Form 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

þ

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2018

 

OR

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                           to                           

 

Commission file number: 001-35285

 

 

Vaxart, Inc.

 

 

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware

 

59-1212264

 

 

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification No.)

 

 

 

290 Utah Ave., Suite 200, South San Francisco, CA

 

94080

 

 

(Address of principal executive offices)

 

(Zip Code)

 

 

 

(650) 550-3500

 

 

(Registrant’s telephone number, including area code)

 

 

 

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 þ   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 during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes þ   No ¨

 

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

 

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer þ

Smaller reporting company þ

Emerging growth company ¨

 

 

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. ¨

 

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

 

The Registrant had 7,141,189 shares of common stock, $0.10 par value, outstanding as of November 12, 2018.

 

 

 

 

 


 

FORM 10-Q

 

FOR THE QUARTER ENDED SEPTEMBER 30, 2018

 

TABLE OF CONTENTS

 

 

 

 

 

Page

Part I

FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited)

1

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

1

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss

2

 

 

 

 

 

 

 

 

Condensed Consolidated Statement of Stockholders’ Equity (Deficit)

3

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

4

 

 

 

 

 

 

 

 

Notes to the Condensed Consolidated Financial Statements

6

 

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

28

 

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

 

 

 

 

 

 

 

Item 4.

Controls and Procedures

38

 

 

 

 

 

 

 

 

 

 

Part II

OTHER INFORMATION

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

39

 

 

 

 

 

 

 

Item 1A.

Risk Factors

39

 

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

76

 

 

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

76

 

 

 

 

 

 

 

Item 4.

Mine Safety Disclosures

76

 

 

 

 

 

 

 

Item 5.

Other Information

76

 

 

 

 

 

 

 

Item 6.

Exhibits

77

 

 

 

 

 

SIGNATURES

 

78

 

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements are identified by words such as “believe,” “will,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “could,” “potentially” or the negative of these terms or similar expressions. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other “forward-looking” information. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q in Part II, Item 1A — “Risk Factors,” and elsewhere in this Quarterly Report on Form 10-Q. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. These statements, like all statements in this Quarterly Report on Form 10-Q, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments. We caution investors that our business and financial performance are subject to substantial risks and uncertainties.

 

In addition, statements such as "we believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

 

Investors and others should note that we announce material financial information to our investors using our investor relations website (http://investors.vaxart.com), SEC filings, press releases, public conference calls and webcasts. We use these channels to communicate with our stockholders and the public about our company. It is possible that the information that we make available may be deemed to be material information. Therefore, we encourage investors, the media, and others interested in our company to review the information we post on these channels.

 


Table of Contents

 

PART I FINANCIAL INFORMATION

 

Item 1.   Financial Statements (Unaudited)

VAXART, INC. AND SUBSIDIARIES

 

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

 

September 30, 

2018

December 31, 

2017

Assets

(Unaudited)

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

17,922

$

1,571

Short-term investments

 

 

 

1,415

Accounts receivable, net of allowance

256

630

Prepaid expenses and other current assets

 

989

 

 

137

Total current assets

 

19,167

 

 

3,753

Property and equipment, net

 

1,059

 

 

730

Intangible assets, net

 

20,410

 

40

 

 

 

 

 

 

Total assets

$

40,636

$

4,523

Liabilities and Stockholders’ Equity (Deficit)

 

 

 

 

 

Current liabilities:

Accounts payable

$

1,301

 

$

1,390

Current portion of secured promissory note payable to Oxford Finance

1,667

1,528

Short-term note payable

 

102

 

 

Liability related to sale of future royalties, current portion

3,279

Other accrued liabilities

 

1,677

 

 

1,605

Total current liabilities

 

8,026

 

 

4,523

Convertible promissory notes, long-term, related parties

 

 

 

35,282

Liability related to sale of future royalties, net of current portion

14,301

Secured promissory note payable to Oxford Finance, net of current portion

 

2,321

 

 

3,440

Total liabilities

 

24,648

 

 

43,245

Commitments and contingencies (Note 10)

 

 

 

 

 

Stockholders’ equity (deficit):

 

 

 

 

 

Preferred Stock: $0.10 par value; 5,000,000 shares authorized; none

    issued and outstanding as of September 30, 2018; 1,221,064

    issued and outstanding as of December 31, 2017, with aggregate

    liquidation value of $39,956

1

Common Stock: $0.10 par value; 200,000,000 shares authorized; 7,141,189 and 138,492

     shares issued and outstanding as of September 30, 2018 and

     December 31, 2017, respectively

 

714

 

 

Additional paid-in capital

108,361

41,259

Accumulated deficit

 

(93,087)

 

 

(79,982)

Total stockholders’ equity (deficit)

 

15,988

 

 

(38,722)

