Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes appearing elsewhere in this Annual Report on Form 10-K and our audited financial statements and related notes for the year ended December 31, 2020 included in our final prospectus for our initial public offering filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, with the Securities and Exchange Commission, on April 30, 2021. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks, uncertainties and assumptions.
Overview
We are a clinical-stage biopharmaceutical company engaged in the discovery and development of novel immunotherapeutics and vaccines for the treatment and prevention of infectious diseases and cancer. We use our proprietary platform to develop product candidates that stimulate powerful, targeted immune responses against pathogens and tumor cells. We design our product candidates to stimulate immune responses that are robust, highly specific, and are differentiated by the magnitude of the T cell populations induced, which exhibit critical functionality and durability. We are focused on applying our platform capabilities and the expertise of our team to address significant unmet medical needs in two settings—the therapeutic setting, for the treatment of chronic infectious diseases and cancer, and the prophylactic setting, for the prevention of infectious diseases, based on our platform’s ability to respond rapidly to epidemic and pandemic threats.
We have a broad pipeline of both clinical and preclinical stage therapeutic and prophylactic programs. Our current therapeutic programs include VTP-300 for the treatment of chronic hepatitis B infection, or CHB, VTP-200 for the treatment of human papilloma virus infection, or HPV, VTP-850 for the treatment of prostate cancer and VTP-600 for the treatment of non-small cell lung cancer, or NSCLC. Our current prophylactic programs include VTP-400 for the prevention of herpes zoster, or shingles, and VTP-500 for the prevention of Middle East respiratory syndrome, or MERS. In addition, we co-invented a COVID-19 vaccine candidate with the University of Oxford, which we assigned to Oxford University Innovation, or OUI, to facilitate the license of those rights by OUI to AstraZeneca UK Limited, or AstraZeneca. The vaccine, formerly referred to as AZD1222, is now authorized for use under the marketing name Vaxzevria in a number of countries. AstraZeneca has exclusive worldwide rights to develop and commercialize Vaxzevria.
On May 4, 2021, we completed our initial public offering, or IPO, pursuant to which we issued and sold 6,500,000 American Depository Shares, or ADSs, at a public offering price of $17.00 per ADS, resulting in net proceeds of $102.8 million, after deducting underwriting discounts and commissions and offering expenses. Prior to our IPO, we funded our operations primarily from private placements of our ordinary and preferred shares, private placements of loan notes convertible into ordinary shares, as well as from grants and licensing agreements, research tax credit payments, investments from non-controlling interest a $2.4 million upfront payment from OUI in July 2020 in connection with the Amendment, Assignment and Revenue Share Agreement, or the OUI License Agreement Amendment, related to the licensing of the COVID-19 vaccine, Vaxzevria, formerly known as AZD1222. We do not expect to generate revenue from any of our own product candidates until we obtain regulatory authorization for one or more of such product candidates, if at all, and commercialize our products, or we enter into out-licensing agreements with third parties. We may receive some revenue pursuant to the OUI License Agreement Amendment with OUI with respect to the AstraZeneca COVID-19 vaccine candidate AZD1222 in certain circumstances if it receives marketing approval from regulatory authorities and is sold commercially. Substantially all of our net losses have resulted from costs incurred in connection with our research and development activities and from general and administrative costs associated with our operations.
We have incurred net losses each year since inception. For the years ended December 31, 2021 and December 31, 2020, we incurred net losses of $51.1 million and $17.9 million, respectively. As of December 31, 2021, we had an accumulated deficit of $108.6 million and we do not expect positive cash flows from operations in the foreseeable future. We expect to continue to incur net operating losses for at least the next several years as we advance our product candidates through clinical development, seek regulatory approval, prepare for approval, and in some cases proceed to commercialization of our product candidates, as well as continue our research and development efforts and invest to establish a commercial manufacturing facility, as and when appropriate.
At this time, we cannot reasonably estimate, or know the nature, timing and estimated costs of all of the efforts that will be necessary to complete the development of any of our product candidates that we develop through our programs. We are also unable to predict when, if ever, material net cash inflows will commence from sales of product candidates we develop, if at all. This is due to the numerous risks and uncertainties associated with developing product candidates to approval and commercialization, including the uncertainty of:
● successful completion of preclinical studies and clinical trials;
110
Table of Contents
● sufficiency of our financial and other resources to complete the necessary preclinical studies and clinical trials;
● acceptance of investigational new drug applications, or INDs, for our planned clinical trials or future clinical trials;
● successful enrollment and completion of clinical trials;
● data from our clinical program supporting approvable and commercially acceptable risk/benefit profiles for our product candidates in the intended populations;
● receipt and maintenance of necessary regulatory and marketing approvals from applicable regulatory authorities, in the light of the commercial environment then existent;
● scale-up of our manufacturing processes and formulation of our product candidates for later stages of development and commercial production;
● establishing either our own manufacturing capabilities or satisfactory agreements with third-party manufacturers for clinical supply for later stages of development and commercial manufacturing;
● entry into collaborations where appropriate to further the development of our product candidates;
● obtaining and maintaining intellectual property and trade secret protection or regulatory exclusivity for our product candidates as well as qualifying for, maintaining, enforcing and defending such intellectual property rights and claims;
● successfully launching or assisting with the launch of commercial sales of our product candidates following approval;
● acceptance of each product’s benefits and uses by patients, the medical community and third-party payors following approval;
● the prevalence and severity of any adverse events experienced with our product candidates in development;
● establishing and maintaining a continued acceptable safety profile of the product candidates following approval;
● obtaining and maintaining healthcare coverage and adequate reimbursement from third-party payors if necessary or desirable; and
● effectively competing with other therapies.
