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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2023

 

OR

 

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

 

For the transition period from _______ to _______

 

Commission file number: 001-37769

 

VBI VACCINES INC.

(Exact name of registrant as specified in its charter)

 

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

 

160 Second Street, Floor 3    
Cambridge, Massachusetts   02142
(Address of principal executive offices)   (Zip Code)

 

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

 

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

 

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

 

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

Yes ☒ No ☐

 

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

Yes ☒ No ☐

 

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

 

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

 

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

 

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

 

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

 

Common Shares, no par value per share   23,687,695
(Class)   Outstanding at November 14, 2023

 

 

 

 
 

 

VBI VACCINES INC.

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2023

TABLE OF CONTENTS

 

    Page
     
PART I - FINANCIAL INFORMATION 5
     
Item 1. Condensed Consolidated Financial Statements 5
     
  Condensed Consolidated Balance Sheets - September 30, 2023 (unaudited) and December 31, 2022 5
     
  Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2023 and 2022 (unaudited) 6
     
  Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2023 and 2022 (unaudited) 7
     
  Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2023 and 2022 (unaudited) 8
     
  Notes to Condensed Consolidated Financial Statements (unaudited) 9
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 27
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 46
     
Item 4. Controls and Procedures 46
     
PART II - OTHER INFORMATION 47
     
Item 1. Legal Proceedings 47
     
Item 1A. Risk Factors 48
     
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity 52
     
Item 3. Defaults Upon Senior Securities 52
     
Item 4. Mine Safety Disclosures 52
     
Item 5. Other Information 52
     
Item 6. Exhibits 53
     
Signatures 54

 

2
 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION

CONTAINED IN THIS REPORT

 

This quarterly report on Form 10-Q (this “Form 10-Q”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. You can find many (but not all) of these statements by looking for words such as “approximates,” “believes,” “hopes,” “expects,” “anticipates,” “estimates,” “projects,” “intends,” “plans,” “would,” “should,” “could,” “will,” “may,” or other similar expressions in this Form 10-Q. In particular, these include statements relating to future actions; prospective products, applications, customers, and technologies; future performance or results of anticipated products; anticipated expenses; and projected financial results. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition, and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of risks, uncertainties, and assumptions that could cause actual results to differ materially from our historical experience and our present expectations, or projections described under the sections in this Quarterly Report on Form 10-Q entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2022 annual report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 13, 2023. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

 

the timing of, and our ability to, obtain and maintain regulatory approvals for our clinical trials, products, and pipeline candidates;
   
our ability to achieve and sustain commercial success of PreHevbrio in the United States (“U.S.”) and Canada and PreHevbri in Europe;
   
the timing and results of our ongoing and planned clinical trials for products and pipeline candidates;
   
the amount of funds we require for our prophylactic and therapeutic pipeline candidates;
   
the potential benefits of strategic partnership agreements and our ability to enter into and successfully execute strategic partnership arrangements;
   
our ability to manufacture, or to have manufactured, our 3-antigen hepatitis B vaccine and our pipeline candidates, at commercially viable scales to the standards and requirements of regulatory agencies;
   
the impact and continuing effects of the COVID-19 endemic on our clinical studies, research programs, manufacturing, business plan, regulatory review including site inspections, and the global economy;
   
our ability to effectively execute and deliver our plans related to commercialization, marketing, manufacturing capabilities, and strategy;
   
our ability to retain and maintain a good relationship with our current employees, and our ability to competitively attract new employees with relevant experience and expertise;
   
the suitability and adequacy of our office, manufacturing, and research facilities and our ability to secure term extensions or expansions of leased space;
   
the ability of our vendors and suppliers to manufacture and deliver materials in a timely manner that meet regulatory agency and our standards and requirements to meet planned timelines and milestones;

 

3
 

 

any disruption in the operations of our Rehovot, Israel manufacturing facility where we manufacture all of our clinical and commercial supplies of our 3-antigen hepatitis B vaccine and clinical supplies of our hepatitis B immunotherapeutic, VBI-2601;
   
our compliance with all laws, rules, and regulations applicable to our business and products;
   
our ability to continue as a going concern;
   
our history of losses;
   
our ability to generate revenues and achieve profitability;
   
emerging competition and rapidly advancing technology in our industry that may outpace our technology;
   
customer demand for our 3-antigen hepatitis B vaccine and pipeline candidates;
   
the impact of competitive or alternative products, technologies, and pricing;
   
general economic conditions and events and the impact they may have on us and our potential customers;
   
our ability to obtain adequate financing in the future on reasonable terms, if, as, and when we need it;
   
our ability to implement network systems and controls that are effective at preventing cyber-attacks, malware intrusions, malicious viruses, and ransomware threats;
   
our ability to secure and maintain protection over our intellectual property;
   
our ability to maintain our existing licenses with licensors of intellectual property, or obtain new licenses for intellectual property;
   
changes to legal and regulatory processes for biosimilar approval and marketing that could reduce the duration of market exclusivity for our products;
   
our ability to regain and maintain compliance with the NASDAQ Capital Market’s (“Nasdaq”) listing standards;
   
our success at managing the risks involved in the foregoing items; and
   
other factors discussed in this Form 10-Q.

 

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

 

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

 

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

 

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

 

4
 

 

PART I—FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements

 

VBI Vaccines Inc. and Subsidiaries

 

Condensed Consolidated Balance Sheets

(in thousands, except share amounts)

 

   September 30, 2023   December 31, 2022 
   (unaudited)     
CURRENT ASSETS          
Cash  $35,454   $62,629 
Accounts receivable, net   353    94 
Inventory, net   7,540    6,599 
Prepaid expenses   2,930    2,309 
Other current assets   3,870    6,059 
Total current assets   50,147    77,690 
           
NON-CURRENT ASSETS          
Other long-term assets   1,094    1,355 
Property and equipment, net   9,423    12,253 
Right of use assets   2,396    3,316 
Intangible assets, net   35,603    58,345 
Goodwill   2,121    2,127 
Total non-current assets   50,637    77,396 
           
TOTAL ASSETS  $100,784   $155,086 
           
CURRENT LIABILITIES          
Accounts payable  $7,008   $12,973 
Other current liabilities   11,923    22,588 
Current portion of deferred revenues   6,970    409 
Current portion of long-term debt, net of debt discount   50,299    - 
Current portion of lease liability   994    972 
Total current liabilities   77,194    36,942 
           
