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. 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. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Annual Report, our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis. You should carefully read the “Cautionary Note Regarding Forward Looking Statements” and “Risk Factors” sections of this Annual Report to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements contained in the following discussion and analysis.
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, cancer and autoimmunity. We aim to treat and prevent infectious
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diseases and cancer by using our proprietary platforms to develop product candidates that stimulate powerful, targeted immune responses against pathogens, infected cells, and tumor cells. We design these 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. In the field of autoimmunity, we use our proprietary platform to develop product candidates that are designed to induce regulatory T cells to suppress specific immune responses and prevent/reverse autoimmunity. 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, cancer, and autoimmunity 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, VTP-1000 for treatment of celiac disease, and VTP-1100 for treatment of HPV-associated cancers. The latter two programs are designed to utilize our SNAPvax platform. 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 with the University of Oxford, the rights to 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, and 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. We do not expect to generate revenue from any of our own product candidates, excluding Vaxzevria, 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. 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.
On March 28, 2022, pursuant to the OUI License Agreement Amendment, we were notified of the commencement of payments, arising from AstraZeneca’s commercial sales of Vaxzevria. Under the terms of an exclusive worldwide license agreement between OUI and AstraZeneca, we understand OUI is entitled to milestone payments and royalties on commercial sales of Vaxzevria that began after the pandemic period. As part of the assignment from us to OUI, we are entitled to receive approximately 24% of payments received by OUI from AstraZeneca. For the year ended December 31, 2022, we recognized approximately $43.7 million as revenue (year ended December 31, 2021: $nil). There is, however, no guarantee or expectation that such payments will continue in the future and, if they do, that we will be notified of such payments in a timely manner.
On August 9, 2022, we filed a Registration Statement on Form S-3, as amended, or the Shelf, with the Securities and Exchange Commission in relation to the registration and potential future issuance of ordinary shares, including ordinary shares represented by ADSs, debt securities, warrants and/or units of any combination thereof in the aggregate amount of up to $200.0 million. The Shelf was declared effective on August 17, 2022. We also simultaneously entered into a sales agreement with Jefferies LLC, as sales agent, providing for the offering, issuance and sale by us of up to an aggregate of $75.0 million of our ordinary shares represented by ADSs from time to time in “at-the-market” offerings under the Shelf. As of December 31, 2022, we sold 307,139 ordinary shares represented by ADSs under the sales agreement, amounting to gross proceeds of $0.7 million.
We have incurred net losses each year since inception through to December 31, 2021. For the year ended December 31, 2022, we generated net income of $5.3 million, primarily as a result of revenues arising from AstraZeneca sales of Vaxzevria and our agreement with OUI. For the year ended December 31, 2021, we incurred net losses of $51.1 million. As of December 31, 2022 and 2021, we had an accumulated deficit of $103.2 million and $108.6 million, respectively, and we do not currently expect profits or positive cash flows from operations in the foreseeable future. We expect 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.
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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;
● successful and timely enrollment and completion of clinical trials;
● 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. We expect that our cash balance as of December 31, 2022 will enable us to fund our operating expenses and capital requirements into the first quarter of 2025.
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Recent Developments
On January 18, 2023, we incorporated Vaccitech Switzerland GmbH, a wholly owned subsidiary of Vaccitech (UK) Limited.
On January 30, 2023, we announced the appointment of Nadège Pelletier, Ph.D., as Chief Scientific Officer.
On March 20, 2023, we announced topline interim data from HPV001, a Phase 1b/2 clinical trial of VTP-200, a potential treatment for low grade HPV-related cervical lesions, which demonstrated favorable safety and immunogenicity data at interim analysis in patients with low-grade cervical HPV lesions. The HPV001 clinical trial will continue as planned to the 12-month primary endpoint.
Impact of the COVID-19 Pandemic
COVID-19 continues to have an impact, both directly and indirectly, on our business and operations, including continuing disruptions to our clinical trial activities. 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, participant recruitment was delayed due, in part, to patient availability and site staff availability, and the last patient’s first visit occurring in January 2023 with the last visit due by January 2024. Interim data is expected to be available in the first quarter of 2023.We recently announced topline initial interim immunogenicity and safety data from 58 patients that reached their six-month evaluation timepoint. We expect to announce the full data from this trial in the first quarter of 2024.
For our Phase 1 (HBV001) clinical trial for VTP-300, recruitment of patients with Chronic Hepatitis B (CHB) in the UK was challenging, due to COVID-19 lockdowns but we completed recruitment for all cohorts in first quarter of 2022. For our Phase 1b/2a (HBV002) clinical trial for VTP-300, CHB patient recruitment was delayed in Taiwan, South Korea, and the United Kingdom due to the ongoing COVID-19 restrictions in those countries due to patient availability, patient hesitancy and site staff availability. Patient recruitment was also delayed in South Korea due to the roll out of Vaxzevria vaccine and vaccine hesitancy. Patient recruitment was completed in May 2022, an update to the interim efficacy data was announced on June 22, 2022 and updated efficacy data was presented at AASLD on November 7, 2022.
