Attached files

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EX-23.2 - VBI Vaccines Inc/BCex23-2.htm
EX-21.1 - VBI Vaccines Inc/BCex21-1.htm
EX-32.2 - VBI Vaccines Inc/BCex32-2.htm
EX-32.1 - VBI Vaccines Inc/BCex32-1.htm
EX-31.2 - VBI Vaccines Inc/BCex31-2.htm
EX-31.1 - VBI Vaccines Inc/BCex31-1.htm
EX-23.1 - VBI Vaccines Inc/BCex23-1.htm
EX-10.59 - VBI Vaccines Inc/BCex10-59.htm
EX-10.58 - VBI Vaccines Inc/BCex10-58.htm
EX-10.57 - VBI Vaccines Inc/BCex10-57.htm
EX-10.56 - VBI Vaccines Inc/BCex10-56.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2017

 

OR

 

[  ] TRANSITION REPORT UNDER 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

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

222 Third Street, Suite 2241

Cambridge, MA 02142

(Address of principal executive offices)

(Zip Code)

 

(617) 830-3031

(Registrant’s telephone number, including area code)

 

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

 

Title of each class  

Name of each exchange on

which each is registered

Common Shares, no par value per share   The NASDAQ Stock Market LLC

 

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

 

None

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [  ] No [X]

 

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 [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ].

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

Large accelerated filer [  ]   Accelerated filer [X]
Non-accelerated filer [  ]   Smaller reporting company [  ]
(Do not check if a smaller reporting company)    

 

Emerging growth company [X]

 

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. [X]

 

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

 

As of June 30, 2017, the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the last sale price of the common equity was $93,487,000.

 

As of February 26, 2018, the registrant had 64,078,781 common shares issued and outstanding, with no par value per share.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s Definitive Proxy Statement on Schedule 14A to be furnished to stockholders in connection with its 2018 Annual Meeting of Stockholders, which shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Annual Report on Form 10-K relates, are incorporated by reference in Part III, Items 10-14 of this Annual Report on Form 10-K.

 

 

 

   

 

 

VBI VACCINES INC.

FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2017

 

TABLE OF CONTENTS

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION CONTAINED IN THIS REPORT ii
PART I.  
ITEM 1: BUSINESS 1
ITEM 1A: RISK FACTORS 20
ITEM 1B: UNRESOLVED STAFF COMMENTS 45
ITEM 2: PROPERTIES 46
ITEM 3: LEGAL PROCEEDINGS 46
ITEM 4: MINE SAFETY DISCLOSURES 47
PART II.  
ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 47
ITEM 6: SELECTED FINANCIAL DATA 49
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 49
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 67
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 67
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 67
ITEM 9A: CONTROLS AND PROCEDURES 67
ITEM 9B: OTHER INFORMATION 68
PART III.  
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 69
ITEM 11: EXECUTIVE COMPENSATION 69
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 69
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 70
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES 70
PART IV.  
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES 70
SIGNATURES 77

 

 i 
   

 

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

 

This Annual Report on Form 10-K (this “Form 10-K”) 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-K. 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. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. 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 product candidates;
   
the timing and results of our ongoing and planned clinical trials for products and product candidates;
   
the amount of funds we require for our immuno-oncology and infectious disease vaccine candidate pipeline;
   
the potential benefits of strategic partnership agreements and our ability to enter into strategic partnership arrangements;
   
our ability to effectively execute and deliver our plans related to commercialization, marketing and manufacturing capabilities and strategy;
   
our ability to license our intellectual property;
   
our ability to maintain a good relationship with our employees;
   
the suitability and adequacy of our office, manufacturing and research facilities and our ability to secure term extensions or expansions of leased space;
   
our ability to manufacture, or to have manufactured, any products we develop to the standards and requirements of regulatory agencies;
   
the ability of our vendors to manufacture and deliver materials that meet regulatory agency and our standards and requirements in order to meet planned timelines and milestones;
   
any disruption in the operations of our manufacturing facility where we manufacture all of our clinical and commercial supplies of Sci-B-Vac™;
   
our compliance with all laws, rules and regulations applicable to our business and products;
   
our ability to continue as a going concern;
   
our history of losses;
   
our ability to generate revenues and achieve profitability;

 

emerging competition and rapidly advancing technology in our industry that may outpace our technology;
   
customer demand for our products and product candidates;
   
the impact of competitive or alternative products, technologies and pricing;
   
general economic conditions and events and the impact they may have on us and our potential customers;
   
our ability to obtain adequate financing in the future on reasonable terms, as and when we need it;
   
our ability to implement network systems and controls that are effective at preventing cyber-attacks, malware intrusions, malicious viruses and ransomware threats;
   

our ability to secure and maintain protection over our intellectual property;

   
changes to legal and regulatory processes for biosimilar approval and marketing could reduce the duration of market exclusivity for our products;
   
our ability to maintain our existing licenses for intellectual property;
   
our success at managing the risks involved in the foregoing items; and
   
other factors discussed in this Form 10-K.

 

 ii 
   

 

Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. Therefore, you should not rely on any of these forward-looking statements. We have included important factors in the cautionary statements included in this Form 10-K, particularly in the “Risk Factors” section, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make or collaborations or strategic partnerships we may enter into.

 

You should read this Form 10-K and the documents that we have filed as exhibits to this Form 10-K completely and with the understanding that our actual future results may be materially different from what we expect. Any forward-looking statement made by us in this Form 10-K is based only on information currently available to us and speaks only as of the date on which it is made. We do not assume any obligation to update any forward-looking statements, whether written or oral, that may be made from time to time, whether as a result of new information, future events or otherwise, except as required by law.

 

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 per share amounts or as otherwise specified, amounts presented are stated in thousands.

 

 iii 
   

 

PART I

 

ITEM 1. BUSINESS

 

Overview

 

We are a commercial stage biopharmaceutical company developing next generation vaccines to address unmet needs in infectious disease and immuno-oncology. Our first marketed product is Sci-B-Vac™ a third-generation hepatitis B virus (“HBV”) vaccine that contains all three viral surface antigens of the hepatitis B virus. Sci-B-Vac is approved for use in Israel and 14 other countries. In December 2017, we initiated a global Phase III program for Sci-B-Vac designed to achieve licensure for the vaccine in the United States (“U.S.”), Europe and Canada. Our wholly-owned subsidiary, SciVac Ltd., manufactures Sci-B-Vac in Rehovot, Israel.

 

We are also advancing our “enveloped” virus-like particle (“eVLP”) platform 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 candidate, and in immuno-oncology, with our therapeutic glioblastoma multiforme (“GBM”) vaccine candidate.

 

Recent Developments

 

Sci-B-Vac

 

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. On December 19, 2017, we announced the commencement of patient dosing in the Phase III clinical program for Sci-B-Vac following discussions with the FDA, the EMA, and Health Canada. The Phase III program will be a global program, with approximately 40 sites across the U.S., Europe and Canada, consisting of two concurrent Phase III studies - a safety and immunogenicity study (“PROTECT”) and a lot-to-lot consistency study (“CONSTANT”), enrolling approximately 4,800 subjects. See “—Principal Products—Sci-B-Vac.” Headline data is expected mid-year 2019.

 

The study continues to enroll participants in both the U.S. and Canada. Clinical trial applications were filed in the United Kingdom, Finland, Germany and Belgium. So far, the applications were approved in the United Kingdom, Finland and in Germany.

 

A post-marketing Phase IV clinical study of Sci-V-Bac in Israel was completed in June 2017, and we are nearing the completion of the clinical study report.

 

 1 

 

 

Congenital CMV Vaccine Candidate (eVLP)

 

Patient enrollment was initiated in June 2016 in a Phase I clinical study for our congenital CMV vaccine candidate, VBI-1501, which is our second lead program. In July 2017, we announced interim data from the Phase I clinical study of safety data through day 84 of the study and initial immunogenicity signals in participant samples collected one month after the second of three planned vaccine doses; our congenital CMV vaccine candidate was well tolerated at all doses and demonstrated induced antibody responses against the CMV glycoprotein B (gB) antigen with clear evidence of dose-dependent boosting after the second vaccination. The final data read-out of safety and immunogenicity, following a third vaccination, is expected in the first half of 2018.

 

Therapeutic GBM Vaccine Candidate (eVLP)

 

On August 11, 2017, the FDA accepted an IND for a therapeutic GBM brain cancer vaccine candidate, VBI-1901, to initiate a multi-center Phase I/IIa clinical study evaluating VBI-1901 in patients with recurrent GBM. The first patient in the study received the first dose in January 2018. We expect immunologic data from ongoing biomarker analyses by mid-year 2018, and initial correlations between biomarker analyses and clinical outcomes in the second half of 2018.

 

On October 3, 2017, the U.S. Patent and Trademark Office granted a patent on VBI-1901.

 

Preclinical Research

 

In October 2017, we disclosed new data on a Zika vaccine candidate, VBI-2501 which was developed with the eVLP platform. The vaccine candidate contains a proprietary modified version of glycoprotein E and NS1 of Zika in a bivalent construct. Preclinical data in mice demonstrated that the bivalent construct produced a surprisingly superior neutralization of Zika, relative to monovalent versions. We believe that such data further supports the flexibility of eVLP platform.

 

Additionally, we have recently completed research collaborations with both Sanofi Vaccine Techonologies S.A.S, (“Sanofi”) and Glaxo Smith Kline Biologicals SA (“GSK”) to stabilize other vaccine candidates. No further work on these collaboration candidates is anticipated at this time.

 

Financing Activities

 

During the year ended December 31, 2017, we raised an aggregate of $71.9 million in equity financing to support our vaccine development programs, to continue the advancement of our research programs and for other general corporate purposes, including an underwritten public offering and a concurrent registered direct offering of an aggregate of 23,575,410 common shares at a price of $3.05 per share, which closed on October 30, 2017. In connection with the registered direct offering, we issued four-year warrants to purchase 550,000 common shares at an exercise price of $3.34 per share. Since inception, we have collectively raised approximately $196.6 million in total equity and debt financing for those purposes.

 

 2 

 

Corporate History

 

We were incorporated under the laws of British Columbia by Memorandum of Association on April 9, 1965 under the name “Alice Arm Molybendum Co. Ltd.” On October 21, 1965, we changed our name to “Alice Arm Mining Ltd.” and subsequently, on July 13, 1975, changed our name to “New Congress Resources Ltd.” On January 12, 1983, we changed our name to “Levon Resources Ltd.”

 

On July 9, 2015, we, then known as Levon Resources Ltd. (“Levon”), completed a plan of arrangement (the “Levon Merger”) pursuant to which SciVac Ltd. (“SciVac”), an Israel based company, completed a reverse takeover of Levon. Levon changed its name from Levon Resources Ltd. to SciVac Therapeutics Inc. and SciVac became our wholly-owned subsidiary. Other than approximately CAD $27 million in cash retained by us, all of our other assets and liabilities were transferred or assumed by 1027949 BC Ltd., our then wholly-owned subsidiary (“BC Ltd.”). Upon consummation of the Levon Merger, each of our shareholders received 0.5 of a common share of BC Ltd., resulting in our shareholders holding 100% of the issued and outstanding shares of BC Ltd; therefore, we no longer own any equity interest in BC Ltd.

 

On July 14, 2015, our common shares commenced trading on the Toronto Stock Exchange (the “TSX”) under the symbol “VAC” and our common shares also began to be quoted on the OTCQX marketplace (the “OTCQX”) maintained by the OTC Markets Group Inc. under the symbol “SVACF.”

 

On May 6, 2016, we completed our acquisition of VBI Vaccines (Delaware) Inc. (“VBI DE”), pursuant to which Seniccav Acquisition Corporation, a Delaware corporation and our wholly-owned subsidiary, merged with and into VBI DE, with VBI DE continuing as the surviving corporation and as our wholly-owned subsidiary (the “VBI-SciVac Merger”). Upon completion of the VBI-SciVac Merger, we (then named “SciVac Therapeutics Inc.”) changed our name to “VBI Vaccines Inc.” and received approval for the listing of our common shares on the NASDAQ Capital Market. Our common shares commenced trading on the NASDAQ Capital Market at the opening of trading on May 9, 2016 under our new name and the symbol “VBIV.” Following the effective time of the VBI-SciVac Merger, our common shares began to trade on the TSX under the new symbol “VBV.”

 

Our registered office is located at Suite 1700, Park Place, 666 Burrard Street, Vancouver British Columbia V6C 2X8. Our principal executive offices are located at 222 Third St. Suite 2241, Cambridge, MA 02142. Our manufacturing operations are located at 13 Gad Feinstein Road, POB 580, Rehovot, Israel 7610303 and our research operations are located at 310 Hunt Club Road East, Suite 201, Ottawa, Ontario Canada K1V 1C1.

 

Background of VBI DE

 

VBI DE was originally established in 1970 as Paulson Capital Corp., an Oregon corporation (“Paulson Oregon”), which began as a holding company whose operating subsidiary, Paulson Investment Company, Inc. (“PIC”), was a full service brokerage firm. Effective March 20, 2014, Paulson Oregon changed its state of incorporation from the State of Oregon to the State of Delaware (the “Reincorporation”) pursuant to an Agreement and Plan of Merger dated March 20, 2014 by and between Paulson Oregon, and Paulson Oregon’s wholly-owned subsidiary, Paulson Capital (Delaware) Corp., a Delaware corporation (“Paulson Delaware”). As a result of the Reincorporation, Paulson Oregon became Paulson Delaware, its name became “Paulson Capital (Delaware) Corp.” and Paulson Oregon ceased to exist. Paulson Oregon’s shareholders approved the Reincorporation pursuant to the Agreement and Plan of Merger at Paulson Oregon’s 2013 annual meeting of shareholders held on November 8, 2013.

 

On July 25, 2014, Variation Biotechnologies (US), Inc. (“VBI US”) completed its merger (the “PLCC Merger”) with VBI Acquisition Corp. (“Merger Sub”), a Delaware corporation and wholly-owned subsidiary of VBI DE, whereby Merger Sub merged with and into VBI US, with VBI US continuing as the surviving corporation. As a result of the PLCC Merger, VBI US was acquired by, and became a wholly-owned subsidiary of VBI DE and VBI DE changed its name to VBI Vaccines Inc. and then subsequently changed its name to VBI Vaccines (Delaware) Inc. on July 19, 2016.

 

The PLCC Merger was consummated pursuant to an Agreement and Plan of Merger, dated May 8, 2014 (the “PLCC Merger Agreement”), by and among VBI US, VBI DE and Merger Sub. The PLCC Merger Agreement and the transactions contemplated thereby were approved by VBI DE’s board of directors on May 1, 2014 and by VBI DE’s stockholders at a special meeting of stockholders held on July 14, 2014.

 

At the effective time of the VBI-SciVac Merger, the stockholders of VBI DE received our common shares which, together with options to purchase shares of VBI DE common stock that were converted into options to purchase our common shares represented approximately 46.2% of our common shares on a fully diluted basis after the VBI-SciVac Merger.

 

 3 

 

 

Subsidiaries

 

SciVac, located in Rehovot, Israel, is our wholly-owned subsidiary that was incorporated on April 18, 2005 pursuant to the Israeli Companies Law (1999), as amended. SciVac currently manufactures and sells our lead product, Sci-B-Vac, a third generation hepatitis B vaccine for adults, children and newborns.

 

SciVac USA, LLC, located in Miami, Florida, was a wholly-owned subsidiary of SciVac and was organized on November 26, 2014 in the State of Florida. SciVac USA, LLC was dissolved on December 18, 2017.

 

VBI DE, is a Delaware corporation, is our wholly-owned subsidiary.

 

VBI US, a Delaware corporation, is a wholly-owned subsidiary of VBI DE and was incorporated on December 18, 2006 in the State of Delaware.

 

Variation Biotechnologies Inc. (“VBI Cda”), located in Ottawa, Ontario, Canada, is a wholly-owned subsidiary of VBI US, was incorporated on August 24, 2001 under the Canada Business Corporations Act and is the primary research facility of VBI DE. VBI Cda was founded in 2001 as a spin-out company from an ongoing research collaboration between researchers at the University of California, Davis and the Children’s Hospital of Eastern Ontario. VBI Cda was involved in the early stage development of vaccine discovery platforms and adjuvant technologies. From 2001 until 2006, VBI Cda’s major stockholders included its founders and several individual “angel” investors. On December 28, 2006, VBI US closed a financing of its Series A Preferred Stock, which resulted in the opening of VBI US’s U.S. headquarters with VBI Cda as its Canadian research-focused subsidiary.

 

Our Internet website can be found at www.vbivaccines.com. The information on, or that can be accessed through, our website is not part of this report. We are subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934, as amended, and, in accordance therewith, we file periodic reports, proxy statements and other information with the SEC. You may access our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, free of charge at our website as soon as reasonably practicable after the material is electronically filed with, or furnished to, the SEC.

 

Contractual Arrangements

 

Ferring License Agreement

 

Our manufactured and marketed product, Sci-B-Vac is a recombinant third generation hepatitis B vaccine which is the subject of a license agreement (“Ferring License Agreement”) with Ferring International Center S.A. (“Ferring”). Under the Ferring License Agreement, we are committed to pay Ferring royalties equal to 7% of net sales (as defined therein). Royalty payments of $35, $6 and $21, were recorded in cost of revenues for the year ended December 31, 2017, 2016 and 2015, respectively. In addition, we are committed to pay 30% of any and all non-royalty consideration, in any form, received by us from such sub-licensees (other than consideration based on net sales for which a royalty is due under the Ferring License Agreement), provided that the payment of 30% shall not apply to a grant of rights in or relating to: (i) the Territory (as such term was defined prior to an amendment dated January 24, 2005); or (ii) the Berna Territory (as defined therein).

 

 4 

 

 

We are 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 (the “License Period”). Upon expiry of the full term of the first License Period having commenced, we have the option to extend the Ferring License Agreement in respect of all the countries that still make up the Territory (as defined in the Ferring 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, we will thereafter have a royalty-free license to market (as defined in the Ferring License Agreement) in such country and when all the License Periods have expired in each country in the Territory.

 

SciGen Singapore Assignment Agreement

 

Under an assignment and assumption agreement, we are required to pay royalties to SciGen Ltd. (“SciGen Singapore”) equal to 5% of Net Sales of Sci-B-Vac product sales (as defined in such agreement). Royalty payments of $25, $4 and $15 were recorded in cost of revenues for the year ended December 31, 2017, 2016 and 2015, respectively.

 

eVLP Technology

 

We are engaged in the inbound licensing of key intellectual property (“IP”). We identified the need for a vaccine antigen discovery and design platform and, as indicated in the discussion titled “Subsidiaries”, through that certain sale and purchase agreement entered into on July 18, 2011 (the “Sale and Purchase Agreement”) among VBI Cda and ePixis SA (“ePixis”) and the shareholders of ePixis (collectively, the “Sellers”), acquired 100% of the outstanding shares of ePixis in order to obtain access to its exclusive rights to key IP covering its “enveloped Virus Like Particle” or “eVLP” vaccine platform (the “Technology”), including patents (the “Acquired Patents”) covering the Technology. We paid a purchase price of €400 (approximately $450) for the ePixis shares and approximately $75 in related transaction costs. VBI Cda also agreed to make certain contingent payments to the Sellers as follows:

 

Upon the completion of a “Successful Technology Transfer”, as defined in the Sale and Purchase Agreement, to a contract manufacturing organization, we paid €101 to the Sellers during the year ended December 31, 2015.
   
Upon the earlier to occur of (i) first approval by the FDA of a new drug application (an “NDA”) permitting us or any sublicensee to market and sell any pharmaceutical product or candidate pharmaceutical product that contains or can express an eVLP (a “eVLP Product”) in the U.S. or (ii) first approval by the EMA of a Marketing Authorization Application or equivalent submission permitting us or our sublicensees to market and sell a eVLP Product candidate in one or more countries in the EU, we must pay to the Sellers €1,000, or, if there are no longer any issued and valid claims of the Acquired Patents in effect at the date such event occurs, €500.

 

If a eVLP Product is commercialized, we will be required to pay the Sellers the following:

 

On the date that Cumulative Net Sales (as defined in the Sale and Purchase Agreement), of all eVLP Products equals or exceeds €25,000, we must pay to the Sellers €1,500, or, if there are no longer any issued and valid claims of the Acquired Patents in effect at the date such event occurs, €750; and
   
On the Date that Cumulative Net Sales of all eVLP Products equals or exceeds €50,000 in the aggregate, we must pay to the Sellers €2,000 or, if there are no longer any issued and valid claims of the Acquired Patents in effect at the date such event occurs, €1,000.

 

 5 

 

 

If any eVLP Product is commercialized by one or more sublicensees, we have agreed to make the following payments to the Sellers:

 

On the date that Cumulative Net Sales by us or any sublicensees of the eVLP Products equal or exceed €25,000 in the aggregate, we must pay to the Sellers €750, or, if there are no longer any issued and valid claims of the Acquired Patents in effect at the date such event occurs, €375;
   
On the date that Cumulative Net Sales made by us or any sublicensees of the eVLP Products equal or exceed €50,000 in the aggregate, we must pay to the Sellers €750, or, if there are no longer any issued and valid claims of the Acquired Patents in effect at the date such event occurs, €375;
   
On the date that Cumulative Net Sales made by us or any sublicensees of the eVLP Products equal or exceed €75,000 in the aggregate, we must pay to the Sellers €1,000, or, if there are no longer any issued and valid claims of the Acquired Patents in effect at the date such event occurs, €500; and
   
On the date that Cumulative Net Sales made by us or any sublicensees of the eVLP Products equal or exceed €100,000 in the aggregate, we must pay to the Sellers €1,000, or, if there are no longer any issued and valid claims of the Acquired Patents in effect at the date such event occurs, €500.

 

Included in the eVLP Acquired Patents were patents (the “UPMC Patents”) co-owned by L’Universite Pierre et Marie Curie (“UPMC”), and the Institut National de la Santé et de la Recherche Médicale (“INSERM”), both in Paris, France. In July 2006, ePixis entered into a license agreement (the “ePixis License Agreement”) with UPMC, INSERM and L’école Normale Supérieure de Lyon (collectively the “Licensor”) pursuant to which the Licensor granted to ePixis an exclusive license (with the right to sublicense with written consent from UPMC) to exploit the UPMC Patents for the purpose of developing, promoting and marketing products within the U.S., Japan, Canada, and Europe until the invalidation of the last of the UPMC Patents, including any supplementary protection certificates. Pursuant to the ePixis License Agreement, ePixis was to pay certain fees to the Licensor based on net sales (as defined in the ePixis License Agreement) of products developed from the UPMC Patents, sublicensing income based on net sales (“Sublicensing Payments”) and one-time payments (“Lump Sum Payments”) for each product developed from the UPMC Patents. ePixis also agreed to reimburse UPMC for fees and costs related to filing and maintaining the patent applications.

