NOTES
TO CONDENSED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1 - GENERAL
Vascular
Biogenics Ltd. (the “Company” or “VBL”) was incorporated in January 2000. The Company is a late-stage
clinical biopharmaceutical company focused on the discovery, development and commercialization of first-in-class treatments for
cancer. VBL has also developed a proprietary platform of small molecules, Lecinoxoids, for the treatment of chronic immune-related
indications, and is also conducting a research program exploring the potential targeting of MOSPD2 for immuno-oncology anti-inflammatory
applications.
VB-111
(ofranergene obadenovec), a Phase 3 drug candidate, is the Company’s lead product candidate in the Company’s cancer
program. VB-201, a Phase 2-ready drug candidate, is the Company’s lead Lecinoxoid-based product candidate. The Company’s
“VB-600 series” for targeting MOSPD2 is at pre-clinical stage.
In
March 2018, the Company reported top-line results from its pivotal Phase 3 GLOBE study in patients with recurrent glioblastoma
(rGBM). The study did not meet its pre-specified primary or secondary endpoints. Since then, the Company has been conducting an
in-depth analysis in order to better understand the outcome of the study and the potential activity of VB-111 in recurrent GBM,
including the possibility that regimen in the GLOBE trial may have impaired the activity of VB-111. The complete GLOBE data and
the Company’s analyses were recently presented at the Society for Neuro-Oncology, or SNO annual meeting, in November 2018.
Thorough analyses of the baseline risk factors of the Phase 2 and the Phase 3 treatment groups did not reveal any differences,
which may explain the different trial outcomes. Change in treatment regimen with the lack of priming with VB-111 in the GLOBE
trial is the only difference found between the two studies. Preclinical data show that treatment with VB-111 in combination with
bevacizumab blocked the anti-tumor the effect of VB-111 compared to VB-111 monotherapy; these data strengthen the hypothesis that
priming with VB-111 without bevacizumab may be critical for the immune and vascular-disruptive/anti-angiogenic mechanism of VB-111
in rGBM.
Unlike
GLOBE, the OVAL Phase 3 study is evaluating VB-111 in combination with chemotherapy rather than Avastin, without any change from
the regimen which demonstrated OS benefit in Phase 2 study for ovarian cancer.
Since
its inception, the Company has incurred significant losses, and it expects to continue to incur significant expenses and losses
for at least the next several years. As of September 30, 2018, the Company had an accumulated deficit of $184.8 million. The Company’s
losses may fluctuate significantly from quarter to quarter and year to year, depending on the timing of its clinical trials, the
receipt of payments under any future collaboration agreements it may enter into, and its expenditures on other research and development
activities.
As
of September 30, 2018, the Company had cash, cash equivalents and short-term bank deposits of $53.7 million. The Company may seek
to raise more capital to pursue additional activities. The Company may seek these funds through a combination of private and public
equity offerings, government grants, strategic collaborations and licensing arrangements. Additional financing may not be available
when the Company needs it or may not be available on terms that are favorable to the Company.
NOTE
2 - BASIS OF PREPARATION
The
Company’s condensed interim financial statements as of September 30, 2018 and for the three and nine months then ended (the
“interim financial statements”) have been prepared in accordance with International Accounting Standard No. 34, “Interim
Financial Reporting” (“IAS 34”). These interim financial statements, which are unaudited, do not include all
disclosures necessary for a complete presentation of the Company’s financial position, results of operations, and cash flows.
The condensed interim financial statements should be read in conjunction with the Company’s annual financial statements
as of December 31, 2017 and for the year then ended, along with the accompanying notes, which have been prepared in accordance
with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board
(“IASB).” The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative
of the results that may be expected for the entire fiscal year or for any other interim period.
NOTE
3 - SIGNIFICANT ACCOUNTING POLICIES
The
accounting policies and calculation methods applied in the preparation of the interim financial statements are consistent with
those applied in the preparation of the annual financial statements as of December 31, 2017 and for the year then ended, except
as follows: (i) IFRS No. 9, “Financial Instruments,” which was effective from January 1, 2018, did not have a material
effect on the Company’s financial statements; (ii) IFRS No. 16, “Leases,” which is not yet in effect and which
the Company has not adopted early, was disclosed in the 2017 annual financial statements. The Company is currently evaluating
the potential effect on its financial statements.
NOTE
4 - FINANCIAL RISK MANAGEMENT AND FINANCIAL INSTRUMENTS
The
Company’s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest
rate risk, cash flow interest rate risk and price risk), credit risk and liquidity risk. The interim financial statements do not
include all financial risk management information and disclosures required in the annual financial statements; therefore, they
should be read in conjunction with the Company’s annual financial statements as of December 31, 2017. There have been no
significant changes in the risk management policies since the year end.