We continue to assess our business plans and the impact COVID-19 is having on our ability to advance the development of our product candidates as a result of adverse impacts on the availability of raw materials for manufacturing, research sites, contract service providers 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 COVID-19, including downturns in business sentiment generally or in our sector in particular. 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 other business disruptions, our ability to conduct our business in the manner and on the timelines presently planned could be materially adversely impacted.
Impact of the Ukraine Crisis
In respect of the international situation in Ukraine, we have assessed the impact on the Company as minimal. We have no operations or suppliers based in Ukraine, Belarus, or Russia, and there is consequently no additional risk or negative impact on the consolidated financial statements.
Impact of Global Economic Conditions and Inflationary Pressures
Instability in global economic conditions and geopolitical matters, as well as volatility in financial markets, could have a material adverse effect on the Company’s results of operations and financial condition. These inflationary pressures and rising interest rates in the United States, the United Kingdom and elsewhere have given rise to increasing concerns that the U.S., U.K. and other economies are now in, or may soon enter, economic recession. Sustained inflationary pressures, increased interest rates, an economic recession or continued or intensified disruptions in the global financial markets could adversely affect our future financing capability or ability to access the capital markets. Additionally, we may incur future increases in operating costs due to additional inflationary increases.
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Components of Our Operating Results
Revenue
To date, we have not generated any revenue from direct product sales and do not expect to do so in the near future, if at all. Most of our revenue to date has been derived from a research grant from the Biomedical Advanced Research and Development Authority, or BARDA, a research collaboration and license agreement with Enara Bio, a research, option and license agreement with Scancell and the OUI License Agreement Amendment with OUI relating to Vaxzevria.
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. In March 2022, we were notified by OUI of the commencement of revenue relating to the commercial sales of Vaxzevria. Our revenue for the year ending December 31, 2022 was $43.7 million, representing the amounts we have been notified of as due by OUI to date and an estimate of future receipts, constrained to the extent that it is probable that a significant reversal of revenue would not occur. No revenue was 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 earned, and it is probable that a significant reversal of revenue will not occur.
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 new next-generation vector platforms, acquiring new nanoparticle based technologies, 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, VTP-300, VTP-600, VTP-850 and readying VTP-400, VTP-500, VTP-1100 and VTP-1000 for clinical trials. Research and development activities account for the major portion of our operating expenses, and we expect research and development expenses to increase in the future. Research and development costs are expensed as incurred. These costs include:
● laboratory costs; and
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. For the year ended December 31, 2022, we recognized a change in fair value in relation to the updated assumptions in the assessment of the contingent consideration fair value recognized from
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the acquisition of Avidea on December 10, 2021. Significant judgment is used to determine the probability of success of achievement of the technology and clinical milestones and the date of the expected milestone. We expect our general and administrative expenses to continue to increase in the future as we expand our operating activities in both the United Kingdom and United States and potentially prepare for manufacturing and/or commercialization of our current and future product candidates. These costs will 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
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 were 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.
Interest Expense
Interest expense results primarily from our convertible loan notes, which carried 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.
Interest Income
Interest income results primarily from the interest earned on our short-term cash deposits and cash balances held by Vaccitech (UK) Limited in United States dollars and pounds sterling.
Research and Development Incentives
Research and development incentives contain payments receivable from the United Kingdom government related to corporation tax relief on research and development projects incentive programs in the United Kingdom. We account for such relief received as other income.
The Company benefits from the United Kingdom research and development tax credit regime, being the Small and Medium-sized Enterprises R&D tax relief program, or SME Program, and, to the extent that our projects are grant funded or relate to work subcontracted to us by third parties, the Research and Development Expenditure Credit program, or RDEC Program.
Under the SME program, the Company is able to surrender some of its trading losses that arise from qualifying research and development activities for a cash rebate of up to 33.35% of such qualifying research and development expenditure. Qualifying expenditures largely comprise employment costs for research staff, consumables, outsourced contract research organization costs and utilities costs incurred as part of research projects. Certain subcontracted qualifying research and development expenditures are eligible for a cash rebate of up
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to 21.67%. A large portion of costs relating to research and development, clinical trials and manufacturing activities are eligible for inclusion within these tax credit cash rebate claims. From the 1st April 2023, it is expected that the SME additional deduction and credit rates will decrease, reducing the tax credit claim available for the Company.