A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and/or timing associated with the development of that product candidate or could prevent continuation of that program being in the company’s interests. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those that we anticipate will be required for the completion of clinical development of a product candidate, or if we experience significant delays in our clinical trials due to patient enrollment or other reasons, we might be required to expend significant additional financial resources and time on the completion of clinical development. In some circumstances, such as the emergence of a significantly more effective therapy from a competitor, it may be appropriate to discontinue a product candidate program. Including the net proceeds from our IPO, we expect that our cash balance as of December 31, 2021 will enable us to fund our operating expenses and capital requirements into the second half of 2024.
Recent Developments
On November 12, 2021, we announced results from ongoing Phase 1 and Phase 1b/2a clinical trials of VTP-300, an immunotherapy candidate in development for the treatment of CHB infection. Results to date showed that both the ChAdOx1-HBV (prime), in study HBV001 (healthy volunteers and CHB patients), and the combination of ChAdOx1-HBV (prime) and MVA-HBV (boost), in study HBV002 (CHB patients only), were highly immunogenic to all HBV viral targets, and were generally well tolerated.
On December 7, 2021, we announced that interim data from 27 patients, who had completed 3 months in the HBV002 study in chronic Hepatitis B (CHB) patients, demonstrated noted changes in surface antigen (HBsAg) levels, especially in the group receiving low-dose
111
Table of Contents
nivolumab with the heterologous boost (VTP-300). The HBV002 study is enrolling 4 groups to explore prime-boost vector combinations, either MVA-HBV (prime) + MVA-HBV (boost), ChAdOx1-HBV (prime) + MVA-HBV (boost) (VTP-300), VTP-300 with low-dose nivolumab given at the boost, and VTP-300 with low-dose nivolumab given at both the prime and the boost. The HBV002 study is designed to evaluate the different regimens and investigators will now look to focus enrollment on Group 2 which involves dosing of VTP-300 without nivolumab and Group 3, which involves dosing of VTP-300 with nivolumab administered with the MVA boost, due to the encouraging surface antigen (HBsAg) decrease measured in these study groups.
In December 2021, we acquired Avidea Technologies Inc., or Avidea, to expand both our technology base and product pipeline and to strengthen our scientific leadership in immunotherapies and vaccines. Prior to the acquisition, Avidea was a privately-held biotechnology company with a goal of advancing the next generation of safer and more effective T cell immunotherapies for treating cancer, infections, and autoimmune diseases. Avidea’s precision immunotherapies are enabled by polymer-drug conjugate technologies, which are purpose-built to address the need for improved T cell and antibody-based immunotherapies. Avidea has established current Good Manufacturing Practice, or cGMP, processes for its platforms and also achieved compelling in vivo proof-of-concept data in rigorous preclinical models for a number of product candidates. This has enabled a strong pipeline of immunotherapies, some of which we expect will enter clinical testing in 2022 and 2023.
On January 18, 2022, we, Cancer Research UK, and the Ludwig Institute for Cancer Research (Ludwig) announced that the first patient had been dosed in the MAGE trial, which is testing a novel immunotherapeutic, VTP-600, in patients with the most common type of lung cancer. The Phase 1/2a trial is expected to enroll approximately 86 people who have been newly diagnosed with non-small cell lung cancer (NSCLC) and will be testing the safety and initial efficacy of VTP-600 in these patients. If further clinical trials are successful, VTP-600 could prove to be a powerful new treatment for a group of patients in need of better options. Depending on its effectiveness in NSCLC, VTP-600 could be evaluated in other types of cancer in the future, including breast, bowel, bladder and melanoma. Cancer Research UK’s Centre for Drug Development (CDD) is managing and providing significant funding for the phase 1/2a trial. Vaccitech Oncology Limited (VOLT), a strategic collaboration between us and Ludwig, are supplying VTP-600 for the trial.
On February 1, 2022, we gave notice to terminate The Oxford Science Park lease. The lease will be terminated on July 30, 2022, by which date the Company will have relocated its corporate headquarters from Oxford to The Harwell Science and Innovation Campus, Oxfordshire.
Impact of the COVID-19 Pandemic
The spread of COVID-19, which we refer to as the COVID-19 pandemic, and the policies and regulations implemented by governments in response to the COVID-19 pandemic have had a significant impact, both directly and indirectly, on the global economy and our business and operations, including continuing disruption to our clinical trial activities. Of note, the initiation of our Phase 1 clinical trial for VTP-500, which was being conducted at the University of Oxford, was paused and discontinued due to COVID-19. In addition, the COVID-19 pandemic has had a negative effect on the operations of our third-party manufacturers and the supply chain for our product candidates and clinical trial materials, due to limitations on travel imposed or recommended by federal, state/provincial or municipal governments, employers and others.
Our study protocols have been amended so that participants who have previously received Vaxzevria (or any other adenovirus-based vaccine) wait for a minimum of three months between their last adenovirus vaccine and injection with our immunotherapeutic product candidates to prevent prior vector immunity affecting the study.
In the VTP-200 program, the initiation of investigational sites for the Phase 1b/2 clinical trial (HPV001) across all countries has been impacted by COVID-19. The UK is particularly affected as resources to support set up of trials not related to COVID-19 have been low across sites. Other pandemic related issues affecting recruitment include the mass vaccination programs and the adverse publicity early in the second quarter of 2021 around Vaxzevria. Participant recruitment continues to be delayed with last patient first visit anticipated in the first quarter of 2022, and the interim analysis is expected to be available in the fourth quarter of 2022.
For our Phase 1 (HBV001) clinical trial for VTP-300, recruitment of patients with Chronic Hepatitis B (CHB) in the UK has been challenging, due to COVID-19 lockdowns. We completed recruitment for cohorts 1-5 in October 2021. For our Phase 1b/2a (HBV002) clinical trial for VTP-300, CHB patient recruitment continues with delays in Taiwan, South Korea, and the United Kingdom due to the ongoing COVID-19 restrictions in those countries. Patient recruitment has also been delayed in South Korea due to the roll out of Vaxzevria vaccine and vaccine hesitancy. Patient recruitment is estimated to be completed in the first quarter of 2022, with full efficacy data expected in the second half of 2022.