NOTE
5 - SHAREHOLDERS’ EQUITY
a.
|
On
June 25, 2018, the Company entered into securities purchase agreements related to the registered direct offering of an aggregate
of 5,904,762 ordinary shares, NIS 0.01 nominal value, at a purchase price of $2.50 per share and accompanying short-term warrants
to purchase up to 2,952,381 ordinary shares and long-term warrants to purchase up to 2,952,381 ordinary shares at an additional
purchase price per warrant combination of $0.125. The combined offering price of each ordinary share and accompanying warrants
is $2.625 per unit for aggregate gross proceeds of approximately $15.5 million. The ordinary shares and the warrants are immediately
separable and were issued separately. The net proceeds from this offering, which closed on June 27, 2018 were $13.7 million
after deducting the underwriting discounts and commissions and offering costs payable by the Company. The short-term and long-term
warrants are exercisable immediately after issuance and will expire on January 6, 2020 and June 26, 2022, respectively at
an exercise price of $2.51 and $3.00 per one ordinary share, respectively. The fair value of the separable warrants on the
date of grant was computed using the Black-Scholes model. The underlying data used for computing the fair value of the short-term
and long-term warrants are mainly as follows: ordinary share price based on the share’s price at the stock market on
June 25, 2018: $2.40; expected volatility based on Company historical trade: 88.0% and 109%; risk-free interest rate: 2.279%
and 2.715% (the risk-free interest rate is determined based on rates of return on maturity of unlinked treasury bonds with
time to maturity that equals the average life of the warrants); expected dividend: zero; and expected life to exercise of
1.5 years and 4.0 years, respectively. The consideration was allocated between ordinary shares and warrants based on the ratio
of the warrants’ fair value and the ordinary share price.
|
|
|
b.
|
During
the first quarter ended March 31, 2018, the Board ratified a change in the vesting periods of the options granted to its employees
and officers executed on November 2016 and March 2017. The options will vest by 4 years with 25% on the first year anniversary,
and the remaining 75% at 1/12 of the options at the end of each quarter over the course of the last 3 years. This change resulted
in a catch-up expense impact of approximately $600 thousand in the first quarter of 2018, which will wind down by the end
of the year.
|
c.
|
In
January 2018, the Company’s Board of Directors approved the grant of options to purchase 128,000 ordinary shares with
an exercise price equal to $6.90 per share vesting over 4 years to its Directors, including 2 new Directors. The fair value
of the options was $838 thousand and was computed using the Black-Scholes model. The underlying data used for computing the
fair value of the options are mainly as follows: an exercise price equal to $6.90, expected volatility: 97%; risk-free interest
rate: 2.46%; expected dividend: zero; and expected term: 11 years.
|
|
|
d.
|
In
February 2018, the Board of Directors approved an increase of 1,402,395 Ordinary Shares to the number of shares available
for issuance under the 2014 Plan.
|
|
|
e.
|
In
August 2018, the Company’s Board of Directors approved the grant of options to
purchase 30,000 ordinary shares with an exercise price equal to $1.78 per share vesting
over 4 years to a new Director. The fair value of the options was $46 thousand and was
computed using the Black-Scholes model. The underlying data used for computing the fair
value of the options are mainly as follows: an exercise price equal to $1.78, expected
volatility: 97%; risk-free interest rate: 2.46%; expected dividend: zero; and expected
term: 11 years.
|
NOTE
6 - REVENUE
In
2017, the Company signed a license and supply agreement. In determining the amounts to be recognized as revenue, the Company used
its judgement in the following main issues:
Identifying
the performance obligations in the agreement and determining whether the license provided is distinct - based on the Company’s
analysis, the license is distinct as the licensee is able to benefit from the license on its own at its current stage (inter alia,
due to sublicensing rights, rights and responsibility for development in the territory, etc.).
Allocation
of the transaction price - the Company estimated the standalone selling prices of the services to be provided based on expected
cost plus a margin and used the residual approach to estimate the standalone selling price of the license as the Company has not
yet established a price for the license, and it has not previously been sold on a standalone basis.
Variable
consideration consists of potential future milestone payments. The Company determined that all such variable consideration shall
be allocated to the license (the satisfied performance obligation).
All
revenue recognized during the nine months ended September 30, 2018 was related to amounts included in the contract liability balance
at the beginning of the period and relates to the recognition of services revenue
.
OPERATING
AND FINANCIAL REVIEW
The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with the
Company’s annual financial statements as of and for the year ended December 31, 2017 (included in our Annual Report of Foreign
Private Issuer on Form 20-F for the year ended December 31, 2017) and their accompanying notes and the related notes and the other
financial information included elsewhere in this Form 6-K. This discussion contains forward-looking statements that involve risks,
uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements
as a result of various factors. Our audited financial statements as of and for the year ended December 31, 2017 and our unaudited
financial statements as of and for the nine months ended on September 30, 2018 (the “Period”) have been prepared
in accordance with IFRS, as issued by the IASB. Unless stated otherwise, comparisons included herein are made to the nine months
period ended on September 30, 2017 (the “Parallel Period”).
