VBI Vaccines Inc/BC - Quarter Report: 2019 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2019

OR

For the transition period from _______ to

Commission file number: 001-37769

VBI VACCINES INC.

(Exact name of registrant as specified in its charter)

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

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

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

Yes [X] No [  ]

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

Yes [X] No [  ]

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

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

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

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

VBI VACCINES INC.

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED June 30, 2019

TABLE OF CONTENTS

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

This quarterly report on Form 10-Q (this “Form 10-Q”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. You can find many (but not all) of these statements by looking for words such as “approximates,” “believes,” “hopes,” “expects,” “anticipates,” “estimates,” “projects,” “intends,” “plans,” “would,” “should,” “could,” “will”, “may,” or other similar expressions in this Form 10-Q. In particular, these include statements relating to future actions; prospective products, applications, customers and technologies; future performance or results of anticipated products; anticipated expenses; and projected financial results. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of risks, uncertainties and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections described under the sections in this Quarterly Report on Form 10-Q entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2018 annual report on the Form 10-K filed with the Securities and Exchange Commission on February 25, 2019. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

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

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

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

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

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

VBI Vaccines Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share amounts)

See accompanying Notes to Condensed Consolidated Financial Statements

VBI Vaccines Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(in thousands, except share and per share amounts)

See accompanying Notes to Condensed Consolidated Financial Statements

VBI Vaccines Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(in thousands, except share amounts)

See accompanying Notes to Condensed Consolidated Financial Statements

VBI Vaccines Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

See accompanying Notes to Condensed Consolidated Financial Statements

VBI Vaccines Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(in thousands, except share and per share amounts)

1. NATURE OF BUSINESS AND CONTINUATION OF BUSINESS

Corporate Overview

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

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

The Company’s registered office is located at Suite 1700, Park Place, 666 Burrard Street, Vancouver, BC V6C 2X8 with its principal office located at 222 Third Street, Suite 2241, Cambridge, MA 02142. In addition, the Company has manufacturing facilities located in Rehovot, Israel and research facilities located in Ottawa, Ontario, Canada.

Principal Operations

VBI is a commercial-stage, biopharmaceutical company developing next generation vaccines to address unmet needs in infectious disease and immuno-oncology. We currently manufacture our product, Sci-B-Vac, a third generation prophylactic Hepatitis B vaccine, which is approved for use in Israel and 10 other countries. Sci-B-Vac has not yet been approved by the United States Food and Drug Administration (the “FDA”), the European Medicines Agency (the “EMA”) or Health Canada. VBI is currently conducting a global Phase III clinical program to obtain FDA, EMA and Health Canada market approvals for commercial sale of Sci-B-Vac in the United States, Europe, and Canada, respectively. Our wholly-owned subsidiary in Rehovot, Israel, currently manufactures and sells Sci-B-Vac. We are also developing a protein-based immunotherapeutic for treatment of Hepatitis B in collaboration with Brii Biosciences Limited (“Brii Bio”).

We are also developing a pipeline of products that target unmet medical needs in infectious disease and oncology. These programs are developed using VBI’s proprietary technology, the enveloped “Virus Like Particle” or “eVLP” vaccine platform, that allows for the design of enveloped virus-like particle vaccines that closely mimic the target viruses. VBI’s lead eVLP programs are targeting human cytomegalovirus (“CMV”), an infection that can lead to serious complications in newborns, solid organ transplant recipients, and people with weakened immune systems, and that is present in glioblastoma (“GBM”), an aggressive form of adult brain cancer.

Liquidity and Going Concern

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

The Company has an accumulated deficit of $235,351 as of June 30, 2019 and cash outflows from operating activities of $26,304 for the six months ended June 30, 2019.

The Company will require significant additional funds to conduct clinical and non-clinical trials, achieve regulatory approvals, and, subject to such approvals, commercially launch its products. The Company plans to finance its future operations with existing cash reserves. Additional financing may be obtained from the issuance of equity securities, the issuance of additional debt, structured asset financings, and/or revenues from potential collaborations, if any. There is no assurance the Company will manage to obtain these sources of financing, if required. The above conditions raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.

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

The carrying amounts of the Company’s long-term assets approximate their respective fair values.

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Consolidation

The Company’s fiscal year ends on December 31 of each calendar year. The accompanying unaudited condensed consolidated financial statements have been prepared in U.S. dollars (“USD”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”), for interim reporting. Accordingly, certain information and footnote disclosures normally included in the financial statements prepared in accordance with United States of America generally accepted accounting principles (“U.S. GAAP”), have been condensed or omitted pursuant to such rules and regulations. The December 31, 2018 consolidated balance sheet in this document was derived from the audited consolidated financial statements. The condensed consolidated financial statements and notes included in this quarterly report on Form 10-Q (this “Form 10-Q”) does not include all of the disclosures required by U.S. GAAP and should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 10-K”), as filed with the SEC on February 25, 2019.

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries: SciVac, VBI DE, VBI US, VBI Cda and SciVac HK. Intercompany balances and transactions between the Company and its subsidiaries are eliminated in the condensed consolidated financial statements.

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

Significant Accounting Policies

The significant accounting policies used in the preparation of these condensed consolidated financial statements are disclosed in the 2018 10-K, and there have been no changes to the Company’s significant accounting policies during the six months ended June 30, 2019, other than accounting for leases discussed below.

Leases

The Company determines if an arrangement is a lease at inception. For the Company’s operating leases, the right-of-use (“ROU”) assets represents the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent an obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Since the lease agreements do not provide an implicit rate, the Company estimated an incremental borrowing rate in determining the present value of the lease payments. Operating lease expense is recognized on a straight-line basis over the lease term, subject to any changes in the lease or expectations regarding the terms. Variable lease costs such as operating costs and property taxes are expensed as incurred. See also Note 3.