112
Table of Contents
If the disruption due to the COVID-19 pandemic continues, our planned future preclinical and clinical development for our other product candidates could also be delayed due to government orders and site policies as a result of the pandemic. The pandemic and government measures taken in response have also had a significant impact, both direct and indirect, on businesses and commerce, as worker shortages have occurred; supply chains have been disrupted; facilities and production have been suspended; and demand for certain goods and services, such as medical services and supplies, has spiked, while demand for other goods and services, such as travel, has fallen. In response to the spread of COVID-19, we have mandated that our non-laboratory based employees, such as clinical, manufacturing, finance, administrative, quality, regulatory and program managers split their time between working from home and the office, being sure to adhere to COVID-19 working guidelines when on the office premises. Our increased reliance on personnel working from home may negatively impact productivity, increase the potential risks of data privacy or security breaches, or disrupt, delay, or otherwise adversely impact our business.
We are still assessing our business plans and the impact the COVID-19 pandemic may have on our ability to advance the development of our product candidates as a result of adverse impacts on the research sites, service providers, vendors, or suppliers on whom we rely, or to raise financing to support the development of our ongoing product candidate development. No assurances can be given that this analysis will enable us to avoid part or all of any impact from the COVID-19 pandemic, including downturns in business sentiment generally or in our sector in particular. The Delta variant increased, and other variants may increase, COVID-19 case counts significantly, which may further impact our ability to conduct our business. The impact of government regulations, vaccine adoption rates (including boosters), the effectiveness of vaccines, and the continuing economic effects of the pandemic and containment measures may also further adversely impact our business. We cannot currently predict the scope and severity of any potential business shutdowns or disruptions, but if we or any of the third parties on whom we rely or with whom we conduct business were to experience shutdowns or other business disruptions, our ability to conduct our business in the manner and on the timelines presently planned could be materially and adversely impacted.
Components of Our Operating Results
Revenue
To date, we have not generated any revenue from product sales and do not expect to do so in the near future, if at all. Our revenue to date has been derived from a research grant from BARDA, a research collaboration and license agreement with Enara Bio and the OUI License Agreement Amendment with OUI relating to Vaxzevria (formerly, AZD1222).
In April 2020, we entered into the OUI License Agreement Amendment with OUI in respect of our rights to use the ChAdOx1 technology in COVID-19 vaccines to facilitate the license of those rights by OUI to AstraZeneca. Under this agreement, we are entitled to receive from OUI a share of payments, including royalties and milestones, received by OUI from AstraZeneca in respect of this vaccine. As a direct result of the OUI License Agreement Amendment, we received a payment of $2.4 million, of which we have recognized $2.4 million as revenue during the year ended December 31, 2020. No revenue has been recognized as a result of this agreement for the year ended December 31, 2021.
We determined that we have no further performance obligations under the terms of the OUI License Agreement Amendment, which comprised the transfer of intellectual property rights only. Accordingly, we plan to recognize these and any future amounts as revenue when received.
Operating Expenses
Our operating expenses since inception have consisted of research and development costs and general administrative costs.
Research and Development Expenses
Since our inception, we have focused significant resources on our research and development activities, including establishing and building on our adenovirus platform, further enhancing our in-licensed ChAdOx1, ChAdOx2 and MVA vectors, developing a new next-generation adenoviral vector, conducting preclinical studies, developing various manufacturing processes, and advancing clinical development of our programs including Phase 2 clinical trials for VTP-100, which we subsequently discontinued development of, as well as initiating the clinical trials for VTP-200 and VTP-300, and readying VTP-600 and VTP-850 for clinical trials. Research and
113
Table of Contents
development activities account for the major portion of our operating expenses. Research and development costs are expensed as incurred. These costs include:
● salaries, benefits and other related costs, including share-based compensation, for personnel engaged in research and development functions;
● expenses incurred in connection with the development of our programs including preclinical studies and clinical trials of our product candidates, under agreements with third parties, such as consultants, contractors, academic institutions and CROs;
● the cost of manufacturing drug products for use in preclinical development and clinical trials, including under agreements with third parties, such as CMOs, consultants and contractors;
● laboratory costs;
● leased facility costs, equipment depreciation and other expenses, which include direct and allocated expenses; and
● intellectual property costs incurred in connection with filing and prosecuting patent applications as well as third-party license fees.
General and Administrative Expenses
Our general and administrative expenses consist primarily of personnel costs, including share-based compensation, in our executive, finance, business development and other administrative functions. Other general and administrative expenses include consulting fees and professional service fees for auditing, tax and legal services, rent expenses related to our offices, depreciation, foreign exchange gains and losses on our cash balances and other central non-research costs. We expect our general and administrative expenses to continue to increase in the future as we expand our operating activities in both the UK and USA and potentially prepare for manufacturing and/or commercialization of our current and future product candidates. These costs would normally increase as our headcount rises to allow full support for our operations as a public company, including increased expenses related to legal, accounting, regulatory and tax-related services associated with maintaining compliance with requirements of the Nasdaq Global Market and the Securities and Exchange Commission, directors’ and officers’ liability insurance premiums and investor relations activities.
Other Income (Expense)
Change in Fair Value of Derivatives
We recognized a change in fair value in relation to the conversion and redemption features embedded in the convertible loan notes in the consolidated statements of operations and comprehensive loss for the year ended December 31, 2021. We had an embedded derivative liability related to the conversion features, the cash redemption feature on maturity and the cash redemption feature upon an exit event that settles in noncash consideration embedded in convertible loan notes. The fair value of the embedded derivatives is a Level 3 valuation with the significant unobservable inputs being the probability of exercise of conversion and cash redemption features. Significant judgment is employed in determining the appropriateness of certain of these inputs.