Overview
We
are a clinical-stage biopharmaceutical company focused on the discovery, development and commercialization of first-in-class treatments
for cancer. Our program is based on our proprietary Vascular Targeting System, or VTS, platform technology, which utilizes genetically
targeted therapy to destroy newly formed, or angiogenic, blood vessels, and which we believe will allow us to develop product
candidates for multiple oncology indications.
Our
lead product candidate, VB-111 (ofranergene obadenovec), is a gene-based biologic that we are developing for solid tumor indications,
with an advanced ongoing program in ovarian cancer. We previously also evaluated VB-111 in a Phase 3 clinical trial, referred
to as the GLOBE study, targeting recurrent glioblastoma (rGBM), an aggressive form of brain cancer. We have received orphan drug
designation in both the United States and Europe for gliomas and an orphan designation for the treatment of ovarian cancer by
the European Medicines Agency.
In
March 2018, we announced top-line results from the GLOBE study, which showed that the study did not meet its pre-specified primary
endpoint of overall survival (OS) or the secondary endpoint of progression-free survival (PFS). Over the past few months we have
been conducting an in-depth analysis in order to better understand the outcome of the GLOBE study and the potential activity of
VB-111 in rGBM, especially as those results materially deviate from the results of the Phase 2 study in the same indication. The
complete GLOBE data and the Company’s analyses were recently presented in Society for Neuro-Oncology, or SNO annual meeting,
in November 2018. Thorough analyses of the baseline risk factors of the Phase 2 and the Phase 3 treatment groups did not reveal
any differences which may explain the different trial outcomes. Change in treatment regimen with the lack of priming with VB-111
in the GLOBE trial is the only difference found between the two studies. Preclinical data show that treatment with VB-111 in combination
with bevacizumab blocked the anti-tumor the effect of VB-111 compared to VB-111 monotherapy; these data strengthen the hypothesis
that priming with VB-111 without bevacizumab may be critical for the immune and vascular-disruptive/anti-angiogenic mechanism
of VB-111 in rGBM.
Unlike GLOBE, the OVAL Phase 3 study is evaluating VB-111 in combination with chemotherapy rather than
Avastin, without any change from the regimen which demonstrated OS benefit in Phase 2 study for ovarian cancer.
VB-111
was also studied in a Phase 2 trial for recurrent platinum-resistant ovarian cancer and in a Phase 2 study in recurrent, iodine-resistant
differentiated thyroid cancer. In a Phase 2 clinical trial for recurrent platinum-resistant ovarian cancer, VB-111 demonstrated
high rate, durable, CA-125 response along with significant increase in overall survival compared to low-dose VB-111. In December
2016, we held an end-of-Phase-2 meeting with the FDA, in which we received approval from the FDA to advance VB-111 into a Phase
3 study in platinum-resistant ovarian cancer, which we launched in December 2017. This study, which we refer to as our OVAL study,
is conducted in collaboration with the Gynecologic Oncology Group (GOG) Foundation, Inc., a leading organization for research
excellence in the field of gynecologic malignancies. Following receipt of results from the GLOBE study, we modified the OVAL study
protocol to include an efficacy interim readout, which we expect to occur in the fourth quarter of 2019.
We
also have been conducting a program targeting anti-inflammatory diseases, based on the use of our Lecinoxoid platform technology.
Lecinoxoids are a novel class of small molecules we developed that are structurally and functionally similar to naturally occurring
molecules known to modulate inflammation. The lead product candidate from this program, VB-201, is a Phase 2-ready molecule that
demonstrated efficacy in reducing vascular inflammation in a Phase 2 sub-study in psoriatic patients with cardiovascular risk.
Based on recent pre-clinical studies, we believe that VB-201 and some second generation molecules such as VB-703 may be applicable
for NASH and renal fibrosis.
We
are also conducting two parallel research programs exploring the potential of targeting of MOSPD2 (Motile Sperm Domain-containing
Protein 2), a protein which we identified as a regulator of cell motility, for anti-inflammatory and immuno-oncology applications.
In the MOSPD2 inflammation program, we reported in January 2017 that targeting of MOSPD2 inhibits chemotaxis of monocytes and
neutrophils immune cells which are involved in various inflammatory indications. Recently, in October 2018, we presented data
showing potential of MOSPD2 as a target for Multiple Sclerosis (MS) at the 34
th
Congress of the European Committee
for Treatment and Research in Multiple Sclerosis (ECTRIMS). In the MOSPD2 oncology program, we presented late-breaking study at
the American Association for Cancer Research (AACR) 2018 Annual Meeting in April 2018, demonstrating high and selective MOSPD2
expression by multiple tumor types along with involvement of MOSPD2 in tumor cell invasiveness. A novel bi-specific antibody that
was engineered to bridge interaction of T-cells with tumor cells, via binding to the T-cell protein CD3 and the tumor receptor
MOSPD2, induced T-cell activation and resulted in the killing of cancer cells in a pre-clinical setting. In a paper published
in July 2018, VBL reported data showing that knock-out of MOSPD2 in tumor cells may reduce metastasis by up to 95% in certain
settings and that targeting MOSPD2 may be a viable therapeutic strategy to prevent the spreading of breast cancer cells. Overall,
we believe that targeting of MOSPD2 may have several therapeutic applications, including in chronic inflammatory conditions such
as MS, and for oncology indications through targeting of MOSPD2-expressing tumor cells. We are developing our pipeline candidates
from the “VB-600 series” of antibodies towards these applications.