 

On July 12, 2011, the parties to the ePixis License Agreement entered into the first amendment to the ePixis License Agreement (the “ePixis Amendment”). The ePixis Amendment authorized the transfer of the ePixis License Agreement to us and laid out new financial terms and conditions for the rights granted under the ePixis License Agreement.

 

The ePixis Amendment provides that the fees to be paid to the Licensor by ePixis on net sales of eVLP Products based on the UPMC Patents will be 1.75% of net sales for annual sales between €0 and €50,000, 1% of net sales for annual sales between €50,000 and €100,000, and 0.75% of net sales for annual sales in excess of €100,000. Pursuant to the ePixis Amendment, Lump Sum Payments would be made as follows:

 

€50 when the results from pre-clinical studies are sufficient to allow a product to enter a regulatory filing similar to an IND or a similar entity in a country other than the U.S.; this milestone was met and paid during the year ended December 31, 2016 for the CMV candidate and an additional €50 was accrued during the year ended December 31, 2017 for the GBM candidate;
   
€150 when the results from pre-clinical studies are sufficient to allow a product into a clinical phase, including Phase I-II clinical studies; this milestone was met and paid during the year ended December 31, 2016 for the CMV candidate and an amount of €150 is due upon initiation of a Phase I clinical trial for the GBM candidate in 2018;
   
€250 when a product enters Phase II clinical studies, an event that is defined by the enrollment of the first patient;
   
€500 when a product enters Phase III clinical studies; and
   
€1,000 when a product is first marketed.

 

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Sublicensing Payments under the ePixis Amendment were revised as follows: 25% of any amounts received by ePixis for the sublicense if the sublicense is entered into prior to the start of Phase I clinical studies; 10% of any amounts received by ePixis if the sublicense is entered into during Phase I clinical studies and prior to the start of Phase II clinical studies; 7% of any amounts received by ePixis if the sublicense is entered into during Phase II clinical studies and prior to the start of Phase III clinical studies, and 5% of any amounts received by ePixis if the sublicense is entered into after the start of Phase III clinical studies. There was no change to the requirement that ePixis reimburse UPMC for fees and costs related to filing and maintaining the patent applications.

 

The parties may terminate the ePixis License Agreement, as amended, by mutual agreement. There is also a cancellation right that may be exercised in the event of breach. UPMC may terminate the ePixis License Agreement if we, among other things, declare bankruptcy; do not put forth reasonable effort or are unable to develop and market the products, and, in particular, if we suspend the development of the products for more than six months; our inability to make the payments required by the ePixis License Agreement; lack of sales of a product, or lack of a signed sub-license agreement within one year from the date of acquiring AMM (Autorisation de mise sur le marché - Regulation of Therapeutic Goods) authorization, or the necessary equivalent authorization for the use of the products; and lack of sales of a product for more than two years after the initial marketing has taken place. During the year-ended December 31, 2016, VBI Cda paid UPMC €200, in milestone payments related to CMV Phase I clinical trial approval and start. There were no payments made to UPMC during the year ended December 31, 2017 and 2015.

 

Kevelt AS

 

Prior to the Levon Merger, one of the directors of SciVac was also the chairman of the board of Kevelt AS (“Kevelt”), a wholly-owned subsidiary of OAO Pharmsynthez (“Pharmsynthez”), and was also the chairman of the board of Pharmsynthez. Following the Levon Merger, in accordance with the merger agreement, this director resigned. On April 26, 2013, prior to the Levon Merger, SciVac entered into a Development and Manufacturing Agreement (“DMA”) with Kevelt, pursuant to which SciVac agreed to develop the manufacturing process for the production of clinical and commercial quantities of certain materials in drug substance form for an aggregate amount of $4.3 million. The original term of the DMA was for a period of one year commencing April 26, 2013, but pursuant to the terms of the DMA, the term automatically renewed thereafter for successive additional one-year periods, unless the parties failed to agree on the terms applicable to any renewal term and either party provided at least 30 days prior written notice of non-renewal to the other. On November 8, 2017, SciVac entered into a settlement agreement with Kevelt, pursuant to which SciVac paid Kevelt $1 million in cash on November 9, 2017, and issued 274,000 common shares of VBI Vaccines Inc. with a value of $1,142 on December 18, 2017. As part of the settlement, the DMA was terminated and each of SciVac and Kevelt released the other from all claims and liabilities arising under the DMA.

 

Principal Products

 

Our principal products include our Sci-B-Vac vaccine, CMV vaccine candidate, GBM vaccines candidate and eVLP Platform.

 

Sci-B-Vac Vaccine

 

Our Sci-B-Vac product is a third generation hepatitis B virus vaccine for adults, children and newborns, approved for use in Israel and 14 other countries. Sci-B-Vac has not yet been approved by the FDA, Health Canada or the EMA. The Sci-B-Vac vaccine has demonstrated safety and efficacy in nearly 500,000 patients in currently licensed markets. Several clinical trials have shown more rapid and high rates of seroprotection with Sci-B-Vac.

 

A Phase IV post-marketing clinical study for Sci-B-Vac in Israel was completed in June 2017 and we are nearing the completion of the clinical study report. The purpose of this study was to confirm a new in-house reference standard for regulatory and quality control purposes. Additionally, we are currently enrolling participants in the Phase III clinical program with the goal of obtaining FDA, EMA, and Health Canada market approvals for commercial sale of Sci-B-Vac in the U.S., the Europe, and Canada, respectively. We estimate that the need for a next-generation hepatitis B vaccine represents an annual global market opportunity of approximately $600 million - $800 million.

 

Sci-B-Vac is a “third generation” hepatitis B virus vaccine, distinguished from previous generations in that Sci-B-Vac (i) is produced in mammalian cells (CHO cells) and (ii) contains all three surface antigens, naturally occurring on the outer surface of the hepatitis B virus – preS1, preS2, and the S proteins. The composition of Sci-B-Vac therefore provides more opportunities for the immune system to respond with antibodies, or neutralizing antibodies, which can recognize one of these components of the hepatitis B particle. Because the Sci-B-Vac active component displays proteins substantially similar to those found on the outer surface of the naturally occurring hepatitis B virus, we believe that Sci-B-Vac could be highly potent and immunogenic (capable of conferring immunity) and provide patients with an alternative to existing yeast-derived hepatitis B virus vaccines. We also believe that Sci-B-Vac fills a significant gap in an unmet medical need to protect against hepatitis B virus, especially in older individuals who may not be adequately protected with currently licensed hepatitis B vaccines: seroconversion rates with currently licensed hepatitis B vaccines fall dramatically within the elderly and high-risk patient populations due to the immuno-senescence or immuno-compromising conditions of such patients.

 

Several clinical studies conducted by us have demonstrated that Sci-B-Vac possesses the following benefits relating to the prevention of the hepatitis B virus:

 

Sci-B-Vac has been demonstrated to be highly immunogenic in adults, children and newborn infants;
   
Several clinical trials have shown rapid and high rates of seroprotection with Sci-B-Vac in a larg percentage of vaccinated individuals. In addition, seroprotection (the attainment of immunologically protective levels of anti-hepatitis B virus antibodies) was induced with only 25-50% of the recommended dose for currently U.S.- licensed hepatitis B virus vaccines; and
   
Sci-B-Vac generated an adequate immune memory for long-term protection against hepatitis B.

 

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Sci-B-Vac is generally well-tolerated by patients; during the clinical development and trials of Sci-B-Vac less than half of the patients experienced local reactions at the injection site (as commonly observed with the use of most vaccines). The injection site reactions included soreness, pain, tenderness, pruritus, which is itchiness, erythema, which is redness, ecchymosis, which is discoloration of the skin resulting from bleeding underneath the skin, swelling, warmth and nodule formation. These reactions were generally mild and were resolved within two days after vaccination. Additionally, fatigue, weakness, headache, fever, malaise, nausea, diarrhea, pharyngitis, which is inflammation of the pharynx, and upper respiratory infection were observed.

 

Phase III Clinical Studies

 

On February 7, 2017, we announced that we received positive scientific advice from the Committee for Medicinal Products for Human Use (“CHMP”) of the EMA regarding our development path for our Sci-B-Vac vaccine in Europe. In its letter, the CHMP expressed its support of our proposed plan to proceed to the Phase III clinical studies of Sci-B-Vac The CHMP also agreed that the product information, as well as data from ongoing studies, supports the Phase III clinical studies and our planned filing of a Marketing Authorization Application (“MAA”) for Sci-B-Vac.

 

On February 22, 2017, we announced that the Biologics and Genetic Therapies Directorate (“BGTD”) of Health Canada expressed its general support and acceptance of our development path for our Sci-B-Vac vaccine in a pre-Clinical Trial Application (“CTA”) meeting. Considering the manufacturing data, licensed clinical efficacy and safety experience of Sci-B-Vac, the BGTD agreed in principle with our overall development strategy. In addition, the BGTD agreed that the proposed Phase III program would satisfy the regulatory requirements, for marketing authorization in Canada, supporting the indication for active immunization against hepatitis B in adults. On June 14, 2017, Health Canada provided us with a No Objection Letter for both PROTECT and CONSTANT studies, which authorized us to proceed with the Sci-B-Vac Phase III clinical studies as described in our CTA.

 

On August 25, 2017, the FDA accepted our IND for the Sci-B-Vac Phase III clinical program. Acceptance of the IND enabled us to initiate the Sci-B-Vac Phase III clinical program in the U.S. Based on the clinical data collected to date, and the discussions held with the FDA, EMA and Health Canada, we initiated enrollment in the Phase III clinical program of Sci-B-Vac for prevention of the hepatitis B virus in December 2017 and commenced patient dosing.

 

The Phase III program consists of two concurrent studies:

 

ABOUT PROTECT – Safety and Immunogenicity Study

 

PROTECT will be a double-blind, two-arm, randomized, controlled study. Approximately 1,600 adult subjects, age 18 years and older, are expected to be randomized in a 1:1 ratio to receive either a three-dose course of Sci-B-Vac 10mcg or a three-dose course of the control vaccines, Engerix-B® 20mcg. Enrollment will be stratified by age group.

 

The co-primary objectives of the study will be:

 

  To demonstrate non-inferiority of the seroprotection rate induced by Sci-B-Vac as compared to Engerix-B four weeks after the third vaccination in adults age 18 and older; and
     
 

To demonstrate superiority of the seroprotection rate induced by Sci-B-Vac as compared to Engerix-B four weeks after the third vaccination in adults older than 45 years of age

 

The study will also include multiple secondary objectives, including demonstrated non-inferiority of the seroprotection rate after two doses of Sci-B-Vac 10mcg compared to after three doses of Engerix-B 20mcg, and the overall safety and tolerability of Sci-B-Vac as compared to Engerix-B.

 

ABOUT CONSTANT - Lot-to-Lot Consistency Study

 

CONSTANT will be a double-blind, four-arm, randomized, controlled study. Approximately 3,200 adult subjects, age 18-45 years, are expected to be randomized in a 1:1:1:1 ratio to receive one of four three-dose courses: Lot A of Sci-B-Vac 10mcg, Lot B of Sci-B-Vac 10mcg, Lot C of Sci-B-Vac 10mcg, or the control vaccine Engerix-B 20mcg.

 

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The primary objective of this study will be to demonstrate lot-to-lot consistency for immune response as measured by geometric mean concentration of antibodies across three independent, consecutive lots of Sci-B-Vac four weeks after the third vaccination.

 

The secondary objective will be to evaluate safety and efficacy of Sci-B-Vac as compared to Engerix-B.

 

Congenital CMV Vaccine Candidate (eVLP)  

 

Our second lead program is a vaccine candidate for congenital CMV, a leading cause of birth defects. Our congenital CMV vaccine candidate uses our eVLP platform, based on the CMV glycoprotein B (“gB”) antigen and is adjuvanted with alum, an adjuvant used in FDA-approved products. CMV is an infection that, while common, can lead to serious complications in babies and people with weak immune systems, and is associated with a number of solid tumors, including Glioblastoma Multiform (GBM), which is a form of adult brain cancer. According to the Centers for Disease Control and Prevention, each year approximately 30,000 infants are born with CMV infection in the U.S, of which about 5,000 will develop permanent problems including deafness, blindness, and developmental delays. We estimate that vaccination of all adolescent women and pre-pregnant women correlates to annual sales in the U.S. of approximately $1 billion with a $5 billion catch-up market.

 

The CMV vaccine candidate has demonstrated in early preclinical animal models, including rabbits and mice, the ability to generate anti-CMV antibodies neutralizing responses in both fibroblasts and epithelial cells.

 

Clinical Development

 

Patient enrollment was initiated in June 2016 in a Phase I clinical study for our congenital CMV vaccine candidate. In July 2017, we announced interim data from the Phase I clinical study of safety data through day 84 of the study and initial immunogenicity signals in participant samples collected one month after the second of three planned vaccine doses. The data was as follows:

 

  Safety: The vaccine was well tolerated at all doses, with no safety signals.
  Immunogenicity:

 

  The vaccine induced antibody responses against the CMV glycoprotein B (gB) antigen with clear evidence of dose-dependent boosting after the second vaccination.
  Immunization with the highest dose of the vaccine induced seroconversion in 100% of subjects after just two vaccinations.
  After two of the three planned vaccinations, neutralizing antibodies against epithelial cell infection were demonstrated in 17% of subjects who received the highest dose of VBI-1501A.
  The highest dose of VBI-1501A (2.0mcg of gB-G content with alum) has approximately 10-fold less antigen content than that typically used in several other eVLP-based vaccines or in past CMV vaccine candidates.
  Formulation of the vaccine with alum enhanced antibody titers.

 

The final data read-out of safety and immunogenicity, following a third vaccination is expected in the first half of 2018.

 

Therapeutic GBM Vaccine Candidate (eVLP)  

 

We have also leveraged our eVLP platform technology to develop a therapeutic GBM brain cancer vaccine candidate, VBI-1901. On August 11, 2017, the FDA accepted an IND to initiate a multi-center Phase I/IIa clinical study evaluating VBI-1901 in patients with recurrent GBM. The multi-center, open-label, two-part study will enroll up to 28 patients and is designed to evaluate safety, tolerability, and the optimal therapeutic dose level of VBI-1901. The first patient in the study received the first dose in January 2018. We expect immunologic data from ongoing biomarker analyses by mid-year 2018, and initial correlations between biomarker analyses and clinical outcomes in the second half of 2018.

 

On October 3, 2017, the U.S. Patent and Trademark Office granted a patent on VBI-1901.

 

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eVLP Vaccine Platform

 

On August 11, 2011, VBI Cda acquired the eVLP vaccine technology through the acquisition of ePixis. The eVLP vaccine technology allows for the expression of envelope glyco-proteins within a lipid-bilayer membrane of a virus like particle (“VLP”). The technology enables the synthetic manufacture of an “enveloped” virus like particle, or “eVLP”. Many viruses are “enveloped” in that they are surrounded by a lipid bilayer membrane. Such viruses display antigenic proteins in the surface of their “envelope” which can be targets for vaccine development. The ability to synthetically manufacture an ‘enveloped’ virus like particle is different from previously developed VLP technologies, which did not include the lipid bilayer membrane, and thus these technologies were unable to express antigenic proteins within an “envelope” as they occur in nature. In addition to the $450 initial payment for the technology and $75 in related transaction costs, we paid approximately $0, $211 and $110 in milestone payments under the e-Pixis Licensing Agreement in the years ended December 31, 2017, 2016 and 2015, respectively.

 

We expect to develop additional vaccine targets based on this platform, either through a partnership, or internally. In October 2017, we disclosed new data on a Zika vaccine candidate, VBI-2501, which employs the eVLP platform. The vaccine candidate contains a proprietary modified version of glycoprotein E and NS1 of Zika in a bivalent construct. Preclinical data in mice demonstrated that the bivalent produced a surprisingly superior neutralization of Zika, relative to monovalent versions. We believe that such data supports the flexibility of eVLP platform. VBI has filed for, and been granted, a patent protecting its Zika candidate which was issued on December 5, 2017.

 

In the normal course of our business, we assess and consider potential acquisition, or collaboration opportunities to gain access to, technologies or assets that are adjacent to our core competencies of immunology and formulation development. We are currently exploring this technology through partnerships with other third-party collaborators.

 

Description of Operations

 

We are headquartered in Cambridge, Massachusetts, with our manufacturing facility in Rehovot, Israel and our research facility in Ottawa, Ontario, Canada. The Cambridge headquarters allows us to leverage our location in a biotechnology hub, and provides us with access to experienced consultants and executive level talent.

 

We operate a proprietary, mammalian cell-derived vaccine manufacturing facility in Rehovot, Israel, which we use to manufacture Sci-B-Vac. The facility was built in December 2006 and is good manufacturing practices (“GMP”) certified by the Israeli Ministry of Health (“MoH”). It has also received MoH authorization to release vaccine batches to export markets. In 2013, the EU entered into an agreement with Israel regarding conformity assessment and acceptance of industrial products. This agreement recognizes Israel’s industrial standards as being equivalent to EU standards. It covers products for human and veterinary use (medicinal products, active pharmaceutical ingredients and excipients) and procedures related to GMP. The agreement means that Israel and the EU recognize each other’s GMP inspection conclusions, manufacturing and import authorizations and certification of conformity of batches without the need for re-testing at import and official-control-authority batch release; however, our facility will have to pass FDA inspection prior to marketing Sci-B-Vac in the U.S.

 

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Current production capabilities satisfy our current manufacturing requirements for domestic and export markets. However, in the event we receive FDA and/or EMA approval for Sci-B-Vac, our production requirements may increase beyond our current production capabilities, and we may enter into agreements with various third parties for the manufacture of Sci-B-Vac.

 

The Canadian research site benefits from its location in Canada’s National Capital Region, providing us with access to world-class research facilities at reasonable rates. This helps keep the unit cost of doing research lower compared to other locations in Canada or the U.S. VBI Cda’s active research collaboration with the Canadian federal government’s National Research Council (“NRC”) provides its staff with on-site access to the NRC’s animal facility for greater control over the testing of our vaccine candidates. NRC staff manages the general animal husbandry and maintenance requirements for VBI Cda’s animal research activities.

 

The three sites collaborate efficiently through the use of a unified information technology infrastructure and web-based video-conferencing services.

 

Sales and Marketing

 

We maintain a business development function responsible for inbound and outbound licensing of our IP portfolio. We do not have a traditional sales and marketing function and distribute Sci-B-Vac in approved countries through a network of distributors. We have an active named-patient program to supply Sci-B-Vac to patients in a few countries where Sci-B-Vac has not yet been approved via partnership with local distributors.

 

Customers

 

Our customers for Sci-B-Vac vaccines are mainly physicians and pharmacists in markets where the product is approved. Through SciVac, services are also made available to the biotechnology industry in Israel pursuant to an agreement with the Israel Innovations Authority (formerly the Office of the Chief Scientist in Israel) and ancillary to the core vaccine development and manufacturing focus.

 

Our target customer base consists of other vaccine and biologics developers who may be interested in gaining access to our proprietary technologies and/or vaccine candidates.

 

Competitors

 

Our products and product candidates face, and will continue to face, intense competition from large pharmaceutical companies, specialty pharmaceutical and biotechnology companies as well as academic and research institutions. We compete in an industry that is characterized by: (i) rapid technological change; (ii) evolving industry standards; (iii) emerging competition; and (iv) new product introductions. Competitors have existing products and technologies that will compete with our product candidates and technologies and may develop and commercialize additional products and technologies that will compete with our product candidates and technologies. Because several competing companies and institutions may have greater financial resources than us, they may be able to: (i) provide broader services and product lines; (ii) make greater investments in research and development (“R&D”); and (iii) carry on larger R&D initiatives. Competitors may also have greater development capabilities than we do and have substantially greater experience in undertaking nonclinical and clinical testing of products, obtaining regulatory approvals and manufacturing and marketing pharmaceutical products. They may also have greater name recognition and better access to customers.

 

We face general market competition from several subsectors of the vaccine development field, including: (i) large, multinational pharmaceutical companies including Sanofi, GSK, Merck, Mitsubishi Tanabe Pharma Corporation, Takeda Pharmaceutical Company Limited and Pfizer, Inc. (ii) mid-size pharmaceutical companies and emerging biotechnology companies including, Dynavax Technologies Corporation, Genocea Biosciences Inc., Vical, Inc. and Hookipa Biotech AG, and (iii) academic and not-for-profit vaccine researchers and developers including the National Institutes of Health and Butantan Institute. The industry is typified by extensive collaboration, licensing and merger and acquisition activity despite the intense competition.

 

Within the Hepatitis B vaccine space, we have several key competitors, including: (1) GSK, the manufacturer of Engerix-B, (2) Merck, the manufacturer of Recombivax HB, and (3) Dynavax, the manufacturer of Heplisav-B. Engerix-B was first approved in the U.S. in 1989 and is considered a global standard of care for immunization against infection caused by all known subtypes of the hepatitis B virus in all age groups. Recombivax HB was first approved in the U.S. in 1983 and has a similar label and positioning as Engerix-B. Dynavax received FDA approval for Heplisav-B in November 2017 as a 2 dose regimen for adults age 18 years and older, and based on data in head-to-head clinical studies, demonstrated statistically significantly higher rates of seroprotection compared with Engerix-B. Dynavax’s has committed to a 60,000 subject Phase IV post-marketing study. While Engerix-B and Recombivax HB are approved globally, Heplisav-B is currently only approved in the U.S. Despite the competition, we believe there are reasons our Sci-B-Vac vaccine has excellent potential, including that: (i) our vaccine contains all three surface antigens of the Hepatitis B virus, the only vaccine that contains the pre-S1 and pre-S2 antigens, which has been shown to contribute to enhanced efficacy (ii) it is adjuvanted with alum, an adjuvant that is present is several approved vaccines and has been used safely in millions of subjects commercially, in contrast to next-generation adjuvants used in other vaccines which, to the best of our knowledge, can enhance potency but does not yet have extensive safety data in commercial use, and (iii) Sci-B-Vac has an extensive data package with demonstrated efficacy and a clean safety in nearly 500,000 subjects commercially.