Loss on Extinguishment of Convertible Loan Notes
On March 15, 2021, we issued 28,957 Series B preferred shares, or Series B Shares, amounting to $125.2 million. Each Series B Share is convertible into 309 ordinary shares and nine deferred shares at the holders’ option at any time. The Series B funding constituted a qualified equity financing in accordance with the terms of the convertible loan notes. As a result, the convertible loan notes were converted on March 15, 2021 into 12,421 Series B Shares with the conversion price being 0.8 times the Series B Shares issue price.
The conversion was accounted for as an extinguishment of the convertible loan notes. As a result, the 12,421 Series B preferred shares issued on conversion was recognized at the settlement-date fair value of the Series B shares and a loss was recognized in earnings for the difference between (1) the fair value of those shares and (2) the sum of the carrying amounts of the convertible loan notes and the bifurcated conversion and redemption feature liability.
114
Table of Contents
Interest Expense
Interest expense results primarily from our convertible loan notes, which carry a market rate of interest. These notes were issued between July and November 2020 and converted on March 15, 2021 into 12,421 Series B Shares with the conversion price being 0.8 times the Series B Shares issue price.
Research and Development Incentives
Research and development incentives contain payments receivable from the United Kingdom and Australian governments related to corporation tax relief on research and development projects incentive programs in the United Kingdom and Australia. We account for such relief received as other income.
Critical Accounting Policies and Use of Estimates
This discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or US GAAP. The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of expenses during the reporting period. On an ongoing basis, management evaluates its estimates, including those related to accruals for external manufacturing of clinical trial material as well as clinical study conduct, fair value of assets and liabilities, and the fair value of ordinary shares and share-based compensation. Management bases its estimates on historical experience and on various other market-specific and relevant assumptions that management believes to be reasonable under the circumstances. Actual results could differ from those estimates.
We believe that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our financial statements and understanding and evaluating our reported financial results.
Going Concern
The consolidated financial statements included elsewhere herein have been presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have financed our activities principally from the issuance of ordinary and preferred equity securities and convertible loan notes. We have experienced recurring losses since inception and expect to incur additional losses in the future in connection with research and development activities. Our ability to continue as a going concern is dependent upon our ability to raise additional debt and equity capital. There can be no assurance that such capital will be available in sufficient amounts or on terms acceptable to us.
We incurred a net loss of $51.1 million and used $32.6 million in cash to fund our operating activities during the year ended December 31, 2021 and $17.9 million and $11.0 million, respectively, for the year ended December 31, 2020. We had an accumulated deficit of $108.6 million as of December 31, 2021. As of December 31, 2021, we had $214.1 million in cash and cash equivalents as a result of equity issuances and the IPO in 2021. Our management believes that we have sufficient cash to support our operations through to the second half of 2024, without additional financing. If we are unable to obtain additional financing in sufficient amounts or on acceptable terms, we may be forced to delay, reduce or eliminate some or all of our research and development programs and product portfolio expansion, which could adversely affect our operating results or business prospects. Although our management continues to pursue these plans, there is no assurance that we will be successful in obtaining sufficient funding on terms acceptable to us to fund continuing operations, if at all. After considering the uncertainties, management consider it is appropriate to continue to adopt the going concern basis in preparing the consolidated financial statements.
Convertible Loan Notes and Embedded Derivatives
In 2020, we entered into a series of unsecured convertible loan notes arrangements on various dates between July through November 2020. The convertible loan notes accrue interest daily at 8% per annum, which is payable in (a) cash upon an event of default or (b) cash or shares at the Board’s discretion upon conversion. The convertible loan notes will mature on June 6, 2023. On maturity, the lenders can elect cash redemption in lieu of conversion, in an amount that equals all outstanding principal plus a redemption premium. The convertible loan notes may not be prepaid without the consent of the lenders.
We review the terms of convertible loan notes and other financing arrangements to determine whether there are embedded derivative instruments, including embedded conversion options that are required to be bifurcated and accounted for separately as a derivative
115
Table of Contents
financial instrument. Derivative financial instruments are initially measured at fair value, and then re-valued at each reporting date, with changes in the fair value reported as charges or credits to consolidated statement of operations and comprehensive loss. To the extent that the initial fair values of the freestanding and/or bifurcated derivative instrument exceed the total proceeds received an immediate charge to consolidated statement of operations and comprehensive loss is recognized in order to initially record the derivative instrument at fair value.
The discount from the face value of the convertible loan notes resulting from allocating some or all of the proceeds to the derivative instruments, together with the stated rate of interest on the instrument, is amortized over the life of the instrument through periodic charges to consolidated statement of operations and comprehensive loss, using the effective interest method.
Embedded derivatives bifurcated are presented along with the host contract on the balance sheet.
Recognition of Revenue from Contracts with Customers
In 2020, we entered into the OUI License Agreement Amendment with OUI to facilitate the license of our rights to the COVID-19 vaccine we co-invented with OUI to AstraZeneca, which is now known as Vaxzevria. Our performance obligations under the terms of this agreement are limited to the transfer of intellectual property rights (licenses and other rights). Payments by AstraZeneca to OUI under this agreement included an up-front payment and may include payments based upon the achievement of defined milestones, commercial milestones and royalties on product sales if certain future conditions are met. We are entitled to a specified percentage of payments, including royalties and milestones, received by OUI from that license agreement with AstraZeneca as set out in the OUI License Agreement Amendment.
We evaluate our collaboration and licensing arrangements pursuant to Accounting Standards Codification 606, or ASC 606. To determine the recognition of revenue from arrangements that fall within the scope of ASC 606, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize determinable revenue when, or as, the company satisfies a performance obligation or (if later) when such revenue becomes payable. We present revenues from collaboration and licensing arrangements separately from other sources of revenue.