In
October 2017, we announced the opening of our new gene therapy manufacturing plant in Modiin, Israel. The facility is the first
commercial-scale gene therapy manufacturing facility in Israel and currently one of the largest gene-therapy designated ones in
the world (20,000 sq. ft.). It is capable of manufacturing in large-scale capacity of 1,000 liters and is scalable to 2,000 liters.
In
November 2017, we signed an exclusive license agreement with NanoCarrier Co., Ltd. (TSE Mothers:4571) for the development, commercialization
and supply of VB-111 in Japan. VBL retains rights to VB-111 in the rest of the world. Under terms of the agreement, VBL has granted
NanoCarrier an exclusive license to develop and commercialize VB-111 in Japan for all indications. VBL will supply NanoCarrier
with VB-111, and NanoCarrier will be responsible for all regulatory and other clinical activities necessary for commercialization
in Japan. In exchange, we received an up-front payment of $15 million, and are entitled to receive greater than $100 million in
development and commercial milestone payments if certain development and commercial milestones are achieved. VBL will also receive
tiered royalties on net sales in the high-teens.
We
commenced operations in 2000, and our operations to date have been limited to organizing and staffing our company, business planning,
raising capital, developing our VTS, Lecinoxoids platform technologies and developing our product candidates, including conducting
pre-clinical studies and clinical trials of VB-111 and VB-201. To date, we have funded our operations through private sales of
preferred shares, a convertible loan, public offerings of ordinary shares and warrants and grants from the Israeli Office
of Chief Scientist, or OCS, which has later transformed to the Israeli Innovation Authority, or IIA, under the Israel Encouragement
of Research and Development in Industry, or the Research Law. We have no products that have received regulatory approval and accordingly
have never generated regular revenue streams. Since our inception and through September 30, 2018, we had raised an aggregate of
$248.9 million to fund our operations, of which $113.4 million was from sales of our equity securities, $40.5 from our
initial public offering, or IPO, $15.0 million from a November 3, 2015 underwritten offering, approximately $24.0 million from
a June 7, 2016 registered direct offering, $17.9 million from a November 16, 2017 underwritten offering, $15.5 million from a
June 27, 2018 registered direct offering and $22.6 million from IIA grants.
Since
inception, we have incurred significant losses. Our loss for the Period was $16.6 million. For the years ended December
31, 2017 and 2016, our loss was $10.1 million and $16.0 million, respectively. We expect to continue to incur significant expenses
and losses for at least the next several years. As of September 30, 2018, we had an accumulated deficit of $184.8 million. Our
losses may fluctuate significantly from quarter to quarter and year to year, depending on the timing of our clinical trials, the
receipt of payments under any future collaborations we may enter into, and our expenditures on other research and development
activities.
As
of September 30, 2018, we had cash, cash equivalents and short-term bank deposits of $ 53.7 million. To fund further operations,
we will need to raise additional capital. We may seek to raise more capital to pursue additional activities, which may be through
a combination of private and public equity offerings, government grants, strategic collaborations and licensing arrangements.
Additional financing may not be available when we specifically need it or may not be available on terms that are favorable to
us. As of September 30, 2018, we had 37 employees. Our operations are currently located in a single facility in Modiin, Israel.
Various
statements in this release concerning our future expectations constitute “forward-looking statements” within the meaning
of the Private Securities Litigation Reform Act of 1995. These statements include words such as “may,” “expects,”
“anticipates,” “believes,” and “intends,” and describe opinions about future events. These
forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results, performance or
achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking
statements. Some of these risks are incurred losses; dependence on the success of our lead product candidate, VB-111, its clinical
development, regulatory approval and commercialization; the novelty of our technologies, which makes it difficult to predict the
time and cost of product candidate development and potential regulatory approval; as well as potential delays in our clinical
trials.
These
and other factors are more fully discussed in the “Risk Factors” section of the Annual Report on Form 20-F for the
year ended December 31, 2017. In addition, any forward-looking statements represent our views only as of the date of this release
and should not be relied upon as representing our views as of any subsequent date. We do not assume any obligation to update any
forward-looking statements unless required by law.