The Company may not be able to continue to claim research and development tax credits under the SME program in the future because it may no longer qualify as a small or medium-sized company. In addition, the EU State Aid cap limits the total aid claimable in respect of a given project to €7.5 million which may impact the Company’s ability to claim R&D tax credits in future. Further, the U.K. Finance Act of 2021 introduced a cap on payable credit claims under the SME Program in excess of £20,000 with effect from April 2021 by reference to, broadly, three times the total Pay As You Earn, or PAYE, and National Insurance Contributions, or NICs, liability of the company, subject to an exception which prevents the cap from applying. That exception requires the company to be creating, taking steps to create or managing intellectual property, as well as having qualifying research and development expenditure in respect of connected parties, which does not exceed 15% of the total claimed. If such exception does not apply, this could restrict the amount of payable credit that we claim. For the year ended December 31, 2022, the R&D tax credits was further restricted by the available tax losses in the UK for the period.
Unsurrendered UK losses may be carried forward indefinitely to be offset against future taxable profits, subject to numerous utilization criteria and restrictions. The amount that can be offset each year is limited to £5.0 million plus an incremental 50% of UK taxable profits.
Critical Accounting Policies and Use of Estimates
This discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. 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 revenue and expenses during the reporting period. On an ongoing basis, management evaluates its estimates, including those related to revenue, expenses, leases, accruals and prepayments for external manufacturing of clinical trial material as well as clinical study conduct, fair value of contingent consideration, impairment of goodwill and intangible assets, 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.
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 include an up-front payment, payments based upon the achievement of defined milestones, royalties on product sales, and may include payments of commercial and other milestones, if certain future conditions are met. We are entitled to receive approximately 24% of receipts, 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. We use judgment to determine whether milestones or other variable consideration, except for sales-based royalties, should be included in the transaction price. For sales-based and clinical development milestones and royalties, when the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sales or milestone achievement occurs or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). This could require management to estimate the amount of revenue to recognize in the period if the actual data for the period has not been provided.
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
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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. Research and development costs are accrued when the related services or goods are delivered ahead of being billed.
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 one to three 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 to bilateral EMI option awards or unapproved option awards. 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 or restricted shares. Upon adoption of the Vaccitech plc Share Award Plan 2021, no further awards are granted pursuant to the 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. we apply 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 straightline 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. We have 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, volatility, the risk-free interest rate and the dividend yield (which is assumed to be zero, as we have not paid any cash dividends). The volatility assumption utilizes both the Company’s historical volatility and those of a portfolio of listed peer companies, weighted towards the Company as we build the historical records following IPO. 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 years ended December 31, 2022 and 2021, were:
Year ended Year ended
December 31, December 31,
Expected volatility 94.7 % 110.6 %
Expected term (years) 6.00 6.31
Risk-free interest rate 2.40 % 1.06 %
Expected dividend yield 0.00 % 0.00 %
For the years ended December 31, 2022 and 2021, 2,296,303 and 1,947,402 share options were granted, respectively. In January and February 2023, we granted a further 1,973,529 share options with a weighted average exercise price of $2.53.
Business Combinations
We acquired Avidea on December 10, 2021 and have accounted for the acquisition using the acquisition method of accounting. This required us to 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 met the criteria of a business combination we first used the “screen test” to assess whether
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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 test” was not met, as the identifiable assets were not substantially all of the fair value of the gross assets acquired, we then applied the “framework” for determining whether the acquired assets 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 to 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 therefore determined the acquisition to meet the definition of a business combination. 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.
We acquired Avidea for an up-front amount of $32.8 million (after working capital adjustments), of which $11.8 million was payable in cash and $21.0 million in 2,151,831 of American Depositary Shares of the Company. In addition, Avidea’s stockholders may be entitled to receive an aggregate of up to $40.0 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 in the consolidated statements of operations and comprehensive loss. The fair value of contingent consideration is based on the probability of pursuit of the activity associated with the milestone, 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 our operating results from the date of acquisition.
Impairment of Goodwill and Intangible Assets
We test goodwill for impairment at least annually, or more frequently if events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. We have 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 $12.2 million recognized to December 31, 2022 wholly relates to the acquisition of Avidea on December 10, 2021. The Company performed the annual impairment test to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. Based on this assessment, the Company has not recognized any impairment losses related to goodwill or intangible assets for the years ended December 31, 2022 and 2021.
Convertible Loan Notes and Embedded Derivatives
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 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 in the consolidated statements 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 in the consolidated statements 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 statements of operations and comprehensive loss, using the effective interest method.
Embedded derivatives bifurcated are presented along with the host contract on the balance sheets.
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In 2020, we entered into a series of unsecured convertible loan notes arrangements on various dates between July through November 2020. The Series B funding on March 21,2021 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 and are no longer outstanding.