Total liabilities and stockholders’ equity (deficit)

$

40,636

 

$

4,523

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

1


 

Table of Contents

 

VAXART, INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

Revenue from government contract

$

194

 

$

915

 

$

1,324

 

$

5,079

Royalty revenue

 

87

 

 

 

 

1,050

 

 

Non-cash royalty revenue related to the sale of future royalties

 

 

 

 

 

18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

281

 

 

915

 

 

2,392

 

 

5,079

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

Research and development

 

4,381

 

 

2,247

 

 

12,801

 

 

10,450

General and administrative

1,674

624

5,455

1,955

Impairment of intangible assets

 

 

 

 

 

1,600

 

 

Impairment of property and equipment

 

106

 

 

106

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

6,161

 

2,871

 

19,962

 

12,405

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

(5,880)

 

(1,956)

 

(17,570)

 

(7,326)

 

 

 

 

 

 

 

 

 

 

 

 

Other income and (expenses):

Bargain purchase gain

 

 

 

 

 

6,660

 

 

Interest income

11

18

52

51

Interest expense

 

(129)

 

 

(768)

 

 

(702)

 

 

(2,267)

Non-cash interest expense related to sale of future royalties

(532)

(1,298)

Gain on sale of equipment

 

 

 

69

 

 

 

 

69

Gain (loss) on revaluation of financial instruments, net

464

(3)

966

Foreign exchange loss

 

(18)

 

 

 

 

(215)

 

 

Total other income and (expenses)

 

(668)

 

 

(217)

 

 

4,494

 

 

(1,181)

Net loss before provision for income taxes

 

(6,548)

 

 

(2,173)

 

 

(13,076)

 

 

(8,507)

Provision for income taxes

 

 

 

 

 

29

 

 

Net loss

 

(6,548)

 

 

(2,173)

 

 

(13,105)

 

 

(8,507)

Series B and C preferred dividend

 

 

 

(725)

 

 

(339)

 

 

(2,153)

Net comprehensive loss attributable to common stockholders

$

(6,548)

 

$

(2,898)

 

$

(13,444)

 

$

(10,660)

 

 

 

 

 

Net loss per share – basic and diluted

$

(0.92)

 

$

(21.36)

 

$

(2.23)

 

$

(78.58)

 

 

 

 

 

Shares used to compute net loss per share – basic and diluted

 

7,141,189

 

 

135,658

 

 

6,038,001

 

 

135,658

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

2


 

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VAXART, INC. AND SUBSIDIARIES

 

Condensed Consolidated Statement of Stockholders’ Equity (Deficit)

(In thousands, except share amounts)

(Unaudited)

Additional

Paid-in

Capital

Total

Stockholders’

(Deficit) Equity

Preferred Stock

Common Stock

Accumulated

Deficit

Shares

Amount

Shares

Amount

Balances as of January 1, 2018

1,221,064

 

$

1

 

138,492

 

$

 

$

41,259

 

$

(79,982)

 

$

(38,722)

Issuance of common stock upon

   conversion of convertible promissory notes,

   related parties

 

 

 

1,571,702

 

 

157

 

 

35,420

 

 

 

 

35,577

Issuance of common stock upon conversion

    of convertible preferred stock

(1,221,064)

 

 

(1)

 

1,918,543

 

 

192

 

 

(191)

 

 

 

Reclassification of warrant to equity

 

 

 

 

 

 

 

70

 

 

 

 

70

Issuance of common stock upon reverse merger

 

 

 

3,510,439

 

 

365

 

 

31,403

 

 

 

 

31,768

Issuance of common stock upon exercise of stock options

 

 

 

2,013

 

 

 

 

13

 

 

 

 

13

Stock-based compensation

 

 

 

 

 

 

 

387

 

 

 

 

387

Net loss

 

 

 

 

 

 

 

 

 

(13,105)

 

 

(13,105)

 

 

 

 

 

 

 

 

Balances as of September 30, 2018

 

$

 

7,141,189

 

$

714

 

$

108,361

 

$

(93,087)

 

$

15,988

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

3


 

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VAXART, INC. AND SUBSIDIARIES

 

 

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

Nine Months Ended September 30,

2018

2017

Cash flows from operating activities:

 

 

 

 

 

Net loss

$

(13,105)

$

(8,507)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

Bargain purchase gain

(6,660)

Depreciation and amortization

 

2,379

 

 

295

Gain on sale of equipment

(69)

Impairment of intangible assets

 

1,600

 

 

Impairment of property and equipment

106

Stock-based compensation

 

387

 

 

374

Amortization of discount on short-term investments

20

Loss (gain) on revaluation of financial instruments, net

 

3

 

 

(966)

Non-cash interest expense

408

1,918

Amortization of note discount

 

18

 

 