Financial
Overview
Revenue
As
of the end of the period, we have generated approximately $14.3 million in revenue from an exclusive license agreement for the
development, commercialization, and supply of VB-111 in Japan for all indications for a $15.0 million upfront payment, in addition
to a $2.0 million recognized milestone payment. The cost of revenues associated with these payments was approximately $0.5 million
mainly to Tel Hashomer for a 2% consideration that was received for granting a license or similar rights to this intellectual
property. We do not expect to receive any other revenue from any product candidates that we develop unless and until we obtain
regulatory approval and commercialize our products or enter into collaborative agreements with third parties.
Research
and Development Expenses
Research
and development expenses consist of costs incurred for the development of both of our platform technologies and our product candidates.
Those expenses include:
●
|
employee-related
expenses, including salaries and share-based compensation expenses for employees in research and development functions;
|
|
|
●
|
expenses
incurred in operating our laboratories and small-scale manufacturing facility;
|
|
|
●
|
expenses
incurred under agreements with CROs and investigative sites that conduct our clinical trials;
|
|
|
●
|
expenses
relating to outsourced and contracted services, such as external laboratories, consulting and advisory services;
|
|
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●
|
supply,
development and manufacturing costs relating to clinical trial materials;
|
|
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●
|
maintenance
of facilities, depreciation and other expenses, which include direct and allocated expenses for rent and insurance; and
|
|
|
●
|
costs
associated with pre-clinical and clinical activities.
|
Research
expenses are recognized as incurred. An intangible asset arising from the development of our product candidates is recognized
if certain capitalization conditions are met. As of September 30, 2018, we did not have any capitalized development costs.
Costs
for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using
information and data provided to us by our vendors and clinical sites. Nonrefundable advance payments for goods or services to
be received in future periods for use in research and development activities are deferred and capitalized. The capitalized amounts
are then expensed as the related goods are delivered and the services are performed.
We
have received grants from the IIA as part of the research and development programs for our VTS and Lecinoxoid platform technologies.
The requirements and restrictions for such grants are found in the Research Law. These grants are subject to repayment through
future royalty payments on any products resulting from these research and development programs, including VB-111 and VB-201. The
total gross amount of grants actually received by us from the IIA, including accrued LIBOR interest as of September 30, 2018 totaled
$28.0 million. As of September 30, 2018, we have incurred a $510 thousand royalty payment to the IIA derived from an upfront and
a milestone payment from an exclusive license agreement of which $427 thousand has been paid to the IIA.
Information
on our liabilities and the restrictions that we are subject to under the Research Law in connection with the IIA grants that we
have received is detailed in the Annual Report on Form 20-F as of and for the year ended December 31, 2017.
Under
applicable accounting rules, the grants from the IIA have been accounted for as an off-set against the related research and development
expenses in our financial statements. As a result, our research and development expenses are shown on our financial statements
net of the IIA grants.
General
and Administrative Expenses
General
and administrative expenses consist principally of salaries and related costs for personnel in executive and finance functions
such as salaries, benefits and share-based compensation. Other general and administrative expenses include facility costs not
otherwise included in research and development expenses, communication expenses, and professional fees for legal services, patent
counseling and portfolio maintenance, consulting, auditing and accounting services.
Marketing
Expenses
Marketing
expenses consists principally of salaries and related cost for personnel in marketing and commercialization functions such as
salaries, benefits and share-based compensation, in addition to commercialization consulting services.
Financial
Expenses (Income), Net
Financial
income is comprised of interest income generated from interest earned on our cash, cash equivalents and short-term bank deposits
and gains and losses due to fluctuations in foreign currency exchange rates, mainly in the appreciation and depreciation of the
NIS exchange rate against the U.S. dollar.
Financial
expenses primarily consist of gains and losses due to fluctuations in foreign currency exchange rates.
Taxes
on Income
We
have not generated taxable income since our inception, and had carry forward tax losses as of December 31, 2017 of $144.9 million.
We anticipate that we will be able to carry forward these tax losses indefinitely to future tax years. Accordingly, we do not
expect to pay taxes in Israel until we have taxable income after the full utilization of our carry forward tax losses.
We
recognize deferred tax assets on losses for tax purposes carried forward to subsequent years if utilization of the related tax
benefit against a future taxable income is expected. We have not created deferred taxes on our tax loss carry forward since their
utilization is not expected in the foreseeable future.
Critical
Accounting Policies and Significant Judgments and Estimates
This
management’s discussion and analysis of our financial condition and results of operations is based on our financial statements,
which have been prepared in accordance with IFRS. The preparation of these financial statements requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Estimates and
judgments are continually evaluated and are based on historical experience and other factors, including expectations of future
events that are believed to be reasonable under the circumstances.
We
make estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the
related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial year are discussed below.