NON-CURRENT LIABILITIES          
Deferred revenues, net of current portion   1,748    2,204 
Long-term debt, net of debt discount   -    48,888 
Lease liability, net of current portion   1,426    2,365 
Liabilities for severance pay   530    524 
Total non-current liabilities   3,704    53,981 
           
COMMITMENTS AND CONTINGENCIES (NOTE 14)   -    - 
           
STOCKHOLDERS’ EQUITY          
Common shares (unlimited authorized; no par value) (September 30, 2023 - issued and outstanding 23,339,220; December 31, 2022 - issued and outstanding 8,608,539)   453,901    442,312 
Additional paid-in capital   105,955    90,020 
Accumulated other comprehensive income   42,462    21,440 
Accumulated deficit   (582,432)   (489,609)
Total stockholders’ equity   19,886    64,163 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $100,784   $155,086 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

5
 

 

VBI Vaccines Inc. and Subsidiaries

 

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(in thousands, except share and per share amounts)

 

   2023   2022   2023   2022 
   Three Months Ended
September 30
  

Nine Months Ended
September 30

 
   2023   2022   2023   2022 
                 
Revenues, net  $6,624   $317   $7,829   $789 
                     
Operating expenses:                    
Cost of revenues   2,525    2,672    9,564    7,948 
Research and development   1,532    4,983    7,975    12,988 
Sales, general and administrative   9,036    14,220    33,237    40,234 
Impairment charges   3,600    -    23,600    - 
Total operating expenses   16,693    21,875    74,376    61,170 
                     
Loss from operations   (10,069)   (21,558)   (66,547)   (60,381)
                     
Interest expense, net   (1,543)   (958)   (4,680)   (2,799)
Foreign exchange loss   (8,832)   (2,693)   (21,596)   (28,982)
Loss before income taxes   (20,444)   (25,209)   (92,823)   (92,162)
                     
Income tax expense   -    -    -    - 
                     
NET LOSS   (20,444)  $(25,209)   (92,823)  $(92,162)
                     
Deemed dividend on certain warrants   (862)   -    (862)   - 
                     
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS  $(21,306)  $(25,209)  $(93,685)  $(92,162)
                     
Other comprehensive income (loss)   7,753    (494)   21,022    23,845 
                     
COMPREHENSIVE LOSS  $(12,691)  $(25,703)  $(71,801)  $(68,317)
                     
Net loss per share of common shares, basic and diluted  $(1.01)  $(2.93)  $(7.30)  $(10.71)
                     
Weighted-average number of common shares outstanding, basic and diluted   21,166,818    8,608,539    12,840,633    8,608,530 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

6
 

 

VBI Vaccines Inc. and Subsidiaries

 

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(in thousands, except share amounts)

 

   Number           Accumulated         
   of       Additional   Other       Total 
   Common   Share   Paid-in   Comprehensive   Accumulated   Stockholders’ 
   Shares   Capital   Capital   Income (Loss)   Deficit   Equity 
                         
BALANCE AS OF DECEMBER 31, 2022   8,608,539   $442,312   $90,020   $21,440   $(489,609)  $64,163 
                               
Stock-based compensation   -    10    2,001    -    -    2,011 
Net loss   -    -    -    -    (27,751)   (27,751)
Currency translation adjustments   -    -    -    6,599    -    6,599 
BALANCE AS OF MARCH 31, 2023   8,608,539   $442,322   $92,021   $28,039   $(517,360)  $45,022 
                               
BALANCE AS OF APRIL 1, 2023   8,608,539   $442,322   $92,021   $28,039   $(517,360)  $45,022 
                               
Stock-based compensation   -    -    1,674    -    -    1,674 
Net loss   -    -    -    -    (44,628)   (44,628)
Currency translation adjustments   -    -    -    6,670    -    6,670 
BALANCE AS OF JUNE 30, 2023   8,608,539   $442,322   $93,695   $34,709   $(561,988)  $8,738 
                               
BALANCE AS OF JULY 1, 2023   8,608,539   $442,322   $93,695   $34,709   $(561,988)  $8,738 
                               
Common shares issued in financing transactions, net of issuance costs   14,730,681    22,339    -    -    -    22,339 
Warrants issued in connection with financing transactions   -    (10,760)   10,760    -    -    - 
Stock-based compensation   -    -    1,500    -    -    1,500 
Net loss   -    -    -    -    (20,444)   (20,444)
Currency translation adjustments   -    -    -    7,753    -    7,753 
BALANCE AS OF SEPTEMBER 30, 2023   23,339,220   $453,901   $105,955   $42,462   $(582,432)  $19,886 
                               
BALANCE AS OF DECEMBER 31, 2021   8,608,298   $442,235   $81,583   $(1,565)  $(378,371)  $143,882 
                               
Adjustments for prior periods from adoption of ASU 2020-06   -    -    (2,746)   -    2,065    (681)
Common shares issued upon exercise of options   241    12    -    -    -    12 
Stock-based compensation   -    25    2,477    -    -    2,502 
Net loss   -    -    -    -    (21,254)   (21,254)
Currency translation adjustments   -    -    -    5,103    -    5,103 
BALANCE AS OF MARCH 31, 2022   8,608,539   $442,272   $81,314   $3,538   $(397,560)  $129,564 
                               
BALANCE AS OF APRIL 1, 2022   8,608,539   $442,272   $81,314   $3,538   $(397,560)  $129,564 
                               
Stock-based compensation   -    14    2,443    -    -    2,457 
Net loss   -    -    -    -    (45,699)   (45,699)
Currency translation adjustments   -    -    -    19,236    -    19,236 
BALANCE AS OF JUNE 30, 2022   8,608,539   $442,286   $83,757   $22,774   $(443,259)  $105,558 
                               
BALANCE AS OF JULY 1, 2022   8,608,539   $442,286   $83,757   $22,774   $(443,259)  $105,558 
                               
Warrant issued in connection with debt amendment   -    -    1,550    -    -    1,550 
Stock-based compensation   -    14    2,398    -    -    2,412 
Net loss   -    -    -    -    (25,209)   (25,209)
Currency translation adjustments   -    -    -    (494)   -    (494)
BALANCE AS OF SEPTEMBER 30, 2022   8,608,539   $442,300   $87,705   $22,280   $(468,468)  $83,817 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

7
 

 

VBI Vaccines Inc. and Subsidiaries

 