 

Within the CMV vaccine space, we have several key competitors, some of whom are further advanced with their CMV vaccine development, as compared to us. Among these, Merck has a highly potent vaccine based on a replication defective CMV virus with an adjuvant and is completing a Phase I study. Interim data from the Phase I was announced in the fourth quarter of 2017. Additionally, Hookipa Biotech AG has initiated clinical development of HB - 101 a prophylactic CMV vaccine based on its Vaxwave™ technology. Despite this competition, we believe there are reasons why our CMV vaccine may have some advantages, including that: (i) our vaccine is based on the successful VLP category of vaccines, which has recently been used in the successful introduction of cervical cancer vaccines, (ii) it is currently expected to use aluminum phosphate as an adjuvant, which has an extensive history of safety through its inclusion in several pediatric vaccines, and (iii) it has demonstrated competitive anti-CMV responses in preclinical animal models.

 

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Suppliers, Contractors and Collaborations

 

Suppliers

 

We currently rely on a single source for our supply of vials and certain reagents required for the manufacture of Sci-B-Vac. Currently, we do not have supply agreements with these vendors and all orders are handled through individual purchase orders on an order-by-order basis. Alternative sources from which we can obtain our supply of these materials exist. However, we may not be able to find alternative suppliers in a timely manner that would provide supplies of these materials at acceptable quantities and prices, if at all. Any interruption in the supply of these materials would disrupt our ability to manufacture Sci-B-Vac and could have a material adverse effect on our business.

 

Contractors

 

We enter into contracts in the normal course of business with contract research organizations (“CROs”) for clinical trials and with vendors for research studies, research supplies and other services and products for operating purposes. These contracts generally provide for termination on notice.

 

Notably, we engage CRO’s to conduct our clinical programs including the GBM Phase I/IIa clinical program, the Sci-B-Vac Global Phase III, clinical program, the Sci-B-Vac post-marketing Phase IV study and the CMV Phase I clinical program. Our reliance on these CRO’s reduces our control over these activities and involves certain risks. See risk factors on page 20.

 

We rely on a number of key contractors to characterize and release Sci-B-Vac for the Israel and other markets. While alternative contractors exist for these services, we may not be able to transition to alternative contractors in a manner that does not disrupt the normal course of manufacturing operations and the supply of Sci-B-Vac.

 

Our novel vaccine development efforts depend on a number of key suppliers to continue our research operations. We have identified the following parties as key suppliers of reagents, technology or expertise which impact our development plans with our eVLP vaccine candidates:

 

  UPMC is the owner of the eVLP vaccine platform IP portfolio to which we have an exclusive license. Under the terms of the ePixis License Agreement, as amended, we are required to pay royalties for successful products developed using the IP for as long as claims remain valid in a given jurisdiction. This patent portfolio has claims that are expected to remain valid until 2022 in the U.S. and 2021 in other countries, after which time we are no longer obligated to compensate UPMC for development of vaccines based on the UPMC IP portfolio. After that time, the remaining patent protection of the CMV vaccine candidate will be based on patent applications filed by us, which if granted, would provide patent protection extending until 2032. There can be no assurance that any such patent applications will be granted or, if granted, be enforceable, and they may be amended to reduce the scope of patent claims.
     
  We have collaborated with NRC on various vaccine projects since 2004 and have a long history of successful partnerships including several NRC-funded industrial research grants. The NRC is the owner of a proprietary cell line (HEK-293-NRC) that we are using for production of our eVLP-based CMV vaccine candidate. VBI Cda and the NRC have signed a research agreement that provides VBI Cda with access to NRC facilities and expertise for the advancement of the CMV vaccine candidate program. Supplementary to such research agreement, we have negotiated terms for a non-exclusive license to the HEK-293-NRC cell line. Under these terms, we will be required to pay success-based milestone payments as the CMV vaccine candidate advances into clinical development and first commercial sales. These terms also provide that no additional royalties on product sales will be required. We signed this licensing agreement in 2014.
     
  Key Reagent Suppliers: Characterization and release assays for our eVLP-based vaccines require specialized reagents. Once clinical development begins, we must ensure consistency and reliability of each reagent in its key quality control and release assays. Many of these reagents are being produced by, and therefore are in our control. Several key reagents including reference proteins and growth media are provided by third parties and can impact preclinical and clinical study start timelines. We have secured sufficient quantities of third party reference proteins and growth media for ongoing clinical studies. Supply of these key reagents remains a risk. See “Risk Factors” on page 20.

 

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  We, through our wholly-owned subsidiaries, depend on subcontractor arrangements to facilitate the completion of our research programs. For example, Paragon Bioservices has manufactured clinical batches of our lead CMV vaccine candidate pursuant to the terms of a GMP-Manufacturing Services Agreement (the “Services Agreement”) dated September 26, 2014. In addition, on May 12, 2016, VBI Cda executed a new Statement of Work as part of the Services Agreement related to the process development and manufacture of an eVLP-based GBM vaccine candidate. The term of the Services Agreement is indefinite, although either party may terminate the Services Agreement upon written notice to the other party. The Company continues to explore alternative sources of product supply.

 

Collaborations

 

We also enter into contracts in the normal course of business with vendors for preclinical safety and research studies, research supplies and other services and products for operating purposes. These contracts generally provide for termination on notice and do not include any minimum purchase commitments, and therefore are cancelable contracts.

 

  On April 2, 2015, VBI Cda entered into a Collaboration and Option License Agreement (the “Sanofi Agreement”) with Sanofi., a company organized under the laws of France (“Sanofi”). Certain provisions of the Sanofi Agreement have not been publicly disclosed in accordance with an Order Granting Confidential Treatment issued by the U.S. Securities and Exchange Commission (the “SEC”) on June 23, 2015. The purpose of the Sanofi Agreement is to allow Sanofi to evaluate the feasibility of using VBI Cda’s LPV technology and expertise to reformulate a Sanofi vaccine candidate (the “Sanofi Project Vaccine”) to provide improved stability (the “Sanofi Project”). VBI has completed the research as per the Sanofi Agreement and data has been shared with Sanofi. The research confirmed stabilizing properties of the LPV technology and Sanofi will continue to evaluate its fit for future programs, but has not exercised its option to apply LPV technology to the Sanofi Project Vaccine. We have no further obligations under the Sanofi Agreement and no further work is anticipated at this time.
     
  On October 8, 2015, we announced that we have applied our eVLP Platform in the development of a novel therapeutic vaccine candidate for GBM with Columbia University’s Brain Tumor Center. We have not made any payments under this collaboration and the related materials transfer agreement. Our GBM vaccine candidate is currently undergoing a Phase I/IIa clinical study.

 

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  On February 8, 2016, VBI Cda entered into an Evaluation and Option Agreement (the “GSK Agreement”) with GSK, a company registered in Belgium (“GSK”). Certain provisions of the GSK Agreement have not been publicly disclosed in accordance with an Order Granting Confidential Treatment issued by the SEC on March 14, 2016. The purpose of the GSK Agreement is to allow GSK to evaluate the feasibility of using VBI Cda’s LPV technology and expertise to formulate a vaccine candidate using GSK’s technology. We have completed its research obligations and data has been shared with GSK as per the terms of the previously disclosed agreements. No further work is anticipated at this time.

 

Employees

 

As of December 31, 2017, we have a total of 98 full-time and 5 part-time employees. The SciVac manufacturing site in Israel had 66 full-time employees and 1 part-time employee and the VBI Cda research site employed 27 full-time and 4 part-time employees, as of December 31, 2017. The remaining 5 full-time employees worked out of our headquarters in Cambridge, MA. None of our employees are represented by unions. Our management considers its relationship with our employees to be good.

 

Facilities and Offices

 

Our registered office is located at Suite 1700, Park Place, 666 Burrard Street, Vancouver, BC V6C 2X8 with our headquarters located at 222 Third Street, Suite 2241, Cambridge, MA 02142. Our manufacturing operations are located in Rehovot, Israel and our primary research facility is located in Ottawa, Ontario, Canada, refer to “Part I - Item 2. Properties.”

 

We rent office, manufacturing and research facility space under various operating leases, and we made rent payments of $919 in 2017.

 

We believe that our office, manufacturing and research facilities are suitable and adequate for our current operations but will consider term extensions or expansion of leased space, depending on market conditions and needs.

 

Business Segment and Financial Information about Geographic Areas

 

We operate in one segment and therefore segment information is not presented. Our principal for financial information about our one operating and reportable segment and geographic areas, refer to “Part II—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II—Financial Statements and Supplementary Data—Note 17—Segment Information.”

 

Cost of Revenues and Services

 

Cost of revenues and services includes direct costs and some allocated indirect costs related to the production, manufacturing and services activities in Israel including but not limited to the costs of materials, consumables, supplies and contractors. Once sales and production volumes increase to sufficient amount, the full cost of production, manufacturing and services will be used to calculate a gross margin, however, at this time with the current volumes, a gross margin would not provide meaningful information.

 

Research and Development

 

We invest heavily in R&D. R&D expenses were $21 million, $10 million and $14.1 million for the years ended December 31, 2017, 2016 and 2015, respectively. All R&D was funded by equity, term loan financings or government grants and refundable R&D tax credits. Our most significant R&D expense to date has been related mainly to Sci-B-Vac, the development of our CMV vaccine candidate, and the related eVLP platform. Our R&D expenses are expected to increase significantly as we conduct and complete the Phase III Sci-B-Vac clinical program; move other vaccine candidates through the clinical development stage and explore other vaccine opportunities and/or collaborations.

 

With the acquisition of VBI DE in 2016, a significant R&D priority has been the CMV vaccine candidate’s GMP manufacturing and its clinical development. Our CMV vaccine candidate was designed internally, and its manufacturing and purification processes were designed by the NRC in collaboration with our staff. Such processes and internal knowledge were transferred to our selected GMP manufacturer, Paragon, and required significant project management expertise and confirmatory R&D studies throughout 2014. In 2015, we engaged a contract research organization, ITR Laboratories Canada Inc., and completed GLP toxicology studies to confirm the safety of the CMV vaccine candidate in animals. We initiated a Phase I clinical study in June 2016 to assess the safety and tolerability of our CMV vaccine candidate in healthy, CMV-negative adults. The study will also assess the vaccine immunogenicity by measuring levels of vaccine-induced CMV neutralizing antibodies. We completed enrollment and initial dosing of 128 participants in September 2016. As of May 2017, all participants had received the third and final immunization in the series. Interim Phase I clinical study results were reported in July 2017, and complete data are expected mid-year 2018.

 

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As previously described, we expect to make additional R&D investments in our other eVLP vaccine candidates, and in our LPV platform, which we expect will be driven by partner-led collaborations, if any.

 

Intellectual Property

 

Patents

 

Our IP portfolio, includes 19 active patent families consisting of 132 fully owned or exclusively licensed allowed patents and patent applications, which include 60 issued patents. The highlights of our patent portfolio include:

 

  CMV vaccine candidate related IP: we own two patent families which directly address our CMV vaccine candidate. These patents include a composition of matter patent describing the lead CMV vaccine candidate as well as a proprietary assay used to provide high-throughput screening of anti-CMV vaccine candidate responses.
     
  eVLP vaccine related IP: we have an exclusive license to three additional patent families that protect the eVLP vaccine platform and derivatives thereof. Among these patents are rights that were originally developed at the UPMC, with which we hold a world-wide exclusive license to the base technology for the design of an eVLP.
     
  LPV vaccine related IP: we own six patent families which protect our LPV technology platform. These patents include the method for manufacturing an LPV so as to confer thermostability, the proprietary ratios of excipients and antigens that are required to give rise to a thermostable formulation, and specific parameters required to confer thermostability to several distinct classes of vaccine antigens and biologic proteins.

 

We have a process of continuously monitoring the competitive landscape for infectious disease vaccines to better understand the research, business and patent activities of our academic and industrial competitors. This process helps management to understand the competitive positioning of the lead CMV project. This knowledge has informed and shaped our patent portfolio, which is designed to protect our proprietary vaccine technologies and establish a defense against third-party infringement claims. Our earliest filed patent family (9 of which have now been issued) have a patent term that extends to 2019 in the U.S. Our licensed patent family relating to virus like particles (7 of which have now been issued) has a patent term that extends to 2021. Our most recently filed patent family will have a patent term that extends to 2037.

 

Trade Secrets

 

Some of our know-how and technology is not patentable. To protect our proprietary rights in unpatentable intellectual property and trade secrets, we require employees, consultants, advisors and collaborators to enter into agreements regarding intellectual property and confidentiality information.

 

Trademarks

 

We use the Sci-B-Vac trademarks in connection with our hepatitis B virus vaccine product. We have registered these trademarks in 14 countries. The trademarks are renewable indefinitely, so long as we make the appropriate filings when required. We also have a registration for the LPV mark in Canada.

 

Governmental Regulation and Product Approval

 

Vaccine development is a highly regulated field. The manufacturing and marketing of our potential products and our ongoing research and development activities are subject to extensive regulation by the FDA and comparable regulatory agencies of local, state and foreign jurisdictions, such as Health Canada in Canada. New products must go through extensive preclinical and clinical development prior to product launch. This process can take more than ten years from candidate identification to licensure/marketing approval by health authorities worldwide. Despite efforts to harmonize regulatory requirements in different jurisdictions, there exists a divergence of legal and regulatory requirements in different countries and territories. Delays in regulatory approval to move from one stage of development to another can potentially cause us significant delays and can affect our market capitalization.

 

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United States, Europe and Canada Regulatory Agencies.

 

Before any of our products can be marketed and sold in the U.S. Europe or Canada, they must receive approval from the relevant regulatory agencies, including the FDA, EMA or Health Canada, respectively. To receive regulatory approvals to market any drug or vaccine, including those we develop, the products in development must undergo rigorous preclinical testing and clinical studies that demonstrate the product’s safety and effectiveness for each indicated use. This extensive regulatory path includes process controls in development, testing, manufacturing, safety, efficacy, record keeping, labeling, storage, approval, advertising, promotion, sale, and distribution of the pharmaceutical products.

 

In general, before any new pharmaceutical product can be marketed in the mentioned geographical areas, the process typically required by the regulatory agencies includes:

 

  preclinical toxicology, laboratory and animal tests;
     
  submission of an investigational new drug application (an “IND”), which must be reviewed by the FDA before human clinical trials may begin; submission of a Scientific Advice application to EMA or submission of a pre-Clinical Trial Application to Health Canada;
     
  adequate and well-controlled human clinical trials to establish the safety and efficacy of the proposed drug for its intended use;
     
  pre-approval inspection of manufacturing facilities and selected clinical investigator sites;
     
  submission of a Biologics License Application (“BLA”) or NDA to the FDA or Health Canada; or submission of an MAA to the EMA; and
     
  FDA approval of a BLA NDA, or a BLA NDA supplement (for subsequent indications or other modifications, including a change in location of the manufacturing facility). EMA approval of the MAA.

 

Preclinical Testing

 

In the U.S., drug candidates are tested in animals until adequate proof of safety and efficacy is established. These preclinical studies generally evaluate the mechanism of action and pharmacology of the product and assess the potential safety and efficacy of the product. Tested compounds must be produced according to applicable current GMP requirements and preclinical safety tests must be conducted in compliance with FDA and international regulations regarding good laboratory practices. The results of the preclinical tests, together with manufacturing information and analytical data, are generally submitted to the FDA as part of an IND, which must become effective before human clinical trials may commence. The IND will automatically become effective 30 days after receipt by the FDA, unless before that time the FDA requests an extension or raises concerns about the conduct of the clinical trials as outlined in the application. If the FDA has any concerns, the sponsor of the application and the FDA must resolve those concerns before clinical trials may begin. Regulatory authorities may require additional preclinical data before allowing the clinical studies to commence or proceed from one phase to another, and could demand that the studies be discontinued or suspended at any time if there are significant safety issues. Furthermore, an independent institutional review board for each medical center proposing to participate in the conduct of the clinical trial must review and approve the clinical protocol and patient informed consent form before commencement of the study at the respective medical center.

 

Clinical Trials

 

Clinical trials for new vaccine drug candidates are typically conducted in three sequential phases that may overlap. In Phase I, the initial introduction of the vaccine drug candidate into human volunteers, the emphasis is on testing for safety or adverse effects, dosage, tolerance, metabolism, distribution, excretion, and clinical pharmacology. Phase II involves studies in a limited patient population to determine the initial efficacy of the vaccine drug candidate for specific targeted indications, to determine dosage tolerance and optimal dosage, and to identify possible adverse side effects and safety risks. Once a vaccine compound shows evidence of effectiveness and is found to have an acceptable safety profile in Phase II evaluations, pivotal Phase III trials are undertaken to more fully evaluate clinical outcomes and to establish the overall risk/benefit profile of the drug, and to provide, if appropriate, an adequate basis for product labeling. During all clinical trials, physicians will monitor patients to determine the effectiveness of the drug candidate and to observe and report any reactions or safety risks that may result from use of the vaccine drug candidate. The FDA, the trial sites internal review board and/or the sponsor may suspend a clinical trial at any time on various grounds, including a finding that the subjects are being exposed to an unacceptable health risk.

 

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Data from the clinical trials, together with preclinical data and other supporting information that establishes a vaccine drug candidate’s safety, are submitted to the FDA in the form of a BLA NDA or BLA NDA supplement (for approval of a new indication if the product candidate is already approved for another indication). Under applicable laws and FDA regulations, each NDA submitted for FDA approval is usually given an internal administrative review within 45 to 60 days following submission of the BLA NDA. If deemed complete, the FDA will “file” the NDA, thereby triggering substantive review of the application. The FDA may refuse to file any BLA NDA that it deems incomplete or not properly reviewable. The FDA has established internal substantive review goals of six months for priority BLA NDAs (for vaccines or drugs addressing serious or life threatening conditions for which there is an unmet medical need) and ten months for regular BLA NDAs. However, these are agency proposed time frames, and so the FDA is not legally required to complete its review within these periods, and these performance goals may change over time. Moreover, the outcome of the review, even if generally favorable, is not typically an actual approval, but an “action letter” that describes additional work that must be done before the BLA NDA can be approved. The FDA’s review of a BLA NDA may involve review and recommendations by an independent FDA advisory committee. The FDA may deny approval of a BLA NDA or BLA NDA supplement if the applicable regulatory criteria are not satisfied, or the FDA may require additional clinical data and/or an additional pivotal Phase III clinical study. Even if such data are submitted, the FDA may ultimately decide the BLA NDA or BLA NDA supplement does not satisfy its criteria for approval.

 

Data Review and Approval

 

Substantial financial resources are necessary to fund the research, clinical trials and related activities necessary to satisfy FDA requirements or similar requirements of state, local and foreign regulatory agencies. It normally takes many years to satisfy these various legal and regulatory requirements, assuming they are ever satisfied. Information generated in this process is susceptible to varying interpretations that could delay, limit, or prevent regulatory approval at any stage of the process. Accordingly, the actual time and expense required to bring a product to market may vary substantially. We cannot assure you that we will submit applications for required authorizations to manufacture and/or market potential products or that any such application will be reviewed and approved by the appropriate regulatory authorities in a timely manner, if at all. Success in early stage clinical trials does not ensure success in later stage clinical trials. Even if a product candidate receives regulatory approval, the approval may be significantly limited to specific disease states, patient populations and dosages, or have conditions placed on them that restrict the commercial applications, advertising, promotion or distribution of these products.

 

Once issued, the FDA may withdraw product approval if ongoing regulatory standards are not met or if safety problems occur after the product reaches the market. In addition, the FDA may require testing and surveillance programs to monitor the effect of approved products which have been commercialized. The FDA also has the power to prevent or limit further marketing of a product based on the results of these post-marketing programs. The FDA may also request additional clinical trials after a product is approved. These so-called Phase IV studies may be made a condition to be satisfied after a drug receives approval. The results of Phase IV studies can confirm the effectiveness of a product candidate and can provide important safety information via the FDA’s voluntary adverse drug reaction reporting system. Any products manufactured or distributed by us pursuant to any FDA approvals would be subject to continuing regulation by the FDA, including record-keeping requirements and reporting of adverse experiences with the drug. Drug manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with GMP, which impose certain procedural and documentation requirements upon us and our third-party manufacturers. We cannot be certain that we or our present or future suppliers will be able to comply with the GMP regulations and other FDA regulatory requirements. If our present or future suppliers are not able to comply with these requirements, the FDA may halt our clinical trials, require us to recall a drug from distribution or withdraw approval of the NDA for that drug. Furthermore, even after regulatory approval is obtained, later discovery of previously unknown negative effects of a product may result in restrictions on the product or even its complete withdrawal from the market.

 

The FDA closely regulates the marketing and promotion of drugs. Approval is typically subject to post-marketing surveillance and other record keeping and reporting obligations, and involves ongoing requirements such as post-marketing annual reports and labeling updates. Product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following initial marketing. A company can make only those claims relating to safety and efficacy that are approved by the FDA. Failure to comply with these requirements can result in adverse publicity, warning letters, corrective advertising and potential civil and/or criminal penalties. Physicians may prescribe legally available drugs for uses that are not described in the product’s labeling and that differ from those tested by us and approved by the FDA. Such off-label uses are common across medical specialties. Physicians may believe that such off-label uses are the best treatment for many patients in varied circumstances. The FDA does not regulate the behavior of physicians in their choice of treatments. The FDA does, however, restrict manufacturers’ communications on the subject of such off-label use.

 

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Biologics Price Competition and Innovation Act of 2009 (BPCIA)

 

Under the Federal Patient Protection and Affordable Care Act, or PPACA, enacted in 2010, and specifically, the Biologics Price Competition and Innovation Act of 2009 (BPCIA) included therein, there is an abbreviated path in the U.S. for regulatory approval of biosimilar versions of approved biological products. The PPACA provides a regulatory mechanism that enables FDA approval of biologic drugs that are similar to (but not exact copies of) innovative drugs on the basis of less extensive data than is required by a full BLA. Under this regulation, an application for approval of a biosimilar may not be filed until four years after marketing approval of the innovator product. Pioneer innovative biological products will receive 12 years of regulatory exclusivity, meaning that the FDA will not approve a biosimilar version until 12 years after the innovative biological product was first approved by the FDA.