Results of Operations
Comparison of the Years Ended December 31, 2022 and 2021
The following table sets forth the significant components of our results of operations (in thousands):
Year Year
ended December ended December
Revenue from Licenses, Grants & Services $ 44,703 $ 268 $ 44,435
Operating expenses:
Other income/(expense):
Unrealized exchange gain on convertible loan notes — 209 (209)
Loss on extinguishment of convertible loan notes — (13,789) 13,789
Research and development incentives 1,240 4,001 (2,761)
Revenue
For the year ended December 31, 2022, our revenue primarily consisted of $43.7 million from the OUI License Agreement Amendment with respect to amounts owed to us by OUI for the commercial sales of Vaxzervria, and $0.8 million attributable to upfront fees associated with a research and license agreement with Scancell.
For the year ended December 31, 2021, our revenue 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. The collaboration and license agreement with Enara Bio was terminated in 2022.
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Research and Development Expenses
The following table summarizes our research and development expenses for the years ended December 31, 2022 and 2021:
Year Year
ended December ended December
Direct research and development expenses by program:
Total direct research and development expenses $ 30,327 $ 13,994 $ 16,333
Internal research and development expenses:
Personnel-related (including share-based compensation) 10,424 5,787 4,637
Total internal research and development expenses 12,023 6,377 5,646
Our research and development expenses for the years ended December 31, 2022 and 2021 were $42.4 million and $20.4 million, respectively, and consisted of direct and internal research and development expenses.
Direct expenses for the years ended December 31, 2022 and 2021 were $30.3 million and $14.0 million, respectively, and consisted of outside services, consultants, laboratory materials, clinical trials, manufacturing of clinical trial materials, as well as costs for external preclinical services and sample testing. Of the $16.3 million increase, $7.3 million pertains to progress in VTP-300, having completed the last patient visit in the HBV001 Phase 1 clinical trial in May 2022, completing enrollment in the HBV002 Phase 2 clinical trial in May 2022, and dosing the first patient in the HBV003 Phase 2 clinical trial in October 2022. $5.1 million of the increase pertains to the commencement of VTP-1000 Celiac disease and VTP-1100 HPV cancer programs in 2022. $2.6 million of the increase pertains to VTP-800/850, which has progressed to FDA clearance of our IND for PCA001, a Phase 1/2 open-label clinical trial, in December 2022. $1.0 million of the increase pertains to VTP-200, having completed enrollment into the Phase 1b/2 clinical trial, HPV001, in December 2022.
Internal research and development expenses for the years ended December 31, 2022 and 2021 were $12.0 million and $6.4 million, respectively. Of the $5.6 million increase, $4.6 million pertains to personnel-related expenses as a result of the relative increase in headcount across locations in the United Kingdom and United States, including those individuals that joined the Company through the acquisition of Avidea in December 2021. Facility related costs increased $0.9 million primarily due to the relocation of the Company headquarters in the third quarter of 2022, and the U.S. facility expenses being incurred for the full year following the Avidea acquisition in December 2021.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2022 were $6.4 million, which were mainly attributable to personnel expenses of $16.8 million, including the share-based compensation charge of $7.2 million, due to an increase in headcount, insurance cost of $6.2 million, legal and professional fees of $4.3 million, and other general and administrative expenses, offset by un unrealized foreign exchange gain on the revaluation of cash balances of $26.4 million, resulting from the fluctuations between the United States dollar and pound sterling exchange rates.
For the year ended December 31, 2021, general and administrative expenses were $25.1 million, which were mainly attributable to personnel expenses of $20.4 million, including the share-based compensation 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.
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Change in fair value of derivatives embedded in convertible loan notes
For the year ended December 31, 2022, there were no outstanding convertible loan notes. For the year ended December 31, 2021, we recognized a gain of $6.0 million in relation to the conversion and redemption features embedded in the convertible loan notes.
Loss on extinguishment of convertible loan notes
There was no loss on extinguishment of convertible loan notes for the year ended December 31, 2022, as there were no outstanding loan notes in the year. 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 Income
For the years ended December 31, 2022 and 2021, interest income was $3.1 million and $0.002 million respectively, which primarily result from the interest earned on our short-term cash deposits and cash balances held by Vaccitech (UK) Limited in United States dollars and pound sterling.
Interest Expense
For the years ended December 31, 2022, interest expense was $0.02 million which mainly relates to dilapidation provision discounted over the length of the lease in respect of the Company headquarters, and $0.003 million interest paid on the debt recognized on the acquisition of Avidea, which was repaid in full in the first quarter of 2022. For the year ended December 31, 2021 interest expense was $2.7 million which primarily related to our convertible loan notes, which carried a market rate of interest.
Research and Development Incentives
For the years ended December 31, 2022 and 2021, we accrued research and development incentives of $1.2 million and $4.0 million respectively, with the decrease attributable to a reduction in losses available to surrender for the receipt of the research and development incentives in Vaccitech (UK) Limited , due to amounts payable to the Company from the commercial sales of Vaxzevria. 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.