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

   2023   2022 
  

For the Nine Months Ended

September 30

 
   2023   2022 
         
CASH FLOWS FROM OPERATING ACTIVITIES          
Net loss  $(92,823)  $(92,162)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   1,516    1,541 
Stock-based compensation   5,185    7,371 
Amortization of debt discount   1,411    1,237 
Loss on extinguishment of long-term debt   -    172 
Impairment charges   23,600    - 
Inventory reserve   1,547    1,401 
Change in operating right of use assets   975    1,010 
Unrealized foreign exchange loss   21,891    28,410 
Net change in operating working capital items:          
Change in accounts receivable   (264)   (127)
Change in inventory   (3,026)   (5,174)
Change in prepaid expenses   (649)   (407)
Change in other current assets   2,120    (667)
Change in other long-term assets   151    (174)
Change in accounts payable   (5,923)   7,606 
Change in deferred revenues   6,485    30 
Change in other current liabilities   (10,051)   (3,715)
Payments made on operating lease liabilities   (971)   (1,001)
Net cash flows used in operating activities   (48,826)   (54,649)
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchase of property and equipment   (697)   (2,892)
Net cash flows used in investing activities   (697)   (2,892)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Proceeds from issuance of commons shares for cash   23,908    - 
Share issuance costs   (1,482)   - 
Proceeds from debt financing   -    20,000 
Debt issuance costs   -    (563)
Proceeds from issuance of common shares for cash, upon exercise of options   -    12 
Net cash flows provided by financing activities   22,426    19,449 
           
Effect of exchange rates on cash   (78)   (52)
           
CHANGE IN CASH FOR THE PERIOD   (27,175)   (38,144)
           
CASH, BEGINNING OF PERIOD   62,629    121,694 
           
CASH, END OF PERIOD  $35,454   $83,550 
           
Supplementary information:          
Interest paid  $4,550   $2,067 
Non-cash investing and financing activities:          
Adjustments for prior periods from adoption of ASU 2020-06   -    681 
Warrant issued in connection with financing transactions   10,760    - 
Warrants issued in connection with debt amendment   -    1,550 
Capital expenditures included in accounts payable and other current liabilities   67    283 
Share issuance costs included in other current liabilities   154    67 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

8
 

 

VBI Vaccines Inc. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

September 30, 2023 and 2022

(in thousands, except share and per share amounts)

 

1. NATURE OF BUSINESS AND CONTINUATION OF BUSINESS

 

Corporate Overview

 

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

 

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

 

The Company’s registered office is located at Suite 1700, Park Place, 666 Burrard Street, Vancouver, BC V6C 2X8 with its principal office located at 160 Second Street, Floor 3, Cambridge, MA 02142. In addition, the Company has manufacturing facilities located in Rehovot, Israel and research facilities located in Ottawa, Ontario, Canada.

 

Reverse Stock Split

 

The Company effected a 1-for-30 reverse stock split (the “Reverse Stock Split”) of its issued and outstanding common shares effective as of April 12, 2023, pursuant to which every 30 of the Company’s issued and outstanding common shares were automatically converted into one common share without any change in the par value per share. All share and per share amounts, including common shares underlying stock options, restricted stock units, and warrants, and applicable exercise prices, have been retroactively adjusted for all periods presented herein to give effect to the Reverse Stock Split as required in accordance with United States of America generally accepted accounting principles (“U.S. GAAP”). Per the requirements of the Business Corporations Act (British Columbia), under which the Company is regulated, if fractional shares held by registered shareholders were to be converted into whole shares, each fractional share remaining after the completion of the Reverse Stock Split that was less than half of a share was cancelled and each fractional share that was at least half of a share was rounded up to one whole share. No shareholders received cash in lieu of fractional shares.

 

Principal Operations

 

VBI is a commercial-stage biopharmaceutical company driven by immunology in the pursuit of prevention and treatment of disease. Through its innovative approach to virus-like particles (“VLPs”), including a proprietary enveloped VLP (“eVLP”) platform technology and a proprietary mRNA-launched eVLP (“MLE”) platform technology, VBI develops vaccine candidates that mimic the natural presentation of viruses, designed to elicit the innate power of the human immune system. VBI is committed to targeting and overcoming significant infectious diseases, including hepatitis B (“HBV”), COVID-19 and coronaviruses, and cytomegalovirus (“CMV”), as well as aggressive cancers including glioblastoma (“GBM”). VBI is headquartered in Cambridge, Massachusetts, with research operations in Ottawa, Canada, and a research and manufacturing site in Rehovot, Israel.

 

2023 Organizational Changes

 

As announced on April 4, 2023, the Company reduced its internal workforce by 30-35%, which began in April and was completed by the end of September 2023. As a result of this and other reductions in spend, VBI expects its operating expenses from normal business to be 30-35% lower in the second half of 2023 as compared with the second half of 2022.

 

9
 

 

COVID-19 Endemic

 

In May 2023, the World Health Organization determined that COVID-19 no longer fit the definition of a public health emergency and the U.S. government announced its plan to let the declaration of a public health emergency associated with COVID-19 expire on May 11, 2023. COVID-19 is expected to remain a serious endemic threat for an indefinite future period and may continue to adversely affect the global economy, and we are unable to predict the full extent of potential delays or impacts on our business, our clinical studies, our research programs, the recoverability of our assets, and our manufacturing. The effects of the COVID-19 endemic, including but not limited to supply chain issues, global shortages of supplies, material and products, volatile market conditions and rising global inflation may continue to disrupt or delay our business operations, including with respect to efforts relating to potential business development transactions, and it could continue to disrupt the marketplace which could have an adverse effect on our operations.

 

Liquidity and Going Concern

 

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

 

The Company has an accumulated deficit of $582,432 and cash of $35,454 as of September 30, 2023. Cash outflows from operating activities were $48,826 for the nine months ended September 30, 2023.

 

The Company will require significant additional funds to conduct clinical and non-clinical trials, achieve and maintain regulatory approvals, and commercially launch and sell our approved products. Additional financing may be obtained from the issuance of equity securities, the issuance of additional debt, government or non-governmental organization grants or subsidies, and/or revenues from potential business development transactions, if any. There is no assurance the Company will manage to obtain these sources of financing, if required. If we are unable to obtain additional financing, we may be required to pursue a reorganization proceeding, including under applicable bankruptcy or insolvency laws. The above conditions raise substantial doubt about the Company’s 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 from this uncertainty.