Amounts received by us as non-refundable upfront payments under the OUI License Agreement Amendment prior to satisfying the above revenue recognition criteria would be recorded as deferred revenue in our consolidated balance sheets. Such amounts would be recognized as revenue over the performance period of the respective services on a percent of completion basis for each of the obligations. Contingent milestone payments related to specified preclinical and clinical development milestones are not initially recognized within the transaction price as they are fully constrained under the guidance in ASC 606.
Research and Development Costs
Research and development costs are expensed as incurred. Research and development expenses consist of costs incurred in performing research and development activities, including salaries and bonuses, share-based compensation, employee benefits, facilities costs, laboratory supplies, depreciation, manufacturing expenses and external costs of vendors engaged to conduct preclinical development activities and clinical trials as well as the cost of licensing technology. Advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. The prepaid amounts are then expensed as the related goods are delivered or the services are performed.
All patent-related costs incurred in connection with filing and prosecuting patent applications are classified as research and development costs and expensed as incurred due to the uncertainty about any future recovery of the expenditure. Upfront payments, milestone payments and annual payments made for the licensing of technology are generally expensed as research and development in the period in which they are incurred. Incremental sublicense fees triggered by contracts with customers are capitalized and expensed as research and development expenses over the period in which the relating revenue is recognized.
Share-based Compensation
We grant options and restricted shares to employees and directors and account for share-based compensation using a fair value method. All of these arrangements are settled in equity at a predetermined price and generally vest over a period of four years. All share options have a life of 10 years before expiration. To the extent such incentives are in the form of share options, up until the first quarter of 2021, the options may have been granted pursuant bilateral EMI option awards or unapproved option awards. The EMI option award
116
Table of Contents
agreements provide for the grant of potentially tax favored Enterprise Management Incentive, or EMI, options, to our U.K. employees and directors. Options issued pursuant to such agreements have an exercise price agreed with HM Revenue & Customs. On April 8, 2021, we adopted the Vaccitech plc Share Award Plan 2021 and the Vaccitech plc Non-Employee Sub-Plan which is a sub-plan of the Vaccitech plc Share Award Plan 2021. Under the terms of the Vaccitech plc Share Award Plan 2021, the Board is permitted to grant awards to employees as restricted share units, options, share appreciation rights, restricted shares. Upon adoption of the Vaccitech plc Share Award Plan 2021, no further awards are granted pursuant bilateral EMI option awards or unapproved option awards.
Share based compensation awards are measured at the grant date fair value. For service-based awards, compensation expense is generally recognized over the requisite service period of the awards, usually the vesting period. The Company applies the “multiple option” method of allocating expense. In applying this method, each vesting tranche of an award is treated as a separate grant and recognized on a straight-line basis over that tranche’s vesting period. For performance-based awards where the vesting of the awards may be accelerated upon the achievement of certain milestones. vesting and the related share-based compensation is recognized as an expense when it is probable the milestone will be met. The Company has elected to recognize the effect of forfeitures on share-based compensation when they occur. Any differences in compensation recognized at the time of forfeiture are recorded as a cumulative adjustment in the period where the forfeiture occurs.
We measure share-based awards granted to employees and directors based on the fair value on the date of grant using the Black-Scholes option-pricing model for options. Black-Scholes utilizes assumptions related to expected term, forfeitures, volatility, the risk-free interest rate, the dividend yield (which is assumed to be zero, as we have not paid any cash dividends). For options granted prior to our IPO, we applied a discount for lack of marketability calculated using the Finnerty model.
The assumptions used in the Black-Scholes model to determine fair value for the share option grants during the year ended December 31, 2021 and the year ended December 31, 2020 and were:
Year ended
Year ended
December 31,
December 31,
2021
2020
Expected volatility
110.6
%
117.73
%
Expected term (years)
6.31
6.40
Risk-free interest rate
1.06
%
1.10
%
Expected dividend yield
0.00
%
0.00
%
For the year ended December 31, 2021, 1,947,402 share options were granted, and 763,230 share options were granted for the year ended December 31, 2020. In January and March 2022, we granted further 1,632,922 share options with a weighted average exercise price of $11.24.
Business Combinations
We acquired Avidea Technologies, Inc on December 10, 2021 and have accounted for the acquisition using the acquisition method of accounting. This required us assess and make judgments as to whether the acquisition met the criteria of a business combination or an asset acquisition. In determining that the acquisition of Avidea Technologies, Inc. met the criteria of a business combination we first used the “screen” to assess whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. As the screen was not met, we then applied the “framework” for determining whether the acquired set included at minimum, an input and substantive process that together significantly contribute to the ability to create output. We concluded that the framework criteria are met because the scientists make up an organized workforce that has the necessary skills, knowledge, or experience to perform processes that when applied to the developed technology (input) is critical to the ability undertake research and development of a product that can be provided to a customer. The more than-insignificant amount of goodwill (including the fair value associated with the workforce), was also an indicator that management considered in determining that the workforce is performing a critical process.
We recognize tangible and identifiable intangible assets acquired and liabilities assumed at their estimated fair values as of the acquisition date. Any excess purchase price over the estimated fair value assigned to the net tangible and identifiable intangible assets acquired and liabilities is allocated to goodwill. The estimate of fair value as of the acquisition date required the use of significant assumptions and estimates. The developed technology was valued using the cost approach. The critical assumptions and estimates included, but were not limited to developer margins, mark up on costs, opportunity costs, discount rates and market rates for salary, bonus and benefits of staff involved in the development of the technology. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as any contingent consideration, we will continue to evaluate
117
Table of Contents
certain assets, liabilities and tax estimates that are subject to change within the measurement period (up to one year from the acquisition date).