3. NEW ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

Leases

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. On January 1, 2019, the Company adopted the new lease standard using the optional transition method under which comparative financial information will not be restated and continue to apply the provisions of the previous lease standard in its annual disclosures for the comparative periods. In addition, the new lease standard provides a number of optional practical expedients in transition. The Company elected the package of practical expedients. As such, the Company did not have to reassess whether expired or existing contracts are or contain a lease; did not have to reasses the lease classifications or reasses the initial direct costs associated with expired or existing leases.

The new lease standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption under which the Company will not recognize ROU assets or lease liabilities for short term leases. The Company elected the practical expedient to not separate lease and non-lease components.

On January 1, 2019, the Company recognized ROU assets and lease liabilities of $1,653 on its consolidated balance sheet.

Compensation – Stock Compensation

In June 2018, the FASB issued ASU 2018-07: Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees, and as a result, the accounting for share-based payments to non-employees will be substantially aligned. Our adoption of this ASU, effective January 1, 2019, did not have a material impact on our condensed consolidated financial statements and footnote disclosures.

Recently Issued Accounting Standards, not yet Adopted

Intangibles – Goodwill and Other, Internal-Use Software

In August 2018, the FASB issued ASU 2018-15: Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customers’ accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Accordingly, the amendments require an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. This ASU can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently evaluating the impact this new guidance will have on its condensed consolidated financial statements and related disclosures.

4. INVENTORY, NET

Inventory is stated at the lower of cost or market and consists of the following:

5. INTANGIBLES AND GOODWILL

The Company amortizes intangible assets with finite lives on a straight-line basis over their estimated useful lives.

Amortization related to the IPR&D assets will not begin amortizing until the Company commercializes its products.

The change in carrying value for IPR&D assets from December 31, 2018 relates to currency translation adjustments which increased by $2,361 for the six-month period ended June 30, 2019.

The goodwill is in VBI Cda and the change in carrying value from December 31, 2018 relates to currency translation adjustments which increased goodwill by $335 for the six-month period ended June 30, 2019.

6. OTHER CURRENT LIABILITIES

Other current liabilities consisted of the following:

7. LOSS PER SHARE OF COMMON SHARES

Basic loss per share is computed by dividing net loss applicable to common stockholders by the weighted average number of common shares outstanding during each period. Diluted loss per share includes the effect, if any, from the potential exercise or conversion of securities, such as warrants, and stock options, which would result in the issuance of incremental shares of common shares unless such effect is anti-dilutive. In computing the basic and diluted net loss per share applicable to common stockholders, the weighted average number of shares remains the same for both calculations due to the fact that when a net loss exists, dilutive shares are not included in the calculation as their effect would be anti-dilutive. These potentially dilutive securities are more fully described in Note 9, Stockholders’ Equity and Additional Paid-in Capital.

The following potentially dilutive securities outstanding at June 30, 2019 and 2018 have been excluded from the computation of diluted weighted average shares outstanding, as they would be antidilutive:

8. LONG-TERM DEBT – RELATED PARTY

As at June 30, 2019 and December 31, 2018, the long-term debt is as follows:

On May 6, 2016, the Company through VBI US assumed a term loan facility with Perceptive Credit Holdings, LP, a related party, (the “Lender”) in the amount of $6,000 (the “Facility”). On December 6, 2016, the Company amended the Facility (the “Amended Credit Facility”) and raised the Lender’s commitment amount to $13,200, which was combined with the remaining balance from the Facility of $1,800. On July 17, 2018, the Company amended the Amended Credit Facility (the “Second Amendment”) to extend the period the Company is required to pay only the interest on the loan from May 31, 2018 to December 31, 2018 and to extend the expiration date of certain warrants to purchase 363,771 common shares issued to the Lender with an original expiration date of July 25, 2019 to December 6, 2021. The Company accounted for this as a debt modification, and as a result of the extension of the warrant expiration date in connection with the Second Amended Facility, the debt discount was increased by $386. This amount represents the incremental fair value of the modified warrants.

On January 31, 2019, the Company further amended the Amended Credit Facility (the “Third Amendment”) to i) extend the period the Company is required to pay only the interest on the loan from December 31, 2018 to January 31, 2020, ii) extend the maturity of the term loan to June 30, 2020 and iii) reduce the exercise price on certain warrants to purchase common shares issued to the Lender to $2.75 from $4.13 for 363,771 warrants issued on July 25, 2014 and for 363,771 warrants issued on December 6, 2016 and from $3.355 for 1,341,282 warrants issued on December 6, 2016. The Company has accounted for this as a debt modification, and as result of the amendment to the exercise price in connection with the Third Amendment, the debt discount was increased by $179. This amount represents the incremental fair value of the modified warrants.

The total principal amount of the loan under the Amended Credit Facility outstanding at June 30, 2019, including the $300 exit fee discussed below, is $15,300. The principal amount of the loan made under the Amended Credit Facility accrues interest at an annual rate equal to the greater of (a) one-month LIBOR (subject to a 5.00% cap) or (b) 1.00%, plus the Applicable Margin. The Applicable Margin will be 11.00%. The Company was required to only pay interest initially until May 31, 2018, which date was extended to December 31, 2018, pursuant to the Second Amendment and further extended to the Amortization Commencement Date pursuant to the Third Amendment. The interest rate as of June 30, 2019 was 13.50%. Upon the occurrence of an Event of Default (as defined in the Amended Credit Facility), and during the continuance of an event of default, the Applicable Margin, defined above, will be increased by 4.00% per annum. This term loan facility maturity date has been extended from December 6, 2019 to June 30, 2020 and includes both financial and non-financial covenants, including a minimum cash balance requirement. The Company was in compliance with these covenants as of June 30, 2019. Pursuant to the Amended Credit Facility, the Company agreed that the Lender shall designate an individual who would be appointed to the Company’s board of directors (the “Board”). The Lender’s designee was also a portfolio manager of the Company’s largest shareholder. Effective January 2018, the Lender’s designee resigned from our Board.

The Company’s obligations under the Amended Credit Facility are secured on a senior basis by a lien on substantially all of the assets of the Company and its subsidiaries and are guaranteed by the Company and its subsidiaries. The Amended Credit Facility also contains customary events of default.