 

On August 26, 2022, we 1) filed a registration statement on Form S-3 (File No. 333-267109), which included a base prospectus which covers the offering, issuance and sale of up to $300,000 of common shares, warrants, units and/or subscription rights; and 2) entered into an Open Market Sale Agreement with Jefferies LLC (“Jefferies”), pursuant to which we may offer and sell our common shares having an aggregate price of up to $125,000 from time to time through Jefferies, acting as agent or principal (the “ATM Program”). During the third quarter of 2023, the Company issued 467,045 common shares under the ATM Program, for total gross proceeds of $373 at a weighted average price of $0.80 per share. The Company incurred $54 in sales agent commissions and share issuance costs related to the common shares issued in the quarter ended September 30, 2023, resulting in net proceeds of $319. As of September 30, 2023, approximately $124,627 of common shares remained available for issuance under the ATM Program.

 

On July 5, 2023, the Company announced the expansion of its hepatitis B partnership with Brii Bio. Through (i) a Collaboration and License Agreement (the “Collaboration Agreement”), dated July 5, 2023, by and between the Company and Brii Bio, and (ii) the Amended and Restated Collaboration and License Agreement (the “A&R Collaboration Agreement, and together with the Collaboration Agreement, the “Brii Collaboration Agreements”), dated July 5, 2023, by and between the Company and Brii Bio, Brii Bio expanded its exclusive license to VBI-2601 to global rights and acquired an exclusive license for PreHevbri in Asia Pacific (“APAC”), excluding Japan. As part of this collaboration, Brii Bio paid the Company an upfront payment of $15,000 consisting of a $3,000 equity investment in a concurrent registered direct offering (discussed below), $5,000 as an advance payment for the clinical and commercial manufacture and supply of VBI-2601 and PreHevbri and any related manufacturing expenditures pursuant to a supply agreement (the “Supply Agreement”) dated July 5, 2023, by and between the Company and Brii Bio, and $7,000 as a non-refundable upfront payment pursuant to the Brii Collaboration Agreements. In addition, pursuant to the Letter Agreement (the “Letter Agreement”), dated July 5, 2023, by and among the Company, SciVac, and Brii Bio, the Company also granted to Brii Bio a security interest, subject to a Subordination Agreement between Brii Bio and K2 HealthVentures LLC (“K2HV”), in all of its respective right, title, and interest in and to all intellectual property, know-how, and licenses to the extent related to PreHevbri and VBI-2601, and all proceeds of the foregoing, in order to secure performance of all of the Company’s obligations under the Brii Collaboration Agreements, the Supply Agreement, and the Loan Agreement (each as defined herein).

 

10
 

 

The Company is also eligible to receive up to an additional $422,000 in potential regulatory and commercial milestone payments (combined under the Brii Collaboration Agreements), and royalties in the licensed territories, which is worldwide for VBI-2601 and APAC, excluding Japan, for PreHevbri. Brii Bio will be responsible for all development, regulatory, and commercial activities and costs for the two programs in their respective licensed territories. There is no assurance that Brii Bio will achieve any of the milestones as specified in the Brii Collaboration Agreements and that we will receive any or all of these potential payments pursuant to the Brii Collaboration Agreements.

 

In July 2023, the Company closed (i) an underwritten public offering of 12,445,454 common shares and accompanying common warrants to purchase up to 12,545,454 common shares (which included 1,536,363 common shares and common warrants to purchase up to 1,636,363 common shares issued pursuant to the underwriters’ partial exercise of their option to purchase additional common shares and common warrants) at a combined public offering price of $1.65 per common share and accompanying common warrant, and (ii) a concurrent registered direct offering, pursuant to the expanded hepatitis B partnership with Brii Bio, of 1,818,182 common shares and accompanying common warrants to purchase up to 1,818,182 common shares, at a combined purchase price of $1.65 per share and accompanying common warrant. The accompanying common warrants issued and sold in each of the underwritten public offering and the registered direct offering have an initial exercise price of $1.65 per share, which, pursuant to certain anti-dilution provisions of the warrants, was reduced to $0.6749 per share, as of September 30, 2023, and expire five years from the date of issuance. The aggregate gross proceeds from the underwritten public offering, including aggregate gross proceeds from the underwriters’ exercise of their option to purchase additional securities, were $20,500. The aggregate gross proceeds from the concurrent registered direct offering were $3,000.

 

As of September 30, 2023, the Company had outstanding warrants to purchase up to an aggregate of 14,363,636 common shares, issued in July 2023. Pursuant to certain anti-dilution provisions of the warrants, as the consideration paid per common share under the ATM Program was less than the exercise price of such warrants in effect immediately prior to such issuance (“New Issuance Price”), the exercise price of the warrants (the “Exercise Price”) was reduced to the New Issuance Price. As of September 30, 2023, the Exercise Price in effect was $0.6749 per share, which resulted in a deemed dividend of $862 as the fair value of the warrants was greater subsequent to the reduction in Exercise Price than it was immediately prior to such reduction in Exercise Price. The fair values were determined using the Black-Scholes option pricing model.

 

On November 1, 2023, the Company received a letter from the Listing Qualifications Department of the Nasdaq Stock Market (“Nasdaq”) indicating that, based upon the closing bid price of the Company’s common shares for the 30 consecutive business day period between September 19, 2023 through October 31, 2023, it did not meet the minimum bid price of $1.00 per share required for continued listing on Nasdaq pursuant to Nasdaq Listing Rule 5550(a)(2). The letter also indicated that the Company will be provided with a compliance period of 180 calendar days, or until April 29, 2024 (the “Compliance Period”), in which to regain compliance pursuant to Nasdaq Listing Rule 5810(c)(3)(A).

 

In order to regain compliance with Nasdaq’s minimum bid price requirement, the common shares must maintain a minimum closing bid price of $1.00 for a minimum of ten consecutive business days during the Compliance Period. In the event that the Company does not regain compliance by the end of the Compliance Period, it may be eligible for additional time to regain compliance. To qualify, the Company will be required to meet the continued listing requirement for the market value of our publicly held shares and all other initial listing standards for Nasdaq, with the exception of the bid price requirement, and will need to provide written notice of our intention to cure the deficiency during the second compliance period, by effecting a reverse stock split if necessary. If we meet these requirements, the Company may be granted an additional 180 calendar days to regain compliance. The Company has not regained compliance as of the date of this Form 10-Q, and if it fails to regain compliance during the Compliance Period or any subsequent grace period granted by Nasdaq, its common shares will be subject to delisting by Nasdaq, which could seriously decrease or eliminate the value of an investment in the common shares and result in significantly increased uncertainty as to the Company’s ability to raise additional capital.