107

Non-cash interest expense related to sale of future royalties

1,298

Non-cash revenue related to sale of future royalties

 

(18)

 

 

Change in operating assets and liabilities:

Accounts receivable, net of allowance

 

15,040

 

 

1,263

Prepaid expenses and other assets

(416)

(133)

Accounts payable

 

(3,495)

 

 

(2,160)

Accrued liabilities

 

(6,391)

 

67

 

 

 

 

 

 

Net cash used in operating activities

 

(8,846)

 

(7,791)

 

 

 

 

 

 

Cash flows from investing activities:

Purchase of property and equipment

 

(512)

 

 

(76)

Proceeds from sale of equipment

70

Cash acquired in reverse merger

 

25,525

 

 

Cash paid for fractional shares in merger

(21)

Purchases of short-term investments

 

(573)

 

 

(6,771)

Proceeds from maturities of short-term investments

 

1,988

 

8,081

 

 

 

 

 

 

Net cash provided by investing activities

 

26,407

 

1,304

 

 

 

 

 

 

Cash flows from financing activities:

Repayment of principal on secured promissory note payable to Oxford Finance

 

(1,111)

 

 

Repayment of short-term note

(112)

Proceeds from issuance of common stock upon exercise of stock options

 

13

 

 

Net cash used in financing activities

 

(1,210)

 

 

Net increase (decrease) in cash and cash equivalents

 

16,351

 

 

(6,487)

Cash and cash equivalents at beginning of the period

 

1,571

 

 

8,405

Cash and cash equivalents at end of the period

$

17,922

 

$

1,918

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

4


 

Table of Contents

 

VAXART, INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

Nine Months Ended September 30,

2018

2017

Supplemental disclosure of cash flow information:

Interest paid

$

276

 

$

241

Supplemental disclosure of non-cash financing activity:

Issuance of common stock upon reverse merger, net of cash paid for partial shares

$

31,768

 

$

Conversion of convertible promissory notes, related parties into common stock upon reverse merger

$

35,577

$

Reclassification of convertible preferred stock warrant liability to equity

$

70

 

$

Acquisition of property and equipment included in accounts payable

$

102

$

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

5


 

Table of Contents

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

 

NOTE 1.  Organization and Basis of Presentation

 

General 

 

Vaxart Biosciences, Inc. was originally incorporated in California in March 2004, under the name West Coast Biologicals, Inc. The Company changed its name to Vaxart, Inc. (“Private Vaxart”) in July 2007, and reincorporated in the state of Delaware.

 

On February 13, 2018, Private Vaxart completed a business combination with Aviragen Therapeutics, Inc. (“Aviragen”), pursuant to which Aviragen merged with Private Vaxart, with Private Vaxart surviving as a wholly-owned subsidiary of Aviragen (the “Merger”). Pursuant to the terms of the Merger, Aviragen changed its name to Vaxart, Inc. (together with its subsidiaries, the “Company” or “Vaxart”) and Private Vaxart changed its name to Vaxart Biosciences, Inc. All of Private Vaxart’s convertible promissory notes and convertible preferred stock was converted into common stock, following which each share of common stock was converted into approximately 0.22148 shares of the Company’s common stock (the “Conversion”). Except as otherwise noted in these Financial Statements, all shares, equity securities and per share amounts of Private Vaxart are presented to give retroactive effect to the Conversion.

 

Immediately following the completion of the Merger, the Company effected a reverse stock split at a ratio of one new share for every eleven shares of the Company’s common stock outstanding (the “Reverse Stock Split”). Except as otherwise noted in these Financial Statements, all share, equity security and per share amounts are presented to give retroactive effect to the Reverse Stock Split.

 

Immediately after the Reverse Stock Split there were approximately 7.1 million shares of the Company’s common stock outstanding. Private Vaxart’s stockholders, warrantholders and optionholders owned approximately 51% of the fully-diluted common stock of the Company, with Aviragen’s stockholders and optionholders immediately prior to the Merger owning approximately 49% of the fully-diluted common stock of the Company. The Company also assumed all of Private Vaxart’s outstanding stock options and warrants with proportionate adjustments to the number of underlying shares and exercise prices based on an exchange ratio, based on the combined impact of the Conversion and the Reverse Stock Split, of approximately 0.0201346 shares of the Company for each share of Private Vaxart.

 

The Company’s principal operations are based in South San Francisco, California, and it operates in one reportable segment, which is the discovery and development of oral recombinant protein vaccines, based on its proprietary oral vaccine platform.

 

Liquidity and Going Concern

 

Since incorporation, the Company has been involved primarily in performing research and development activities, hiring personnel, and raising capital to support these activities. The Company has experienced losses and negative cash flows from operations since its inception. As of September 30, 2018, the Company had an accumulated deficit of $93.1 million and a loan with an outstanding balance of $4.0 million from Oxford Finance, LLC (“Oxford Finance”), repayable in monthly installments by January 2021 (see Note 9).