The Company acquired Avidea for an up-front amount of $33.3 million, of which $12.2 million was payable in cash and $21.1 million in 2,163,694 of the Company’s American Depositary Shares. In addition, Avidea’s stockholders may be entitled to receive an aggregate of up to $40 million in additional payments, payable in a mixture of cash and ADSs, upon the achievement of certain milestones. This contingent consideration is included within the purchase price and is recognized at its fair value on the acquisition date, and subsequently remeasured to fair value at each reporting date until the contingency is resolved. Changes in fair value are recognized in earnings. The fair value of Contingent Consideration is determined based on the probability of pursuit, the probability of success of the achievement of the milestone, the expected date of milestone achievement and applying the relevant discount rate.
Transaction costs are expensed as incurred in general and administrative expenses. Results of operations and cash flows of acquired companies are included in the Company’s operating results from the date of acquisition.
Goodwill and Purchased Intangible Asset
We test goodwill for impairment at least annually on November 30, or more frequently if events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. The Company has elected to assess goodwill for impairment by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis of determining whether it is necessary to perform the quantitative goodwill impairment test. We have one reporting unit. Accordingly, our review of goodwill impairment indicators is performed at the entity-wide level. This requires us to assess and make judgments regarding a variety of factors, including clinical data results, business plans, anticipated future cash flows, economic projections and other market data. Because there are inherent uncertainties involved in these factors, significant differences between these estimates and actual results could result in future impairment charges and could materially impact our future financial results. The goodwill of $12.6 million recognized to December 31, 2021 wholly relates to the acquisition of Avidea Technologies, Inc. on December 10, 2021. No events or circumstances changed during the year ended December 31, 2021 that would indicate that the fair value of the reporting unit is below the carrying amount. We will perform an impairment assessment of the Company's assets including goodwill and intangible assets in the first quarter of 2022 as the Company has experienced a sustained decline in the price of its ADSs in the first quarter of 2022 which is a potential indicator that it is more likely than not that a goodwill impairment exists. The impairment assessment could lead to an impairment charge for the first quarter of 2022.
Our purchased intangible assets were recently acquired in connection with the Avidea Technologies, Inc. business combination, and consist of developed technologies, notably SNAPvax. We have determined a useful life of 10 years and will amortize the developed technology over this period. If we were to identify an impairment indicator in the future, we may conclude that the carrying value of the intangible asset is not recoverable within the remaining useful life of the asset and recognize a non-cash impairment charge. An impairment of this asset could have a material impact on our results of operations.
118
Table of Contents
Results of Operations
Comparison of the Years Ended December 31, 2021 and December 31, 2020
The following table sets forth the significant components of our results of operations (in thousands):
Year
Year
ended December
ended December
31, 2021
31, 2020
Change
Revenue from Licenses, Grants & Services Operating expenses:
268
4,821
(4,553)
Operating expenses:
Research & development
20,371
14,387
5,985
General and administrative
25,118
10,480
14,637
Total operating expenses
45,489
24,867
20,622
Loss from operations
(45,221)
(20,046)
25,175
Other income (expense)
Change in fair value of derivatives
5,994
2,039
3,955
Unrealized exchange gain on convertible loan notes
209
448
(239)
Loss on extinguishment of convertible loan notes
(13,789)
—
(13,789)
Interest income
2
—
2
Interest expense
(2,668)
(3,600)
932
Research and development incentives
4,001
3,279
722
Others
332
42
290
Total other (expenses) income
(5,919)
2,208
(8,127)
Tax benefit
28
(95)
123
Net loss
(51,112)
(17,933)
(33,179)
Revenue
For the year ended December 31, 2021, our revenue primarily consisted of $0.2 million of reimbursement of research and development expenses from BARDA and $0.1 million of license revenue from a research, collaboration and license agreement with Enara Bio. For the year ended December 31, 2020, our revenue primarily consisted of $2.4 million from the OUI License Agreement Amendment with respect to the AstraZeneca COVID-19 vaccine candidate AZD1222 and $1.6 million of reimbursement of research and development expenses from BARDA.
Research and Development Expenses
The following table summarizes our research and development expenses for the years ended December 31, 2021 and December 31, 2020:
Year
Year
ended December
ended December
31, 2021
31, 2020
Change
Direct research and development expenses by program:
VTP-200 HPV
3,061
1,716
1,345
VTP-300 HBV
6,431
3,646
2,785
VTP-600 NSCLC
687
1,598
(911)
VTP-800/850 Prostate cancer
2,433
119
2,314
Other and earlier stage programs
1,382
3,245
(1,863)
Internal research and development expenses:
Personnel-related (including share-based compensation)
5,787
2,966
2,821
Facility related
410
191
219
Other internal costs
180
906
(726)
Total research and development expense
$
20,371
14,387
5,984
119
Table of Contents
Our research and development expenses for the years ended December 31, 2021 and 2020 were $20.4 million and $14.4 million, respectively. Personnel-related expenses were $5.8 million and $3.0 million, respectively, as a result of the relative increase in our headcount across both the UK and US. Direct expenses for outside services and consultants and laboratory materials were $14.0 million for the year ended December 31, 2021 and $10.3 million for the year ended December 31, 2020 and mainly comprised of costs for clinical trials, manufacturing of clinical trial materials, as well as costs for external preclinical services and sample testing. The Other and earlier stage programs for the year ended December 31, 2021 includes a refund of $0.3 million received in respect of the closure of the MVA-based influenza prophylactic, VTP-100, which did not meet defined primary clinical endpoints in 2020.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2021 were $25.1 million, which were mainly attributable to personnel expenses of $20.4 million, including the share-based payment charge of $14.2 million, insurance costs of $4.8 million and legal and professional fees of $2.9 million, netted by unrealized foreign exchange gain on cash balances of $6.0 million. The share-based payment charge includes a one-off expense relating to the RSUs that vested upon the successful completion of our IPO. For the year ended December 31, 2020, general and administrative expenses were $10.5 million, including personnel expenses of $5.4 million, and professional fees and consulting fees of $3.2 million, netted by unrealized foreign exchange gains on our cash balances of $0.4 million.