 

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

 

2. SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation and Consolidation

 

The Company’s fiscal year ends on December 31 of each calendar year. The accompanying unaudited condensed consolidated financial statements have been prepared in U.S. dollars (“USD”) and pursuant to the rules and regulations of the SEC, for interim reporting. Accordingly, certain information and footnote disclosures normally included in the financial statements prepared in accordance with U.S. GAAP, have been condensed or omitted pursuant to such rules and regulations. The December 31, 2022 condensed consolidated balance sheet in this document was derived from the audited consolidated financial statements. The condensed consolidated financial statements and notes included in this quarterly report on this Form 10-Q does not include all of the disclosures required by U.S. GAAP and should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 10-K”), as filed with the SEC on March 13, 2023.

 

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

 

11
 

 

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

 

Significant Accounting Policies

 

The significant accounting policies used in the preparation of these condensed consolidated financial statements are disclosed in the 2022 10-K, and there have been no changes to the Company’s significant accounting policies during the nine months ended September 30, 2023, other than the polices discussed below.

 

Restructuring charges

 

Restructuring costs include charges associated with exit or disposal activities that meet the definition of restructuring under FASB ASC Topic 420, Exit or Disposal Cost Obligations (“ASC 420”). The Company’s restructuring plans are typically completed within a one-year period or less. Restructuring costs incurred under these plans may include (i) one-time termination benefits related to employee separations, (ii) contract termination costs, and (iii) other related costs associated with exit or disposal activities including, but not limited to, costs for consolidating or closing facilities.

 

3. NEW ACCOUNTING PRONOUNCEMENTS

 

Recently Adopted Accounting Pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The amendments in ASU 2016-13, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Our adoption of this ASU, effective January 1, 2023, did not have a material impact on our condensed consolidated financial statements and the related footnote disclosures.

 

4. INVENTORY, NET

 

Inventory consists of the following:

 SCHEDULE OF INVENTORY

   September 30, 2023   December 31, 2022 
Finished goods  $1,940   $893 
Work-in-process   2,136    1,869 
Raw materials   3,464    3,837 
Inventory, net  $7,540   $6,599 

 

5. OTHER CURRENT ASSETS

 

Other current assets consisted of the following:

 

   September 30, 2023   December 31, 2022 
Government receivables  $3,470   $4,033 
Other current assets   400    2,026 
Total other current assets  $3,870   $6,059 

 

12
 

 

6. IMPAIRMENT CHARGES

 

The drop in market conditions experienced in April 2023 and subsequently in September 2023 were considered triggering events for interim impairment tests for property and equipment, In-Process Research and Development (“IPR&D”) and goodwill. The impairment test compares the carrying amount of the assets to their respective fair values. If the carrying amount exceeds the fair value of the assets, such excess is recorded as an impairment charge.

 

Impairment charges consist of the following:

 

   2023   2022   2023   2022 
   Three months ended September 30   Nine months ended September 30 
   2023   2022   2023   2022 
Property and equipment (Note 7)  $-   $-   $1,000   $- 
IPR&D (Note 8)   3,600    -    22,600    - 
 Impairment charges   $3,600   $-   $23,600   $- 

 

7. PROPERTY AND EQUIPMENT

 

As discussed above, in April 2023, the Company performed an interim impairment test. The fair value of the property and equipment’s assets included in the impairment test was determined using a combination of the market approach and the cost approach and is considered Level 3 in the fair value hierarchy. Some of the more significant estimates and assumptions inherent in the estimate of the fair value the property and equipment include: 1) current market prices; 2) cost to replace the assets; and 3) factors to account for obsolescence. The Company recorded an impairment of property and equipment of $1,000 as a result of its interim impairment test performed as of April 30, 2023. The Company considered the further decline in market conditions in September 2023 to be an additional triggering event for the second interim impairment test to be performed, which such test resulted in no further impairment as of September 30, 2023.

 

8. INTANGIBLE ASSETS, NET, AND GOODWILL

 

The Company’s intangible assets determined to have indefinite useful lives IPR&D and goodwill, are tested for impairment annually, or more frequently if events or circumstances indicate that the assets might be impaired. As discussed above, in April 2023, the Company performed an interim impairment test. The IPR&D assets, consisting of the CMV and GBM programs acquired in a business combination (the 2016 merger between VBI and SciVac), are capitalized as an intangible asset and are tested for impairment at least annually until commercialization, after which time the IPR&D will be amortized over its estimated useful life. The fair value of the IPR&D assets included in the impairment test was determined using the income approach method and is considered Level 3 in the fair value hierarchy. Some of the more significant estimates and assumptions inherent in the estimate of the fair value of IPR&D assets include: 1) the amount and timing of costs to develop the IPR&D into viable products; 2) the amount and timing of future cash inflows; 3) the discount rate; and 4) the probability of technical and regulatory success. The discount rate used was 15% and the cumulative probability of technical and regulatory success to achieve approval to market the products ranged from approximately 10% to 17%. During the second quarter of 2023, the Company recorded an impairment of IPR&D of $19,000, as a partial impairment to the congenital CMV asset, as a result of its interim impairment test performed as of April 30, 2023. The Company performed its annual test as of August 31, 2023 and determined there was no additional IPR&D impairment. The methodology and significant estimates and assumptions used in determining the fair value of the IPR&D assets as of August 31, 2023 were the same as the interim impairment test performed as of April 30, 2023. As discussed above, the Company considered the further decline in market conditions in September 2023 to be an additional triggering event for the second interim impairment test to be performed. During the third quarter of 2023, the Company recorded an impairment of IPR&D of $3,600, as a partial impairment to the congenital CMV asset, as a result of its interim impairment test performed as of September 30, 2023. The methodology and significant estimates and assumptions used in determining the fair value of the IPR&D assets as of September 30, 2023 were the same as the annual impairment test, other than the discount rate. This discount rate used was 25%.

 

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       September 30, 2023 
   Gross       Cumulative   Cumulative     
   Carrying   Accumulated   Impairment   Currency   Net Book 
   Amount   Amortization   Charge   Translation   Value 
IPR&D assets  $61,500   $       -   $(22,900)  $(2,997)  $35,603 

 

       December 31, 2022 
   Gross       Cumulative   Cumulative     
   Carrying   Accumulated   Impairment   Currency   Net Book 
   Amount   Amortization   Charge   Translation   Value 
IPR&D assets  $61,500   $         -   $(300)  $(2,855)  $58,345 

 

The change in carrying value for IPR&D assets from December 31, 2022, relates to the impairment of $22,600 and currency translation adjustments which decreased by $142 for the nine months ended September 30, 2023.