 

Fast Track Approval

 

The Federal Food, Drug, and Cosmetic Act, as amended, and the related FDA regulations provide certain mechanisms for the accelerated “Fast Track” approval of potential products intended to treat serious or life-threatening illnesses which have demonstrated the potential to address unmet medical needs. These procedures permit early consultation and commitment from the FDA regarding the preclinical and clinical studies necessary to gain marketing approval. Provisions of this regulatory framework also permit, in certain cases, BLA NDAs to be approved on the basis of valid indirect measurements of benefit of product effectiveness, thus accelerating the normal approval process. In the future, certain potential products employing our technology might qualify for this accelerated regulatory procedure. Even if the FDA agrees that these potential products qualify for accelerated approval procedures, FDA may deny approval of our drugs or may require additional studies before approval. The FDA may also require us to perform post-approval, or Phase IV, studies as a condition of such early approval. In addition, the FDA may impose restrictions on distribution and/or promotion in connection with any accelerated approval, and may withdraw approval if post-approval studies do not confirm the intended clinical benefit or safety of the potential product.

 

Orphan Drug Designation

 

Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the U.S. Orphan drug designation must be requested before submitting a BLA NDA. After the FDA grants orphan drug designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan drug designation does not convey any advantage in or shorten the duration of the regulatory review and approval process. If a product that has orphan drug designation subsequently receives FDA approval for the disease for which it has such designation, the product is entitled to orphan product exclusivity, which means that FDA may not approve any other applications to market the same drug for the same disease, except in very limited circumstances, for seven years. These very limited circumstances are (i) an inability to supply the drug in sufficient quantities or (ii) a situation in which a new formulation of the drug has shown superior safety or efficacy. This exclusivity, however, also could block the approval of our product for seven years if a competitor obtains earlier approval of the same drug for the same indication.

 

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Foreign Regulation

 

In addition to regulations in the U.S., we are and will continue to be subject to a variety of laws and regulations governing clinical trials and commercial sales and distribution of our products in foreign countries. Whether or not we obtain FDA approval for a product, we must separately obtain approval of a product by the comparable regulatory authorities of those foreign countries before we may commence clinical trials or marketing of the product in those countries. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country.

 

Under the applicable EU regulatory systems, we may submit marketing authorization applications either under a centralized or decentralized procedure. The centralized procedure, which is available for medicines produced by biotechnology or which are highly innovative, provides for the grant of a single marketing authorization that is valid for all EU member states. This authorization is an MMA. The decentralized procedure provides for mutual recognition of national approval decisions.

 

Under this decentralized procedure, the holder of a national marketing authorization may submit an application to the remaining member states. Within 90 days of receiving the applications and assessment report, each member state must decide whether to recognize approval. This procedure is referred to as the mutual recognition procedure.

 

The policies of the FDA and foreign regulatory authorities may change and additional government regulations may be enacted which could prevent or delay regulatory approval of our products and could also increase the cost of regulatory compliance. We cannot predict the likelihood, nature or extent of adverse governmental regulation that might arise from future legislative or administrative action, either in the U.S. or abroad.

 

Other Government Regulation

 

Our research and development activities use biological and hazardous materials that are dangerous to human health and safety or the environment. We are subject to a variety of federal, provincial, state and local laws and regulations governing the use, generation, manufacture, storage, handling and disposal of these materials and wastes resulting from these materials. We are also subject to regulation by the Occupational Safety and Health Administration and federal, provincial and state environmental protection agencies and to regulation under the Toxic Substances Control Act.

 

In addition, once our products are marketed commercially, we will have to comply with the various laws relating to the Medicare, Medicaid and other federal healthcare programs. These federal laws include, by way of example, the following:

 

  The anti-kickback statute (Section 1128B(b) of the Social Security Act) which prohibits certain business practices and relationships that might affect the provision and cost of healthcare services reimbursable under Medicare, Medicaid and other federal healthcare programs, including the payment or receipt of remuneration for the referral of patients whose care will be paid by Medicare or other governmental programs;
     
  The physician self-referral prohibition (Ethics in Patient Referral Act of 1989, as amended, commonly referred to as the Stark Law, Section 1877 of the Social Security Act), which prohibits referrals by physicians of Medicare or Medicaid patients to providers of a broad range of designated healthcare services in which the physicians (or their immediate family members) have ownership interests or with which they have certain other financial arrangements;
     
  The anti-inducement law (Section 1128A(a)(5) of the Social Security Act), which prohibits providers from offering anything to a Medicare or Medicaid beneficiary to induce that beneficiary to use items or services covered by either program;
     
  The False Claims Act (31 U.S.C. § 3729 et seq.), which prohibits any person from knowingly presenting or causing to be presented false or fraudulent claims for payment to the federal government (including the Medicare and Medicaid programs); and
     
  The Civil Monetary Penalties Law (Section 1128A of the Social Security Act), which authorizes the United States Department of Health and Human Services to impose civil penalties administratively for fraudulent or abusive acts.

 

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Sanctions for violating these federal laws include criminal and civil penalties that range from punitive sanctions, damage assessments, money penalties, imprisonment, denial of Medicare and Medicaid payments, or exclusion from the Medicare and Medicaid programs, or some combination thereof. These laws also impose an affirmative duty on those receiving Medicare or Medicaid funding to ensure that they do not employ or contract with persons excluded from Medicare and other government programs.

 

We are building our government relations and regulatory capabilities by leveraging consultants who have extensive experience with the regulatory process. Consultants we have hired include Florian Schodel who led the clinical development of several vaccines through licensure at Merck Research Laboratories for over a decade.

 

We also use additional regulatory consultants including several former FDA regulators with experience at the Center for Biologics Evaluation & Research (“CBER”) which is the division of FDA that regulates vaccines and other drugs.

 

Available Information

 

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website at www.vbivaccines.com, as soon as reasonably practicable after such reports are available on the Securities and Exchange Commission website at www.sec.gov.

 

ITEM 1A: RISK FACTORS

 

We are subject to various risks that may materially harm our business, prospects, financial condition and results of operations. An investment in our common shares is speculative and involves a high degree of risk. In evaluating an investment in our common shares, you should carefully consider the risks described below, together with the other information included in this Form 10-K, including the consolidated financial statements and related notes.

 

The risks described below are not the only risks we face. If any of the events described in the following risk factors actually occurs, or if additional risks and uncertainties later materialize, that are not presently known to us or that we currently deem immaterial, then our business, prospects, results of operations and financial condition could be materially adversely affected. In that event, the trading price of our common shares could decline, and you may lose all or part of your investment in our shares. The risks discussed below include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements.

 

Product Development Risks

 

Because our vaccine product development efforts depend on new and rapidly evolving technologies, we cannot be certain that our efforts will be successful.

 

Our vaccine development efforts depend on new, rapidly evolving technologies and on the marketability and profitability of our products. Commercialization of our vaccines could fail for a variety of reasons, and include the possibility that:

 

  Sci-B-Vac may not be approved for sale in the U.S., Europe or Canada;
     
  our eVLP vaccine technologies, any or all of the products based on such technologies or our manufacturing process will be ineffective or unsafe, or otherwise fail to receive necessary regulatory clearances or achieve commercial viability;
     
  our lipid particle vaccine technologies, any or all of the products produced using such technologies will be ineffective or unsafe, or otherwise fail to receive necessary regulatory clearances or achieve commercial viability;
     
  we may be unable to develop a scale-up method for our manufacturing protocols in a cost-effective manner;
     
  the products, if safe and effective, will be difficult to manufacture on a large-scale or may be uneconomical to market;

 

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  our subcontracted third party manufacturing facility may fail to continue to pass regulatory inspections;
     
  proprietary rights of third parties will prevent us or our collaborators from exploiting technologies, and manufacturing or marketing products; and
     
  third-party competitors will gain greater market share due to superior products or marketing capabilities.

 

The FDA and corresponding foreign regulatory agencies may require more clinical trials for our Sci-B-Vac than we currently expect or are conducting before granting regulatory approval, if regulatory approval is granted at all.

 

Our registration and commercial timelines for Sci-B-Vac depend on further discussions with the FDA and corresponding foreign regulatory agencies and requirements and requests they may make for additional data or completion of additional clinical trials. Any such requirements or requests could:

 

  o adversely affect our ability to timely and successfully commercialize or market Sci-B-Vac in the U.S. and other jurisdictions where Sci-B-Vac is not currently approved;
     
  o result in significant additional costs;
     
  o potentially diminish any competitive advantages for Sci-B-Vac;
     
  o potentially limit the markets for Sci-B-Vac;
     
  o adversely affect our ability to enter into collaborations or receive milestone payments or royalties from potential collaborators;
     
  o cause us to abandon the further development of Sci-B-Vac to comply with requests by the FDA or other jurisdictions where it is not currently approved; or
     
  o limit our ability to obtain additional financing on acceptable terms, if at all.

 

Pre-clinical and clinical trials will be lengthy and expensive. Delays in clinical trials are common for many reasons and any such delays could result in increased costs to us and jeopardize or delay our ability to obtain regulatory approval and commence product sales as currently contemplated.

 

As part of the regulatory process, we must conduct clinical trials for each vaccine candidate to demonstrate safety and efficacy to the satisfaction of the regulatory authorities, including the FDA for the U.S., the EMA for the European Union and Health Canada for Canada. Clinical trials are subject to rigorous regulatory requirements and are expensive and time-consuming to design and implement. We may experience delays in clinical trials for any of our vaccine candidates, and the projected timelines for continued development of the technologies and related vaccine candidates by us may otherwise be subject to delay or suspension. Our planned clinical trials might not begin on time; may be interrupted, delayed, suspended, or terminated once commenced; might need to be redesigned; might not enroll a sufficient number of patients; or might not be completed on schedule, if at all. Clinical trials can be delayed for a variety of reasons, including the following:

 

  delays in obtaining regulatory approval to commence a trial;
     
  imposition of a clinical hold following an inspection of our clinical trial operations or trial sites by the FDA or other regulatory authorities;
     
  imposition of a clinical hold because of safety or efficacy concerns by the FDA, a data safety monitoring board or committee, a clinical trial site’s Institutional Review Board (“IRB”), or us;

 

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  delays in reaching agreement on acceptable terms with prospective contract research organizations (“CROs”) and clinical trial sites;
     
  delays in obtaining required IRB approval at each site for clinical trial protocols;
     
  delays in identifying, recruiting and training suitable clinical investigators;
     
  delays in recruiting suitable patients to participate in a trial;
     
  delays in having patients complete participation in a trial or return for post-treatment follow-up;
     
  clinical sites dropping out of a trial to the detriment of enrollment;
     
  time required to add new sites;
     
  delays in obtaining sufficient supplies of clinical trial materials, including comparator drugs;
     
  delays resulting from negative or equivocal findings of a data safety monitoring board for a trial; or
     
  adverse or inconclusive results from pre-clinical testing or clinical trials.

 

Patient enrollment, a significant factor in the timing of clinical trials, is affected by many factors, including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials, and clinicians’ and patients’ perceptions as to the potential advantages of the biologic being studied in relation to other available therapies, including any new biologics that may be approved for the indications we are investigating. Any of these delays in completing our clinical trials could increase costs, slow down the product development and approval process, and jeopardize our ability to commence product sales and generate revenue.

 

Development of sufficient and appropriate clinical protocols to demonstrate safety and efficacy are required, and we may not adequately develop such protocols to support approval.

 

In addition to FDA requirements and those of other regulatory authorities, an independent IRB or an independent ethics committee at each medical institution proposing to participate in the conduct of the clinical trial generally must review and approve the clinical trial design and patient informed consent form before commencement of the study at the respective medical institution. The IRBs approve the clinical trial protocols, which describe the type of people who may participate in the clinical trial, the schedule of tests and procedures, the medications and dosages to be studied, the length of the study, the study’s objectives, and other details. In general, the IRB will consider, among other matters, ethical factors, the safety of human subjects and the possibility of liability of the institution conducting the trial. Our preclinical studies may not be adequate proof of safety and efficacy, and as a result, we may not be successful in developing clinical trial protocols necessary to support IRB approval. Any delay or failure to obtain IRB approval to conduct a clinical trial at a prospective site could materially impact the costs, timing or successful completion of a clinical trial.

 

We rely on CROs, third party investigators, and independent sites to conduct our clinical trials. If these third parties do not fulfill their contractual obligations or meet expected deadlines, our planned clinical trials may be extended, delayed, modified, or terminated and we may fail to obtain the regulatory approvals necessary to commercialize our product candidates.

 

We rely on third party CROs to conduct our clinical trials, including the Sci-B-Vac Phase III clinical studies. If these CROs do not perform their obligations or meet expected deadlines, our planned clinical trials may be extended, delayed, modified or terminated. We rely on the processes of our CROs to ensure that accurate records are maintained to support the results of the clinical trials. While we or our CROs conduct regular monitoring of clinical sites, we are dependent on the processes and quality control efforts of our third party contractors to ensure that detailed, quality records are maintained to support the results of the clinical trials that they are conducting on our behalf. Any extension, delay, modification or termination of our clinical trials or failure to ensure adequate documentation and the quality of the results in the clinical trials could delay or otherwise adversely affect our ability to commercialize our products and product candidates and could have a material adverse effect on our business and operations.

 

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We may rely upon independent sites and investigators, such as universities and medical institutions and their faculty or staff, to conduct our clinical trials. These sites and investigators are not our employees and we cannot control the amount or timing of resources that they devote to our programs. If these investigators or collaborators fail to devote sufficient time and resources to our product development programs, or if their performance is substandard, the approval of our regulatory submissions and our introductions of new products will be delayed or prevented.

 

Our potential collaborators may also have relationships with other commercial entities, some of which may compete with us. If outside collaborators assist our competitors to our detriment, the approval of our regulatory submissions will be delayed and the sales from our products, if and when commercialized, will be less than expected. Even if clinical trials are completed as planned, their results may not support expectations or intended marketing claims. The clinical trials process may fail to demonstrate that our product candidates are safe and effective for indicated uses. Such failure could cause us to abandon a product candidate and could delay development of other product candidates.

 

Additional delays to the completion of clinical studies may result from modifications being made to the protocol during the clinical trial, if such modifications are warranted and/or required by the occurrences in the given trial.

 

Each modification to a protocol for a clinical trial must be submitted to the FDA or foreign regulatory authorities and the IRBs. This submission could result in the delay or suspension of a clinical trial while the modification is evaluated. In addition, depending on the magnitude and nature of the changes made, the FDA and other regulatory authorities could take the position that the data generated by the clinical trial prior to the protocol modification cannot be pooled with the data collected after the modification because the same protocol was not used throughout the trial. This prohibition might require the enrollment of additional subjects, which could result in the extension of the clinical trial and the FDA and other regulatory authorities delaying approval of a product candidate.

 

We may be required to suspend or discontinue clinical trials because of adverse side effects or other safety risks that could preclude approval of our biologic candidates.

 

Our clinical trials may be suspended or terminated at any time for a number of reasons. A clinical trial may be suspended or terminated by us, our collaborators, the FDA, or other regulatory authorities because of a failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, presentation of unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using the investigational biologic, changes in governmental regulations or administrative actions, lack of adequate funding to continue the clinical trial, or negative or equivocal findings of the data safety monitoring board or the IRB for a clinical trial. An IRB may also suspend or terminate our clinical trials for failure to protect patient safety or patient rights. We may voluntarily suspend or terminate our clinical trials if at any time we believe that they present an unacceptable risk to participants. If we elect or are forced to suspend or terminate any clinical trial of any proposed product that we develop, the commercial prospects of such proposed product will be harmed and our ability to generate product revenue from such proposed product will be delayed or eliminated. Any of these occurrences may harm our business, financial condition, results of operations and prospects significantly.

 

The future results of our current or future clinical trials may not support our product candidate claims or may result in the discovery of unexpected adverse side effects.

 

Even if our clinical trials are completed as planned, we cannot be certain that the results will support our product candidate claims or that the FDA or foreign regulatory authorities will agree with our conclusions regarding them. Success in pre-clinical studies and early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that the later trials will replicate the results of prior trials and pre-clinical studies. The clinical trial process may fail to demonstrate that our product candidates are safe and effective for the proposed indicated uses. If the FDA or foreign regulatory authorities conclude that the clinical trials for any of our product candidates for which we might seek approval have failed to demonstrate safety and effectiveness, we would not receive regulatory approval to market that product in the U.S. or in other jurisdictions for the indications sought. In addition, such an outcome could cause us to abandon the product candidate and might delay development of others. Any delay or termination of our clinical trials will delay the filing of any product submissions with the FDA or foreign regulatory authorities and, ultimately, our ability to commercialize our product candidates and generate revenues. It is also possible that patients enrolled in clinical trials will experience adverse side effects that are not currently part of the product candidate’s profile. Adverse clinical trial results, such as death or injury due to side effects, could jeopardize regulatory approval, and if approval is granted, such results may also lead to marketing restrictions or prohibitions. In addition, the clinical trials performed until now involve a relatively small patient population. Because of the small sample size, their results may not be indicative of future results.

 

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International commercialization of Sci-B-Vac and our vaccine candidates faces significant obstacles, including obtaining regulatory approvals. Failure to obtain regulatory approval in foreign jurisdictions will prevent us from marketing or selling our products in such jurisdictions.

 

Sci-B-Vac is approved for sale in Israel and 14 other countries. In countries where we do not currently have the required approvals (including the U.S., the European Union and Canada), we will need to obtain separate approvals from the relevant regulatory, pricing and reimbursement authorities to market or sell Sci-B-Vac or any of our vaccine candidates. Pursuing regulatory approvals will be time-consuming and expensive, and we may not obtain foreign regulatory approvals on a timely basis, if at all. The regulations vary among countries, and regulatory authorities in one market may require different or additional clinical trials than those required to obtain approval for our vaccine candidates in another market, and the time required to obtain approval may differ in one market from that required to obtain approval for our vaccine candidates in another market. Obtaining approval in one country does not ensure approval by regulatory authorities in other countries.

 

In addition, we have limited foreign regulatory, clinical and commercial resources. We currently market or sell Sci-B-Vac through collaborative relationships with foreign partners and may plan to do so with other vaccine candidates in the future, and, as such, current and future partners are critical to our international success. We may not be able to maintain current, or enter into future, collaboration agreements with appropriate partners for important foreign markets on acceptable terms, if at all. Current and future collaborations with foreign partners may not be effective or profitable.

 

Future legislation, regulations and policies adopted by the FDA or other regulatory authorities may increase the time and costs required for us to conduct and complete clinical trials for our vaccine candidates.

 

The FDA has established regulations, guidelines and policies to govern the pharmaceutical development and approval process, as have foreign regulatory authorities. We expect there will continue to be federal and state laws and/or regulations, proposed and implemented, that could impact our operations and business. Any change in regulatory requirements resulting from the adoption of new legislation, regulations or policies may require us to amend existing clinical trial protocols or add new clinical trials to comply with these changes. Such amendments to existing protocols or clinical trial applications or the need for new ones, may significantly and adversely affect the cost, timing and completion of the clinical trials for our candidates.

 

In addition, the FDA’s policies and those of other regulatory authorities may change and additional government regulations may be issued that could prevent, limit or delay regulatory approval of our product candidates, or impose more stringent product labeling and post-marketing testing and other requirements.

 

Developments by competitors may establish standards of care that affect our ability to conduct our clinical trials as planned.

 

Changes in standards related to clinical trial design could affect our ability to design and conduct clinical trials as planned. For example, regulatory authorities may not allow us to compare one or more of our product candidates to a placebo in a particular clinical indication where approved products are available. In that case, both the cost and the amount of time required to conduct a clinical trial could increase.

 

We face product liability exposure, which, if not covered by insurance, could result in significant financial liability.

 

The risk of product liability is inherent in the research, development, manufacturing, marketing and use of pharmaceutical products. Sci-B-Vac, our product candidates and products that we may commercially market in the future may cause, or may appear to have caused, injury or dangerous drug reactions, and expose us to product liability claims. These claims might be made by patients who use the product, healthcare providers, pharmaceutical companies, our corporate collaborators or others selling such products. If our current products or any of our product candidates during clinical trials were to cause adverse side effects, we may be exposed to substantial liabilities. Regardless of the merits or eventual outcome, product liability claims or other claims related to our products or product candidates may result in:

 

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  decreased demand for our products due to negative public perception;
     
  injury to our reputation;
     
  withdrawal of clinical trial participants or difficulties in recruiting new trial participants;
     
  initiation of investigations by regulators;
     
  costs to defend or settle the related litigation;
     
  a diversion of management’s time and our resources;
     
  substantial monetary awards to trial participants or patients;
     
  product recalls, withdrawals or labeling, marketing or promotional restrictions;
     
  loss of revenues from product sales; and
     
  the inability to commercialize any of our product candidates, if approved.

 

We currently maintain product liability insurance, and we obtain clinical trial insurance once a clinical trial is initiated. However, the insurance coverage may not be sufficient to reimburse us for any expenses or losses we may suffer. Insurance coverage is becoming increasingly expensive, and, in the future, we, or any of our collaborators, may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts or at all to protect us against losses due to liability. Even if our agreements with any current or future collaborators entitle us to indemnification against product liability losses, such indemnification may not be available or adequate should any claim arise. Our inability to obtain sufficient product liability insurance at an acceptable cost to protect against product liability claims could prevent or inhibit the commercialization of our product candidates. If a successful product liability claim or series of claims is brought against us for uninsured liabilities or in excess of insured liabilities, our assets may not be sufficient to cover such claims and our business operations could be impaired.

 

Should any of the events described above occur, this could have a material adverse effect on our business, financial condition and results of operations.

 

Even if we obtain regulatory approval for one or more of our product candidates, we will still face extensive, ongoing regulatory requirements and review and our products may face future development and regulatory difficulties.