Revenue
In
2017, the Company signed a license and supply agreement. In determining the amounts to be recognized as revenue, the Company used
its judgement in the following main issues:
Identifying
the performance obligations in the agreement and determining whether the license provided is distinct - based on the Company’s
analysis, the license is distinct as the licensee is able to benefit from the license on its own at its current stage (inter alia,
due to sublicensing rights, rights and responsibility for development in the territory, etc.).
Allocation
of the transaction price - the Company estimated the standalone selling prices of the services to be provided based on expected
cost plus a margin and used the residual approach to estimate the standalone selling price of the license as the Company has not
yet established a price for the license, and it has not previously been sold on a standalone basis.
Variable
consideration consists of potential future milestone payments. The Company determined that all such variable consideration shall
be allocated to the license (the satisfied performance obligation).
Share-Based
Compensation
We
operate a number of equity-settled, share-based compensation plans for employees (as defined in IFRS 2 “Share-Based Payments”),
directors and service providers. As part of the plans, we grant employees, directors and service providers, from time to time
and at our discretion, options and RSU’s to purchase our ordinary shares. The fair value of the employee and service provider
services received in exchange for the grant of the options and RSU’s is recognized as an expense in our statements of comprehensive
loss and is carried to additional paid in capital in our statements of financial position. The total amount is recognized as an
expense ratably over the vesting period of the options, which is the period during which all vesting conditions are expected to
be met.
We
estimate the fair value of our options awards to employees and directors using the Black-Scholes option pricing model,
which requires the input of highly subjective assumptions, including (a) the expected volatility of our shares, (b) the expected
term of the award, (c) the risk-free interest rate, and (d) expected dividends. Due to the lack of a public market for the trading
of our shares until October 2014 and a lack of company-specific historical and implied volatility data, we have based our estimate
of expected volatility on the historic volatility of a group of similar companies that are publicly traded. For options granted
since 2015, the expected volatility was calculated using weighted average and was based on the stock price volatility of the Company
since October 1st, 2014 (IPO date) and the remaining years on the stock price volatility of similar companies.
We
will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own share
price becomes available. We estimate the fair value of our share-based awards to service providers based on the value of services
received, which is based on the additional cash compensation that we would need to pay if such options were not granted.
Service
conditions and performance vesting conditions are included in assumptions about the number of options and RSU’s that are
expected to vest. The total expense is recognized over the vesting period, which is the period over which all of the specified
vesting conditions are to be satisfied.
We
are also required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures
differ from the estimates. Vesting conditions are included in assumptions about the number of options and RSU’s that are
expected to vest. At the end of each reporting period, we revise our estimates of the number of options and RSU’s that are
expected to vest based on the nonmarket vesting conditions. We recognize the impact of the revision to original estimates, if
any, in profit or loss, with a corresponding adjustment to additional paid in capital.
Clinical
trial accruals
Clinical
trial expenses are charged to research and development expense as incurred. The Company accrues for expenses resulting from obligations
under contracts with clinical research organizations (CROs). The financial terms of these contracts are subject to negotiations,
which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services
are provided. The Company’s objective is to reflect the appropriate trial expense in the financial statements by matching
the appropriate expenses with the period in which services and efforts are expended. As of September 30, 2018, the company had
clinical accruals in the amount of approximately $0.4 million.
Results
of Operations
Comparison
of nine month periods ended September 30, 2018 and 2017:
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
Increase
(decrease)
|
|
|
|
2018
|
|
|
2017
|
|
|
$
|
|
|
%
|
|
|
|
(in
thousands)
|
|
|
|
(unaudited)
|
|
Revenues
|
|
$
|
444
|
|
|
$
|
-
|
|
|
$
|
444
|
|
|
|
100
|
%
|
Cost of revenues
|
|
|
(188
|
)
|
|
|
-
|
|
|
|
(188
|
)
|
|
|
100
|
%
|
Gross
profit
|
|
|
256
|
|
|
|
-
|
|
|
|
256
|
|
|
|
100
|
%
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development, gross
|
|
|
14,702
|
|
|
|
14,426
|
|
|
$
|
276
|
|
|
|
2
|
%
|
Government
grants
|
|
|
(1,910
|
)
|
|
|
(2,320
|
)
|
|
|
410
|
|
|
|
-18
|
%
|
Research
and development, net
|
|
$
|
12,792
|
|
|
$
|
12,106
|
|
|
$
|
686
|
|
|
|
6
|
%
|
General
and administrative
|
|
|
3,972
|
|
|
|
4,727
|
|
|
|
(755
|
)
|
|
|
-16
|
%
|
Marketing
|
|
|
575
|
|
|
|
-
|
|
|
|
575
|
|
|
|
1
00
|
%
|
Operating
loss
|
|
|
17,083
|
|
|
|
16,833
|
|
|
|
250
|
|
|
|
1
|
%
|
Financial
income, net
|
|
|
(498
|
)
|
|
|
(387
|
)
|
|
|
(111
|
)
|
|
|
29
|
%
|
Loss
|
|
$
|
16,585
|
|
|
$
|
16,446
|
|
|
$
|
139
|
|
|
|
1
|
%
|
Revenues.
