would be antidilutive:
|
|
March
31, 2017
|
|
|
March
31, 2016
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
2,068,824
|
|
|
|
-
|
|
Stock options
and equity awards
|
|
|
3,120,525
|
|
|
|
-
|
|
|
|
|
5,189,349
|
|
|
|
-
|
|
As
at March 31, 2017 and the December 31, 2016, the unamortized debt discount is as follows:
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, net of deferred financing costs and unamortized debt discount based on an imputed interest rate of 20.5% of $3,056 and
$3,344 at March 31, 2017 and December 31, 2016, respectively
|
|
$
|
12,244
|
|
|
$
|
11,956
|
|
As a result of the VBI-SciVac Merger,
the Company through VBI DE assumed a term loan facility with Perceptive Credit Holdings, LP (the “Lender”) in the
amount of $6,000 (the “Facility”), with an initial advance of $3,000 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 $13,200 which was combined with the remaining balance from the
Facility of $1,800. The total principal outstanding at March 31, 2017, including the $300 exit fee discussed below, is
$15,300 before the net deferred financing costs and unamortized debt discount of $3,056. Borrowings under the Amended
Facility are secured by all of VBI assets. The principal on the Amended 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 March 31, 2017 was 12%. Upon the
occurrence of an event of default, 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. The Company was in compliance with these covenants as
of March 31, 2017. Pursuant to the Amended Facility, the Company agreed to appoint a representative of Perceptive Credit
on our Board who is also a portfolio manager of the Company’s largest shareholder.
The
Company’s obligations under the Amended Facility are secured on a senior basis by a lien on substantially all of the assets
of the Company and its U.S. and Canadian subsidiaries and guaranteed by the Company and its U.S. and Canadian subsidiaries. The
Amended and Restated Credit Agreement also contains customary events of default.
In
connection with the Amended Facility, on December 6, 2016 the Company issued to the lender two tranches of warrants. The first
tranche was a warrant to purchase 363,771 common shares at an exercise price of $4.13 per share and the second tranche was a warrant
to purchase 1,341,282 common shares at an exercise price per share of $3.355. The total proceeds attributed to the warrants was
$2,793 based on the relative fair value of the warrants as compared to the sum of the fair values of the warrants and debt. This
resulted in the debt being issued at a discount. The Company incurred $360 of debt issuance costs and 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 March 31, 2017, the unamortized
debt discount is $3,056. The Company recorded $288 of interest expense related to the amortization of the debt discount during
the three months ended March 31, 2017.
The
following table summarizes the future principal payments that the Company expects to make for long-term debt:
Period
ending
March 31,
|
|
|
Principal
payments on
Amended Facility
and exit fee
|
|
2017
|
|
|
$
|
-
|
|
2018
|
|
|
|
1,600
|
|
2019
|
|
|
|
13,700
|
|
|
|
|
$
|
15,300
|
|
7.
|
DEFERRED
REVENUE AND RELATED PARTY TRANSACTIONS
|
i.
|
Prior
to the VBI-SciVac 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 VBI-SciVac Merger, in accordance with the
merger agreement, this director resigned.
|
|
|
|
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. 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.
|
|
|
|
On
March 28, 2017, the Company’s legal counsel provided the requested documentation,
indicating that the amount owed to Kevelt is not $800 but rather $690 less any acquisition
costs (as defined in the DMA). The Company’s legal counsel proposed a settlement
together with mutual waivers of any claims whereby the Company would remit the original
$800 as follows: 50% (i.e. $400) to be paid in cash and 50% (i.e. $400) through the issuance
of the Company’s common shares.
|
ii.
|
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 services agreement are based
on market rates and comparable to other non-related party service agreements.
|
See Note 6, for Facility from a lender
that is also affiliated with the Company’s largest shareholder.
|
|
Three
months ended
March
31
|
|
|
|
2017
|
|
|
2016
|
|
Services
revenues from related parties:
|
|
|
|
|
|
|
|
|
OPKO
Bio
|
|
$
|
1
|
|
|
$
|
7
|
|
Subsequent
to the VBI-SciVac Merger on May 6, 2016, Kevelt and Pharmsynthez are no longer considered related parties due to the common shareholder
no longer having significant influence.