Change in fair value of derivatives
For the years ended December 31, 2021, and 2020, we recognized a change in fair value of $6.0 million and $2.0 million, respectively, in relation to the conversion and redemption features embedded in the convertible loan notes.
Loss on extinguishment of convertible loan notes
For the year ended December 31, 2021, we recognized a loss of $13.8 million related to conversion of convertible loan notes into 12,421 Series B preferred shares. The loss is a difference between (1) the fair value of those shares ($53.7 million) and (2) the sum of the carrying amounts of the convertible loan notes ($25.6 million) and the bifurcated conversion and redemption feature liability ($14.4 million).
Interest Expense
For the years ended December 31, 2021, and 2020, interest expense was $2.7 million and $3.6 million respectively, which primarily relate to our convertible loan notes, which carry a market rate of interest.
Research and Development Incentives
For the years ended December 31, 2021 and 2020, we accrued research and development incentives of $4.0 million and $3.3 million, respectively. Such research and development incentives relate to corporation tax relief on research and development projects incentive programs in the United Kingdom. We account for such relief received as other income.
Liquidity and Capital Resources
Sources of Liquidity
Since our inception, we have funded our operations primarily through private and public placements of our ordinary and preferred shares as well as from grants and research incentives, various agreements with public funding agencies, and most recently from an upfront payment from OUI in connection with the OUI License Agreement Amendment and the issuance of convertible loan notes. Through December 31, 2021, we had received gross proceeds of approximately $324.8 million from the issuance of our ordinary and preferred shares and convertible loan notes. As of December 31, 2021, we had cash and cash equivalents of $214.1 million. Key financing and corporate milestones include the following:
● In March 2016, we raised gross proceeds of approximately $14.0 million from the issuance of our seed round of ordinary shares.
120
Table of Contents
● Between November 2017 and December 2018, we raised gross proceeds of $33.9 million from the issuance of our Series A Shares.
● Between July 2020 and November 2020, we raised gross proceeds of $41.2 million from the issuance of convertible loan notes.
● In March 2021, we raised gross proceeds of $125.2 million from the issuance of our Series B shares.
● In May 2021, we raised gross proceeds of $110.5 million from the initial public offering of our ordinary shares on NASDAQ.
We do not expect positive cash flows from operations in the foreseeable future, if at all. Historically, we have incurred operating losses as a result of ongoing efforts to develop our heterologous ChAdOx1-MVA prime-boost immunotherapy platform and our product candidates, including conducting ongoing research and development, preclinical studies, clinical trials, providing general and administrative support for these operations and developing our intellectual property portfolio. We expect to continue to incur net operating losses for at least the next few years as we progress clinical development, seek regulatory approval, prepare for and, if approved, proceed to manufacture and commercialization of our most advanced product candidates. Operating profits may arrive earlier if programs are licensed or sold to third parties before final approval, but this cannot be guaranteed.
Cash Flows
The following table sets forth a summary of the primary sources and uses of cash (in thousands) for each period presented:
Year
Year
ended December
ended December
31, 2021
31, 2020
Net cash used in operating activities
(32,583)
(11,028)
Net cash used in investing activities
(12,912)
(293)
Net cash provided by financing activities
222,742
41,435
Effect of exchange rates on cash and cash equivalents
(6,459)
1,720
Net increase in cash and cash equivalents
170,788
31,834
121
Table of Contents
Cash Used in Operating Activities
During the year ended December 31, 2021, net cash used in operating activities was $32.6 million, primarily resulting from our net loss of $51.1 million, adjusted by fair value gain on embedded derivatives of $6.0 million, loss on conversion of convertible loan notes of $13.8 million, share-based compensation of $16.5 million, non-cash interest expense of $0.8 million, depreciation and amortization of $0.6 million, foreign exchange gain on convertible loan notes of $0.2 million and changes in our operating assets and liabilities, net of $7.0 million. During the year ended December 31, 2020, net cash used in operating activities was $11.0 million, primarily resulting from our net loss of $17.9 million, adjusted by share based compensation of $3.6 million, depreciation of $0.2 million and changes in our operating assets and liabilities, net of $2.0 million.
Net Cash Used in Investing Activities
During the year ended December 31, 2021, cash used in investing activities was $12.9 million, including $11.8 million which was related to the acquisition of Avidea Technologies, Inc, and $1.1 million from capital expenditures. During the year ended December 31, 2020, cash used in investing activities was $0.3 million, which resulted from capital expenditures in connection with the new laboratory, improvements to expand our laboratory space and purchases of property and equipment.
Net Cash Provided by Financing Activities
During the year ended December 31, 2021, cash provided by financing activities was $222.7 million consisting of $121.8 million of net proceeds from the issuance of Series B shares, $102.8 million of net proceeds from our initial public, offering costs of $2.2 million and $0.3 million of proceeds from issuance of shares to non-controlling interest. During the year ended December 3l, 2020, cash provided by financing activities was $41.4 million, consisting of $41.2 million of proceeds from the issuance of convertible loan notes and $0.3 million of capital contributions from non-controlling interest.
Effect of exchange rates on cash and cash equivalents
During the year ended December 31, 2021 and 2021, the effect of foreign exchange on cash and cash equivalents was $6.5 million loss and $1.7 million gain respectively, primarily as a result of fluctuations between the U.S dollar and pound sterling exchange rates.