Tax benefit
For the years ended December 31, 2022 and 2021, the tax benefit was $4.5 million and $0.03 million respectively, which primarily relates to movements in deferred tax resulting from the deferred tax liability recognised in respect of the acquired intangible asset.
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, the issuance of convertible loan notes and most recently from royalty and milestone payments from OUI in connection with the OUI License Agreement Amendment. Through December 31, 2022, we had received gross proceeds of approximately $325.5 million from the issuance of our ordinary and preferred shares and convertible loan notes. As of December 31, 2022, we had cash and cash equivalents of $194.4 million. Key financing and corporate milestones include the following:
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On August 9, 2022, we filed a Registration Statement on Form S-3 as amended, or the Shelf, with the Securities and Exchange Commission in relation to the registration and potential future issuance of ordinary shares, including ordinary shares represented by ADSs, debt securities, warrants and/or units of any combination thereof in the aggregate amount of up to $200.0 million. The Shelf was declared effective on August 17, 2022. We also simultaneously entered into a sales agreement with Jefferies LLC, as sales agent, providing for the offering, issuance and sale by us of up to an aggregate of $75.0 million of our ordinary shares represented by ADSs from time to time in “at-the-market” offerings under the Shelf. As of December 31, 2022, we sold 307,139 ordinary shares represented by ADSs under the sales agreement, amounting to gross proceeds of $0.7 million.
We do not currently 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 prime-boost immunotherapy platforms 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 negative cash flows from operations 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 arise 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
Net cash used in operating activities $ (14,431) $ (32,583)
Net cash used in investing activities (5,750) (12,912)
Net cash provided by financing activities 325 222,742
Effect of exchange rates on cash and cash equivalents 187 (6,459)
Net (decrease)/increase in cash and cash equivalents $ (19,669) $ 170,788
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Cash Used in Operating Activities
During the year ended December 31, 2022, net cash used in operating activities was $14.4 million, primarily resulting from our net income of $5.3 million, adjusted by foreign exchange gain on translation of $24.8 million, share based compensation of $9.9 million, depreciation and amortization of $4.3 million, and changes in our operating assets and liabilities, net of $5.5 million primarily resulting from the OUI receivable, and an increase in prepaid expense due to the payment of annual insurance premiums that occurred in the second quarter of 2022.
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.
Net Cash Used in Investing Activities
During the year ended December 31, 2022, cash used in investing activities was $5.8 million primarily resulted from capital expenditures related to our new headquarters in Harwell, United Kingdom.
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, and $1.1 million related to capital expenditures.
Net Cash Provided by Financing Activities
During the year ended December 31, 2022, cash provided by financing activities was $0.3 million resulting from $0.5 million net proceeds from the issuance ordinary shares through the “at-the-market” sales agreement, offset by $0.2 million repayment of debt incurred previously by the acquired company Avidea (acquired on December 10, 2021, that subsequently became Vaccitech North America, Inc.).
During the year ended December 3l, 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 the IPO after offering costs of $2.2 million 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, 2022 and 2021, the effect of foreign exchange on cash and cash equivalents was a $0.2 million gain and $6.5 million loss respectively, primarily as a result of fluctuations between the United States 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 have incurred losses in each year since our inception in 2016, through to December 31, 2021. We were profitable in 2022 but continue to maintain negative operating cash flows. As of December 31, 2022, we had an accumulated deficit of $103.2 million. We expect to continue to incur significant losses and negative cash flows from operations for the foreseeable future. We anticipate that our expenses will increase substantially as we:
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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, acquisition of additional complementary platforms such as SNAPvax, development of new technologies in house, 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:
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● the success of OUI’s licensed product candidate with AstraZeneca;
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. Unless and until we can generate a substantial amount of revenue from our product candidates, we expect to finance our future cash needs through public or private equity offerings, debt financings, collaborations, licensing arrangements or other sources, or any combination of the foregoing.
Based on our research and development plans, we expect that our existing cash and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements into the first quarter of 2025. 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.
If we raise additional funds through collaborations, strategic alliances, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds when needed, we would be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
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 are set forth in Note 17 “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, 2022. See section entitled “Business - Our Collaboration and License Agreements.
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.
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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 $1.235 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 consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency and Currency Translation
We are subject to the risk of fluctuations in foreign currency exchange rates, specifically with respect to the euro, pound sterling and Australian dollar. Our reporting currency is the United States dollar, and functional currency of Vaccitech plc and its consolidated subsidiaries, Vaccitech (UK) Limited and Vaccitech Oncology Limited, is the pound sterling. The functional currency of our wholly owned foreign subsidiary, Vaccitech North America, Inc. is the United States dollar. The functional currency of our wholly owned foreign subsidiary, Vaccitech Australia Pty, is the Australian dollar. The functional currency of our wholly owned foreign subsidiary, Vaccitech Italia S.R.L, is the euro. Our cash and cash equivalents as of December 31, 2022 consisted primarily of cash balances held by Vaccitech (UK) Limited in United States dollars.