8.
|
STOCKHOLDERS’
EQUITY AND ADDITIONAL PAID-IN CAPITAL
|
Stock
option plans
The
Company’s stock option plans are approved by and administered by the Company’s board of directors (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
No
further options will be issued under the 2006 VBI US Stock Option Plan (the “2006 Plan”). As at March 31, 2017, there
were 1,314 options outstanding under the 2006 Plan.
2013
Stock Incentive Plan
No
further options will be issued under the 2013 Equity Incentive Plan (the “2013 Plan”). As at March 31, 2017, there
were 5 options outstanding under the 2013 Plan.
2014
Equity Incentive Plan
No
further options will be issued under the 2014 Equity Incentive Plan (the “2014 Plan”). As at March 31, 2017, there
were 735 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 10% maximum is inclusive of options granted under all
equity incentive plans. The 2016 Plan is an omnibus equity incentive plan pursuant to which the Company may grant equity and equity-linked
awards to eligible participants in order to promote the success of the Company 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. As at March 31, 2017, there were 411 options and 656 stock awards outstanding
under the 2016 Plan.
The
aggregate number of common shares remaining available for issuance for awards under this plan total 585 at March 31, 2017.
Activity
related to stock options is as follows (in thousands, except for weighted average exercise price):
|
|
Number
of Stock Options
|
|
|
Weighted
Average Exercise Price
|
|
|
|
|
|
|
|
|
Balance outstanding
at December 31, 2016
|
|
|
2,168
|
|
|
$
|
4.45
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
316
|
|
|
$
|
3.63
|
|
Exercised
|
|
|
(19
|
)
|
|
$
|
3.10
|
|
|
|
|
|
|
|
|
|
|
Balance outstanding at March 31,
2017
|
|
|
2,465
|
|
|
$
|
4.36
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2017
|
|
|
1,396
|
|
|
$
|
4.42
|
|
|
|
|
|
|
|
|
|
|
Options expected
to vest at March 31, 2017
|
|
|
1,069
|
|
|
$
|
4.29
|
|
Information
relating to restricted stock units is as follow (in thousands, except for weighted average fair value at grant date):
|
|
Number
of Stock Awards
|
|
|
Weighted
Average Fair Value at Grant Date
|
|
|
|
|
|
|
|
|
Unvested shares outstanding
at December 31, 2016
|
|
|
639
|
|
|
$
|
3.88
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
57
|
|
|
$
|
4.72
|
|
Vested and exercised
|
|
|
(7
|
)
|
|
$
|
5.49
|
|
Forfeited
|
|
|
(33
|
)
|
|
$
|
3.90
|
|
|
|
|
|
|
|
|
|
|
Unvested shares outstanding at
March 31, 2017
|
|
|
656
|
|
|
$
|
3.93
|
|
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 three months ended March 31, 2017 and 2016 was as follows:
|
|
Three
months ended
March
31
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
185
|
|
|
$
|
-
|
|
General and administrative
|
|
|
423
|
|
|
|
-
|
|
Cost of revenues
|
|
|
16
|
|
|
|
-
|
|
Total stock-based
compensation expense
|
|
$
|
624
|
|
|
$
|
-
|
|
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.
The Company determines its annual effective tax rate
at the end of each interim period based on the year to date period results. Since the Company is incorporated in Canada, it is
required to use Canada’s statutory tax rate of 26.00 % in the determination of the estimated annual effective tax rate.
The Company’s effective tax rate on loss before
tax for the three months ended March 31, 2017 of 4.78% (0% - 2016) differs from the Canadian statutory rate of 26% primarily due
to recording a valuation allowance on the Canadian deferred tax assets in excess of the remaining Canadian deferred tax liability,
resulting in an income tax benefit, and the effect of recording a valuation allowance against deferred tax assets in all other
jurisdictions.