 

The Company expects to incur increasing costs as research and clinical trials are advanced and, therefore, expects to continue to incur losses and negative operating cash flows for the next several years. Absent additional funding or adjustments to currently planned operating activities, and in view of the uncertainties regarding future royalty revenue on sales of Relenza® and Inavir®, management believes that the Company’s cash and cash equivalents of $17.9 million held as of September 30, 2018, are sufficient to fund the Company into, but possibly not beyond, the second quarter of 2019.

 

The Company reviews its operations and clinical plans on a continuing basis, including its commitments for upcoming clinical trials. The Company plans to finance its operations with royalty revenue on sales of Relenza® and Inavir®, additional equity or debt financing arrangements, and potentially with additional funding from government contracts or strategic alliances with partner companies. The availability and amount of such funding is not certain.

 

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VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

The uncertainties inherent in the Company’s future operations and in its ability to obtain additional funding raise substantial doubt about its ability to continue as a going concern beyond one year from the date these financial statements are issued. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

While management believes its plan to raise additional funds will alleviate the conditions that raise substantial doubt, these plans are not entirely within its control and cannot be assessed as being probable of occurring. If adequate funds are not available, the Company may be required to reduce operating expenses, delay or reduce the scope of its product development programs, obtain funds through arrangements with others that may require the Company to relinquish rights to certain of its technologies or products that the Company would otherwise seek to develop or commercialize itself, or cease operations.

 

NOTE 2.  Summary of Significant Accounting Policies

 

Basis of Presentation – The Company has prepared the accompanying condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to these rules and regulations. These condensed consolidated financial statements should be read in conjunction with the audited financial statements of Vaxart Biosciences, Inc. and footnotes related thereto for the year ended December 31, 2017, included in our Form 8-K/A filed with the SEC on April 2, 2018. In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company’s financial position and the results of its operations and cash flows. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year.

 

Basis of Consolidation – The condensed consolidated financial statements include the financial statements of Vaxart, Inc. and its subsidiaries. All significant transactions and balances between Vaxart, Inc. and its subsidiaries have been eliminated in consolidation.

 

Use of Estimates – The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities in the financial statements and accompanying notes. Actual results and outcomes could differ from these estimates and assumptions.

 

Foreign Currencies – Foreign exchange gains and losses for assets and liabilities of the Company’s non-U.S. subsidiaries for which the functional currency is the U.S. dollar are recorded in foreign exchange gain (loss), net in the Company’s statement of operations and comprehensive loss. The Company has no subsidiaries for which the local currency is the functional currency.

 

Cash and Cash Equivalents  The Company considers all highly liquid debt investments with an original maturity of three months or less when purchased to be cash equivalents. Cash equivalents, which may consist of amounts invested in money market funds, corporate bonds and commercial paper, are stated at fair value. Cash and cash equivalents as of September 30, 2018 and December 31, 2017, includes $50,000 of restricted cash.

 

Short-Term Investments  The Company’s short-term investments have only comprised commercial paper and corporate bonds. The short-term investments are classified as held-to-maturity based on the Company’s positive intent and ability to hold the securities to maturity. This classification is reevaluated at each balance sheet date. Short-term investments are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is presented as interest income in the statement of operations and comprehensive loss. The specific identification method is used to determine the realized gain or loss on securities sold or otherwise disposed. When the fair value of a debt security classified as held-to-maturity is less than its amortized cost, the Company assesses whether or not: (i) it has the intent to sell the security or (ii) it is more likely than not that the Company will be required to sell the security before its anticipated recovery. If either of these conditions is met, the Company must recognize an other-than-temporary impairment through earnings for the difference between the debt security’s amortized cost basis and its fair value. Gains and losses are recognized in earnings when the investments are sold or impaired.

 

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VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

Concentration of Credit Risk  Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash, cash equivalents, short-term investments and accounts receivable. The Company places its cash, cash equivalents and short‑term investments at financial institutions that management believes are of high credit quality. The Company is exposed to credit risk in the event of default by the financial institutions holding the cash and cash equivalents to the extent such amounts are in excess of the federally insured limits. The Company has not experienced any losses on its deposits since inception.

 

The primary focus of the Company’s investment strategy is to preserve capital and meet liquidity requirements. The Company’s investment policy addresses the level of credit exposure by limiting the concentration in any one corporate issuer or sector and establishing a minimum allowable credit rating. The Company generally requires no collateral from its customers.