On
November 3, 2017 the Company entered into an exclusive license agreement with NanoCarrier Co., Ltd. for the development, commercialization,
and supply of ofranergene obadenovec (“VB-111”) in Japan for all indications. In exchange, the Company received an
up-front and a milestone payment of $17.0 million in aggregate, of which $0.4 million was recognized as of September 2018. This
was offset in 2018 by a cost of revenues payment of approximately $188 thousand, comprised mostly of labor costs related to the
performance obligations that were delivered during the period.
Research
and development expenses, net
.
Research
and development expenses are shown net of IIA grants. Research and development expenses, net were approximately $12.8 million
for the Period, compared to approximately $12.1 million in the Parallel Period, an increase of approximately $0.7 million or 6%.
The increase in research and development expenses, gross in the Period was mainly due to increased expenses for materials of $0.9
million for the preparation of large-scale production, in addition to increased facility expenses of $0.9 million, the majority
of which are temporary expenses related to the transition period from the old to the new site and depreciation expense of $0.7
due to the operations of our new Modiin facility, an increase of payroll related costs mainly due to an overall increase of share
based compensation and other payroll related costs of approximately $0.9 million, offset by a decrease in expenses for subcontractors
and consultants of approximately $3.1 million mainly due to the winding down of the VB-111 Globe Study in 2018.
General
and administrative expenses
.
General
and administrative expenses for the Period were $3.9 million, compared to $4.7 million for the Parallel Period, a decrease of
$0.8 million or 16%. This decrease is mainly attributed to payroll related costs for management and directors share-based compensation
expense.
Marketing
expenses
Marketing
expenses for the Period ended September 30, 2018 were $0.6 million, an activity that commenced only in June 2017.
Financial
expenses (income), net
.
Financial
income, net for the Period was approximately ($498) thousand, compared to approximately ($387) thousand for the Parallel Period,
an increase of $111 thousand or 29%. The increase was primarily attributable to higher interest received due to more favorable
interest rates offset by unfavorable foreign exchange losses.
Liquidity
and Capital Resources
Since
our inception and through September 30, 2018, we have raised a total of $113.4 million from sales of our equity securities before
the initial public offering, $40.5 million gross in the initial public offering itself ($34.9 million net), $15.0 million from
a November 3, 2015 underwritten offering, $24.0 million from a June 7, 2016 registered direct offering $17.9 million from a November
16, 2017 underwritten offering, $15.5 million from a June 27, 2018 registered direct offering and $22.6 million from IIA grants.
Our primary uses of cash have been to fund working capital requirements and research and development, and we expect these will
continue to represent our primary uses of cash.
Funding
Requirements
At
September 30, 2018, we had cash and cash equivalents and short-term bank deposits totaling $53.7 million and working capital of
$50.1 million. We expect that our cash and cash equivalents will enable us to fund our operating expenses and capital expenditure
requirements for more than 3 years and is expected to be sufficient to enable us to support our Phase 3 clinical trial for VB-111
for ovarian cancer, and to advance our pipeline, including our VB-600 platform targeting MOSPD2. We are unable to estimate the
amounts of increased capital outlays and operating expenses associated with completing the development of VB-111 and our other
product candidates. Our future capital requirements will depend on many factors, including:
●
|
the
costs, timing and outcome of regulatory review of VB-111 and any other product candidates we may pursue;
|
|
|
●
|
the
costs of future development activities, including clinical trials, for VB-111 and any other product candidates we may pursue;
|
|
|
●
|
the
costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights
and defending intellectual property-related claims;
|
|
|
●
|
the
extent to which we acquire or in-license other products and technologies; and
|
|
|
●
|
our
ability to establish any future collaboration arrangements on favorable terms, if at all.
|
Until
such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination
of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. We do not have any committed
external source of funds.
Cash
Flows
The
following table sets forth the primary sources and uses of cash for each of the periods set forth below:
|
|
Period
ended September 30
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in
thousands)
|
|
|
|
(unaudited)
|
|
Cash
used in operating activities
|
|
$
|
(12,683
|
)
|
|
$
|
(14,257
|
)
|
Cash
provided by investing activities
|
|
|
786
|
|
|
|
13,164
|
|
Cash
provided by financing activities
|
|
|
13,759
|
|
|
|
995
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
$
|
1,862
|
|
|
$
|
(98
|
)
|
Operating
Activities
Cash
used in operating activities for the Period was $12.9 million and consisted primarily of net loss of $16.6 million arising primarily
from research and development activities in addition to a net increase in working capital of $0.4 million, partially offset by
a net aggregate non-cash charges of $3.8 million.
Cash
used in operating activities for the Parallel Period was $14.3 million and consisted primarily of net loss of $16.4 million arising
primarily from research and development activities in addition to a net increase in working capital of $0.9 million, and partially
offset by net aggregate non-cash charges of $2.8 million.