 

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. When evaluating goodwill for impairment, we may first perform an assessment qualitatively whether it is more likely than not that a reporting unit’s carrying amount exceeds its fair value, referred to as a “step zero” approach. Subsequently (if necessary, after step zero), if the carrying value of a reporting unit exceeded its fair value an impairment would be recorded. We performed our goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. There was no goodwill impairment determined as a result of the Company’s interim impairment test performed as of April 30, 2023 and its annual impairment test performed as of August 31, 2023. As discussed above, the Company considered the further decline in market conditions in September 2023 to be an additional triggering event for the second interim impairment test to be performed and determined there was no goodwill impairment as of September 30, 2023. The Company consists of a single reporting unit and uses its market capitalization to determine the fair value of the reporting unit. In order to determine the market capitalization, the Company used the trailing 20-day volume weighted average price of its shares as of the testing date.

 

       September 30, 2023 
   Gross   Cumulative   Cumulative     
   Carrying   Impairment   Currency   Net Book 
   Amount   Charge   Translation   Value 
Goodwill  $8,714   $(6,292)  $(301)  $2,121 
                     

 

       December 31, 2022 
   Gross   Cumulative   Cumulative     
   Carrying   Impairment   Currency   Net Book 
   Amount   Charge   Translation   Value 
Goodwill  $8,714   $(6,292)  $(295)  $2,127 

 

The change in carrying value for goodwill from December 31, 2022, relates to currency translation adjustments which decreased by $6 for the nine months ended September 30, 2023.

 

The Company has experienced a continued drop in market conditions subsequent to September 30, 2023 that may be an indicator of additional impairment to our property and equipment, intangible assets, and/or goodwill, which may result in the Company having to perform an additional interim impairment analysis during the three months ended December 31, 2023.

 

9. OTHER CURRENT LIABILITIES

 

Other current liabilities consisted of the following:

 

   September 30, 2023   December 31, 2022 
Accrued research and development expenses (including clinical trial accrued expenses)  $3,405   $6,561 
Accrued professional fees   1,568    3,250 
Payroll and employee-related costs   1,883    4,036 
Deferred funding   3,925    6,966 
Other current liabilities   1,142    1,775 
Total other current liabilities  $11,923   $22,588 

 

14
 

 

Included in payroll and employee-related costs are one time termination benefits as a result of our organizational changes to reduce our internal workforce by 30-35%, which took place mostly in the second quarter of 2023, as discussed in Note 1. The Company did not incur contract termination costs or other related costs.

 

The Company did not incur significant charges in one-time termination benefits during the three or nine months ended September 30, 2023.

 

The following table presents changes in one-time termination benefits for nine months ended September 30, 2023.

 

Accrued balance at January 1, 2023  $ - 
       
Charges   759 
Cash payments   (698)
      
Accrued balance at September 30, 2023  $61 

 

The restructuring charges are included in cost of revenues, research and development and sales, general and administrative in the condensed consolidated statements of operations and comprehensive loss.

 

10. LOSS PER SHARE OF COMMON SHARES

 

Basic loss per share is computed by dividing net loss applicable to common stockholders by the weighted average number of common shares outstanding during each period. Diluted loss per share includes the effect, if any, from the potential exercise or conversion of securities, such as warrants, and stock options, which would result in the issuance of incremental shares of common shares unless such effect is anti-dilutive. In computing the basic and diluted net loss per share applicable to common stockholders, the weighted average number of shares remains the same for both calculations due to the fact that when a net loss exists, dilutive shares are not included in the calculation as their effect would be anti-dilutive. These potentially dilutive securities are more fully described in Note 12, Stockholders’ Equity and Additional Paid-in Capital.

 

The following potentially dilutive securities outstanding at September 30, 2023 and 2022 have been excluded from the computation of diluted weighted average shares outstanding, as they would be antidilutive:

 

   2023   2022 
   Nine months ended September 30, 
   2023   2022 
Warrants   14,467,566    118,816 
Stock options and restricted stock units   1,662,836    769,933 
K2HV conversion feature   205,396    205,396 
Total   16,335,798    1,094,145 

 

11. LONG-TERM DEBT

 

As of September 30, 2023, and December 31, 2022, the Company’s long-term debt is as follows:

 

   September 30, 2023   December 31, 2022 
Long-term debt, net of debt discount of $5,400 ($6,811 at December 31, 2022)  $50,299   $48,888 
Less: current portion, net of debt discount of $5,400 ($0 at December 31, 2022)   50,299    - 
Long-term debt, net of current portion  $-   $48,888 

 

15
 

 

On May 22, 2020, the Company, along with its subsidiary VBI Cda (collectively, the “Borrowers”), entered into the Loan and Guaranty Agreement (the “Loan Agreement”) with K2HV and any other lender from time-to-time party thereto (the “Lenders”). On May 22, 2020, the Lenders advanced the first tranche of term loans of $20,000. Pursuant to the Loan Agreement, the Lenders originally had the ability to convert, at the Lenders’ option, up to $4,000 of the secured term loan into common shares of the Company at a conversion price of $43.80 per share until the original maturity date of June 1, 2024. On February 3, 2021, pursuant to the Loan Agreement, the Lenders, converted $2,000 of the secured term loan into 45,662 common shares at a conversion price of $43.80 per share.

 

On May 17, 2021, the Company entered into the First Amendment to the Loan and Guaranty Agreement (“First Amendment”) with the Lenders and received additional loan advances of $12,000.

 

On September 14, 2022, the Company entered into the Second Amendment to the Loan Agreement (the “Second Amendment”) with the Lenders to: (i) increase the amount of the term loans available under the Loan Agreement to $100,000 from $50,000, which term loans are available in additional tranches subject to the achievement of milestones and other customary conditions, (ii) add certain minimum net revenue covenants, (iii) extend the final maturity date for the term loans to September 14, 2026, which may be extended to September 14, 2027, under certain circumstances, and (iv) to the extent that the maturity date is extended, the term loans will begin amortizing on a monthly basis on September 14, 2026.