 

Accounts Receivable  Accounts receivable arise from the Company’s royalty revenue receivable for sales, net of estimated returns, of Inavir® and Relenza®, and from its contract with the Department of Health and Human Services, Office of Biomedical Advanced Research and Development Authority (“HHS BARDA”) (see Note 6), and are reported at amounts expected to be collected in future periods. An allowance for uncollectible accounts will be recorded based on a combination of historical experience, aging analysis, and information on specific accounts, with related amounts recorded as a reserve against revenue recognized. Account balances will be written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

 

Property and Equipment  Property and equipment is carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets. Depreciation begins at the time the asset is placed in service. Maintenance and repairs are charged to operations as incurred. Upon sale or retirement of assets, the cost and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss is reflected in other income and (expenses) in the period realized.

 

The useful lives of the property and equipment are as follows:

 

Laboratory equipment

5 years

Office and computer equipment

3 years

Leasehold improvements

Shorter of remaining lease term or estimated useful life

 

Intangible Assets  Intangible assets comprise developed technology, intellectual property and, until it was considered fully impaired (see Note 5), in-process research and development. Intangible assets are carried at cost less accumulated amortization. Amortization is computed using the straight-line method over useful lives ranging from 1.3 to 11.75 years for developed technology and 20 years for intellectual property. In-process research and development is considered to be indefinite-lived and is not amortized, but is subject to impairment testing. The Company assessed its in-process research and development as fully impaired in the three months ended June 30, 2018 (see Note 5).

 

Impairment of Long-Lived Assets  The Company reviews its long-lived assets, including finite-lived property and equipment and intangible assets, for impairment whenever events or changes in circumstances indicate the carrying amount of these assets may not be recoverable. Recoverability of these assets is measured by comparison of the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate over its remaining life. When indications of impairment are present and the estimated undiscounted future cash flows from the use of these assets is less than the assets’ carrying value, the related assets will be written down to fair value. The Company assessed leasehold improvements and furniture at its leased offices in Alpharetta, Georgia as impaired in the three months ended September 30, 2018 (see Notes 5 and 10). There have been no other impairments of the Company’s long-lived assets for the periods presented.

 

Accrued Clinical and Manufacturing Expenses  The Company accrues for estimated costs of research and development activities conducted by third-party service providers, which include the conduct of preclinical studies and clinical trials, and contract manufacturing activities. The Company records the estimated costs of research and development activities based upon the estimated amount of services provided and includes the costs incurred but not yet invoiced within other accrued liabilities in the balance sheets and within research and development expense in the condensed consolidated statements of operations and comprehensive loss. These costs can be a significant component of the Company’s research and development expenses.

 

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VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

The Company estimates the amount of services provided through discussions with internal personnel and external service providers as to the progress or stage of completion of the services and the agreed-upon fee to be paid for such services. The Company makes significant judgments and estimates in determining the accrued balance in each reporting period. As actual costs become known, it adjusts its accrued estimates. Although the Company does not expect its estimates to be materially different from amounts actually incurred, its understanding of the status and timing of services performed, the number of subjects enrolled, and the rate of enrollment may vary from its estimates and could result in the Company reporting amounts that are too high or too low in any particular period. The Company’s accrued expenses are dependent, in part, upon the receipt of timely and accurate reporting from contract research organizations and other third-party service providers. To date, the Company has not experienced any material differences between accrued costs and actual costs incurred.

 

Convertible Preferred Stock Warrant Liability  The Company has issued certain convertible preferred stock warrants. These warrants were recorded within other accrued liabilities in the balance sheets at fair value due to down-round protection features contained in the convertible preferred stock into which the warrants were exercisable. At the end of each reporting period, changes in fair value of the warrants since the prior period were recorded as a component of gain (loss) on revaluation of financial instruments in the condensed consolidated statements of operations and comprehensive loss. In the event that the terms of the warrant change such that liability accounting is no longer required, the fair value on the date of such change is released to equity.

 

Convertible Promissory Notes Embedded Derivative Liability  The Company recorded derivative instruments related to redemption features embedded within the outstanding convertible promissory notes. The embedded derivatives were accounted for as liabilities at their estimated fair value when the convertible promissory notes were issued and were re-measured to fair value as of each balance sheet date, with the related re-measurement adjustment being recognized as a component of gain (loss) on revaluation of financial instruments in the condensed consolidated statements of operations and comprehensive loss.

 

Revenue Recognition – The Company recognizes revenue when it transfers control of promised goods or services to its customers, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. To determine revenue recognition, the Company performs the following five steps:

 

(i)

identification of the promised goods or services in the contract;

(ii)

determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract;

(iii)

measurement of the transaction price, including the constraint on variable consideration;

(iv)

allocation of the transaction price to the performance obligations based on estimated selling prices; and

(v)

recognition of revenue when (or as) the Company satisfies each performance obligation. A performance obligation is a promise in a contract to transfer a distinct good or service
to the customer and is the unit of account.