The total debt discount of $4,018 is being charged to interest expense using the effective interest method over the term of the debt. As of June 30, 2019, and December 31, 2018, the unamortized debt discount is $944 and $1,274, respectively.

At June 30, 2019 and December 31, 2018, the fair value of our outstanding debt, which is considered level 3 in the fair value hierarchy, is estimated to be approximately $15,348 and $14,975, respectively.

Interest expense, net of interest income recorded in the three and six months ended June 30, 2019 and 2018 was as follows:

The following table summarizes the future principal payments due under long-term debt:

9. STOCKHOLDERS’ EQUITY AND ADDITIONAL PAID-IN CAPITAL

Stock option plans

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

2006 VBI US Stock Option Plan

No further options will be issued under the 2006 VBI US Stock Option Plan (the “2006 Plan”). As at June 30, 2019, there were 1,112,696 options outstanding under the 2006 Plan.

2013 Equity Incentive Plan

No further options will be issued under the 2013 Equity Incentive Plan (the “2013 Plan”). As at June 30, 2019, there were no options outstanding under the 2013 Plan.

2014 Equity Incentive Plan

No further options will be issued under the 2014 Equity Incentive Plan (the “2014 Plan”). As at June 30, 2019, there were 521,242 options outstanding under the 2014 Plan.

2016 VBI Incentive Plan

The 2016 VBI Equity Incentive Plan (the “2016 Plan”) is a rolling incentive plan that sets the number of common shares issuable under the 2016 Plan, together with any other security-based compensation arrangement of the Company, at a maximum of 10% of the aggregate common shares issued and outstanding on a non-diluted basis at the time of any grant under the 2016 Plan. The 10% maximum is inclusive of options granted under all equity incentive plans. The 2016 Plan is an omnibus equity incentive plan pursuant to which the Company may grant equity and equity-linked awards to eligible participants in order to promote the success of the Company by providing a means to offer incentives and to attract, motivate, retain and reward persons eligible to participate in the 2016 Plan. Grants under the 2016 Plan include a grant or right consisting of one or more options, stock appreciation rights (“SARs”), restricted share units (“RSUs”), performance share units (“PSUs”), shares of restricted stock or other such award as may be permitted under the 2016 Plan. As at June 30, 2019, there were 5,106,286 options and 246,531 stock awards outstanding under the 2016 Plan.

The aggregate number of common shares remaining available for issuance for awards under the 2016 Plan total 1,676,460 at June 30, 2019.

Activity related to stock options is as follows:

Information relating to RSUs is as follow:

In determining the amount of stock-based compensation the Company used the Black-Scholes option pricing model to establish the fair value of options granted by applying the following weighted average assumptions:

The fair value of the options is recognized as an expense on a straight-line basis over the vesting period and forfeitures are accounted for when they occur. The total stock-based compensation expense recorded in the three and six months ended June 30, 2019 and 2018 was as follows:

10. REVENUES AND DEFERRED REVENUE

Revenue is comprised of the following:

The following table presents revenues expected to be recognized in the future related to performance obligations, based on current estimates, that are unsatisfied at June 30, 2019:

The following table presents changes in the deferred revenue balance for the year ended December 31, 2018:

Collaboration and License Agreement – Brii Bio

On December 4, 2018, we entered into a Collaboration and License Agreement with Brii Bio (the “Collaboration and License Agreement”), whereby:

Pursuant to the Collaboration and License Agreement, the Company is responsible for the R&D services and Brii Bio is responsible for costs relating to the clinical trials for the Licensed Territory.

The initial consideration of the Collaboration and License Agreement consisted of a $11 million non-refundable upfront payment. As part of the Collaboration and License Agreement, the Company and Brii Bio entered into a stock purchase agreement. Under the terms of the stock purchase agreement, the Company issued to Brii Bio 2,295,082 shares of its common stock valued at $3.6 million (based on the Company’s common stock price on December 4, 2018). The remaining $7.4 million, deemed to be the initial transaction price, was allocated to two performance obligations: i) the VBI-2601 license and ii) R&D services. The R&D services were allocated $4.8 million of the transaction price using an estimated selling price based on an expected cost plus a margin approach and the remaining transaction price of $2.6 million was allocated to the VBI-2601 license using the residual method.

In addition, the Company is also eligible to receive an additional $117.5 million in potential regulatory and sales milestone payments, along with royalties on commercial sales in the licensed territory. Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. Therefore, no variable consideration was included in the initial transaction price and no such amounts have been recognized to date.

On December 4, 2018, the Company recognized the VBI-2601 license when it was granted and Brii Bio is able to use and benefit from the license, as it was determined to be distinct. The R&D Services will be satisfied over time as services are rendered using the “cost-to-cost” input method as this method represents the most accurate depiction of the transfer of services based on the types of costs expected to be incurred. As at June 30, 2019 R&D services related to Brii Bio that remain unsatisfied are $4.0 million, out of the $4.6 million total deferred revenue.

Upon termination of the Collaboration and License Agreement prior to the end of the term, there is no obligation for refund and any amounts in deferred revenue related to unsatisfied performance obligations will be immediately recognized.

11. INCOME TAXES

The Company operates in U.S., Israel and Canadian tax jurisdictions. Its income is subject to varying rates of tax, and losses incurred in one jurisdiction cannot be used to offset income taxes payable in another.

The Company determines its annual effective tax rate at the end of each interim period based on the year to date period results. Since the Company is incorporated in Canada, it is required to use Canada’s statutory tax rate of 26.50% in the determination of the estimated annual effective tax rate.

The Company’s effective tax rate on loss before tax for the three and six months ended June 30, 2019 of 0.0% (0.0% for the three and six months ended June 30, 2018) differs from the Canadian statutory rate of 26.50% primarily due to recording a valuation allowance on the Canadian deferred tax assets in excess of the remaining Canadian deferred tax liability and the effect of recording a valuation allowance against deferred tax assets in all other jurisdictions.