Assets and liabilities are translated into United States dollars at the exchange rate in effect on the balance sheet date. Revenue and expenses are translated at the average exchange rate in effect during the period. Translation adjustments are included in the consolidated Balance Sheets as a component of accumulated other comprehensive loss. Adjustments that arise from exchange rate changes on transactions denominated in a currency other than the local currency are included in operating expenses, net in the consolidated Statements of Operations and Comprehensive Loss as incurred.
We incur significant operating costs in the UK and face exposure to changes in the exchange ratio of the United States dollar and the pound sterling arising from expenses and payables at our UK operations that are settled in pound sterling. For the year ended December 31, 2022, an average 10% weakening in the United States dollar relative to the pound sterling would have resulted in an increase to our expenses denominated in pound sterling of approximately $4.5 million, as compared to an increase in our expenses of approximately $4.9 million in the year ended December 31, 2021.
Interest Rate Sensitivity
We are not currently exposed significantly to market risk related to changes in interest rates, as we have no significant interest-bearing liabilities. We had cash and cash equivalents of $194.4 million as of December 31, 2022, which were primarily held as account balances with banks in the United Kingdom, United States and Australia. A hypothetical 10% relative change in interest rates during any of the periods presented would not have had a material impact on our financial statements.
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Financial Statements and Supplementary Data
Consolidated Financial Statements
Our audited consolidated financial statements are included at the end of this Annual Report, starting at page F-1.
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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2022. The term “disclosure controls and procedures”, means controls and other procedures of a company that are designed to provide reasonable assurance that the information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that the information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Notwithstanding the ineffective disclosure controls and procedures as a result of the identified material weaknesses, management has concluded that the consolidated financial statements included elsewhere in this Annual Report on Form 10-K present fairly, in all material respects, the Company’s financial position, results of operations and cash flows in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”).
Management’s Annual Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, and for the assessment of the effectiveness of internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP.
A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In making its assessment of the Company’s internal control over financial reporting as of December 31, 2022, management used the criteria set forth in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and evaluated the internal control over financial reporting. As a result of the material weaknesses described below, management concluded our internal control over financial reporting was not effective as of December 31, 2022 based on criteria in Internal Control-Integrated Framework (2013) issued by the COSO.
Management previously reported, in our Annual Report on Form 10-K for the year ended December 31, 2021, material weaknesses in our internal control over financial reporting related to: (i) our IT general control environment has not been sufficiently designed to include appropriate user access rights and (ii) policies and procedures with respect to the review, supervision and monitoring of our accounting and reporting functions were either not designed and in place or not operating effectively.
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As of the year ended December 31, 2022, in addition to the above material weakness on IT general control user access rights, we also identified additional deficiencies related to the design and implementation of controls over program development, program changes, and computer operations.
Remediation Efforts
During fiscal year 2022, we undertook efforts to remediate previously disclosed material weaknesses, including assessing and identifying risks to financial reporting over all business processes impacting financial reporting and implementation of controls over critical accounting policies and estimates. Although we made substantial progress throughout the year, the design and operation of SOX-level controls remained ongoing as of December 31, 2022, due to a significant amount of progress occurring in the second half of the year, and therefore being unable to determine if a control had been formalized, operated and tested with enough instances to be embedded within the control environment for fiscal year 2022. In implementing SOX in 2022, management applied a risk based approach, focusing on establishing and testing controls over the critical accounting policies and estimates such as going concern, revenue, contingent consideration, impairment and leases, as a priority. Some business process controls over critical accounting policies and estimates established in the fiscal year that were dependent on systems without effective IT general controls were deemed ineffective because they could be adversely impacted by the lack of system controls. Our internal control remediation efforts will continue into fiscal year 2023 and focus on the areas detailed below.
Planned Remediation Activities
(i) IT general controls
We are taking measures to address the IT environment through the implementation of a new enterprise resource planning (“ERP”) system and controls over program development, program changes, computer operations and access rights. We have implemented the new ERP system for the U.K. Company in the first quarter of 2023, and plan to rollout implementation of the new ERP system to the U.S. Company later in 2023.
For the new ERP system and all other IT systems deemed significant to financial reporting, we plan to implement: (i) program change management controls to ensure that IT program and data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized, and implemented appropriately; (ii) user access controls to ensure appropriate segregation of duties exist, to adequately restrict user and privileged access to certain financial applications, programs and data to appropriate company personnel; (iii) computer operations controls to ensure that critical batch jobs are monitored and data backups are authorized and monitored, (iv) testing and approval controls for program development to ensure that changes are aligned with business and IT requirements, and (v) identification and testing of system-generated information and calculations used in the execution of manual controls.