 

Revenue from royalties earned as a percentage of sales, including milestone payments based on achieving a specified level of sales, where a license is deemed to be the predominant item to which the royalties relate, is recognized as revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).

 

The Company performs research and development work under its cost‑plus‑fixed‑fee contract with HHS BARDA. The Company recognizes revenue under research contracts only when a contract has been executed and the contract price is fixed or determinable. Revenue from the HHS BARDA contract is recognized in the period during which the related costs are incurred and the related services are rendered, provided that the applicable conditions under the contract have been met. Costs of contract revenue are recorded as a component of operating expenses in the condensed consolidated statements of operations and comprehensive loss.

 

Under the cost reimbursable contract with HHS BARDA, the Company is reimbursed for allowable costs, and recognizes revenue as allowable costs are incurred and the fixed-fee is earned. Reimbursable costs under the contract primarily include direct labor, subcontract costs, materials, equipment, travel, and approved overhead and indirect costs. Fixed fees under cost reimbursable contracts are earned in proportion to the allowable costs incurred in performance of the work relative to total estimated contract costs, with such costs incurred representing a reasonable measurement of the proportional performance of the work completed. Under the HHS BARDA contract, certain activities must be pre-approved in order for their costs to be deemed allowable direct costs. The HHS BARDA contract provides the U.S. government the ability to terminate the contract for convenience or to terminate for default if the Company fails to meet its obligations as set forth in the statement of work.

 

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VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

 

Management believes that if the government were to terminate the HHS BARDA contract for convenience, the costs incurred through the effective date of such termination and any settlement costs resulting from such termination would be allowable costs. Payments to the Company under cost reimbursable contracts, such as this contract, are provisional payments subject to adjustment upon annual audit by the government. Management believes that revenue for periods not yet audited has been recorded in amounts that are expected to be realized upon final audit and settlement. When the final determination of the allowable costs for any year has been made, revenue and billings may be adjusted accordingly in the period that the adjustment is known.

 

Research and Development Costs – Research and development costs are expensed as incurred. Research and development costs consist primarily of salaries and benefits, stock-based compensation, consultant fees, third-party costs for conducting clinical trials and the manufacture of clinical trial materials, certain facility costs and other costs associated with clinical trials. Payments made to other entities are under agreements that are generally cancelable by the Company. Advance payments for research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the related services are performed.

 

Stock-Based Compensation – The Company measures the fair value of all stock-based awards, including stock options, to employees and, since April 1, 2018, to nonemployees, on the grant date and records the fair value of these awards, net of estimated forfeitures, to compensation expense over the service period. Prior to April 1, 2018, the fair value of awards to nonemployees was measured on the date of performance at the fair value of the consideration received or the fair value of the equity instruments issued, whichever was more reliably measured. The fair value of options is estimated using the Black-Scholes valuation model.

 

Net Income (Loss) Per Share Attributable to Common Stockholders – Basic net income (loss) per share is computed by dividing net income (loss), as adjusted for dividends on the Series B and Series C convertible preferred stock in the period, by the weighted average number of common shares outstanding during the period, without consideration of potential common shares.

 

Diluted net income (loss) per common share is computed giving effect to all potential dilutive common shares, comprising common stock issuable upon exercise of stock options and warrants. The Company uses the treasury-stock method to compute diluted income (loss) per share with respect to its stock options and warrants. For purposes of this calculation, options and warrants to purchase common stock are considered to be potential common shares and are only included in the calculation of diluted net income per share when their effect is dilutive. In the event of a net loss, the effects of all potentially dilutive shares are excluded from the diluted net loss per share calculation as their inclusion would be antidilutive.

 

Recently Adopted Accounting Pronouncements

 

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This update simplifies the accounting for share-based payment transactions by changing the guidance for accounting for non-employee share-based awards so that, instead of revaluing each award at each balance sheet date during the period over which it vests, the value will be fixed on the grant date and expensed over the vesting period in the same way that employee awards are already accounted for. This guidance is effective for annual periods beginning after December 15, 2018, including interim periods within that year, with early adoption permitted. The Company adopted this standard effective April 1, 2018, and since it had no unvested awards granted to non-employees, its adoption had no effect on the Company’s financial condition or results of operations.

 

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. This update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This guidance is effective for annual periods beginning after December 15, 2017, including interim periods within that year, and must be applied prospectively to an award modified on or after the adoption date. The Company adopted this standard effective January 1, 2018, and its adoption had no effect on the Company’s financial condition or results of operations.

 

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VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which will simplify the goodwill impairment calculation by eliminating Step 2 from the current goodwill impairment test. The new standard does not change how a goodwill impairment is identified. The standard will be effective January 1, 2020, with early adoption permitted, and is to be applied prospectively from the date of adoption. The Company adopted this standard effective January 1, 2018, and its adoption had no effect on the Company’s financial condition or results of operations.