 

On September 15, 2022, the Lenders advanced to the Borrowers the Restatement First Tranche Term Loan (as defined in the Second Amendment) in an aggregate amount of $50,000 which included the refinancing of the $30,000 in term loans that were outstanding under the Loan Agreement as amended by the First Amendment. The next tranche of term loans of up to $10,000 will be available from April 1, 2024, through June 30, 2024, so long as certain milestones are achieved, no events of default under the Loan Agreement have occurred and are continuing, and the Liquidity Requirement is satisfied. The final tranche of term loans of up to $25,000 shall be available at any time from September 14, 2022, until September 14, 2026, subject to the Lender’s review of the Company’s clinical and financial plans and Lender’s investment committee approval.

 

Pursuant to the Second Amendment, the Lenders have the ability to convert $7,000 into common shares, by which $2,000 of the term loans shall be convertible into 45,662 common shares at a conversion price of $43.80 per share and $5,000 of the term loans shall be convertible into 159,734 common shares at a conversion price of $31.302 per share (“K2HV conversion feature”).

 

In connection with the Loan Agreement, on May 22, 2020, the Company issued the Lenders a warrant to purchase up to 20,833 common shares (the “Original K2HV Warrant”) at an exercise price of $33.60 per share. On May 17, 2021, in connection with the First Amendment, the Company amended and restated the Original K2HV Warrant to purchase an additional 10,417 common shares for a total of 31,250 common shares (the “First Amendment Warrant”) with the same exercise price of $33.60 per share. On September 14, 2022, in connection with the Second Amendment and the advance of the first tranche of term loans of $50,000 by the Lenders, the Company issued the Lenders a warrant to purchase an additional 72,680 common shares (the “Second Amendment Warrant”) with a warrant exercise price of $24.08 per share. If and/or when additional tranches are advanced pursuant to the Second Amendment, the Company will issue additional warrants to purchase up to 72,680 common shares pursuant to the Second Amendment Warrant.

 

The First Amendment Warrant and the Second Amendment Warrant may be exercised either for cash or on a cashless “net exercise” basis. The First Amendment Warrant expires on May 22, 2030 and the Second Amendment Warrant expires on September 14, 2032.

 

The Company is required to make a final payment equal to 6.95% of the aggregate term loan principal on the maturity date of the term loan, or upon earlier prepayment of the term loans in accordance with the Second Amendment (the “Second Amendment Final Payment”). The final payment related to the refinanced $30,000 in term loans that were outstanding under the Loan Agreement as amended by the First Amendment of $2,224 remains and is due the earlier of June 1, 2024 or the earlier prepayment of the term loans in accordance with the Second Amendment (the “Original Final Payment”).

 

Upon receipt of additional funds, issuable pursuant to the various tranches, under the Second Amendment, additional common shares will be issuable pursuant to the Second Amendment Warrant as determined by the principal amount of the applicable tranche actually funded multiplied by 3.5% and divided by the warrant exercise price of $24.08, and the Second Amendment Final Payment will increase by 6.95% of the funds advanced.

 

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The total principal amount of the loan under the Loan Agreement as amended by the Second Amendment, outstanding at September 30, 2023, including the Original Final Payment of $2,224 and the Second Amendment Final Payment of $3,475 in connection with the Second Amendment, is $55,699. The principal amount of the loan made under the Loan Agreement as amended by the Second Amendment accrues interest at an annual rate equal to the greater of (a) 8.00%, or (b) prime rate plus 4.00%. The interest rate as of September 30, 2023 was 12.50%. The effective interest rate on the loan of $50,000, excluding the Original Final Payment and Second Amendment Final Payment, is 16.03%.

 

The secured term loan maturity date is September 14, 2026, until which the Company is required to pay only interest, or if the milestone for the next tranche of the term loans has been achieved, September 14, 2027. The Loan Agreement, as amended by the Second Amendment, includes both financial and non-financial covenants, including quarterly minimum Net Revenue (as defined in the Loan Agreement) targets. The Company was not in compliance with the minimum Net Revenue covenant for the measurement period ended September 30, 2023, and did not qualify for an exception for this covenant, which constitutes an Event of Default (as defined in the Loan Agreement). In anticipation of K2HV declaring an Event of Default as a result of such failure to comply with the Net Revenue covenant, the Company began discussions with K2HV with respect to possible forbearance and other remedies. On October 27, 2023, the Borrowers and K2HV entered into an extension agreement (the “Extension Agreement”), pursuant to which the due date for the Company to deliver the compliance certificate for the period ending September 30, 2023, pursuant to the Loan Agreement, was extended from October 30, 2023, to November 6, 2023, which date was extended again from November 6, 2023, to November 13, 2023, pursuant to a subsequent letter agreement dated November 3, 2023. Pursuant to the Extension Agreement, as amended, K2HV agreed to refrain from declaring an Event of Default under the Loan Agreement and/or the Loan Documents (as defined in the Loan Agreement) prior to November 13, 2023. On November 13, 2023, the Borrowers entered into a forbearance agreement with the Lenders (the “Forbearance Agreement”), pursuant to which the Lenders agreed to forbear from exercising the Secured Parties’ (as defined in the Loan Agreement) rights with respect to the failure to meet the minimum Net Revenue covenant for the measurement period ended September 30, 2023 (the “Specified Default”), from November 13, 2023, through and including November 28, 2023 (the “Forbearance Period”), subject to compliance by the Borrowers with certain terms and conditions as set forth in the Forbearance Agreement. Such conditions include delivery of cash flow budget and adherence reports, and adherence with such budget and cash flow forecast. The Forbearance Period will immediately terminate if an Event of Default other than the Specified Default, occurs, including any Event of Default caused by a breach of the terms of the Forbearance Agreement. There is no assurance that the Company will be able to meet the conditions set forth in the Forbearance Agreement, which will result in a termination of the Forbearance Period. In addition, the Forbearance Agreement is not a waiver by K2HV of the Company’s obligation to meet the covenants pursuant to the Loan Agreement. Accordingly, K2HV may declare an Event of Default after the end of the Forbearance Period, and there is no assurance that the Company would be able to enter into another forbearance agreement for any additional periods. Upon occurrence and during the continuance of an Event of Default, K2HV is entitled to declare all obligations under the Loan Agreement immediately due and payable and to stop advancing money or extending credit under the Loan Agreement, and the applicable rate of interest, described above, will be increased by 5.00% per annum.

 

The obligations under the Loan Agreement as amended by the Third Amendment (as defined below) are secured on a senior basis by a lien on substantially all of the assets of the Company and its subsidiaries. The subsidiaries of the Company, other than VBI Cda, SciVac HK, and VBI BV, are guarantors of the obligations of the Company and VBI Cda under the Loan Agreement. The Loan Agreement also contains customary events of default.