Future Funding Requirements
To date, we have devoted substantially all of our resources to organizing and staffing our company, business planning, raising capital, undertaking preclinical studies and conducting clinical trials of our product candidates. As a result, we are not yet profitable and have incurred losses in each period since our inception in 2016. As of December 31, 2021, we had an accumulated deficit of $108.6 million. We expect to continue to incur significant losses for the foreseeable future. We anticipate that our expenses will increase substantially as we:
● pursue the clinical and preclinical development of our current product candidates;
● use our technologies to advance additional product candidates into preclinical and clinical development;
● seek marketing authorizations for product candidates that successfully complete clinical trials, if any;
● attract, hire and retain additional clinical, regulatory, quality control and other scientific personnel;
● establish our manufacturing capabilities through third parties or by ourselves and scale-up manufacturing to provide adequate supply for clinical trials and commercialization, including any manufacturing finishing and logistics personnel;
● expand our operational, financial and management systems and increase personnel appropriately, including personnel to support our manufacturing and commercialization efforts and our operations as a public company;
● maintain, expand, enforce, and protect our intellectual property portfolio as appropriate;
122
Table of Contents
● establish sales, marketing, medical affairs and distribution teams and infrastructure to commercialize any products for which we may obtain marketing approval and intend to commercialize on our own or jointly;
● acquire or in-license other companies, product candidates and technologies; and
● incur additional legal, accounting and other expenses in operating our business, including office expansion and the additional costs associated with operating as a public company.
Even if we succeed in commercializing one or more of our product candidates, we will continue to incur substantial research and development and other expenditure to develop and market additional product candidates. We may encounter unforeseen expenses, difficulties, complications, delays and other factors that may adversely affect our business. The size of our future net losses will depend on the rate of future growth of our expenses combined with our ability to generate revenue. Our prior losses and expected future losses have had and will continue to have an adverse effect on our shareholders’ equity and working capital unless and until eliminated by revenue growth.
We may require substantial additional financing in the future to meet any such unanticipated factors and a failure to obtain this necessary capital could force us to delay, limit, reduce or terminate our product development programs, commercialization efforts or other operations.
Since our foundation, we have invested a significant portion of our efforts and financial resources in research and development activities for our ChAdOx1, ChAdOx2 and MVA technologies, development of new technologies, and our product candidates derived from these technologies. Preclinical studies and especially clinical trials and additional research and development activities will require substantial funds to complete. We believe that we will continue to expend substantial resources for the foreseeable future in connection with the development of our current product candidates and programs as well as any future product candidates we may elect to pursue, as well as the gradual gaining of control over our required manufacturing capabilities and other corporate functions. These expenditures will include costs associated with conducting preclinical studies and clinical trials, obtaining regulatory approvals, and potentially in-house manufacturing and supply, as well as marketing and selling any products approved for sale. In addition, other unanticipated costs may arise as outlined above. Because the outcome of any preclinical study or clinical trial is uncertain and the rate of change of third-party costs is also unpredictable, we cannot reasonably estimate now the actual amounts which will be necessary to complete the development and commercialization of our current or future product candidates successfully.
Our future capital requirements may depend on many factors, including:
● the scope, progress, results and costs of researching and developing our current and future product candidates and programs, and of conducting preclinical studies and clinical trials;
● the number and development requirements of other product candidates that we may pursue, and of other indications for our current product candidates that we may pursue;
● the stability, scale and yield of future manufacturing processes as we scale-up production and formulation of our product candidates either internally or externally for later stages of development and commercialization;
● the timing of, success achieved and the costs involved in obtaining regulatory and marketing approvals and developing our ability to establish license or sale transactions and/or sales and marketing capabilities, if any, for our current and future product candidates if clinical trials and approval processes are successful;
● the success of our collaborations with CanSino, CRUK and the Ludwig Institute and any future collaboration partners;
● the success of OUI’s licensed product candidate with AstraZeneca;
● our ability to establish and maintain collaborations, strategic licensing or other arrangements and the financial terms of such agreements;
● the cost to the company of commercialization activities for our current and future product candidates that we may take on, whether alone or with a collaborator;
123
Table of Contents
● the costs involved in preparing, filing, prosecuting, maintaining, expanding, defending and enforcing patent and other intellectual property claims, including litigation costs and the outcome of such litigation;
● the timing, receipt and amount of sales of, or royalties or other income from, our future products, if any; and
● the emergence and success or otherwise of competing oncology and infectious disease therapies and other market developments.
A change in the outcome of any of these or other variables with respect to the development of any of our current and future product candidates could significantly change the costs and timing associated with the development of that product candidate, in either direction. Furthermore, our operating plans may change in the future owing to research outcomes or other opportunities, and we may need additional funds to meet operational needs and capital requirements associated with such altered operating plans.
Based on our research and development plans, we expect that the net proceeds from our IPO, together with our existing cash and cash equivalents, will enable us to fund our operating expenses and capital expenditure requirements into the second half of 2024. These estimates are based on assumptions that may prove to be wrong, and we could use our available capital resources more quickly than we expect.
Lease, Purchase, and Other Obligations
We have operating lease obligations related to our property, plant and equipment. The details of these leases are disclosed in Item 2. "Properties.". The obligations related to both short- and long-term lease arrangements is set forth in Note 16 "Commitment and Contingencies" to our consolidated financial statements.
We enter into contracts in the normal course of business with CROs and other third parties for clinical trials and preclinical research studies and testing. These contracts are generally cancellable by us upon prior notice. Payments due upon cancellation consist only of payments for services provided or expenses incurred, including noncancellable obligations of our service providers, up to the date of cancellation.
We have contingent payment obligations that we may incur upon achievement of clinical, regulatory and commercial milestones, as applicable, or royalty payments that we may be required to make under our licenses; however, the amount, timing and likelihood of such payments are not known as of December 31, 2021.
Emerging Growth Company Status
We are an emerging growth company under the Jumpstart Our Business Startups Act of 2012, as amended, or the JOBS Act. As an emerging growth company, we may delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.
We will remain an emerging growth company until the earliest of (1) the last day of the fiscal year (a) following the fifth anniversary of the date of the closing of our IPO, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our ADSs held by non-affiliates exceeded $700.0 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.
Recent Accounting Pronouncements
A description of recently issued accounting pronouncement that may potentially impact our financial position and results of operations is disclosed in Note 2 to our condensed consolidated financial statements.
124
Table of Contents