Investing
Activities
Net
cash provided by investing activities was $0.8 million for the Period. This was primarily due to the maturation of short-term
bank deposits of $48 million, and offset by investing in short-term bank deposits of $45 million and purchasing of property
and equipment of $2.2 million.
Net
cash used by investing activities in the Parallel Period was $9.8 million. This was primarily due to the maturation
of short-term bank deposits
Financing
Activities
Net
cash provided by and used in financing activities was $13.8 million for the Period was the result of the net receipt of $13.7
million from the issuance of ordinary shares and warrants per the closing of June 27, 2018 securities offering. Net cash provided
by for the Parallel Period was $995 thousand.
Contractual
Obligations and Commitments
The
following tables summarize our contractual obligations and commitments as of September 30, 2018 that will affect our future liquidity:
|
|
|
|
|
Less
than
|
|
|
1-3
|
|
|
4-5
|
|
|
More
than
|
|
|
|
Total
|
|
|
1
Year
|
|
|
Years
|
|
|
Years
|
|
|
5
Years
|
|
|
|
(in
thousands)
|
|
Licenses
|
|
$
|
348
|
|
|
$
|
116
|
|
|
$
|
232
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Operating
Leases
|
|
|
2,303
|
|
|
|
535
|
|
|
|
885
|
|
|
|
662
|
|
|
|
221
|
|
Total
|
|
$
|
2,651
|
|
|
$
|
651
|
|
|
$
|
1,117
|
|
|
$
|
662
|
|
|
$
|
221
|
|
Off-Balance
Sheet Arrangements
Since
our inception, we have not engaged in any off-balance sheet arrangements, as defined in the rules and regulations of the SEC,
such as relationships with unconsolidated entities or financial partnerships, which are often referred to as structured finance
or special purpose entities, established for the purpose of facilitating financing transactions that are not required to be reflected
on our statement of financial positions.
Quantitative
and Qualitative Disclosures about Market Risk
We
are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our
financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result
of foreign currency exchange rates. Approximately 37% of our expenses in the first nine months of 2018 were denominated in New
Israeli Shekels. Changes of 5% in the US$/NIS exchange rate will increase or decrease the operation expenses by up to 1%.
Foreign
Currency Exchange Risk
Fluctuations
in exchange rates, especially the NIS against the U.S. dollar, may affect our results, as some of our assets are linked to NIS,
as are some of our liabilities. In addition, the fluctuation in the NIS exchange rate against the U.S. dollar may impact our results,
as a portion of our operating cost is NIS denominated.
Inflation
Risk
We
do not believe that inflation had a material effect on our business, financial condition or results of operations in the last
two fiscal years. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset
such higher costs through hedging transactions. Our inability or failure to do so could harm our business, financial condition
and results of operations.
Recently
Issued and Adopted Accounting Pronouncements
IFRS
9, Financial Instruments, addresses the classification, measurement and recognition of financial assets and financial liabilities.
The complete version of IFRS 9 was issued in July 2014. It replaces the guidance in IAS 39 that relates to the classification
and measurement of financial instruments. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary
measurement categories for financial assets: amortized cost, fair value through OCI and fair value through the P&L. There
is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. For financial liabilities,
there were no changes to classification and measurement except for the recognition of changes in own credit risk in other comprehensive
income for liabilities designated at fair value through profit or loss. The standard is effective for accounting periods beginning
on or after January 1, 2018. Early adoption is permitted. The Company concluded that IFRS 9 did not have material impact on the
financial statements.
In
January 2016, the IASB issued IFRS 16-Leases which sets out the principles for the recognition, measurement, presentation and
disclosure of leases for both parties to a contract and replaces the previous leases standard, IAS 17-Leases. IFRS 16 eliminates
the classification of leases for the lessee as either operating leases or finance leases as required by IAS 17 and instead introduces
a single lessee accounting model whereby a lessee is required to recognize assets and liabilities for all leases with a term that
is greater than 12 months, unless the underlying asset is of low value, and to recognize depreciation of leases assets separately
from interest on lease liabilities in the statements of comprehensive loss. As IFRS 16 substantially carries forward the lessor
accounting requirements in IAS 17, a lessor will continue to classify its leases as operating leases or finance leases and to
account for those two types of leases differently. IFRS 16 is effective from January 1, 2019 with early adoption allowed only
if IFRS 15-Revenue from Contracts with Customers is also applied. The Company is currently evaluating the impact of adoption on
its Financial Statements.
JOBS
Act
On
April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting
requirements for an “emerging growth company.” As an “emerging growth company,” we are electing to not
take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting
standards, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of
such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to not take
advantage of the extended transition period for complying with new or revised accounting standards is irrevocable. In addition,
we are in the process of evaluating the benefits of relying on the other exemptions and reduced reporting requirements provided
by the JOBS Act.