 

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business (“ASU 2017-01”). The new standard clarifies the definition of a business to help companies evaluate whether acquisition or disposal transactions should be accounted for as asset groups or as businesses. The Company adopted this standard when it became effective on January 1, 2018, and its adoption had no effect on the Company’s financial condition or results of operations, although it was applied in the Company’s determination that the Merger should be accounted for as a business combination.

 

In August 2016, the FASB issued Accounting Standards Update (ASU) 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provides additional guidance on the presentation and classification of certain items in the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. The Company adopted this standard effective January 1, 2018, and its adoption had no effect on the Company’s financial condition or results of operations.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes nearly all existing revenue recognition guidance under Topic 605, Revenue Recognition. The new standard requires a company to recognize revenue when it transfers goods and services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. ASU 2014-09 defines a five-step process that includes identifying the contract with the customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations in the contract and recognizing revenue when (or as) the entity satisfies the performance obligations. In July 2015, the FASB approved a one-year deferral of the effective date of the new standard to 2018 for public companies, with an option that would permit companies to adopt the new standard as early as the original effective date of 2017.

 

The Company has determined that its HHS BARDA government contract is not within the scope of ASU 2014-09 as the government entity is not a customer under the agreement. The Company adopted this standard with respect to its royalty revenue using the modified retrospective method on January 1, 2018. Under the modified retrospective transition method, the cumulative effect of applying the standard is recognized at the date of initial application for all contracts not completed as of the date of adoption. The adoption of ASU 2014-09 did not have any effect on the Company’s financial condition or results of operations and therefore no cumulative effect adjustment was recorded, although the Company has modified its accounting policies to reflect the requirements of this standard and make additional disclosures.

 

Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02 Leases (Topic 842), which replaces most current lease guidance when it becomes effective. This standard update intends to increase the transparency and improve comparability by requiring entities to recognize assets and liabilities on the balance sheet for all leases, with certain exceptions. The new standard states that a lessee will recognize a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statements of operations. The new guidance will be effective for the Company starting in the first quarter of fiscal 2019, with early adoption permitted. The Company plans to adopt the new guidance effective January 1, 2019, using the modified retrospective method. The adoption will have no effect on the Company’s statements of operations or cash flows, other than on related disclosures, but will increase both its reported assets and reported liabilities in equal amounts that cannot yet be finally quantified due to uncertainty regarding possible new leases and amendments to existing leases.

 

The Company has reviewed all other significant newly-issued accounting pronouncements and concluded that they either are not applicable to the Company’s operations or no material effect is expected on its condensed consolidated financial statements as a result of future adoption.

 

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VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

NOTE 3.  Business Combination

 

On February 13, 2018, the Company acquired Aviragen in a reverse merger (see Note 1). On the date of the Merger, Aviragen had in-process research and development as it was conducting a Phase 2 trial, it had previously developed drugs that were licensed to others who brought them to market and it had a workforce that was considered to have the necessary skills, knowledge, and experience to perform a process that, when applied to the in-process research and development, was critical to the ability to convert it into outputs. Based on this evaluation, the Company determined that the Merger should be accounted for as a business combination.

 

Since the date of the Merger, the results of Aviragen’s operations have been included in the condensed consolidated financial statements. As a result of the acquisition, the Company eliminated the majority of its debt and acquired a significant cash balance in exchange for equity securities.

 

The total purchase price for Aviragen is summarized as follows (in thousands):

 

Common stock

$

31,789

 

 

 

Total

$

31,789

 

In connection with the Aviragen acquisition, the Company allocated the total purchase consideration to the net assets and liabilities acquired, including identifiable intangible assets, based on their respective fair values at the acquisition date.

 

The following table summarizes the preliminary allocation of the purchase price to the fair value of the respective assets and liabilities acquired, adjustments made since the acquisition date and the allocation as of September 30, 2018:

 

 

 

As of

February 13,

2018

 

 

Adjustments

 

 

As of

September 30,

2018

 

 

 

 

 

(in thousands)

 

 

 

Cash and cash equivalents

$

25,525

 

$

 

$

25,525

Accounts receivable

 

14,666

 

 

 

 

14,666

Prepaid expenses

 

446

 

 

(10)

 

 

436

Property and equipment

 

170

 

 

 

 

170

Intangible assets:

 

 

 

 

 

 

 

 

Developed technology (1)

 

22,400

 

 

 

 

22,400

In-process research and development (2)

 

1,600

 

 

 

 

1,600

Total assets

 

64,807

 

 

(10)

 

 

64,797

 

 

 

 

 

 

 

 

 

Accounts payable

 

(3,379)

 

 

75

 

 

(3,304)

Other current liabilities

 

(6,351)

 

 

(393)

 

 

(6,744)

Liability related to sale of future royalties

 

(16,300)

 

 

 

 

(16,300)

Net assets acquired

 

38,777

 

 

(328)

 

 

38,449

 

 

 

 

 

 

 

 

 

Purchase price

 

(31,789)

 

 

 

 

(31,789)

 

 

 

 

 

 

 

 

 

Bargain purchase gain (3)

$

6,988

 

$

(328)

 

$

6,660

 

__________

 

(1)  Developed technology comprises Inavir® and Relenza®, both influenza vaccines on which the Company is presently receiving royalty revenue, which, based on preliminary valuations, are being amortized on a straight-line basis over the estimated periods of future royalties of 11.75 and 1.3 years, respectively.