The Company maintains a valuation allowance on all of its deferred tax assets. A valuation allowance is required when, based upon an assessment of various factors, including recent operating loss history, anticipated future earnings, and prudent and reasonable tax planning strategies, it is more likely than not that some portion of the deferred tax assets will not be realized.

12. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

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

On September 13, 2018, two actions were brought in the District Court of the central district in Israel naming our subsidiary SciVac as a defendant. In one claim, two minors, through their parents, allege among other things, defects in certain batches of Sci-B-Vac discovered in July 2015; that Sci-B-Vac was approved for use in children and infants in Israel without sufficient evidence establishing its safety; that SciVac failed to provide accurate information about Sci-B-Vac to consumers and that each child suffered side effects from the vaccine. The claim was filed together with a motion seeking approval of a class action on behalf of 428,000 children vaccinated with Sci-B-Vac in Israel from April, 2011 and seeking damages in a total amount of NIS 1,879,500,000 (not in thousands) ($527,061). The second claim is a civil action brought by two minors and their parents against SciVac and the Israel Ministry of Health alleging, among other things, that SciVac marketed an experimental, defective, hazardous or harmful vaccine; that Sci-B-Vac was marketed in Israel without sufficient evidence establishing its safety; and that Sci-B-Vac was produced and marketed in Israel without approval of a western regulatory body. The claim seeks damages for past and future losses and expenses as well as punitive damages.

SciVac believes these matters to be without merit and intends to defend these claims vigorously.

The District Court has accepted SciVac’s motion to suspend reaching a decision on the approval of the class action pending the determination of liability under the civil action. The trial of the civil action has been scheduled to begin on September 19, 2019.

Operating leases

The Company has entered into various non-cancelable lease agreements for its office, lab and manufacturing facilities, which are classified as operating leases. The office facility lease agreement in the United States expires on April 30, 2020, with no option to extend. Our manufacturing facility lease agreement expires on January 31, 2022, which includes one five-year option to extend until January 31, 2027. The lease agreement for our research facility in Canada, which comprises of office and laboratory space, expires on December 31, 2019 with the option to extend the term for two periods of three years.

Options to extend are not recognized as part of the lease liabilities or recognized as right to use assets. There are no residual value guarantees, no variable lease payments, and no restrictions or covenants imposed by leases. The discount rate used in measuring the lease liabilities and right of use assets was determined by reviewing our incremental borrowing rate at the initial measurement date.

Rent expense for the three and six months ended June 30, 2018 was $229 and $445, respectively.

Operating lease costs are included in general and administrative (“G&A”) expenses in the statement of operation and comprehensive loss.

Operating cash flow supplemental information as of June 30, 2019:

On January 1, 2019, initial right of use (“ROU”) assets of $1,653 was recognized as a non-cash asset addition with the adoption of the new lease standard. During the six months ended June 30, 2019, the Company entered into a new lease agreement and recognized a ROU asset of $249.

The following table summarizes future undiscounted cash payments reconciled to the lease liabilities:

13. SEGMENT INFORMATION

The Company’s Chief Executive Officer (“CEO”) has been identified as the chief operating decision maker. The CEO evaluates the performance of the Company and allocates resources based on the information provided by the Company’s internal management system at a consolidated level. The Company has determined that it has only one operating segment.

Revenues from external customers are attributed to geographic areas based on location of the contracting customers:

There was no revenue attributed to our country of domicile, Canada, for the three and six months ended June 30, 2019 and 2018.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the related notes included elsewhere in this Form 10-Q and with our audited consolidated financial statements included in our 2018 10-K as filed with the SEC.

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

Overview

We are a commercial-stage, biopharmaceutical company developing next generation vaccines to address unmet needs in infectious disease and immuno-oncology. Our lead product, Sci-B-Vac, is a prophylactic Hepatitis B vaccine for use in adults, children and newborns, which is approved for use in Israel and 10 other countries. Sci-B-Vac has not yet been approved for use by the FDA, EMA or Health Canada. We are currently conducting a global Phase III clinical program for Sci-B-Vac designed to support regulatory filings to the FDA, EMA, and Health Canada for commercial sale of Sci-B-Vac in the United States, Europe, and Canada respectively. The program consists of two concurrent Phase III studies - a safety and immunogenicity study (“PROTECT”) and a lot-to-lot consistency study (“CONSTANT”).

On June 17, 2019, we announced positive top-line results from the randomized, double-blind, pivotal Phase III study, PROTECT, designed to evaluate the efficacy and safety of a 10µg dose of Sci-B-Vac compared with a 20µg dose of the comparator vaccine, Engerix-B®. The study, which enrolled a total of 1,607 adults, of which 81% were age ≥ 45 years, met both of its co-primary endpoints:

Moreover, SPR of Sci-B-Vac compared with Engerix-B was statistically significantly higher in all key subgroup analyses of adults age ≥ 18 years, including by age, gender, body mass index (BMI), diabetic status, and smoking status, 4 weeks after 3^rd vaccination (at day 196):

The safety and tolerability seen in PROTECT was consistent with the known safety profile of Sci-B-Vac, with no new safety risks identified and no safety signals observed in either study cohort. Moreover, there were no observed clusters or unusual patterns of adverse events – the adverse events were generally consistent with characteristics of the study population.

The PROTECT study did not meet the secondary endpoint of non-inferiority of two doses of Sci-B-Vac (at day 168) compared with three doses of Engerix-B (at day 196) in all subjects age ≥ 18 years; however, the SPR of Sci-B-Vac compared with Engerix-B was statistically significantly higher at each time point on a per-visit basis. The non-inferiority analysis of two doses of Sci-B-Vac compared with three doses of Engerix-B in subjects age 18-45 years will be reassessed based on the complete integrated data analyses from both the PROTECT and the CONSTANT studies. The top-line data from the CONSTANT study is expected around year-end 2019.

Subject to successful completion of the CONSTANT study, we expect to submit applications for regulatory approvals in the United States, Europe, and Canada beginning mid-year 2020.