The Company maintains a valuation allowance on some
of its deferred tax assets in certain jurisdictions. A valuation allowance is required when, based upon an assessment of various
factors, including recent operating loss history, anticipated future earnings, and prudent and reasonable tax planning strategies,
it is more likely than not that some portion of the deferred tax assets will not be realized.
10.
|
COMMITMENTS
AND CONTINGENCIES
|
Licensing
(a)
|
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 $2 and $0 were recorded in cost of revenues for the years ended March 31, 2017, and 2016, 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 (the “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.
|
(b)
|
Under
an Assignment and Assumption Agreement, the Company is required to pay royalties to SciGen Singapore equal to 5% of Net Sales.
Royalty payments of $1 and $0 were recorded in cost of revenues for the years ended March 31, 2017, and 2016, respectively.
|
Legal
Proceedings
From
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 7, for the dispute with Kevelt with regard to the DMA.
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 2022. Rent
expense for the three months ended March 31, 2017 and 2016 was $217 and $95, respectively.
The
future annual minimum payments under these leases is as follows:
Year ending December 31
|
|
|
|
|
|
Remaining 2017
|
|
$
|
661
|
|
2018
|
|
|
717
|
|
2019
|
|
|
664
|
|
2020
|
|
|
442
|
|
2021
|
|
|
442
|
|
Thereafter
|
|
|
37
|
|
Total
|
|
$
|
2,963
|
|
On May 9, 2017, VBI DE signed a one
year term extension related to the office space in Cambridge, MA committing it to approximately $144 of rent payments which
has been included in the above table.
11.
|
REVENUE
BY GEOGRAPHIC REGION
|
|
|
Three Months Ended
March 31
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Israel
|
|
$
|
111
|
|
|
$
|
40
|
|
Asia
|
|
|
14
|
|
|
|
4
|
|
South America
|
|
|
2
|
|
|
|
-
|
|
Europe
|
|
|
-
|
|
|
|
4
|
|
Total
|
|
$
|
127
|
|
|
$
|
48
|
|
12.
|
PROPERTY
AND EQUIPMENT, NET BY GEOGRAPHIC REGION
|
|
|
March
31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Property and equipment in Israel
|
|
$
|
1,914
|
|
|
$
|
1,850
|
|
Property and equipment in North America
|
|
|
139
|
|
|
|
-
|
|
Total
|
|
$
|
2,053
|
|
|
$
|
1,850
|
|
On May 15, 2017, the Company entered
into an equity distribution agreement (the “Distribution Agreement”) with a registered broker-dealer, as sales agent
(the “Sales Agent”), pursuant to which the Company may offer and sell, from time to time, through the Sales Agent
its common shares having an aggregate offering price of up to $30 million. The Company is not obligated to sell any common shares
under the Distribution Agreement. Subject to the terms and conditions of the Distribution Agreement, the Sales Agent will use
commercially reasonable efforts consistent with its normal trading and sales practices, applicable state and federal law, rules
and regulations, and the rules of the NASDAQ Capital Market to sell shares from time to time based upon the Company’s instructions,
including any price, time or size limits specified by the Company. The Company will pay the Sales Agent a commission of 3.0% of
the aggregate gross proceeds from each sale of common shares occurring pursuant to the Distribution Agreement, if any. The Company
has also agreed to reimburse the Sales Agent for legal fees and disbursements, not to exceed $50 in the aggregate, in connection
with entering into the Distribution Agreement. The Distribution Agreement may be terminated by the Sales Agent or the Company
at any time upon ten days’ notice to the other party, or by the Sales Agent at any time in certain circumstances.
In connection with the execution of the Distribution
Agreement, on May 12, 2017, the Company entered into a waiver agreement (the “Waiver Agreement”)with Perceptive Credit
Holdings, LP (“Perceptive Credit”), pursuant to which Perceptive Credit agreed to waive the Company’s obligations
to (i) notify Perceptive Credit of the planned filing of a Registration Statement and (ii) include all or a portion of
the common shares issuable to Perceptive Credit upon the exercise of a warrant to purchase common shares in the Registration Statement.