We are taking measures to address this material weakness, which includes hiring appropriate personnel whose roles are to enhance policies and procedures with respect to the review, supervision, formalization and monitoring of our accounting and reporting functions. Additionally, we plan to enhance business process controls through the following activities:
As we monitor and evaluate our ICFR, we will continue to assess the effectiveness of our remediation plan and prioritize our resources.
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Attestation Report of the Registered Public Accounting Firm
This Annual Report does not include an attestation report of our registered public accounting firm due to an exemption provided by the JOBS Act for “emerging growth companies.”
Changes in Internal Control over Financial Reporting
Other than the changes related to the ongoing remediation activities related to the material weaknesses noted above, no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the year ended December 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
Not applicable.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not Applicable.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required under this item is incorporated herein by reference to our definitive proxy statement for our 2023 Annual General Meeting to be filed with the U.S. Securities and Exchange Commission.
Item 11. Executive Compensation
The information required under this item is incorporated herein by reference to our definitive proxy statement for our 2023 Annual General Meeting to be filed with the United States Securities and Exchange Commission.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required under this item is incorporated herein by reference to our definitive proxy statement for our 2023 Annual General Meeting to be filed with the U.S. Securities and Exchange Commission.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required under this item is incorporated herein by reference to our definitive proxy statement for our 2023 Annual General Meeting to be filed with the United States Securities and Exchange Commission.
Item 14. Principal Accounting Fees and Services
The information required under this item is incorporated herein by reference to our definitive proxy statement for our 2023 Annual General Meeting to be filed with the United States. Securities and Exchange Commission.
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PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) The following documents are filed as part of this report:
(1) Financial Statements.
The financial statements filed as part of this report are listed on the Index to Consolidated Financial Statements in Item 8.
(2) Financial Statement Schedules.
No schedules are submitted because they are not applicable, not required, or because the information is included in the consolidated financial statements or the notes thereto.
(3) Exhibits.
EXHIBIT INDEX
Exhibits number Description of exhibit
4.2 Form of American Depositary Receipt (included in Exhibit 4.1).
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21.1* Subsidiaries of the Registrant.
23.2* Consent of BDO LLP, independent registered public accounting firm.
24.1* Power of Attorney (included on signature page to this Annual Report).
101.INS* XBRL Instance Document
101.SCH* XBRL Taxonomy Extension Schema Document
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* XBRL Taxonomy Extension Label Linkbase Document
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document
* Filed or furnished herewith.
+ The certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to be furnished with this Annual Report and will not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the Registrant specifically incorporates it by reference.
Item 16. Form 10-K Summary
Not Applicable.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
By: /s/ WILLIAM ENRIGHT
William Enright
Chief Executive Officer
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POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints William Enright and Gemma Brown, and each of them, as his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature Title Date
/s/ WILLIAM ENRIGHT Chief Executive Officer and Director March 24, 2023
William Enright (Principal Executive Officer)
/s/ GEMMA BROWN Chief Financial Officer March 24, 2023
Gemma Brown (Principal Financial and Accounting Officer)
/s/ ROBIN WRIGHT Chairman and Director March 24, 2023
Robin Wright
/s/ ALEX HAMMACHER Director March 24, 2023
Alex Hammacher
/s/ PIERRE A. MORGON Director March 24, 2023
Pierre A. Morgon
/s/ ANNE M. PHILLIPS Director March 24, 2023
Anne M. Phillips
/s/ KAREN T. DAWES Director March 24, 2023
Karen T. Dawes
/s/ JOSEPH C. F. SCHEEREN Director March 24, 2023
Joseph C. F. Scheeren
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Consolidated Balance Sheets F-1
Consolidated Statements of Operations and Comprehensive Loss F-2
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Vaccitech plc
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Vaccitech plc and its subsidiaries (the “Company’) as of December 31, 2022, and the related consolidated statement of operations and comprehensive loss, of changes in redeemable convertible preferred shares and shareholders’ equity, and of cash flows for the year then ended, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Reading, United Kingdom
March 24, 2023
We have served as the Company’s auditor since 2022.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Vaccitech plc
Oxford, United Kingdom
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Vaccitech plc (the “Company”) as of December 31, 2021, the related consolidated statements of operations and comprehensive loss, changes in redeemable convertible preferred shares and shareholders’ equity (deficit), and cash flows for the year ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021, and the results of its operations and its cash flows for the year ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ BDO LLP
BDO LLP
We have served as the Company’s auditor from 2017 through 2022.