 

Even if we obtain regulatory approval for one or more of our product candidates in the U.S., which we cannot guarantee, the FDA may still impose significant restrictions on a product’s indicated uses or marketing or impose conditions for approval, or impose ongoing requirements for potentially costly post-approval studies, including Phase IV clinical trials or post-market surveillance. As a condition to granting marketing approval of a product, the FDA may require us to conduct additional clinical trials. The results generated in these post-approval clinical trials could result in loss of marketing approval, changes in product labeling, or new or increased concerns about side effects or efficacy of a product. For example, the labeling for our product candidates, if approved, may include restrictions on use or warnings. The Food and Drug Administration Amendments Act of 2007 gives the FDA enhanced post-market authority, including the explicit authority to require post-market studies and clinical trials, labeling changes based on new safety information and compliance with FDA-approved Risk Evaluation and Mitigation Strategies (“REMS programs”). If approved, our vaccine candidates will also be subject to ongoing FDA requirements governing the manufacturing, labeling, packaging, storage, distribution, safety surveillance, advertising, promotion, record keeping and reporting of safety and other post-market information. The FDA’s exercise of its authority could result in delays or increased costs during product development, clinical trials and regulatory review, increased costs to comply with additional post-approval regulatory requirements and potential restrictions on sales of approved products. Foreign regulatory agencies often have similar authority and may impose comparable costs. Post-marketing studies, whether conducted by us or by others and whether mandated by regulatory agencies or voluntary, and other emerging data about marketed products, such as adverse event reports, may also adversely affect sales of our product candidates once approved, and potentially our other marketed products. Further, the discovery of significant problems with a product similar to one of our products that implicate (or are perceived to implicate) an entire class of products could have an adverse effect on sales of our approved products. Accordingly, new data about our products could negatively affect demand because of real or perceived side effects or uncertainty regarding efficacy and, in some cases, could result in product withdrawal or recall. Furthermore, new data and information, including information about product misuse, may lead government agencies, professional societies and practice management groups or organizations involved with various diseases to publish guidelines or recommendations related to the use of our products or the use of related therapies or place restrictions on sales. Such guidelines or recommendations may lead to lower sales of our products.

 

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The holder of an approved biologics license application (“BLA”) also is subject to obligations to monitor and report adverse events and instances of the failure of a product to meet the specifications in the BLA. Application holders must submit new or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling, or manufacturing process. Application holders must also submit advertising and other promotional material to the FDA. Advertising and promotional materials must comply with FDA rules in addition to other potentially applicable federal and state laws, including, by way of example, the Federal Trade Commission Act. Any sales and promotional activities are also potentially subject to federal and state consumer protection and unfair competition laws. The FDA and other regulatory agencies strictly regulate the promotional claims that may be made about prescription products. In particular, a product may not be promoted for uses that are not approved by the FDA, or such other regulatory agencies as reflected in the product’s approved labeling. In particular, any labeling approved by such regulatory agencies for our product candidates may also include restrictions on use. Such regulatory agencies may impose further requirements or restrictions on the distribution or use of our product candidates as part of a mandatory plan, such as limiting prescribing to certain physicians or medical centers that have undergone specialized training, limiting treatment to patients who meet certain safe-use criteria and requiring treated patients to enroll in a registry. If we receive marketing approval for one or more of our product candidates, physicians may nevertheless prescribe such products to their patients in a manner that is inconsistent with the approved label. If we are found to have promoted such off-label uses, we may become subject to significant liability. In particular, the U.S. federal government has levied large civil and criminal fines against companies for alleged improper promotion and has enjoined several companies from engaging in off-label promotion. The FDA has also requested that companies enter into consent decrees or permanent injunctions under which specified promotional conduct is changed or curtailed.

 

Depending on the circumstances, failure to meet post-approval requirements by us or our third-party collaborators can result in criminal prosecution, fines or other penalties, injunctions, recall or seizure of products, total or partial suspension of production, denial or withdrawal of pre-marketing product approvals, FDA issuance of Form 483, untitled letters, and/or warning letters, suspension or termination of any ongoing clinical trials, or refusal to allow us to enter into supply contracts, including government contracts. Any government investigation of alleged violations of law could require us to expend significant amounts of time and resources in response, and could generate negative publicity and significantly inhibit our ability to bring to market or continue to market our products and generate revenue.

 

We may not succeed at in-licensing product candidates or technologies to expand our product pipeline.

 

We may not successfully in-license product candidates or technologies to expand our product pipeline. The number of such candidates and technologies is limited. Competition among large pharmaceutical companies and biopharmaceutical companies for promising product candidates and technologies is intense because such companies generally desire to expand their product pipelines through in-licensing. If we fail to carry out such in-licensing and expand our product pipeline, our potential future revenues may suffer especially if our current products or product candidates fail to generate material revenue.

 

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The failure by us or our current or future manufacturers to obtain FDA or other regulatory agencies’ approval for their manufacturing facilities could have a material adverse impact on our business, results of operations, financial condition and prospects.

 

The facilities of any of our current and future manufacturers, whether the facilities are ours or third-party manufacturer facilities, must be approved by the FDA after we submit our BLA and before approval or by the regulators in other jurisdictions for our product candidate to be manufactured for commercial production. In the event that we are approved to market a drug product in the U.S., we or our third-party manufacturers must register the manufacturing facilities with the FDA and are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with the FDA’s current Good Manufacturing Practices (“cGMP”) regulations. Similar rules apply in the event we are approved to market a medicinal product in the European Union. Other than Sci-B-Vac, which is currently manufactured by us, we are completely dependent on these third-party manufacturers for compliance with the requirements of U.S. and non-U.S. regulators for the manufacture of our finished products. If we or our third-party manufacturers cannot successfully produce material that conforms to our specifications and current good manufacturing practice requirements of any applicable regulatory agency, we will not be able to secure approval for our manufacturing facilities. If the FDA or another regulatory agency does not approve these facilities for commercial production, we will need to find alternative suppliers, which would result in significant delays in obtaining required regulatory approvals. In addition, if we or a regulatory agency discover previously unknown problems with a product, such as adverse events of unanticipated severity or frequency or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product, the manufacturing facility, or us, including requiring recall or withdrawal of the product from the market or suspension of manufacturing, requiring new warnings or other labeling changes to limit use of the drug, requiring that we conduct additional clinical trials, imposing new monitoring requirements or requiring that we establish a REMS program. These challenges may have a material adverse impact on our business, results of operations, financial condition and prospects.

 

We manufacture clinical and commercial supplies of Sci-B-Vac at a single location. Any disruption in the operations of our manufacturing facility could adversely affect our business and results of operations.

 

We rely on our manufacturing facility in Rehovot, Israel, for the manufacture of all clinical and commercial supplies of Sci-B-Vac. Our current manufacturing facility contains highly specialized equipment and materials and utilizes complicated production processes developed over a number of years, which would be difficult, time-consuming and costly to duplicate or, though a remote risk, may be impossible to duplicate. If our facility were damaged or destroyed, or otherwise subject to disruption, including contamination, it would require substantial lead-time to replace our manufacturing capabilities and could cause costly delays. In such event, we would be forced to identify and rely entirely on third-party contract manufacturers for an indefinite period of time, which we may not be able to do in a timely manner and would further increase our production costs. Any disruptions or delays at our facility or its failure to meet regulatory compliance would significantly impair our ability to manufacture Sci-B-Vac for sale in the jurisdictions where it is approved for sale and for our proposed clinical studies in jurisdictions where we are seeking regulatory approval, which would result in increased costs and losses and adversely affect our business and results of operations.

 

If the supplier of our raw materials and certain reagents, fails to provide sufficient quantities to us, we may not be able to obtain an alternative supply on a timely or acceptable basis.

 

We rely on a single source for our supply of raw materials and certain reagents required for the manufacture of Sci-B-Vac. We do not have a written or oral agreement with this source of supply, as all orders are handled through individual purchase orders or an order-by-order basis. Alternative sources from which we can obtain our supply of most of these materials exist. However, we may not be able to find alternative suppliers in a timely manner that would provide supplies of these raw materials or reagents at acceptable quantities and prices, if at all. Any interruption in the supply of these materials would disrupt our ability to manufacture Sci-B-Vac for further development, current and future clinical trials, and commercial manufacturing, and could have a material adverse effect on our business, commercialization of Sci-B-Vac and future profit margins, if any.

 

We do not manufacture any of our raw materials nor do we plan to develop any capacity to do so. Instead, we rely on multiple sources to supply our raw materials so that we can manufacture sufficient quantities of Sci-B-Vac at our manufacturing facility. Some of the countries of origin of our raw materials are not the same as our drug manufacturing location. Any disruption in supply of raw materials from a qualified supplier could result in significant delays with our manufacturing, clinical trials, BLA filing, BLA approval or commercial sale of the finished product due to contract delays, the need to manufacture new raw materials, out of specification raw materials, the need for import and export permits, and the failure of the newly sourced raw materials to perform to the standards of the previously sourced raw materials. These delays could have a material adverse effect on our business and future profit margins, if any.

 

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We expect the healthcare industry to face increased limitations on reimbursement, rebates and other payments as a result of continued healthcare reform changes, which could adversely affect third-party coverage of our products and how much or under what circumstances healthcare providers will prescribe or administer our products.

 

In both the U.S. and other countries, sales of our products will depend in part upon the availability of reimbursement from third-party payers, which include governmental authorities, managed care organizations and other private health insurers. Third-party payers are increasingly challenging the price and examining the cost effectiveness of medical products and services.

 

Increasing expenditures for healthcare have been the subject of considerable public attention in the U.S. Both private and government entities are seeking ways to reduce or contain healthcare costs. Numerous proposals that would effect changes in the U.S. healthcare system have been introduced or proposed in Congress and in some state legislatures, including reducing reimbursement for prescription products and reducing the levels at which consumers and healthcare providers are reimbursed for purchases of pharmaceutical products.

 

Although we cannot predict the full effect on our business of the implementation of existing legislation or the enactment of additional legislation pursuant to healthcare and other legislative reform, we believe that legislation or regulations that would reduce reimbursement for, or restrict coverage of, our products could adversely affect how much or under what circumstances healthcare providers will prescribe or administer our products. As such, this legislation or regulations could materially and adversely affect our business by reducing our ability to generate revenue, raise capital, obtain additional collaborators and market our products. In addition, we believe the increasing emphasis on managed care in the U.S. has and will continue to put pressure on the price and usage of pharmaceutical products, which may adversely impact product sales.

 

Governments outside the U.S. tend to impose strict price controls, which may adversely affect our future revenues.

 

In some countries, particularly the countries of the European Union, the pricing and/or reimbursement of prescription pharmaceuticals is subject to governmental control. In Canada, the prices of patented medicines are subject to price controls. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our products to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be harmed, possibly materially.

 

We face intense competition and rapid technological change, which may make it more difficult to achieve significant market penetration. If we cannot compete successfully for market share against other drug companies, we may not achieve sufficient product revenues and our business will suffer.

 

The market for our product candidates is characterized by intense competition and rapid technological advances. For example, if it is approved in the future, Sci-B-Vac will compete in the U.S. with established hepatitis B virus vaccines marketed by Merck & Co. and GlaxoSmithKline plc and outside the U.S. with vaccines from those companies and several additional established pharmaceutical companies. If competitors’ existing products or new products are more effective than or considered superior to our current or future products, the commercial opportunity for our products will be reduced or eliminated. Existing or future competing products may provide greater therapeutic convenience or clinical or other benefits for a specific indication than our products, or may offer comparable performance at a lower cost. We face competition from fully integrated pharmaceutical companies and smaller companies that are collaborating with larger pharmaceutical companies, academic institutions, government agencies and other public and private research organizations. Many of our competitors have products or product candidates already approved or in development. In addition, many of these competitors, either alone or together with their collaborative partners, are larger than us and have substantially greater financial, technical, research, marketing, sales, distribution and other resources. Existing and potential competitors may develop or market products that are more effective or commercially attractive than any that we are developing or marketing. Competitors may obtain regulatory approvals and introduce and commercialize products before we do. These developments could have a significant negative effect on our financial condition. Even if we are able to compete successfully, we may not be able to do so in a profitable manner.

 

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We may be exposed to liability claims associated with the use of hazardous materials and chemicals.

 

Our research and development activities involve the controlled use of hazardous materials and chemicals. Although we believe that our safety procedures for using, storing, handling and disposing of these materials comply with federal, state, provincial and local laws and regulations, we cannot completely eliminate the risk of accidental injury or contamination from these materials. In the event of such an accident, we could be held liable for any resulting damages and any liability could materially adversely affect our business, financial condition and results of operations. In addition, the federal, provincial, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous or radioactive materials and waste products may require us to incur substantial compliance costs that could materially adversely affect our business and financial condition.

 

Our vaccine candidates may never achieve market acceptance, even if we obtain regulatory approvals.

 

Even if we receive regulatory approvals for the commercial sale of our vaccine candidates, the commercial success of these vaccine candidates will depend on, among other things, their acceptance by physicians, patients, third-party payers such as health insurance companies and other members of the medical community as a vaccine and a cost-effective alternative to competing products. If our vaccine candidates fail to gain market acceptance, we may be unable to earn sufficient revenue to continue our business. Market acceptance of, and demand for, any product that we may develop and commercialize will depend on many factors, including:

 

  our ability to provide acceptable evidence of safety and efficacy;
     
  the prevalence and severity of adverse side effects;
     
  whether our vaccines are differentiated from other vaccines based on immunogenicity;
     
  availability, relative cost and relative efficacy of alternative and competing treatments;
     
  the effectiveness of our marketing and distribution strategy;
     
  publicity concerning our products or competing products and treatments; and
     
  our ability to obtain sufficient third-party insurance coverage or reimbursement.

 

In particular, there are significant challenges to obtaining regulatory approval for CMV vaccine candidates developed for the target market (pre-pregnant women) due to the relatively low tolerance for risk to these populations. The risk-benefit analysis undertaken by the FDA and other regulators in deciding whether or not to approve this product candidate will be high relative to other vaccines and biologic products that target less sensitive populations.

 

If our vaccine candidates do not become widely accepted by physicians, patients, third-party payers and other members of the medical community, our business, financial condition and results of operations would be materially and adversely affected.

 

If we are unable to manufacture our eVLP vaccines in sufficient quantities, at sufficient yields or are unable to obtain regulatory approvals for a manufacturing facility for our vaccines, we may experience delays in product development, clinical trials, regulatory approval and commercial distribution.

 

Completion of our clinical trials and commercialization of our eVLP vaccine candidates require access to, or development of, facilities to manufacture our eVLP vaccine candidates at sufficient yields and at commercial-scale. We have limited experience manufacturing any of our eVLP vaccine candidates in the volumes that will be necessary to support large-scale clinical trials or commercial sales. Efforts to establish these capabilities may not meet initial expectations as to scheduling, scale-up, reproducibility, yield, purity, cost, potency or quality.

 

If we are unable to manufacture our eVLP vaccine candidates in clinical or commercial quantities, as the case may be, in sufficient yields, with sufficient purity, potency, quality, and identity, then we must find, qualify, and rely on third parties. Any new third-party manufacturers must also receive FDA approval before we may use product manufactured by them as our commercial products and product candidates. Our vaccines may be in competition with other products for access to these facilities and may be subject to delays in manufacture if our third party manufacturers give other products greater priority. Although we regularly evaluate potential manufacturers, we have a third party manufacturing agreement in place with Paragon and have reserved resource capability for the manufacture of our Phase I and Phase I/IIa clinical trial materials. We have conducted technology transfer related to our proprietary product. Despite progress achieved to date, any delays experienced by Paragon, whether directly by Paragon or by its raw material suppliers in relation to our project, may result in delays in clinical development of our eVLP candidates.

 

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As a result, any delay or interruption could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

In light of our current resources and limited experience, we may need to establish successful third-party relationships to successfully commercialize our product candidates.

 

The near and long-term viability of our vaccine candidates may depend, in part, on our ability to successfully establish new strategic collaborations with pharmaceutical and biotechnology companies, non-profit organizations and government agencies. Establishing strategic collaborations and obtaining government funding is difficult and time-consuming. Potential collaborators may reject collaborations based upon their assessment of our financial, regulatory or intellectual property position or based on their internal pipeline; government agencies may reject contract or grant applications based on their assessment of public need, the public interest, the ability of our products to address these areas, or other reasons beyond our expectations or control. If we fail to establish a sufficient number of collaborations or government relationships on acceptable terms, we may not be able to commercialize our vaccine candidates or generate sufficient revenue to fund further research and development efforts.

 

Even if we establish new collaborations or obtain government funding, these relationships may never result in the successful development or commercialization of any vaccine candidates for several reasons, including the fact that:

 

  we may not have the ability to control the activities of our partners and cannot provide assurance that they will fulfill their obligations to us, including with respect to the license, development and commercialization of vaccine candidates, in a timely manner or at all;
     
  such partners may not devote sufficient resources to our vaccine candidates or properly maintain or defend our intellectual property rights;
     
  relationships with our collaborators could also be subject to certain fraud and abuse laws if not structured properly to comply with such laws;
     
  any failure on the part of our partners to perform or satisfy their obligations to us could lead to delays in the development or commercialization of our vaccine candidates and affect our ability to realize product revenue; and
     
  disagreements, including disputes over the ownership of technology developed with such collaborators, could result in litigation, which would be time-consuming and expensive, and may delay or terminate research and development efforts, regulatory approvals and commercialization activities.

 

If we or our collaborators fail to maintain our existing agreements or in the event we fail to establish agreements as necessary, we could be required to undertake research, development, manufacturing and commercialization activities solely at our own expense. These activities would significantly increase our capital requirements and, given our lack of sales, marketing and distribution capabilities, significantly delay the commercialization of our vaccine candidates.

 

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Risks Related to Our Capital Requirements and Financings

 

We will need additional financing to continue our operations. If we are unable to obtain additional financing on acceptable terms, we may have to curtail or cease our development plans and operations.

 

Since inception, we and our subsidiaries collectively have raised approximately $196.6 million in total equity and debt financing to support clinical and research development and general business operations. Our revenue generating activities include product sales and research and development services pursuant to fee for service agreements, research collaboration agreements and certain governmental research and development grants. However, our revenues have not been significant to date. Our long-term success and ability to continue as a going concern is dependent upon obtaining sufficient capital to fund the research and development of our products, to bring about their successful commercial release, if approved, to generate revenue and, ultimately, to attain profitable operations or alternatively advance the products and technology to such a point that an acquirer would find attractive. We face substantial demand on our cash resources to fund operations and our growth plans in the future.

 

To date, we have been able to obtain financing; however, there is no assurance that financing will be available in the future, or if it is, that it will be available at terms acceptable to us. Additional financings may be effected through debt financing and/or the issuance of equity securities, there being no assurance that any type of financing on terms acceptable to us will be available or otherwise occur. Debt financing must be repaid regardless of whether we generate revenues or cash flows from operations and may be secured by substantially all of our assets. Any equity financing or debt financing that requires the issuance of equity securities or securities convertible into equity securities would cause the percentage ownership of our shareholders to be diluted, which dilution may be substantial. Also, any additional equity securities issued may have rights, preferences or privileges senior to those of existing shareholders. Furthermore, if we issue additional securities, whether equity or debt, or if investors believe we may issue additional securities, the market price of our common shares could decline. If such financing is not available when required or is not available on acceptable terms, we may be required to reduce or eliminate certain product candidates and development activities, and it may ultimately require us to suspend or cease operations, which could cause investors to lose the entire amount of their investment.

 

We have incurred significant losses since inception and anticipate that we will incur continued losses for the foreseeable future.

 

We have incurred significant net losses and negative operating cash flows since inception. We incurred net losses of approximately $39 million in 2017, $23.2 million in 2016 and $26.2 million in 2015. As of December 31, 2017, we had an accumulated deficit of $144 million. Our income generating activities have been from sales of our Sci-B-Vac product in markets that have generated a limited number of sales to-date and fees from research and development services. We expect to incur significant and increasing operating losses for the next several years as we continue to advance Phase III clinical program for Sci-B-Vac and support regulatory submissions, expand our research and development, advance other vaccine candidates into and through clinical development, including CMV and GBM vaccine candidates, complete clinical trials and seek regulatory approval. Because of the numerous risks and uncertainties associated with developing and commercializing pharmaceutical products, as well as those related to our expectations for Sci-B-Vac Phase III clinical program, we are unable to predict the extent of any future losses or guarantee when, or if, our company will become profitable or cash flow positive. If we never achieve profitability or positive cash flows, or achieve either later than we anticipate, you may lose some or all of your investment in us.

 

Our financial statements have been prepared on a going concern basis; we must raise additional capital to fund our operations in order to continue as a going concern.

 

In its report dated February 26, 2018 EisnerAmper LLP, our independent registered public accounting firm, expressed substantial doubt about our ability to continue as a going concern as we have suffered recurring losses from operations and have insufficient liquidity to fund our future operations. If we are unable to improve our liquidity position we may not be able to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result if we are unable to continue as a going concern and, therefore, be required to realize our assets and discharge out liabilities other than in the normal course of business which could cause investors to suffer the loss of all or substantial portion of their investment. As of December 31, 2017, we had $67.7 million of cash. In order to have sufficient cash to fund our operations in the future, we will need to raise additional equity or debt capital and cannot provide any assurance that we will be successful in doing so.

 

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Risks Related to Our Business

 

Our future results will suffer if we do not effectively manage our expanded operations.

 

As a result of our acquisition of VBI DE on May 6, 2016 in the VBI-SciVac Merger, we became a larger company than either we or VBI DE was, on a stand-alone basis, prior to the VBI-SciVac Merger, and our business became more complex. There can be no assurance that we will effectively manage this increased complexity without experiencing operating inefficiencies or control deficiencies. Our failure to successfully manage the increased complexity could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

 

We have international operations, which subject us to risks inherent with operations outside of the U.S.

 

We have international operations and we may seek to obtain market approvals in foreign markets that we deem to generate significant opportunities. However, even with the cooperation of a commercialization partner, conducting drug development in foreign countries involves inherent risks, including, but not limited to: difficulties in staffing, funding and managing foreign operations; different and unexpected changes in regulatory requirements; export restrictions; tariffs and other trade barriers; different reimbursement systems; economic weaknesses or political instability in particular foreign economies and markets; compliance with tax, employment, immigration and labor laws for employees living or travelling abroad; supply chain and raw materials management; difficulties in protecting, acquiring, enforcing and litigating intellectual property rights; fluctuations in currency exchange rates; and potentially adverse tax consequences.

 

If we were to experience any of the difficulties listed above, or any other difficulties, our international development activities and our overall financial condition may suffer and cause us to reduce or discontinue our international development and market approval efforts.

 

We may not be successful in hiring and retaining key employees, in which case our business may be harmed.