We are also developing VBI-2601, a recombinant, protein-based immunotherapeutic for the treatment of Hepatitis B, a disease that affects more that 250 million people worldwide. Chronic Hepatitis B infection can lead to cirrhosis of the liver, hepatocellular cancer, and other liver disease, making it a life-threatening global health problem. VBI-2601 is formulated to induce broad immunity against the Hepatitis B virus, including T-cell immunity which plays an important role in controlling Hepatitis B infection. On December 6, 2018, the Company announced that it had entered into the Collaboration and License Agreement with Brii Bio, pursuant to which, among other things, subject to terms and conditions set forth in the Collaboration and License Agreement, we and Brii Bio agreed to collaborate on the development of a hepatitis B recombinant protein-based immunotherapeutic in the licensed territory, which consists of China, Hong Kong, Taiwan and Macau, and to conduct a Phase II collaboration clinical trial for the purpose of comparing VBI-2601 with a novel composition developed jointly with Brii Bio. We expect to initiate enrollment in the Phase II clinical proof-of concept study in Q4 2019, which would enable an initial data readout mid-year 2020.

We are also advancing a pipeline of eVLP programs, developed with our eVLP platform technology that allows for the design of vaccines that closely mimic the target viruses. We have programs in both infectious diseases, with our prophylactic CMV (“VBI-1501”) vaccine candidate, and in immuno-oncology, with our GBM (“VBI-1901”) vaccine immunotherapeutic candidate.

CMV may cause severe infections in newborn children (congenital CMV) and may also cause serious infections in people with weakened immune systems, such as solid organ or bone marrow transplant recipients. In May 2018, we announced positive top-line results from the randomized, placebo-controlled Phase I study of VBI-1501. The final Phase I study results demonstrated that VBI-1501 was safe and well-tolerated at all doses, with and without the adjuvant alum. The highest dose of VBI-1501, 2.0µg, with alum, elicited CMV-neutralizing antibodies against fibroblast cell infection in 100% of subjects after the third vaccination, up from 81% of subjects after the second vaccination, inducing titers comparable to those observed in patients protected as a result of natural infection. Neutralizing antibodies against epithelial cell infection were also seen in 31% of subjects after the third vaccination of VBI-1501 2.0µg with alum. The data also showed the formulation of the vaccine with alum enhanced antibody titers. The highest dose of VBI-1501 tested, 2.0µg with alum, has approximately 10-fold less antigen content than that used in several other VLP-based vaccines or in past non-VBI CMV vaccine candidates. In December 2018 we announced plans for a Phase II clinical study evaluating VBI-1501 following positive discussions with Health Canada. We received similarly positive guidance from FDA in July 2019. The Phase II study is expected to assess the safety and immunogenicity of dosages of VBI-1501 up to 20µg with alum. The Investigational New Drug submission for this study is expected around the end of the year.

Our GBM brain cancer vaccine immunotherapeutic program, VBI-1901, targets CMV in tumor cells. CMV is virus that is associated with a number of solid tumors, including GBM. We initiated dosing in a multi-center Phase I/IIa clinical study evaluating VBI-1901 in patients with recurrent GBM in January 2018. The DSMB has completed reviews of all safety data from our fully-enrolled Part A portion of the Phase I/IIa trial in recurrent GBM subjects, which included 6 subjects in each of 3 different dose cohorts. The DSMB unanimously recommended the continuation of the study without modification and had no safety concerns about any of the 3 dose levels of VBI-1901. Enrollment in Part A of the study completed in mid-December 2018. On April 23, 2019, we announced that, based on safety and immunogenicity data, the highest dose tested in Part A of the study, 10µg, has been selected as the optimal dose level to test in Part B of the study.

On June 2, 2019, we presented a poster at the ASCO Annual Meeting that exhibited clinical data from Part A of the Phase I/IIa study of VBI-1901 in recurrent GBM patients. The poster presented data on a total of 18 patients enrolled in Part A of the study, which was a multi-center, open-label, dose-escalation study across three dose cohorts of VBI’s vaccine immunotherapeutic, VBI-1901 – 0.4µg, 2.0µg, and 10.0µg. Part A of the study was designed to evaluate the safety and tolerability of VBI-1901, and to define the optimal immunogenic dose level to test in the Part B extension phase of the study. Part B will also further assess immunologic responses and potential correlations with tumor and clinical responses. In July 2019, the first patient was dosed in Part B of the study, which is designed to enroll 10 GBM patients, all with first-recurrent tumors. We expect initial immunologic data from Part B of the study to become available around year-end 2019 and the expanded immunologic data and correlations with tumor and clinical responses from Part B of the study to become available in the first half of 2020.

Highlights from the poster presentation include:

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

At present, our operations are focused on:

VBI’s revenue generating activities have been the sale of Sci-B-Vac product in markets where it is approved or on a named patient basis where it is not approved, though those markets have generated a limited number of sales to-date, various collaboration agreements, and R&D services generating fees. VBI has incurred significant net losses and negative operating cash flows since inception and expects to continue incurring losses and negative cash flows from operations as we carry out our planned clinical, regulatory, R&D, sales and manufacturing activities with respect to the advancement of our Sci-B-Vac and new pipeline candidates. As of June 30, 2019, VBI had an accumulated deficit of approximately $235 million and stockholders’ equity of approximately $76 million. Our ability to maintain our status as an operating company and to realize our investment in our IPR&D assets is dependent upon obtaining adequate cash to finance our clinical development, manufacturing, our administrative overhead and our research and development activities. We plan to finance future operations with existing cash reserves. We expect that we will need to secure additional financing to finance our business plans, which may be a combination of proceeds from the issuance of equity securities, the issuance of additional debt, structured asset financings and revenues from potential collaborations, if any. There is no assurance the Company will manage to obtain these sources of financing, if required. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements have been prepared assuming that we will continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should we be unable to continue as a going concern.