London, United Kingdom
March 25, 2022
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VACCITECH PLC
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
As of As of
December 31, December 31,
ASSETS
Accounts receivable 323 20
Accounts receivable – related parties 5,524 —
Research and development incentives receivable 4,541 6,229
Prepaid expenses and other current assets 8,268 6,462
Property and equipment, net 7,957 1,829
Right of use assets, net 7,753 7,257
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accrued expenses and other current liabilities 8,061 7,875
Deferred revenue — 182
Operating lease liability - current 433 523
Debt — 159
Non-Current liabilities:
Operating lease liability 8,340 6,540
Contingent consideration 1,711 2,371
Other non-current liabilities 965 —
Deferred tax liability, net 3,746 8,084
Commitments and contingencies (Note 17)
Shareholders’ equity:
Noncontrolling interest 305 437
Total liabilities and shareholders’ equity $ 270,205 $ 280,715
1Indicates amount less than one thousand
The accompanying notes are an integral part of these consolidated financial statements.
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VACCITECH PLC
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
Year ended Year ended
December 31, December 31,
Service revenue — 21
Research grants and contracts 9 184
Operating expenses
Other income (expense):
Unrealized foreign exchange gain on convertible loan notes — 209
Loss on extinguishment of convertible loan notes — (13,789)
Interest income 3,103 2
Interest expense (19) (2,668)
Research and development incentives 1,240 4,001
Total other income/(expense) 4,891 (5,919)
Profit/(loss) before income tax 850 (51,140)
Net loss attributable to noncontrolling interest 21 247
Comprehensive loss attributable to noncontrolling interest 132 250
1Includes license revenue from related parties for the year ended December 31, 2022 totaling $43.7 million (December 31, 2021: $nil).
The accompanying notes are an integral part of these consolidated financial statements.
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VACCITECH PLC
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED SHARES
AND SHAREHOLDERS’ EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
1 Indicates amount less than one thousand
The accompanying notes are an integral part of these consolidated financial statements.
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VACCITECH PLC
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED SHARES
AND SHAREHOLDERS’ EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
Year ended December 31, 2021
1 Indicates amount less than one thousand
The accompanying notes are an integral part of these consolidated financial statements.
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VACCITECH PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Year ended Year ended
December 31, December 31,
CASH FLOWS FROM OPERATING ACTIVITIES:
Depreciation and amortization 4,323 602
Non-cash lease expenses 1,216 338
Unrealized foreign exchange gain on convertible loan notes — (209)
Change in contingent consideration (73) —
Non cash interest expense 19 813
Loss on extinguishment of convertible loan notes — 13,789
Deferred tax expense (4,337) (119)
Profit on sale of property and equipment (348) —
Changes in operating assets and liabilities:
Accounts receivable (including related parties) (5,833) 559
Prepaid expenses and other current assets (2,170) (4,221)
Research and development incentives receivable 1,158 (3,607)
Accrued expenses and other current liabilities 751 4,417
Deferred revenue (183) (63)
Net cash used in operating activities $ (14,431) $ (32,583)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiary, net of cash acquired — (11,766)
Proceeds from sale of property and equipment 388 —
Purchases of property and equipment (6,138) (1,146)
Net cash used in investing activities $ (5,750) $ (12,912)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issue of shares from the exercise of stock options 0 1 9
Contributions from noncontrolling interest — 296
Repayment of debt (159) —
Transaction costs for Series B shares — (3,402)
Proceeds from issue of Series B shares — 125,239
Initial public offering cost — (2,165)
Proceeds from initial public offering — 102,765
Proceeds from issue of ordinary shares 484 —
Net cash provided by financing activities $ 325 $ 222,742
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS 187 (6,459)
Net (decrease)/ increase in cash and cash equivalents (19,669) 170,788
Cash and cash equivalents, beginning of the year 214,054 43,266
Cash and cash equivalents, end of the year $ 194,385 $ 214,054
Supplemental cash flow disclosures:
Cash paid for interest $ 0 1 $ 1,844
Cash paid for income taxes $ 0 1 $ 152
Non-Cash investing and financing activities
Issue of ordinary shares $ 0 1 $ 21,118
Issue of deferred A shares $ — $ 86
Issue of deferred B shares $ — $ 8
Issue of deferred C shares $ — $ 0 1
Issue of Series B shares $ — $ 53,721
Conversion of Series A and B to ordinary shares $ — $ 209,229
Cash consideration on acquisition of subsidiary payable $ — $ 400
Asset retirement obligation $ 999 $ —
Measurement period adjustments $ (38) $ —
Contingent Consideration settled in equity $ 78 $ —
1 Indicates amount less than one thousand
The accompanying notes are an integral part of these consolidated financial statements.
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VACCITECH PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Basis of Presentation
Nature of business