 

Our business is highly dependent upon the continued services of our senior management and key scientific and technical personnel. As such, our future success depends on our ability to identify, attract, hire or engage, retain and motivate well-qualified managerial, technical, clinical and regulatory personnel. Our operations require qualified personnel with expertise in nonclinical pharmacology and toxicology, pharmaceutical development, clinical research, regulatory affairs, manufacturing, sales and marketing. We must compete for qualified individuals with numerous biopharmaceutical companies, universities and other research institutions. Competition for such individuals is intense, and, when the need arises, we may not be able to hire the personnel necessary to support our efforts. There can be no assurance that these professionals will be available in the market, or that we will be able to retain existing professionals or to meet or to continue to meet their compensation requirements. Furthermore, the cost base in relation to such compensation, which may include equity compensation, may increase significantly, which could have a material adverse effect on us. Failure to establish and maintain an effective management team and work force could adversely affect our ability to operate, grow and manage our business.

 

Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.

 

We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to:

 

  comply with FDA regulations or similar regulations of comparable foreign regulatory authorities;
     
  provide accurate information to the FDA or comparable foreign regulatory authorities;
     
  comply with manufacturing standards that we have established;
     
  comply with federal and state healthcare fraud and abuse laws and regulations and similar laws and regulations established and enforced by comparable foreign regulatory authorities;

 

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  properly protect patient information which is subject to federal and state privacy and security laws or similar laws in foreign countries;
     
  report financial information or data accurately; or
     
  disclose unauthorized activities to us.

 

In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commissions, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. It is not always possible to identify and deter employee misconduct, and the precautions that we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us and we are not successful in defending or asserting our rights, those actions could have a significant impact on our business and results of operations, including the imposition of significant fines or other sanctions.

 

We are subject to federal, provincial and state laws and regulations relating to our business and our failure to comply with those laws could have a material adverse effect on our results of operations and financial conditions.

 

We are subject to healthcare regulation and enforcement by the U.S. federal government and the states and other jurisdictions in which we conduct our business. The laws that may affect our ability to operate include the following:

 

  the federal healthcare program Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under government healthcare programs such as the Medicare and Medicaid programs;
     
  the federal Ethics in Patient Referrals Act of 1989, commonly known as the Stark Law, which prohibits a physician from referring a patient for certain items or services covered by Medicare or Medicaid to an entity in which the physician or a family has a financial interest;
     
  the federal False Claims Act and related laws that prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other government healthcare programs that are false or fraudulent;
     
  the so-called qui tam provisions of the federal and state false claims acts which permit whistleblowers to sue in the name the federal or state governments’ healthcare providers and others for alleged violations of those laws and which permit whistleblowers to obtain a reward for bringing the case. These qui tam cases have been on the rise in recent years;
     
  federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;
     
  state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws that may apply to items or services reimbursed by any third-party payer, including commercial insurers;

 

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  the Patient Protection and Affordable Care Act (the “Affordable Care Act”) which imposes reporting requirements on device and pharmaceutical manufacturers to make annual public disclosures of payments to healthcare providers and ownership of their stock by healthcare providers. Failure to submit required information may result in civil monetary penalties of up to an aggregate of $150,000 per year (or up to an aggregate of $1 million per year for “knowing failures”), for all payments, transfers of value, or ownership or investment interests that are not reported;
     
  The Prescription Drug Marketing Act, as amended, which governs the distribution of prescription drug samples to healthcare practitioners;
     
  The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), which imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters; and
     
  State law equivalents of HIPAA related to the privacy and security of patient information.

 

Further, the Affordable Care Act, among other things, amends the intent requirement of the federal anti-kickback and criminal healthcare fraud statutes. A person or entity can now be found guilty of fraud or false claims under the Affordable Care Act without actual knowledge of the statute or specific intent to violate it. In addition, the Affordable Care Act provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the false claims statutes. Possible sanctions for violation of these anti-kickback laws include monetary fines, civil and criminal penalties, exclusion from Medicare, Medicaid and other government programs and forfeiture of amounts collected in violation of such prohibitions. Any violations of these laws, or any action against us for violation of these laws, even if we successfully defend against such claims, could result in a material adverse effect on our reputation, business, results of operations and financial condition.

 

In addition, there has been a recent trend of increased federal and state regulation of payments made to physicians for marketing. Some states, such as California, Massachusetts and Vermont, mandate implementation of corporate compliance programs, along with the tracking and reporting of gifts, compensation and other remuneration to physicians.

 

The scope and enforcement of these laws is uncertain and subject to change in the current environment of healthcare reform, especially in light of the lack of applicable precedent and regulations. We are not able to predict the impact on our business of any changes in these laws. Federal or state regulatory authorities may challenge our future activities under these laws. Any such challenge could have a material adverse effect on our reputation, business, results of operations and financial condition. Any state or federal regulatory review of the Company, regardless of the outcome, would be costly and time-consuming.

 

In addition, we expect that the current presidential administration and U.S. Congress will seek to modify, repeal, or otherwise invalidate all, or certain provisions of, the Affordable Care Act. Since taking office, President Trump has continued to support the repeal of all or portions of the Affordable Care Act. In January 2017, the House and Senate passed a budget resolution that authorizes congressional committees to draft legislation to repeal all or portions of the Affordable Care Act and permits such legislation to pass with a majority vote in the Senate. President Trump has also recently issued an executive order in which he stated that it is his administration’s policy to seek the prompt repeal of the Affordable Care Act and directed executive departments and federal agencies to waive, defer, grant exemptions from, or delay the implementation of the provisions of the Affordable Care Act to the maximum extent permitted by law. There is still uncertainty with respect to the impact President Trump’s administration and the U.S. Congress may have, if any, and any changes will likely take time to unfold, and could have an impact on coverage and reimbursement for healthcare items and services covered by plans that were authorized by the Affordable Care Act. However, we cannot predict the ultimate content, timing or effect of any healthcare reform legislation or the impact of potential legislation on us.

 

In the context of securing and protecting any patient information that our clinical sites may obtain which may be subject to HIPAA or state law protections, we intend to include in the written agreements we will enter into with such clinical sites provisions requiring such clinical sites to have appropriate policies, procedures and systems in place to satisfy the privacy and security requirements. Our efforts, however, cannot protect against every potential threat to such patient information. For example, cyber-attacks or improper actions of an employee could result in a breach of our systems, resulting in immediate costs to address and correct the breach and notify any impacted parties, as well as potential litigation or governmental proceedings which could result in monetary fines and/or criminal sanctions. A breach of protected information could result in material adverse effects on our reputation, business operations and financial condition.

 

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We may expand our business through the acquisition of rights to new product candidates that could disrupt our business and harm our financial condition.

 

We may expand our product offerings, and we may seek acquisitions of product candidates or technologies to do so. We may also seek to expand our business through the acquisition of businesses or companies having rights to new product candidates. Acquisitions involve numerous risks, including substantial cash expenditures; potentially dilutive issuances of equity securities; incurrence of debt and contingent liabilities, some of which may be difficult or impossible to identify at the time of the acquisition; difficulties in assimilating the acquired technologies or the operations of the acquired companies; diversion of management’s attention away from other business concerns; risks of entering markets in which we have limited or no direct experience; and the potential loss of key employees or key employees of the acquired companies.

 

There can be no assurance that any acquisition by us will result in short-term or long-term benefits to us. We may incorrectly judge the value or worth of an acquired product, company or business. In addition, future success of the combined company will depend in part on our ability to manage the rapid growth associated with some of these acquisitions. There can be no assurance that we will be able to make the combination of our business with that of any acquired products, businesses or companies work or be successful. Furthermore, the development or expansion of our business or any acquired products, businesses or companies may require a substantial capital investment by us. We may not have these necessary funds or such funds might not be available on acceptable terms or at all. We may also seek to raise funds by selling capital stock or instruments convertible into or exercisable for capital stock, which could dilute each shareholder’s ownership interest.

 

Business interruptions could limit our ability to operate our business.

 

Our operations, as well as those of any collaborators on which we depend, are vulnerable to damage or interruption from computer viruses, human error, natural disasters, extreme weather, electrical and telecommunication failures, international acts of terror and similar events. Our formal disaster recovery plan and back-up operations and business interruption insurance may not be adequate to compensate us for losses we may suffer. A significant business interruption could result in losses or damages incurred by us and require us to cease or curtail our operations.

 

Our business and operations would suffer in the event of computer system failures, cyber-attacks or deficiencies in our cyber-security.

 

In the ordinary course of our business, we collect and store sensitive data, including intellectual property, research data, our proprietary business information and that of our suppliers, technical information about our products, clinical trial plans and employee records. Similarly, our third-party providers possess certain of our sensitive data and confidential information. The secure maintenance of this information is critical to our operations and business strategy. Despite the implementation of security measures, our internal computer systems, and those of third parties on which we rely, are vulnerable to damage from computer viruses, malware, ransomware, cyber fraud, natural disasters, terrorism, war, telecommunication and electrical failures, cyber-attacks or cyber-intrusions over the Internet, attachments to emails, persons inside our organization, or persons with access to systems inside our organization. The risk of a security breach or disruption, particularly through cyber-attacks or cyber intrusion, including by computer hackers, foreign governments, and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, encrypted, lost or stolen. Any such access, inappropriate disclosure of confidential or proprietary information or other loss of information, including our data being breached at third-party providers, could result in legal claims or proceedings, liability or financial loss under laws that protect the privacy of personal information, disruption of our operations or our product development programs and damage to our reputation, which could adversely affect our business. For example, the loss of clinical trial data from completed or ongoing or planned clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data.

 

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Under current U.S., Canadian and Israeli law, we may not be able to enforce covenants not to compete or to prevent the breach of confidentiality agreements, and therefore, may be unable to prevent our competitors from benefiting from the expertise of some of our former employees.

 

We generally enter into non-competition agreements with our employees and certain key consultants. These agreements prohibit our employees and certain key consultants, if they cease working for us, from competing directly with us or working for our competitors or clients for a limited period of time. However, under current U.S., Canadian and Israeli law, we may be unable to enforce these agreements, in whole or in part, and therefore, we cannot be sure that these employees and key consultants will not compete with us. For example, in the past, Israeli courts have required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer which have been recognized by the courts, such as the secrecy of a company’s confidential commercial information or the protection of its intellectual property. If we are unable to demonstrate that harm would be caused to us or otherwise enforce these non-competition agreements, in whole or in part, we may be unable to prevent our competitors from benefitting from the expertise our former employees or consultants developed while working for us and our ability to remain competitive may be diminished.

 

We rely on confidential information that we seek to protect through confidentiality agreements with our employees and other parties. If these agreements are breached, competitors may obtain and use our confidential information to gain a competitive advantage over us or could substantially delay product development or harm our commercialization activities. We may not have any remedies against our competitors and any remedies that may be available to us may not be adequate to protect our business or compensate us for the damaging disclosure. In addition, we may have to expend resources to protect our interests from possible infringement by others, which may divert our available funds away from our business activities.

 

We have significant operations located in Israel and, therefore, our results may be adversely affected by political, economic and military instability in Israel.

 

Our subsidiary’s operations are located in Rehovot, Israel. Accordingly, political, economic and military conditions in Israel may directly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its trading partners could adversely affect our business and results of operations.

 

Any armed conflicts, terrorist activities or political instability in the region could adversely affect business conditions and could harm our results of operations and could make it more difficult for us to raise capital. Parties with whom we do business have sometimes declined to travel to Israel during periods of heightened unrest or tension, forcing us to make alternative arrangements when necessary in order to meet our business partners face to face. In addition, the political and security situation in Israel may result in parties with whom we have agreements involving performance in Israel claiming that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions in such agreements.

 

Since the Gaza Strip’s 2007 coup, by which the terrorist organization Hamas seized control, there have been a number of armed conflicts between Hamas and Israel - in December-January 2008-9, November 2012 and as recently as July-August 2014 - in all of which conflicts rockets were fired from Gaza into Israeli civilian population centers. During the summer of 2006, Israel was engaged in an armed conflict with Hezbollah, a Lebanese Islamist Shiite militia group and political party backed by Iran and controlling large swathes of Lebanon. These conflicts involved missile strikes against civilian targets in various parts of Israel, including areas in which our Rehovot facilities, employees and some of our consultants are located, and negatively affected business conditions in Israel. Since February 2011, Egypt has experienced political turbulence and an increase in terrorist activity in the Sinai Peninsula following the resignation of Hosni Mubarak as president. This included protests throughout Egypt, and the appointment of a military regime in his stead, followed by the elections to parliament which brought groups affiliated with the Muslim Brotherhood (which had been previously outlawed by Egypt), and the subsequent overthrow of this elected government by a military regime instead. Such political turbulence and violence could affect the region as a whole. Similar civil unrest and political turbulence has occurred in other countries in the region, including Syria which shares a common border with Israel, and is affecting the political stability of those countries. Since April 2011, internal conflict in Syria has escalated, and evidence indicates that chemical weapons have been used in the region. Intervention may be contemplated by outside parties in order to prevent further chemical weapon use. The extreme Sunni jihadist group ISIS has taken over large parts of Syria and its neighbor to the east, Iraq, and committed widespread massacres against the local civilian populations in those areas, all the while continuing in its efforts to conquer further territories. Syria and Iraq are now widely viewed as failed states on the verge of disintegration into tribal fiefdoms. This instability and any intervention may lead to additional conflicts in the region. In addition, Iran has threatened to attack Israel and is widely believed to be developing nuclear weapons. Iran also has a strong influence among extremist groups in the region, such as Hamas in Gaza, Hezbollah in Lebanon, and both the Allawite regime and various rebel militia groups in Syria. These situations may potentially escalate in the future to more violent events which may affect Israel and us. Any armed conflicts, terrorist activities or political instability in the region could adversely affect business conditions and could harm our results of operations and could make it more difficult for us to raise capital.

 

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Commercial insurance does not cover losses that may occur as a result of an event associated with the security situation in the Middle East. Although the Israeli government is currently committed to covering the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure that this government coverage will be maintained, or if maintained, will be sufficient to compensate us fully for damages incurred. Any losses or damages incurred by us could have a material adverse effect on our business. Any armed conflicts or political instability in the region would likely negatively affect business conditions generally and could harm our results of operations.

 

Political relations could limit our ability to sell or buy internationally.

 

We could be adversely affected by the interruption or reduction of trade between Israel and its trading partners. To date the State of Israel and Israeli companies have been repeatedly subjected to economic boycotts. Several countries, companies and organizations continue to participate in a boycott of Israeli firms and others doing business with Israel or with Israeli companies. Also, over the past several years there have been calls in Europe and elsewhere to reduce trade with Israel. These restrictive laws and policies may have an adverse impact on our operating results, financial condition or the expansion of our business

 

The operations of our subsidiary in Israel may be disrupted as a result of the obligation of Israeli citizens to perform military service.

 

Many Israeli citizens are obligated to perform several days, and in some cases more, of annual military reserve duty until they reach the age of 40 (or older, for reservists who are officers or who have certain special training) and, in the event of a military conflict, may be called to active duty. In response to increases in terrorist activity and recent armed conflicts, there have been periods of significant call-ups of military reservists. It is possible that there will be military reserve duty call-ups in the future. The operations of our subsidiary in Israel could be disrupted by such call-ups, which may include the call-up of our employees or the employees of our Israeli business partners. Such disruption could materially adversely affect our business, financial condition and results of operations.

 

Exchange rate fluctuations between the U.S. dollar, Canadian dollar and the New Israeli Shekel currencies may negatively affect our earnings cash flows.

 

Our functional currency is the U.S. dollar. We incur expenses in New Israeli Shekel, which we refer to as NIS, Canadian Dollars and U.S. dollars. As a result, we are exposed to the risks that the U.S. dollar may devalue relative to the Canadian Dollar or NIS, or, if the U.S. dollar appreciates relative to the Canadian Dollar or NIS, that the inflation rate in the U.S. may exceed such rate of devaluation of the U.S. dollar, or that the timing of such devaluation may lag behind inflation in the U.S. The average exchange rate for the year ended December 31, 2017, was US$1.00 = NIS 3.5971 and US$ 1.00 = Canadian Dollar 1.2973. We cannot predict any future trends in the rate of inflation in the U.S. or the rate of devaluation, if any, of the U.S. dollar against the Canadian Dollar or NIS.

 

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Risks Related to Our Intellectual Property

 

Our success depends on our ability to maintain the proprietary nature of our technology. We may become subject to third parties’ claims alleging infringement of patents and proprietary rights or seeking to invalidate our patents or proprietary rights, which would be costly, time-consuming and, if successfully asserted against us, delay or prevent the development of our current or future product candidates or commercialization of our products.

 

Our success in large part depends on our ability to maintain the proprietary nature of our technology. To do so, we must, at significant cost, prosecute and maintain existing patents, obtain new patents and pursue trade secret and other intellectual property protection. We also must operate without infringing the proprietary rights of third parties or allowing third parties to infringe our rights. We currently have rights to over 132 fully owned or exclusively licensed patents and patent applications. However, patent issues relating to pharmaceuticals and biologics involve complex legal, scientific and factual questions.

 

To date, no consistent policy has emerged regarding the breadth of biotechnology patent claims that are granted by the U.S. Patent and Trademark Office or enforced by the federal courts. Therefore, we do not know whether our patent applications will result in the issuance of patents, or that any patents issued to us will provide us with any competitive advantage. We also cannot be sure that we will develop additional proprietary products that are patentable. Furthermore, there is a risk that others will independently develop similar technology or products or circumvent the patents issued to us.

 

Even if we are issued patents for our technologies, there is always a risk that third parties will initiate post grant review or inter parties review proceedings to challenge the validity of one or more of our patents. These proceedings can result in the loss of patent claims. Even if we are successful in defending our patents during post grant review or inter parties review proceedings, these procedures are time consuming and expensive and may have a negative impact on our results.

 

There is also a risk that third parties may challenge our existing patents in court or claim that we are infringing their patents or proprietary rights. We cannot assure you that manufacture, use or sale of any of our products or current or future product candidates will not infringe existing or future patents. Because we have not conducted a formal freedom to operate analysis for patents related to our products or product candidates, we may not be aware of patents that have already been issued that a third party might assert are infringed by one of our products or current or future product candidates. Because patent applications can take many years to issue and may be confidential for eighteen months or more after filing, there also may be applications now pending of which we are unaware and which may later result in issued patents that we may infringe by commercializing any of our products or current or future product candidates. We could incur substantial costs in defending patent infringement suits or in filing suits against others to have their patents declared invalid or claim infringement of our patents. It is also possible that we may be required to obtain licenses from third parties to avoid infringing third-party patents or other proprietary rights. We cannot be sure that such third-party licenses would be available to us on acceptable terms, if at all. If we are unable to obtain required third-party licenses, we may be delayed in or prohibited from developing, manufacturing or selling products requiring such licenses.

 

Although our patent filings include claims covering various features of our vaccine candidates, including composition, methods of manufacture and use, our patents do not provide us with complete protection against the development of competing products. Furthermore, generic versions of patented biologic products (i.e. biosimilars) may have structural differences which cause them to fall outside the scope of patent claims. Some of our know-how and technology is not patentable. To protect our proprietary rights in unpatentable intellectual property and trade secrets, we require employees, consultants, advisors and collaborators to enter into confidentiality agreements. These agreements may not provide meaningful protection for our trade secrets, know-how or other proprietary information.

 

Sci-B-Vac is not currently protected by any pending patent application nor any unexpired patent. Accordingly, Sci-B-Vac may be subject to competition from the sale of generic products that could adversely affect our business and operations.

 

Sci-B-Vac has no patent production, and therefore, we will seek to rely on non-patent data exclusivity in the BPCIA, which is described further under “—Risks Related to our Intellectual Property—We may not be able to obtain marketing exclusivity in the U.S. under the BPCIA or equivalent regulatory data exclusivity protection in other jurisdictions for our products.”

 

Sci-B-Vac is the only product we currently market. Failure to obtain and retain marketing exclusivity or expiration of the market exclusivity could seriously adversely affect the revenue potential for Sci-B-Vac in the jurisdictions where it is approved for sale.

 

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Our ability to protect and enforce our patents does not guarantee that we will secure the right to commercialize the patents.

 

A patent is a limited monopoly right conferred upon an inventor, and any successors in title, in return for the making and disclosing of a useful, new, and non-obvious invention. This monopoly is of limited duration but, while in force, allows the patent holder to prevent others from making and/or using his invention. While a patent gives the holder this right to exclude others, it is not a license to commercialize the invention, where other permissions may be required for permissible commercialization to occur. For example, a drug cannot be marketed without the appropriate authorization from the FDA, regardless of the existence of a patent covering the product. Further, the invention, even if patented itself, cannot be commercialized if it infringes the valid patent rights of another party.

 

Obtaining and maintaining our patent protection depends on compliance with various procedural, documentary, fee payment and other requirements imposed by governmental patent offices, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

 

The U.S. Patent and Trademark Office and various foreign governmental patent offices require compliance with a number of procedural, documentary, fee payment and other provisions during the patent process. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case, which could result in a material adverse effect on our business or results of operations.

 

We are dependent on technologies we have licensed and we may need to license in the future, and if we fail to obtain licenses we need, or fail to comply with our payment obligations in the agreements under which we in-license intellectual property and other rights from third parties, we could lose our ability to develop our product candidates.

 

We currently are dependent on licenses from third parties for certain of our key technologies relating to eVLP technology, including the licenses from the L’Universite Pierre et Marie Curie (“UPMC”). Under our license agreement with UPMC and other licensors, we are granted an exclusive license to a family of patents and patent applications that is expected to expire in the U.S. in 2022 and 2021 in other countries. Under this agreement, we are required to pay UPMC between 0.75% to 1.75% of net sales and certain lump-sum milestone payments. In addition, we expect we will need to license intellectual property from other third parties in the future and that these licenses will be material to our business. No assurance can be given that we will generate sufficient revenue or raise additional financing to meet our payment obligations in the license agreements with UPMC or other license agreements we enter into with third parties in the future. Any failure to make the payments required by the license agreements may permit the licensor to terminate the license. If we were to lose or otherwise be unable to maintain these licenses for any reason, it would halt our ability to develop our product candidates. Furthermore, such loss of these licenses may enable development of new products based on the eVLP platform that may compete with our product candidates, and our competitors may gain proprietary position. Any of the foregoing could result in a material adverse effect on our business or results of operations.