We have incurred operating losses since inception, have not generated significant product sales revenue and have not achieved profitable operations. We incurred net losses of $13.2 and $27.8 million for the three and six months ended June 30, 2019 and we expect to continue to incur substantial losses in future periods. We anticipate that we will continue to incur substantial operating expenses as we continue our research and development, clinical studies and as we take steps to commercialize our product. These include expenses related to:

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

Equity Financing Activities

In 2018, we received aggregate gross proceeds of $42.9 million from an underwritten public offering of an aggregate of 30,665,304 common shares at a price of $1.40 per share. After deducting the underwriting discounts and commissions and offering expenses, net proceeds from the offering were $39.8 million. Net proceeds from the offering will be used to support our pipeline programs, to continue the advancement of our clinical development and research programs and for other general corporate purposes.

On December 4, 2018, we entered into a Collaboration and License Agreement with Brii Bio, whereby we received a total upfront payment of $11 million to collaborate on the development of a hepatitis B recombinant protein based immunotherapeutic in China, Hong Kong, Taiwan and Macau and to conduct a Phase II collaboration clinical trial. The Collaboration and License Agreement specified an allocation of $7 million of this amount as an equity investment in exchange for 2,295,082 common shares. The Collaboration and License Agreement set forth a price of $3.05 per share which was at a premium to the closing market price of $1.58 on the day of issuance, resulting in actual allocation of the fair value of the 2,295,082 shares being $3.6 million. The remaining $7.4 million of the $11 million consideration received was allocated to the sale of the license and research and development services.

Amended Credit Facility

In 2016, the Company through VBI US assumed the Facility with the Lender, a related party, in the amount of $6,000. On December 6, 2016, the Company amended the Facility by the Amended Credit Facility and raised the Lender’s commitment amount to $13,200, which was combined with the remaining balance from the Facility of $1,800. On July 17, 2018, the Company amended the Amended Credit Facility by the Second Amendment to extend the period the Company is required to pay only the interest on the loan from May 31, 2018 to December 31, 2018 and to extend the expiration date of certain warrants to purchase 363,771 common shares issued to the Lender with an original issue date of July 25, 2014, from July 25, 2019 to December 6, 2021. The Company accounted for this as a debt modification, and as a result of the extension of the warrant expiration date in connection with the Second Amendment, the debt discount was increased by $386. This amount represents the incremental fair value of the modified warrants. On January 31, 2019 we further amended the Amended Credit Facility by the Third Amendment to i) extend the period we are required to pay only the interest on the loan from December 31, 2018 to the Amortization Commencement Date (which is defined as the later of July 31, 2019 and, if the Sci-B-Vac PROTECT Phase III clinical trial primary endpoints were achieved by June 30, 2019, January 31, 2020); ii) to extend the maturity date of the term loan from December 31, 2019 to June 30, 2020 and iii) reduce the exercise price on certain warrants to purchase common shares issued to the Lender to $2.75 from $4.13 for 363,771 warrants issued on July 25, 2014 and for 363,771 warrants issued on December 6, 2016 and from $3.355 for 1,341,282 warrants issued on December 6, 2016. On June 17, 2019, we announced that Sci-B-Vac PROTECT Phase III clinical trial primary endpoints had been achieved, thereby extending the interest only portion of the term loan to January 31, 2020.

Research and Development (“R&D”) Services

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

These R&D services are primarily marketed to the Israeli research community in academia and Israeli biotechnology companies in the life sciences lacking the infrastructure or experience in the development and production of therapeutic proteins to the standards and quality required for clinical trials for human use. In the first half of 2019, the Company provided services to biotechnology companies including analytical development, upstream development process, protein purification and formulation and filling for Phase I clinical studies.

In addition, pursuant to the Collaboration and License Agreement with Brii Bio we provide R&D services to Brii Bio as part of the development of VBI-2601.

Modernization and Capacity Increases of Our Manufacturing Facility

In 2018, we temporarily closed our manufacturing facility in Rehovot, Israel, for modernization and capacity increase. We re-commenced operations in May 2019 and anticipate a review of the modernization and the capacity increase by the Israeli Ministry of Health (“IMoH”) in the second half of 2019. We increased the capacity of our manufacturing facility to be able to supply commercial quantities of Sci-B-Vac upon FDA, and/or EMA and/or Health Canada approval and future clinical supplies of VBI-2601.

Ferring License and SciGen Assignment Agreements

Under a license agreement (“Ferring License Agreement”) with Ferring International Center S.A. (“Ferring”), we are committed to pay Ferring royalties equal to 7% of net sales (as defined therein) of HBsAg “Product” (as defined therein). Under an assignment and assumption agreement (“SciGen Assignment Agreement”), we are required to pay royalties to SciGen Ltd. equal to 5% of net sales (as defined in the Ferring License Agreement) of Product. Under the Ferring License Agreement and the SciGen Assignment Agreement, we originally were to pay royalties on a country-by-country basis until the date 10 years after the date of commencement of the first royalty year in respect of such country. In April 2019, we exercised our option to extend the Ferring License Agreement in respect of all the countries that still make up the territory for an additional 7 years by making a one-time payment to Ferring of $100. Royalties under the Ferring License Agreement and SciGen Assignment Agreement will continue to be payable for the duration of the extended license periods. When the Ferring license has been in effect for, and elapsed after, a 17 year license period with respect to a country in the territory, we will thereafter have a royalty-free license to market in such country. We are in discussion with both parties to review the economic aspects of these agreements given the time period that they have been in place.

Financial Overview

Overall Performance

The Company had net losses of approximately $13,170 and $16,731 for the three months ended June 30, 2019 and 2018, respectively, and $27,776 and $28,982 for the six months ended June 30, 2019 and 2018 respectively. The Company has an accumulated deficit of $235,351 at June 30, 2019. The Company had $30,075 of cash at June 30, 2019 and net working capital deficit of approximately $(1,694).