 

On July 5, 2023, the Borrowers and K2HV entered into (i) an amendment (the “Third Amendment”) to the Loan Agreement, and (ii) an amendment to the Pledge and Security Agreement, dated May 22, 2020, by and among the Company, VBI DE, VBI Cda, K2HV, and Ankura Trust Company, LLC, as collateral trustee for the lenders, pursuant to which the parties have agreed to permit the Brii Collaboration Agreements, the Supply Agreement, and the Letter Agreement, SciVac and Brii Bio. The Company granted to K2HV a security interest in, all of its respective right, title, and interest in and to substantially all of the Company’s intellectual property. In addition, among others, any breach, default or other triggering event by the Company occurring under the Brii Collaboration Agreements resulting in Brii Bio exercising a right to terminate the Brii Collaboration Agreements, will cross default the Third Amendment.

 

The total initial debt discount related to the Second Amendment is $7,359. As of September 30, 2023, and December 31, 2022, the unamortized debt discount was $5,400 and $6,811 respectively. The debt discount is being charged to interest expense, net in the condensed consolidated statement of operations and comprehensive loss using the effective interest method over the term of the debt.

 

At September 30, 2023 and December 31, 2022, the fair value of our outstanding debt, which is considered level 3 in the fair value hierarchy, is estimated to be $46,230 and $56,510, respectively.

 

17
 

 

Interest expense, net recorded in the three and nine months ended September 30, 2023 and 2022 was as follows:

 

    2023     2022     2023     2022  
   

Three months ended

September 30

   

Nine months ended

September 30

 
    2023     2022     2023     2022  
Interest expense   $ 1,588     $ 856     $ 4,586     $ 2,132  
Amortization of debt discount     470       416       1,411       1,237  
Extinguishment loss     -       172       -       172  
Interest income     (515)       (486 )     (1,317 )     (742 )
Total interest expense, net of interest income   $ 1,543     $ 958     $ 4,680     $ 2,799  

 

12. STOCKHOLDERS’ EQUITY AND ADDITIONAL PAID-IN CAPITAL

 

Stock option plans

 

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

 

2006 VBI US Stock Option Plan

 

The 2006 VBI US Stock Option Plan (the “2006 Plan”), was approved by and was previously administered by the VBI US board of directors which designated eligible participants to be included under the 2006 Plan, and designated the number of options, exercise price and vesting period of the new options. The 2006 Plan was not approved by the stockholders of VBI US. The 2006 Plan was superseded by the 2014 Plan (as defined below) following the PLCC Merger and no further options will be issued under the 2006 Plan. As of September 30, 2023, there were 28,038 options outstanding under the 2006 Plan.

 

2014 Equity Incentive Plan

 

On May 1, 2014, the VBI DE board of directors adopted the VBI Vaccines Inc. 2014 Equity Incentive Plan (the “2014 Plan”). The 2014 Plan was approved by the VBI DE’s shareholders on July 14, 2014. The 2014 Plan was superseded by the 2016 Plan (as defined below) and no further options will be issued under the 2014 Plan. As of September 30, 2023, there were 17,195 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 by providing a means to offer incentives and to attract, motivate, retain and reward persons eligible to participate in the 2016 Plan. Grants under the 2016 Plan include a grant or right consisting of one or more options, stock appreciation rights (“SARs”), restricted share units (“RSUs”), performance share units (“PSUs”), shares of restricted stock, or other such award as may be permitted under the 2016 Plan. As of September 30, 2023, there were 1,617,603 options outstanding and no RSUs unvested under the 2016 Plan.

 

The aggregate number of common shares remaining available for issuance for awards under the 2016 Plan totaled 622,295 at September 30, 2023.

 

18
 

 

Activity related to stock options is as follows:

 

   Number of   Weighted 
   Stock   Average 
   Options   Exercise Price 
Balance outstanding at December 31, 2022   761,243   $71.26 
           
Granted   996,143    2.02 
Forfeited   94,550    61.90 
           
Balance outstanding at September 30, 2023   1,662,836   $30.32 
           
Exercisable at September 30, 2023   633,031   $69.26 

 

Information relating to RSUs is as follow:

 

       Weighted 
       Average 
   Number of   Fair Value 
   Stock Awards   at Grant Date 
Unvested shares outstanding at December 31, 2022   82   $43.80 
           
Vested   (82)   43.80 
Unvested shares outstanding at September 30, 2023   -   $- 

 

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:

 

   Nine months ended September 30 
   2023   2022 
Volatility   112.44%   93.23%
Risk free interest rate   4.17%   1.75%
Expected term in years   5.74    5.83 
Expected dividend yield   0.00%   0.00%
Weighted average fair value per option  $1.65   $33.90 

 

The fair value of the options is recognized as an expense on a straight-line basis over the vesting period and forfeitures are accounted for when they occur. The total stock-based compensation expense recorded in the three and nine months ended September 30, 2023 and 2022 was as follows:

 

  

Three months ended

September 30

  

Nine months ended

September 30

 
   2023   2022   2023   2022 
Research and development  $191   $514   $684   $1,534 
Sales, general, and administrative   1,287    1,868    4,437    5,751 
Cost of revenues   22    30    64    86 
Total stock-based compensation expense  $1,500   $2,412   $5,185   $7,371 

 

13. REVENUES, NET AND DEFERRED REVENUE

 

Revenues, net comprises the following:

 

   2023   2022   2023   2022 
  

Three months ended

September 30

  

Nine months ended

September 30

 
   2023   2022   2023   2022 
Product revenues, net  $1,076   $258   $2,262   $680 
License revenue   3,596    -    3,596    - 
R&D service revenues   1,952    59    1,971    109 
Revenues  $6,624   $317   $7,829   $789 

 

19
 

 

The following table presents revenues expected to be recognized in the future related to performance obligations, based on current estimates, that are unsatisfied at September 30, 2023:

 

   Total   Current
portion to
September 30, 2024
   Remaining
portion
thereafter
 
Product revenues, net  $5,314   $5,314   $- 
R&D service revenues   3,404    1,656    1,748 
   $8,718   $6,970   $1,748 

 

The following table presents changes in the deferred revenue balance for the nine months ended September 30, 2023:

 

Balance at January 1, 2022  $2,803 
    - 
    - 
    - 
      
Balance at December 31, 2022   2,613