 

In addition, we do not own the patents or patent applications that we license, and as such, we may need to rely upon our licensors to properly prosecute and maintain those patent applications and prevent infringement of those patents. If our licensors are unable to adequately protect their proprietary intellectual property we license from legal challenges or infringing technologies, we will not be able to compete effectively in the drug discovery and development business.

 

If patent laws or the interpretation of patent laws change, our competitors may be able to develop and commercialize our discoveries.

 

Important legal issues remain to be resolved as to the extent and scope of available patent protection for biopharmaceutical products and processes in the U.S. and other important markets outside the U.S., such as Europe, China and Japan. As such, litigation or administrative proceedings may be necessary to determine the validity, scope and ownership of certain of our and others’ proprietary rights. Any such litigation or proceeding may result in a significant commitment of resources in the future and could force us to do one or more of the following: cease selling or using any of our products that incorporate a challenged intellectual property, which would adversely affect our revenue; obtain a license or other rights from the holder of the intellectual property right alleged to have been infringed or otherwise violated, which license may not be available on reasonable terms, if at all; and redesign our products to avoid infringing or violating the intellectual property rights of third parties, which may be time-consuming or impossible to do. In addition, changes in patent laws in the U.S. and other countries may result in allowing others to use our discoveries or develop and commercialize our products. We cannot provide assurance that the patents we obtain or the unpatented technology we hold will afford us significant commercial protection.

 

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We may not be able to enforce our intellectual property rights throughout the world. This risk is exacerbated for us because it expects that one or more of its product candidates will be manufactured and used in a number of foreign countries.

 

The laws of foreign countries may not protect intellectual property rights to the same extent as the laws of the U.S. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. This risk is exacerbated for us because we currently have one product manufactured, and we expect that one or more of our product candidates will be manufactured, and used in a number of foreign countries.

 

The legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating to life sciences. This could make it difficult for us to stop the infringement or other misappropriation of our intellectual property rights. For example, several foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, some countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents and trade secrets may provide limited or no benefit.

 

Most jurisdictions in which we have applied for, intend to apply for or have been issued patents have patent protection laws similar to those of the U.S., but some of them do not. For example, we may do business in China, Indonesia and India in the future and the countries in these regions may not provide the same or similar protection as that provided in the U.S. Additionally, due to uncertainty in patent protection law, we have not filed applications in many countries where significant markets exist.

 

Proceedings to enforce patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the U.S. and foreign countries may affect our ability to obtain adequate protection for our technology and the enforcement of our intellectual property.

 

We may not be able to monetize intangible assets including In Process Research and Development (“IPR&D”) which may result in the need to record an impairment charge.

 

Our balance sheet contains significant amounts of intangible assets. For IPR&D assets, the risk of failure is significant, and there can be no certainty that these assets ultimately will yield successful products. The nature of our business is high-risk and requires that we invest in a large number of projects in an effort to achieve a successful portfolio of approved products. Our ability to realize value on these significant investments is often contingent upon, among other things, regulatory approvals and market acceptance while we currently expect to be able to monetize our intangible assets, these IPR&D assets may become impaired and be written off at some time in the future. An example of an event that is indicative of impairment is a projection or forecast that indicates losses or reduced profits associated with an asset. For IPR&D projects, this could result from, among other things, a change in outlook based on clinical trial data, a delay in the projected launch date or additional expenditures to commercialize the product.

 

While all intangible assets other than goodwill can face events and circumstances that can lead to impairment, in general, intangible assets other than goodwill that are most at risk of impairment include IPR&D assets. IPR&D assets are high-risk, as research and development is an inherently risky activity.

 

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We may not be able to obtain marketing exclusivity in the U.S. under the BPCIA or equivalent regulatory data exclusivity protection in other jurisdictions for our products.

 

The BPCIA, which is included in the Affordable Care Act, creates an approval pathway for biosimilar and interchangeable biological products and provides the manufacturer of innovator biologic a twelve-year period of marketing exclusivity. Similar data exclusivity regimes exist in the European Union and in Canada, although the term of market exclusivity is shorter than in the U.S. We intend to seek the maximum period of market exclusivity for our Sci-B-Vac product and our other vaccine candidate products in each jurisdiction, but there is no guarantee that any of our products will receive any marketing exclusivity under the BPCIA, or under analogous legislation in other jurisdictions. Furthermore, changes in legislation could alter the period of market exclusivity or limit its availability. Our failure to obtain exclusivity for any product that is ultimately approved by the FDA, the EMA or Health Canada may expose us to substantial competition, which could have significant adverse financial consequences.

 

Risks Related to Our Indebtedness

 

Our obligations under our credit facility are secured by substantially all of our assets, so if we default on those obligations, the lender could foreclose on our assets. As a result of these security interests, such assets would only be available to satisfy claims of our general creditors or to holders of our equity securities if we were to become insolvent at a time when the value of such assets exceeded the amount of our indebtedness and other obligations.

 

Perceptive Credit Holdings, LP (“Perceptive Credit”), the lender under the Amended and Restated Credit Agreement and Guaranty, dated December 6, 2016 (the “Amended Credit Agreement”) has a security interest in all of our assets other than excluded and future projects. As a result, if we default under our obligations to the lender, the lender could foreclose on its security interests and liquidate some or all of these assets, which would harm our business, financial condition and results of operations. The principal amount of the term loan as of December 31, 2017, was $15 million ($15.3 million including the exit fee).

 

In the event of a default in connection with our bankruptcy, insolvency, liquidation, or reorganization, the lender would have a prior right to substantially all of our assets to the exclusion of our general creditors. In that event, our assets would first be used to repay in full all indebtedness and other obligations secured by the lender, resulting in all or a portion of our assets being unavailable to satisfy the claims of any unsecured indebtedness. Only after satisfying the claims of any unsecured creditors would any amount be available for our equity holders. These events of default include, among other things, our failure to pay any amounts due under the Amended Credit Agreement or any of the other loan documents, a breach of covenants under the Amended Credit Agreement, our insolvency, a material adverse effect occurring, the occurrence of certain defaults under certain other indebtedness or certain final judgments against us.

 

The pledge of these assets and other restrictions may limit our flexibility in raising capital for other purposes. Because substantially all of our assets are pledged under the term loan, our ability to incur additional secured indebtedness or to sell or dispose of assets to raise capital may be impaired, which could have an adverse effect on our financial flexibility.

 

If we are unable to comply with certain financial and operating restrictions in our existing credit facility, we may be limited in our business activities and access to credit or may default under our credit facility.

 

Provisions in the Amended Credit Agreement impose restrictions or require prior approval on our ability, and the ability of certain of our subsidiaries to, among other things:

 

  incur additional debt;
     
  pay cash dividends and make distributions;
     
  make certain investments and acquisitions;
     
  guarantee the indebtedness of others or our subsidiaries;
     
  redeem or repurchase capital shares;
     
  create liens or encumbrances;

 

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  enter into transactions with affiliates;
     
  engage in new lines of business;
     
  sell, lease or transfer certain parts of our business or property;
     
  incur obligations for capital expenditures;
     
  issue additional capital shares; and
     
  acquire new companies and merge or consolidate.

 

The Amended Credit Agreement also contains other customary covenants, including covenants that require us to meet specified financial ratios and financial tests and maintain a minimum cash balance of $2.5 million. We may not be able to comply with these covenants in the future. Our failure to comply with these covenants may result in the declaration of an event of default, which, if not cured or waived, may result in the acceleration of the maturity of indebtedness outstanding under this agreement and would require us to pay all amounts outstanding. If the maturity of our indebtedness is accelerated, we may not have sufficient funds available for repayment or we may not have the ability to borrow or obtain sufficient funds to replace the accelerated indebtedness on terms acceptable to us or at all. Our failure to repay our indebtedness would result in our lender foreclosing on all or a portion of our assets and force us to curtail or cease our operations.

 

Our outstanding term loan obligations may adversely affect our cash flow and our ability to operate our business.

 

Pursuant to the terms of Amended Credit Agreement, the lender made a term loan to us in aggregate amount of $15.0 million. We are required to make average monthly payments of interest in the amount of approximately $143 (based on the one-month London Interbank Offered Rate being 1% or less until April 2018) and monthly payments of interest and principal in the amount of approximately $200 per month from May 2018 until the loan matures. The principal amount of the term loan as of December 31, 2017, was $15 million ($15.3 million including the exit fee). The term loan under the Amended Credit Agreement matures on December 6, 2019.

 

The terms of our term loan could have negative consequences to us, such as:

 

  we may be unable to obtain additional financing to fund working capital, operating losses, capital expenditures or acquisitions on terms acceptable to us, or at all;
     
  the amount of our interest expense may increase because our term loan has a variable rate of interest at any time dependent on one-month London Interbank Offered Rate greater than 1%; and
     
  we may be more vulnerable to economic downturns and adverse developments in our industry or the economy in general.

 

Our ability to meet our expenses and debt obligations will depend on our future performance, which will be affected by financial, business, economic, regulatory and other factors. We will be unable to control many of these factors, such as economic conditions. We cannot be certain that we will continue to have sufficient capital to allow us to pay the principal and interest on our debt and meet any other obligations. If we do not have enough money to service our debt, we may be required, but unable to refinance all or part of our existing debt, sell assets, borrow money or raise equity on terms acceptable to us, if at all, and the lender could foreclose on its security interests and liquidate some or all of our assets.

 

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Risks Related to Our Common Shares

 

The price of our common shares has been, and may continue to be, volatile. This may affect the ability of our investors to sell their shares, and the value of an investment in our common shares may decline.

 

During the 12-month period ended December 31, 2017, our common shares traded as high as $6.60 per share and as low as $3.04 per share. Due to the volatility of the market for our common shares, the market price for our shares may be significantly affected by factors such as variations in quarterly and yearly operating results or changes in state, provincial or federal regulations affecting us and our industry. Furthermore, in recent years the stock market has experienced extreme price and volume fluctuations that are unrelated or disproportionate to the operating performance of the affected companies. Such broad market fluctuations may adversely affect the market price of our common shares.

 

We have no immediate plans to pay dividends.

 

We plan to reinvest all of our earnings, to the extent we have earnings, in order to market our products and to cover operating costs and to otherwise become and remain competitive. We do not plan to pay any cash dividends with respect to our securities in the foreseeable future. We cannot assure you that we would, at any time, generate sufficient surplus cash that would be available for distribution to the holders of our common shares as a dividend. In addition, our Amended Credit Agreement with Perceptive Credit prohibits us from declaring or paying cash dividends or making distributions on any class of our capital stock. We currently intend to retain earnings, if any, for reinvestment in our business. Therefore, holders of our common shares should not expect to receive cash dividends on our common shares.

 

Common shares eligible for future sale may cause the price of our common shares to decline.

 

From time to time, certain of our shareholders may be eligible to sell all or some of their common shares by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act of 1933, as amended, subject to certain limitations. In general, pursuant to Rule 144, non-affiliate shareholders may sell freely after six months, subject only to the current public information requirement (which disappears after one year). Of the 64,078,781 common shares outstanding as of December 31, 2017, approximately 38,286,208 common shares are held by “non-affiliates,” all of which are freely tradable without restriction pursuant to Rule 144.

 

Any substantial sale of our common shares pursuant to Rule 144 or pursuant to any resale prospectus may have a material adverse effect on the market price of our common shares.

 

In addition, as of December 31, 2017, we had outstanding options, awards, and warrants for the purchase of 5,394,598 common shares. Of this amount, options, awards and warrants for the purchase of 846,162 common shares are held by non-affiliates, who may sell these shares in the public markets from time to time, without limitations on the timing, amount or method of sale. If our share price rises, the holders may exercise their options and sell a large number of shares. This could cause the market price of our common shares to decline.

 

As compared to previous years, we are required to comply with the domestic reporting regime under the Securities Exchange Act of 1934, as amended, and will incur significant legal, accounting and other expenses and resources, and our management will be required to devote substantial time to new compliance initiatives and corporate governance practices.

 

Prior to December 31, 2016, we were a foreign private issuer and therefore were not required to comply with all of the periodic disclosure and current reporting requirements of the Securities Exchange Act of 1934, as amended, applicable to U.S. domestic issuers. As we are no longer a foreign private issuer as of January 1, 2017, we are required to comply with all of the periodic disclosure and current reporting requirements of the Securities Exchange Act of 1934, as amended, applicable to U.S. domestic issuers, which are more detailed and extensive than the requirements for foreign private issuers. In addition, our officers, directors and principal shareholders are no longer exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act and are no longer exempt from the requirements of Regulation FD promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. We are also no longer permitted to follow our home country rules in lieu of the corporate governance obligations imposed by The NASDAQ Stock Market LLC, and may be required to comply with the governance practices required of U.S. domestic issuers. The regulatory and compliance costs associated with the reporting and governance requirements applicable to U.S. domestic issuers may be significantly higher than the costs we previously incurred as a foreign private issuer. As a result, we expect that the loss of foreign private issuer status will increase our legal and financial compliance costs and will make some activities highly time consuming and costly. In addition, we need to develop our reporting and compliance infrastructure and may face challenges in complying with the new requirements applicable to us.

 

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There are inherent limitations in all control systems, and misstatements due to error or fraud may occur and not be detected.

 

The ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act require us to identify material weaknesses in internal control over financial reporting, which is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the U.S. Our management, including our chief executive officer and principal financial officer, does not expect that our internal controls and disclosure controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, in our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Further, controls can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions. Over time, a control may be inadequate because of changes in conditions, such as growth of the company or increased transaction volume, or the degree of compliance with the policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

In addition, discovery and disclosure of a material weakness, by definition, could have a material adverse impact on our financial statements. Such an occurrence could discourage certain customers or suppliers from doing business with us, cause downgrades in our future debt ratings leading to higher borrowing costs and affect how our common share trades. This could, in turn, negatively affect our ability to access public debt or equity markets for capital.

 

We are an “emerging growth company” and may elect to comply with reduced public company reporting requirements, which could make our common shares less attractive to investors.

 

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act. For as long as we continue to be an “emerging growth company”, we may take advantage of exemptions from various reporting requirements that are applicable to other public reporting companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in our periodic reports. We could be an “emerging growth company” up until December 31, 2021, although circumstances could cause us to lose that status earlier if our annual revenues exceed $1.07 billion, if we issue more than $1.0 billion in non-convertible debt in any three-year period or if the market value of our common shares held by non-affiliates exceeds $700 million as of any June 30th, in which case we would no longer be an “emerging growth company” as of the following December 31st. We cannot predict if investors will find our securities less attractive because we may rely on these exemptions. If some investors find our securities less attractive as a result, there may be a less active trading market for our securities and the price of our securities may be more volatile.

 

U.S. civil liabilities may not be enforceable against us or certain of our officers.

 

We are governed by the Business Corporations Act (British Columbia) (“BCBCA”) and a substantial portion of our assets, including our manufacturing facility in Rehovot, Israel, and our research facility in Ottawa, Canada, are located outside the U.S. As a result, it may be difficult for investors to effect service of process within the U.S. upon us or to enforce judgments obtained against us in U.S. courts, in any action, including actions predicated upon the civil liability provisions of U.S. federal securities laws or any other laws of the U.S. Additionally, rights predicated solely upon civil liability provisions of U.S. federal securities laws or any other laws of the U.S. may not be enforceable in original actions, or actions to enforce judgments obtained in U.S. courts, brought in Canadian or Israeli courts. In addition, two of our officers reside outside of the U.S., and all or a substantial portion of their assets may be located outside the U.S., which may make effecting service of process within the U.S. or enforcing judgments obtained against such persons in U.S. courts difficult.

 

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We are governed by the corporate laws of British Columbia which in some cases have a different effect on shareholders than the corporate laws of Delaware, U.S.

 

We are governed by the BCBCA and other relevant laws, which may affect the rights of shareholders differently than those of a company governed by the laws of a U.S. jurisdiction, and may, together with our charter documents, including the advance notice provisions in our Articles for the nomination of directors, have the effect of delaying, deferring or discouraging another party from acquiring control of our company by means of a tender offer, a proxy contest or otherwise, or may affect the price an acquiring party would be willing to offer in such an instance. The material differences between the BCBCA and Delaware General Corporation Law, or DGCL, that may have the greatest such effect include, but are not limited to, the following: (i) for material corporate transactions (such as mergers and amalgamations, other extraordinary corporate transactions or amendments to our articles) the BCBCA generally requires a two-thirds majority vote by shareholders, whereas DGCL generally only requires a majority vote; and (ii) under the BCBCA a holder of 5% or more of our common shares can requisition a special meeting of shareholders, whereas such right does not exist under the DGCL.

 

We may be subject to securities litigation, which is expensive and could divert management attention.

 

In the past, companies that have experienced volatility in the market price of their securities have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Litigation of this type could result in substantial costs and diversion of management’s attention and resources, which could seriously hurt our business. Any adverse determination in litigation could also subject us to significant liabilities.

 

The concentration of the capital stock ownership with our insiders will likely limit the ability of other shareholders to influence corporate matters.

 

As of December 31, 2017, approximately 39.2% of our outstanding common shares was controlled by our officers, directors, beneficial owners of 10% or more of our securities and their respective affiliates. As a result, these shareholders, if they acted together, may be able to determine or influence matters that require approval by our shareholders, including the election of directors and approval of significant corporate transactions. Corporate actions might be taken even if other shareholders oppose them. This concentration of ownership might also have the effect of delaying or preventing a corporate transaction that other shareholders may view as beneficial.

 

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the price of our common shares and trading volume could decline.

 

The trading market for our common shares will depend in part on the research and reports that securities or industry analysts publish about us or our business. Although we currently have research coverage by securities and industry analysts, you should not invest in our common shares in anticipation that we will increase such coverage. If one or more of the analysts who covers us at any given time downgrades our common shares or publishes inaccurate or unfavorable research about our business, the price of our common shares would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our common shares could decrease, which could cause the price of our common shares and trading volume to decline.

 

ITEM 1B: UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

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ITEM 2: PROPERTIES

 

We rent office and research facility space under several operating leases.

 

  a) our headquarters, which is comprised of approximately 2,359 square feet of office space, is held pursuant to a lease agreement that was entered into on May 31, 2012 with ATLP. The lease has been amended five times since it was entered into for the purpose of revising the length of the term and providing for a new base rent. Pursuant to the fifth amendment, which was entered into on May 9, 2017, the lease term was extended to April 30, 2018 with a base rent for the premises of $12 per month. We are also responsible for the payment of additional rent, including our pro rata share of real estate taxes, operating expenses, as defined in the lease, and betterment assessments, as defined in the lease. Six months following the first anniversary of the date of the fourth amendment and so long as we are not in breach of the terms of the lease, either we or ATLP may terminate the lease upon 60 days’ notice. We are exploring a lease extension or alternative space for the balance of 2018 and the foreseeable future.
     
  b) our manufacturing facility is comprised of approximately of 3,096 square meter of manufacturing suite, laboratory and office space is held pursuant to a lease agreement that was entered into on June 16, 2006 with Eilot Hashkaot. The lease has been amended four times since it was entered into for the purpose of revising the length of the term and providing for a new base rent. Pursuant to the fourth amendment, which was entered into on February 24, 2016, the lease term was extended to January 31, 2022. The renewed lease includes a five-year option to extend until January 31, 2027 with an increase of 10%. The amount of the lease is approximately $29 per month and linked to the CPI. We entered into an agreement on September 5, 2016 for additional office space of 490 square meters (fifth amendment to the lease agreement) under which we are obligated to pay an additional $5 per month and linked to the CPI. The commitments for existing and additional space are for a term of five years ending January 31, 2022, with a five-year option to extend until January 31, 2027 with an increase of 10%. On January 16, 2017, we entered into a Sub lease agreement for additional office space of 200 square meters with Green Power YE. The term of the sub-sublease extends to January 22, 2018 with an option to extend for one year. The lease term was extended until January 22, 2019. The amount of the lease is a fixed price including all rental utilities of $7 per month.
     
  c) VBI Cda’s research facility, which is comprised of laboratory and office space, is held pursuant to a sub-sublease that was entered into on September 1, 2014 with Iogen Corporation and subsequently amended to include some additional space and extend the initial term to December 31, 2019. VBI Cda has the right to extend the term for two periods of three years. VBI Cda has a right to terminate the sub-sublease after one year by providing no less than 6 months’ notice to Iogen Corporation, while Iogen Corporation has the right to terminate the sub-sublease after the second year by providing no less than 6 months’ notice to VBI Cda. The base and additional rent for the premises is currently nineteen dollars USD per square foot per year through December 31, 2019. VBI Cda is also responsible for its pro rata share of additional rent, payable monthly, which includes, but is not limited to, operating and maintenance costs, real estate taxes, general maintenance and repair costs, insurance and professional fees. In addition to the base rent and the additional rent, VBI Cda is responsible for the payment of a refundable harmonized sales tax as require by the Excise Tax Act (Canada). Pursuant to the sub-sublease, the additional rent per month will not exceed eighteen dollars CAD per square foot of rentable premises. VBI Cda was required to provide a security deposit in the amount of $18.8 CAD which Iogen Corporation will hold until the end of the term and may, in the event of a failure by VBI Cda to pay rent as and when due, apply the security deposit to the unpaid rent obligation.

 

Pursuant to these leases, we made rent payments of $919 in 2017.

 

We believe that our office, manufacturing and research facilities are suitable and adequate for our current operations but will consider term extensions or expansion of leased space, depending on market conditions and needs.

 

ITEM 3: LEGAL PROCEEDINGS

 

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

 

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ITEM 4: MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

Market Information

 

Our common shares began publicly trading on The NASDAQ Capital Market on May 9, 2016 under the symbol “VBIV.” On that same day, our common shares began trading under the symbol “VBV” in Canada on the TSX. Prior to May 9, 2016, our common shares were traded in Canada on the TSX under the symbol “VAC” and quoted in the U.S. on the OTCQX under the symbol “SVACF.” The table below presents the range of high and low sales prices of our common shares for the four quarters of the year ended December 31, 2017, and the last two quarters of the year ended December 31, 2016, and the high and low bid prices of our common shares for the first two quarters of the year ended December 31, 2016. The bid quotations reported by the OTCQX reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. All prices reported below are adjusted to reflect the 1:40 reverse share split we effected on April 29, 2016.