Cost of revenues

Cost of revenues consist primarily of costs incurred for manufacturing the Sci-B-Vac vaccine, which includes cost of materials, consumables, supplies, contractors and manufacturing salaries. Certain cost of revenues related to the temporary closure of the manufacturing facility of approximately $348 was allocated to G&A expenses.

Research and Development Expenses

R&D expenses consist primarily of costs incurred for the development of Sci-B-Vac, our CMV candidate, our GBM vaccine immunotherapeutic candidate, and VBI-2601, which include:

We expense R&D costs when we incur them.

General and Administrative Expenses

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

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

Interest Income

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

Interest Expense

Interest expense is associated with our Amended Credit Facility as discussed in Note 8 of the Notes to the Condensed Consolidated Financial Statements.

Results of Operations

Three and six Months Ended June 30, 2019 Compared to the Three and six Months Ended June 30, 2018

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

Revenues

Revenue for the three and six months ended June 30, 2019 was $640 and $1,000 as compared to $234 and $412 for the three and six months ended June 30, 2018. Revenues for the three months ended June 30, 2019 increased by $406 or 174% due to R&D services revenues earned pursuant to the Collaboration and License Agreement with Brii Bio offset by a decrease in product revenue due to decreased sales of Sci-B-Vac product on a named patient basis during the three months ended June 30, 2019, compared to the three months ended June 30, 2018.

Revenues for the six months ended increased by $588 or 143% due to R&D services revenues earned pursuant to the Collaboration and License Agreement with Brii Bio offset by a decrease in product revenue due to decreased sales of Sci-B-Vac product on a named patient basis during the six months ended June 30, 2019, compared to the six months ended June 30, 2018.

Revenues by Geographic Region

Cost of Revenues

Cost of revenues for the three months ended June 30, 2019 was $2,354 as compared to $1,067 for the three months ended June 30, 2018. The increase in the cost of revenues of $1,287, or 121%, is due to the following: 1) cost of revenue related to Collaboration and License Agreement with Brii Bio during the three months ended in June 30, 2019 which did not occur in the three months ended June 30, 2018; 2) the re-commencement of manufacturing subsequent to the temporary closure of our manufacturing facility in Rehovot; and 3) a reclassification of certain costs of revenues to general and administrative expenses in the three months ended June 30, 2018 which did not occur in the three months ended June 30, 2019.

Cost of revenues for the six months ended June 30, 2019 was $3,342 as compared to $2,480 for the six months ended June 30, 2018. The increase in the cost of revenues of $862, or 35%, was as a result of the cost of revenues from Brii Bio and the re-commencement of manufacturing as discussed above.

Research and Development Expenses

R&D expenses for the three months ended June 30, 2019 were $ 7,361 as compared to $10,914 for the three months ended June 30, 2018. The decrease in R&D expenses of $3,553 or 33%, is a result of the decrease in the costs related to the ongoing clinical studies of Sci-B-Vac and our GBM vaccine immunotherapeutic candidate which are nearing completion compared to the three months ended June 30, 2018. During the three months ended June 30, 2019 we completed the Sci-B-Vac PROTECT study and completed last patient last vaccination for the Sci-B-Vac CONSTANT study. For our GBM vaccine immunotherapeutic candidate, Part A of the clinical trial is also nearing completion compared to the three months ended June 30, 2018.

R&D expenses for the six months ended June 30, 2019 were $16,588 as compared to $17,879 for the six months ended June 30, 2018. The decrease in R&D expenses of $1,291 or 7% is as result of the decrease of the costs related to the clinical studies of Sci-B-Vac and GBM as discussed above, offset by increased expenses related to the preparation for the Phase II CMV clinical study mainly in the first three months of 2019.

General and Administrative Expenses

G&A expenses for the three months ended June 30, 2019 were $3,194 as compared to $3,987 for the three months ended June 30, 2018. The G&A expense decrease of $793, or 20%, is a result of a decrease in marketing and administrative expenses, the allocation of certain cost of revenues related to the temporary facility closure, to G&A expenses, as discussed above under “Cost of Revenues” and the impairment loss on property and equipment that were incurred during the three months period ended June 30, 2018 that did not re-occur during the three months ended June 30, 2019.

General and administrative (“G&A”) expenses for the six months ended June 30, 2019 were $7,158 as compared to $7,412 for the six months ended June 30, 2018. The G&A expense decrease of $254, or 3%, is a result of the decreased marketing and administrative expenses and the impairment loss on property and equipment that was discussed above for the three months ended June 30, 2019.

Net Loss from Operations

The net loss from operations for the three months ended June 30, 2019 was $12,269 as compared to $15,734 for the three months ended June 30, 2018. The $3,465 decrease in the net loss from operations resulted from the items discussed above.

The net loss from operations for the six months ended June 30, 2019 were $26,088 as compared to $27,359 for the six months ended June 30, 2018. The $1,271 decrease in the net loss from operations resulted from items discussed above.

Interest Expense, net

The interest expense, net of interest income decreased by $70 and $129 for the three and six months ended June 30, 2019 largely resulting from an increase in interest income for the three and six months ended June 30, 2019 compared to the three and six months ended June 30, 2018 due to higher interest rates.

Interest paid on the long-term debt and non-cash accretion related to the debt discount were slightly higher due to the increased interest rate for the three and six months ended June 30, 2019, compared to the three and six months ended June 30, 2018.

Foreign Exchange Loss

The foreign exchange loss of $335 and $642 for the three and six months ended June 30, 2019 and the foreign exchange loss of $361 and $448 for the three months period ended June 30, 2018 are a result of the changes in the foreign currency exchange rates (NIS and CAD) in which the foreign currency transactions were denominated for each of those periods.

Net Loss

Net loss of $13,170 and $27,776 for the three and six months ended June 30, 2019 compared to $16,731 and $28,982 for the three and six months ended June 30, 2018 is a result of the items discussed above.

Liquidity and Capital Resources

As at June 30, 2019, we had cash of $30,075 as compared to $59,270 as at December 31, 2018. As at June 30, 2019, the Company had working capital deficit of $(1,694) as compared to working capital of $38,354 at December 31, 2018. Working capital is calculated by subtracting current liabilities from current assets.