 

Period  TSX (Canadian Dollars)   OTCQX (U.S. Dollars)   NASDAQ Capital Market (U.S. Dollars) 
   High   Low   High   Low   High   Low 
2017:                              
Fourth Quarter  $6.61   $4.10   $N/A   $N/A   $5.10   $3.18 
Third Quarter  $6.40   $3.85   $N/A   $N/A   $5.05   $3.04 
Second Quarter  $7.60   $5.22   $N/A   $N/A   $5.72   $4.00 
First Quarter  $8.94   $4.25   $N/A   $N/A   $6.60   $3.07 
                               
2016:                              
Fourth Quarter  $5.05   $3.61    N/A    N/A   $3.85   $2.75 
Third Quarter  $5.76   $4.66    N/A    N/A   $4.15   $3.26 
Second Quarter (May 9 through June 30)  $5.76   $4.51    N/A    N/A   $4.40   $3.55 
Second Quarter (April 1 through May 8)  $6.40   $4.40   $4.75   $4.05    N/A    N/A 
First Quarter  $7.60   $4.80   $5.08   $3.60    N/A    N/A 

 

Holders

 

As of February 22, 2018, we had approximately 834 shareholders of record. This number does not include an indeterminate number of shareholders whose shares are held by brokers in street name.

 

Dividends

 

We have not paid cash dividends on our common shares since January 1, 2015, and do not anticipate paying any cash dividends in the foreseeable future, but intend to retain our capital resources for reinvestment in our business. In addition, our Amended Credit Agreement with Perceptive Credit prohibits us from declaring or paying cash dividends or making distributions on any class of our capital stock.

 

Performance Graph

 

The following performance graph and related information shall not be deemed to be “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act, except to the extent that we specifically incorporate it by reference into such filing.

 

The following graph compares the performance of our common stock to the NASDAQ Composite Index and to the NASDAQ Biotechnology Index from May 6, 2016 (the first date that shares of our common stock were registered on a U.S. national securities exchange) through December 31, 2017. The comparison graph shows the cumulative total stockholder return assuming $100 was invested after the market closed on May 6, 2016, in our common stock and in each of the foregoing indices, and it assumes reinvestment of dividends, if any. The comparisons in the graph below are based upon historical data and are not indicative of, or intended to forecast, future performance of our common stock or the foregoing indices.

 

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Recent Issuances of Unregistered Securities

 

On December 18, 2017, we issued 274,000 common shares to Kevelt, pursuant to a settlement agreement, dated November 8, 2017, between SciVac and Kevelt, entered into to settle Kevelt’s claims made in connection with the DMA, See “Part I.—Item 1. Business—Contractual Arrangements—Kevelt AS.” As part of the settlement, the DMA was terminated, and each of SciVac and Kevelt released the other from all claims and liabilities arising under the DMA. The common shares were issued to Kevelt pursuant to an exemption from registration requirements of U.S. federal and state securities laws in reliance on Regulation S promulgated under the Securities Act of 1933, as amended. The certificate representing the shares contained a restricted legend. Kevelt provided representation that Kevelt is not a “U.S. Person,” as defined in Rule 902 under the Securities Act of 1933, as amended, and, at the time of each of the origination of contact concerning the transactions contemplated by the settlement agreement and the execution and delivery of the settlement agreement, Kevelt was outside of the U.S.

 

Purchase of Equity Securities

 

Not applicable.

 

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ITEM 6: SELECTED FINANCIAL DATA.

 

The selected consolidated financial information set forth below for the five years ended December 31, 2017, is not necessarily indicative of results of future operations, and should be read in conjunction with Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto included in Part II, Item 8 of this Form 10-K to fully understand factors that may affect the comparability of the information presented below. The selected statements of operations data for each of the three years in the period ended December 31, 2017, and the balance sheet data at December 31, 2017 and 2016 have been derived from our audited financial statements included elsewhere in this Form 10-K. The selected balance sheet data at December 31, 2015 have been derived from our audited financial statements not included in this Form 10-K. The selected statements of operations data for the period ended December 31, 2014 and 2013 and the balance sheet data at December 31, 2014 and 2013 have been derived from unaudited financial information not included in this Form 10-K.

 

The share and per share amounts set forth below reflect the 1:40 reverse share split we effected on April 29, 2016.

 

   Years Ended December 31, 
   2017   2016   2015   2014   2013 
                    
   (in thousands, except per share amounts) 
Consolidated statements of operations data:                         
Revenue  $865   $548   $955   $2,868   $1,661 
Expenses:                         
Cost of revenue   5,193    3,671    3,753    3,699    3,986 
Research and development   20,918    9,966    14,123    634    613 
General and administration   12,034    11,761    6,838    2,728    2,852 
Total operating expenses   38,145    25,398    24,714    7,061    7,451 
                          
Net loss from operations   (37,280)   (24,850)   (23,759)   (4,193)   (5,790)
                          
Interest expense, net   (2,882)   (324)   (1,105)   (991)   (3,595)
Foreign exchange gain (loss)   736    189    (1,458)   (1,607)   348 
Loss before income taxes   (39,426)   (24,985)   (26,322)   (6,791)   (9,037)
                          
Income tax benefit   431    1,780    129    1,119    176 
                          
Net loss  $(38,995)  $(23,205)  $(26,193)  $(5,672)  $(8,861)
                          
Net loss per share of common shares - basic and diluted  $(0.61)  $(0.77)  $(2.07)  $(0.93)  $(1.37)
                          
Weighted-average number of common shares outstanding - basic and diluted   44,158,692    30,043,501    12,630,184    6,097,923    6,478,780 

 

   As of December 31, 
   2017   2016   2015   2014   2013 
   (in thousands) 
Consolidated balance sheet data:                         
Cash and cash equivalents  $67,694   $32,282   $12,476   $393   $2 
Working capital   57,190    26,744    11,593    (53)   (2,722)
Total assets   145,656    104,754    17,045    5,619    4,576 
                          
Other long-term obligations   12,633    13,409    1,922    11,953    30,257 
                          
Common stock and additional paid-in capital   262,697    191,907    94,932    47,115    21,256 
Total stockholders’ equity (deficit)   119,787    83,731    12,194    (9,413)   (30,621)

 

ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis summarizes the significant factors affecting our operating results, financial condition, liquidity and cash flows as of and for the periods presented below. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this Form 10-K. In addition to historical information, this discussion and analysis here and throughout this Form 10-K contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements.

 

Overview

 

Levon Merger

 

On July 9, 2015, the Company, then known as Levon, completed a plan of arrangement (the “Levon Merger”) pursuant to which SciVac Ltd. (“SciVac”), an Israel based company, completed a reverse takeover of Levon. Levon changed its name from Levon Resources Ltd. to SciVac Therapeutics Inc. Other than approximately CAD $27 million in cash retained by Levon, all other assets and liabilities of Levon were transferred or assumed by BC Ltd., Levon’s then wholly owned subsidiary. Upon consummation of the Levon Merger, each Levon shareholder received 0.5 of a common share of BC Ltd., resulting in the Levon shareholders holding 100% of the issued and outstanding shares of BC Ltd; therefore, the Company no longer owns any equity interest in BC Ltd.

 

VBI- SciVac Merger

 

On May 6, 2016, the Company completed its acquisition of VBI DE, pursuant to which Seniccav Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary of SciVac, merged with and into VBI DE in the VBI-SciVac Merger, with VBI DE continuing as the surviving corporation and as a wholly-owned subsidiary of SciVac . Upon completion of the VBI-SciVac Merger, SciVac changed its name to “VBI Vaccines Inc.” and received approval for the listing of its common shares on The Nasdaq Capital Market. The common shares began trading on The Nasdaq Capital Market at the opening of trading on May 9, 2016 under the Company’s new name and the ticker symbol, VBIV. Prior to the VBI-SciVac Merger, the Company’s common shares had been also listed on the Toronto Stock Exchange (the “TSX”) under the symbol “VAC”. Following the Effective Time of the VBI-SciVac Merger, the common shares began to trade on the TSX under the new symbol, “VBV”.

 

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Overview

 

VBI is a commercial-stage, biopharmaceutical company developing next generation vaccines to address unmet needs in infectious disease and immuno-oncology. We currently manufacture our product, Sci-B-Vac a third generation hepatitis B vaccine for adults, children and newborns, which is approved for use in Israel and 14 other countries. Sci-B-Vac, but has not yet been approved by the FDA or the EMA. The Sci-B-Vac vaccine has demonstrated safety and efficacy in nearly 500,000 patients in currently licensed markets. Several clinical trials have shown rapid and high rates of seroprotection with Sci-B-Vac. The Phase IV clinical study, conducted in Israel in order to qualify a new in-house reference standard for regulatory and quality control purposes, was successfully completed. We are currently enrolling patients in a Phase III clinical program to obtain FDA, EMA, and Health Canada market approvals for commercial sale of Sci-B-Vac in the U.S., Europe, and Canada respectively. Our wholly-owned subsidiary in Rehovot, Israel currently manufactures and sells Sci-B-Vac.

 

As a result of our acquisition of VBI DE on May 6, 2016 (see Background of VBI DE below), we are also developing novel technologies that seek to enhance vaccine protection in large, underserved markets. These include an enveloped “Virus Like Particle” or “eVLP” vaccine platform technology that allows for the design of enveloped virus-like particle vaccines that closely mimic the target viruses. VBI is advancing a pipeline of eVLP vaccines, with lead programs in human cytomegalovirus (“CMV”), an infection that, while common, can lead to serious complications in babies and people with weak immune systems, and is involved in the progression of glioblastoma multiforme (“GBM”), which is a form of brain cancer. In September 2016, the Company completed the enrollment and initial dosing of 128 participants in the Phase I clinical study to evaluate its preventative CMV vaccine candidate. In July 2017, we announced interim data from the Phase I clinical study of safety data through day 84 of the study and initial immunogenicity signals in participant samples collected one month after the second of three planned vaccine doses. Final data read out is anticipated mid-year 2018. In January 2018, VBI initiated dosing of its GBM candidate in a Phase I/IIa clinical program. We expect immunologic data from ongoing biomarker analyses by mid-year 2018 and initial correlations between biomarker analyses and clinical outcomes in the second half of 2018.

 

The Company may also seek to in-license clinical-stage vaccines that we believe complement our product and pipeline portfolio, in addition to technologies that may supplement our therapeutic vaccination efforts in immuno-oncology.

 

At present, our operations are focused on:

 

  manufacturing in Rehovot, Israel and sale of Sci-B-Vac in territories where it is currently registered;
     
  Conducting the Sci-B-Vac Phase III clinical program to support various marketing authorization applications in the U.S., Europe, Canada;
     
  Completing the Phase I clinical study for our CMV vaccine candidate, VBI-1501;
     
  Conducting the planned Phase I/IIa clinical study of our GBM vaccine candidate, VBI-1901;
     
  scaling-up Sci-B-Vac manufacturing capabilities to further commercialize this product in additional markets where we may obtain regulatory approval;
     
  continuing the research and development of our product candidates, including the exploration and development of new product candidates, including a Zika vaccine candidate;
     
  adding operational, financial and management information systems and human resources support, including additional personnel to support our vaccine development and commercialization activities; and
     
  maintaining, expanding and protecting our intellectual property portfolio.

 

VBI’s income generating activities have been from sales of its Sci-B-Vac product in markets that have generated a limited number of sales to-date as well as fees from R&D services. VBI has incurred significant net losses and negative operating cash flows since inception, and expect to continue incurring losses and negative cash flows from operations as we carry out our, planned clinical, regulatory, R&D, sales and manufacturing activities with respect to the advancement of our Sci-B-Vac and new vaccine candidates. As of December 31, 2017, VBI had an accumulated deficit of approximately $144 million and stockholders’ equity of approximately $120 million. Our ability to maintain our status as an operating company is dependent upon obtaining adequate cash to finance our clinical development, manufacturing, our administrative overhead and our research and development activities. We plan to finance future operations with existing cash reserves. We expect that we will need to secure additional financing to finance our business plans, if required, which may be a combination of 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, if required. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements have been prepared assuming that we will continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should we be unable to continue as a going concern.

 

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We have incurred operating losses since inception, have not generated significant product sales revenue and have not achieved profitable operations. We incurred net losses of $39 million for the year ended December 31, 2017 and we expect to continue to incur substantial losses in future periods. We anticipate that our operating expenses will increase substantially as we continue our clinical studies. These include expenses related to:

 

  continuing the Phase III clinical program for Sci-B-Vac and the of the Phase I/IIa clinical study of our GBM vaccine candidate;
     
  continuing the research and development of our product candidates;
     
  scaling-up manufacturing capabilities, both at Rehovot and through sub-contractors to commercialize products and dose forms for which we may obtain regulatory approval;
     
  maintaining, expanding and protecting our intellectual property portfolio;
     
  hiring additional clinical, manufacturing, and scientific personnel or contractors; and
     
  adding operational, financial and management information systems and human resources support, including additional personnel, to support our vaccine development.

 

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

 

In 2017, we raised $71.9 million from equity financings to support our Sci-B-Vac, CMV and GBM vaccine programs, to continue the advancement of our research programs and for other general corporate purposes. Based upon our current cash position and by monitoring our discretionary expenditures as well as the management of our clinical trial commitments and operating costs, we believe these proceeds will be sufficient to fund our activities, including our approved capital expenditure requirements, into 2018. We expect, however, that we will need to secure additional financing in the future to carry out all of our planned clinical, regulatory, R&D, sales and manufacturing activities with respect to the advancement of our Sci-B-Vac and new vaccine candidates.

 

Since inception, VBI and its subsidiaries collectively have raised approximately $196.6 million in total equity and debt financing to support clinical and research development and general business operations.

 

Research &Development (“R&D”) Services

 

Pursuant to an agreement with the Israel Innovations Authority (formerly the Office of the Chief Scientist of Israel), the Company is required to make services available for the biotechnology industry in Israel. These services include relevant activities for development and manufacturing of therapeutic proteins according to international standards and GMP quality level suitable for toxicological studies in animals and clinical studies (Phase I & II) in humans. Service activities include analytics/bio analytics methods for development and process development of therapeutic proteins starting with a lead candidate clone through the upstream, purification, formulation and filling processes and manufacturing for Phase I & II clinical trials.

 

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These R&D services are primarily marketed to the Israeli research community in academia and Israeli biotechnology companies in the life sciences lacking the infrastructure or experience in the development and production of therapeutic proteins in the standards and quality required for clinical trials for human use. In 2017 and 2016 the Company provided services to more than 10 biotechnology companies including analytical development, upstream development process, protein purification and formulation and filling for Phase I clinical studies.

 

VBI Cda also provides some R&D services pursuant to a research agreement and certain governmental research and development grants.

 

Financial Overview

 

Overall Performance

 

The Company had net losses of approximately $39 million and $23.2 million for the years ended December 31, 2017, and 2016, respectively. The Company has an accumulated deficit of $144 million as December 31, 2017. The Company had $67.7 million of cash at December 31, 2017 and net working capital of approximately $57.2 million.

 

Cost of revenues

 

Cost of revenues consist primarily of costs incurred for manufacturing the Sci-B-Vac vaccine, which includes cost of materials, consumables, supplies, contractors and manufacturing salaries.

 

Research and Development Expenses

 

R&D expenses consist primarily of costs incurred for the development of our CMV, GBM and Sci-B-Vac vaccines, which include:

 

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

 

We expense research and development costs when we incur them.

 

General and Administration Expenses

 

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

 

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

 

Interest Income

 

Interest income consists principally of interest income earned on cash balances.

 

Interest Expense

 

Interest expense is associated with our credit facility entered into on July 25, 2014 and subsequently amended on December 6, 2016.

 

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Results of Operations

 

Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016

 

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

 

   Years ended  December 31         
   2017   2016   Change $   Change % 
Revenue  $865   $548   $317    58%
                     
Expenses:                    
Cost of revenue   5,193    3,671    1,522    41%
Research and development   20,918    9,966    10,952    110%
General and administration   12,034    11,761    273    2%
Total operating expenses   38,145    25,398    12,747    50%
                     
Net loss from operations   (37,280)   (24,850)   (12,430)   50%
                     
Interest expenses, net   (2,882)   (324)   (2,558)   790%
Foreign exchange gain   736    189    547    289%
Loss before income taxes   (39,426)   (24,985)   (14,441)   58%
                     
Income tax benefit   431    1,780    (1,349)   (76)%
                     
NET LOSS  $(38,995)  $(23,205)  $(15,790)   68%

 

Revenues

 

Revenue for the year ended December 31, 2017 was $865 as compared to $548 for the year ended December 31, 2016. The revenue increased by $317, or 58%, largely as a result of a full year of sales in the year ended December 31, 2017 subsequent to the partial shutdown of production during the first half of 2016 for maintenance and construction.

 

Revenue by Geographic Region

 

   

Years ended December 31

             
    2017     2016     $ Change     % Change  
                         
Revenue in Israel   $ 520     $ 320     $ 200       63 %
Revenue in Asia     151       4       147       3675 %
Revenue in Europe     194       224       (30 )     (13 %)
                                 
Total Revenue   $ 865     $ 548     $ 317       58 %

 

Cost of Revenues

 

Cost of revenues for the year ended December 31, 2017 was $5,193 as compared to $3,671 for the year ended December 31, 2016. The increase in the cost of revenues of $1,522, or 41%, was a result of a full year of manufacturing in the year ended December 31, 2017, subsequent to the partial shutdown in the first half of 2016, as noted above.

 

Research and Development

 

Research and development (“R&D”) expenses for the year ended December 31, 2017 were $20,918 as compared to $9,966 for the year ended December 31, 2016. The increase in R&D of $10,952 or 110% was as a result of a full year of post-acquisition activity in 2017 compared to eight months in 2016 and as a result of increased costs related to the clinical trials of CMV, GBM and Sci-B-Vac.

 

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General and Administration

 

General and administration (“G&A”) expenses for the year ended December 31, 2017 were $12,034 as compared to $11,761 for the year ended December 31, 2016. The G&A expense increase of $273 or 2% is comparable; however, there was a full year of post-acquisition activity in the year ended December 31, 2017 compared to eight months in the year ended December 31, 2016 which was offset by the additional costs in the year ended December 31, 2016 as a result of additional professional and transaction related costs incurred by the Company related to the VBI-SciVac Merger.

 

Net Loss from Operations

 

The net loss from operations for the year ended December 31, 2017 was $37,280 as compared to $24,850 for the year ended December 31, 2016. The $12,430 increase in the net loss from operations resulted from the increased cost of revenues and R&D as discussed above.

 

Interest Expense, net

 

The interest expense increase of $2,558 is as a result of an increase in the principal amount outstanding debt of $13.2 million which occurred in December of 2016. The interest paid on long-term debt during the year-ended December 31, 2017 and 2016 was $1,850 and $283, respectively. The Company also accreted $1,181 of non-cash interest expense related to the debt discount during 2017.

 

Foreign Exchange Gain

 

The foreign exchange gain for the year ended December 31, 2017 was $736 compared to $189 for the year ended December 31, 2016. The gain results from the fluctuation of foreign currency exchange rates related to transactions and balances in foreign currencies (currencies that differ from the functional currencies of the respective entities).

 

Income tax benefit

 

The income tax benefit for the year ended December 31, 2017 was $431 as compared to $1,780 for the year ended December 31, 2016. The tax benefit recognized in 2017 and 2016 related to the deferred taxes recorded for the increase in net operating loss carry forwards in the acquired Company subsequent to the VBI-SciVac Merger. The tax benefit recorded in 2017 was limited to the amount of the deferred tax asset that is more likely than not to be realized.

 

Net Loss

 

The net loss increased by $15,790 or 68%, from $23,205 for the year ended December 31, 2016 to $38,995 for the year ended December 31, 2017. The increase in our net loss is mainly attributable to the increase in our loss from operations, discussed above.

 

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Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015

 

Overall Performance

 

The Company had net losses of approximately $23.2 million and $26.2 million for the years ended December 31, 2016 and 2015, respectively. The Company has an accumulated deficit of $105 million as December 31, 2016. The Company had $32.3 million of cash at December 31, 2016 and net working capital of approximately $26.7 million.

 

Research and Development Expenses

 

Our research and development expenses consist primarily of costs incurred for the development of our CMV vaccine candidate, which include:

 

  the cost of acquiring, developing and manufacturing clinical trial materials and other consumables and lab supplies used in our pre-clinical studies
     
  expenses incurred under agreements with contractors or Contract Manufacturing Organizations to advance the CMV vaccine candidate into clinical trials; and
     
  employee-related expenses, including salaries, benefits, travel and stock-based compensation expense.

 

We expense research and development costs when we incur them.

 

General and Administration Expenses

 

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

 

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

 

Interest Income

 

Interest income consists principally of interest income earned on cash balances and on R&D tax refunds.

 

Interest Expense

 

Interest expense is associated with our credit facility entered into on July 25, 2014 and subsequently amended on December 6, 2016.

 

Results of Operations

 

   Years ended  December 31         
   2016   2015   Change $   Change % 
Revenue  $548   $955   $(407)   (43)%
                     
Expenses:                    
Cost of revenue   3,671    3,753    (82)   (2)%
Research and development   9,966    14,123    (4,157)   (29)%
General and administration   11,761    6,838    4,923    72%
Total operating expenses   25,398    24,714    684    3%
                     
Net loss from operations   (24,850)   (23,759)   (1,091)   5%
                     
Interest expenses, net   (324)   (1,105)   781    (71)%
Foreign exchange gain   189    (1,458)   1,647    (113)%
Loss before income taxes   (24,985)   (26,322)   1,337    (5)%
                     
Income tax benefit   1,780    129    1,651    1280%
                     
NET LOSS  $(23,205)  $(26,193)  $2,988    (11)%

 

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

 

Revenues

 

Revenue for the year ended December 31, 2016 was $548 as compared to $955 for the year ended December 31, 2015. The revenue decreased by $407, or 43%, largely as a result of the partial shutdown of production during the first quarter of 2016 for maintenance and construction as well as the subsequent slower ramp-up of revenues and the reduction of the number of larger service contacts in 2016 compared to 2015. These reductions were partially offset by $220 of collaboration revenue generated through VBI DE since the VBI-SciVac Merger.

 

Revenue by Geographic Region

 

   Years ended December 31         
   2016   2015   $ Change   % Change 
               
Revenue in Israel  $320   $534   $(214)   (40%)
Revenue in Asia   4    8    (4)   (50%)
Revenue in Europe   224    413