The report of our independent registered public accounting firm on our consolidated financial statements for the year ended December 31, 2018 contains an explanatory paragraph regarding our ability to continue as a going concern. VBI has incurred significant net losses and negative operating cash flows since inception and expects to continue incurring losses and negative cash flows from operations as we carry out our planned clinical, regulatory, R&D, sales and manufacturing activities with respect to the advancement of our Sci-B-Vac and new pipeline candidates. As of June 30, 2019, VBI had an accumulated deficit of approximately $235 million and stockholders’ equity of approximately $76 million. Our ability to maintain our status as an operating company and to realize our investment in our IPR&D assets is dependent upon obtaining adequate cash to finance our clinical development, manufacturing, our administrative overhead and our research and development activities. We plan to finance future operations with existing cash reserves. We expect that we will need to secure additional financing to finance our business plans, which may be a combination of proceeds from the issuance of equity securities, the issuance of additional debt, structured asset financings and revenues from potential collaborations, if any. There is no assurance the Company will manage to obtain these sources of financing, if required. The accompanying financial statements have been prepared assuming that we will continue as a going concern; however, the above conditions raise substantial doubt about our ability to do so. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should we be unable to continue as a going concern. Our long-term success and ability to continue as a going concern is dependent upon obtaining sufficient capital to fund the research and development of our products, to bring about their successful commercial release, to generate revenue and, ultimately, to attain profitable operations or, alternatively, to advance our products and technology to such a point that they would be attractive candidates for acquisition by others in the industry.

We will require additional funds to conduct clinical and non-clinical trials, achieve regulatory approvals, and, subject to such approvals, commercially launch our products, and will need to secure additional financing in the future to support our operations and to realize our investment in our IPR&D assets. We base this belief on assumptions that are subject to change, and we may be required to use our available cash resources sooner than we currently expect. Our actual future capital requirements will depend on many factors, including the progress and results of our ongoing clinical trials, the duration and cost of discovery and preclinical development, laboratory testing and clinical trials for our pipeline candidates, the timing and outcome of regulatory review of our products, obtaining regulatory approvals for our recently modernized manufacturing facility in Rehovot, Israel, product sales outside of Israel, the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims and other intellectual property rights, the number and development requirements of other pipeline candidates that we pursue and the costs of commercialization activities, including product marketing, sales and distribution.

We expect to finance our future cash needs through public or private equity offerings, debt financings or structured asset financings, or corporate collaboration and licensing arrangements. Although we are pursuing different opportunities, other than as disclosed in this report, we currently do not have any signed commitments for future external funding. We may need to raise additional funds more quickly if one or more of our assumptions prove to be incorrect or if we choose to expand our product development efforts more rapidly than we presently anticipate. We may also decide to raise additional funds even before we need them if the conditions for raising capital are favorable. Additional equity or debt or structured asset financing, grants or corporate collaboration and licensing arrangements may not be available on acceptable terms, if at all. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate our R&D programs, reduce our planned commercialization efforts or obtain funds through arrangements with collaborators or others that may require us to relinquish rights to certain pipeline candidates that we might otherwise seek to develop or commercialize independently.

To the extent we raise additional capital by issuing equity securities or obtaining borrowings convertible into equity, ownership dilution to existing stockholders will result and future investors may be granted rights superior to those of existing stockholders. The incurrence of indebtedness or debt financing would result in increased fixed obligations and could also result in covenants that would restrict our operations. Our ability to obtain additional capital may depend on prevailing economic conditions and financial, business and other factors beyond our control. The unstable economic environment in Europe, and disruptions in the United States and global financial markets may adversely impact the availability and cost of credit, as well as our ability to raise money in the capital markets. Current economic conditions have been, and continue to be volatile. Continued instability in these market conditions may limit our ability to access the capital necessary to fund and grow our business.

On December 4, 2018, we entered into a Collaboration and License Agreement with Brii Bio, whereby we received a total upfront payment of $11 million to collaborate on the development of a hepatitis B recombinant protein based immunotherapeutic in China, Hong Kong, Taiwan and Macau and to conduct a Phase II collaboration clinical trial. The Collaboration and License Agreement specified an allocation of $7 million of this amount as an equity investment in exchange for 2,295,082 common shares. The Collaboration and License Agreement set forth a price of $3.05 per share which was at a premium to the closing market price of $1.58 on the day of issuance, resulting in actual allocation of the fair value of the 2,295,082 shares being $3.6 million. The remaining $7.4 million of the $11 million consideration received was allocated to the sale of the license and research and development services.

On December 17, 2018, we closed an underwritten public offering of an aggregate of 30,665,304 common shares at a price of $1.40 per share for total gross proceeds of $42,932. The Company incurred $3,152 of issuance costs related to the offering resulting in net cash proceeds of $39,780.

Net cash used by Operating Activities

The Company incurred net losses of $27,776 and $28,982 in the six months ended June 30, 2019 and 2018, respectively. The Company used $26,304 and $24,527 in cash for operating activities during the six months ended June 30, 2019 and 2018, respectively. The increase in cash outflows is largely as a result of payments made to suppliers.

Net cash used by Investing Activities

Cash flows used in investing activities increased from $2,037 for the six months ended June 30, 2018 to $2,901 for the six months ended June 30, 2019. The increase was largely related to the payment of property and equipment in SciVac. As part of modernization and capacity increases of our manufacturing facility, we were, and are continued to be, required to pay for additional manufacturing equipment and information technology equipment, which we expect to be between $400 and $600.

Net cash received from Financing Activities

Cash flows related to financing activities were not significant in six months ended June 30, 2019 and 2018.

The Company’s long-term success and ability to continue as a going concern is dependent upon obtaining sufficient capital to fund the research and development of its products, to bring about their successful commercial release, to generate revenue and, ultimately, to attain profitable operations or, alternatively, to advance its products and technology to such a point that they would be attractive candidates for acquisition by others in the industry.