 

(2)   In-process research and development (see Note 5) related to teslexivir, or BTA074, a direct-acting antiviral that, at the time of the Merger, was being actively developed as a treatment for genital warts. The preliminary valuation was prepared by an independent third party based on estimated discounted cash flows based on probability-weighted future development expenditures and revenue streams provided by the Company’s management.

 

(3)   The bargain purchase gain represents the excess of a preliminary valuation of the fair value of tangible and identified intangible assets, less liabilities, acquired over the purchase price.

 

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VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

In addition, the Company incurred and expensed costs directly related to the Merger totaling approximately $1.4 million, of which approximately $0.5 million was incurred in the nine months ended September 30, 2018, substantially all in the three months ended March 31, 2018, and is included in general and administrative expenses in the condensed consolidated statement of operations and comprehensive loss. The Company is in the process of gathering the information necessary to evaluate the tax impact of the acquisition, including the treatment of the bargain purchase gain, and to finalize accrued expenses and the discount rate and underlying assumptions utilized in the valuation of the intangible assets acquired. The Company expects to complete its evaluation of the impact, if any, during fiscal 2018.

 

Selected amounts related to Aviragen’s business included in the Company’s condensed consolidated statement of operations for the three and nine months ended September 30, 2018, are as follows:

 

 

Period Ended September 30, 2018

 

Three Months

 

Nine Months

 

 

(in thousands)

Revenue

$

87

 

$

1,068

 

 

 

 

 

 

Net loss

$

(2,625)

 

$

(5,267)

 

The unaudited pro forma information in the table below summarizes the combined results of operations of Vaxart Biosciences, Inc. with those of Aviragen as though these entities were combined as of January 1, 2017. The results of Aviragen’s business for the three and nine months ended September 30, 2017, are based on the actual unaudited financial statements prepared for the three and nine months ended September 30, 2017, and for the three and nine months ended September 30, 2018, are based on the Company’s results of operations, with the year-to-date results increased by Aviragen’s activities in the forty-three days prior to the closing of the Merger. The pro forma financial information for all periods presented also includes the removal of direct acquisition-related costs, the reduction in interest expense on borrowing converted into equity in the reverse merger, and the actual depreciation and amortization that would have been charged assuming the fair value adjustments to property and equipment and intangible assets had been applied as of January 1, 2017. This unaudited pro forma information is summarized as follows:

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

2018

 

2017

 

2018

 

2017

 

(in thousands)

 

(in thousands)

Total revenue

$

281

 

$

3,586

 

$

13,928

 

$

12,640

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(6,133)

 

$

(5,854)

 

$

(8,385)

 

$

(23,340)

 

The pro forma financial information as presented above is for informational purposes only and is not indicative of the consolidated results of operations of future periods or the results of operations that would have been achieved had the acquisition had taken place on January 1, 2017.

 

 

NOTE 4.  Fair Value of Financial Instruments

 

Fair value accounting is applied for all financial assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Financial instruments include cash and cash equivalents, short‑term investments, accounts receivable, accounts payable and accrued liabilities that approximate fair value due to their relatively short maturities. As short‑term investments are classified as held‑to‑maturity, they are recorded at their amortized cost.

 

Assets and liabilities recorded at fair value on a recurring basis in the balance sheets are categorized based upon the level of judgment associated with inputs used to measure their fair values. The accounting guidance for fair value provides a framework for measuring fair value and requires certain disclosures about how fair value is determined. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance also establishes a three‑level valuation hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based upon whether such inputs are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the reporting entity.

 

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VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

The three-level hierarchy for the inputs to valuation techniques is briefly summarized as follows:

 

Level 1 – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

 

Level 2 – Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

 

Level 3 – Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

 

The Company’s money market funds are classified within Level 1 of the fair value hierarchy and are valued based on quoted prices in active markets for identical securities. The Company’s corporate bonds and commercial paper are classified within Level 2 of the fair value hierarchy and are valued based on quoted prices for similar assets or prices derived from observable market data. Level 3 liabilities consist of convertible promissory notes embedded derivative liabilities and a convertible preferred stock warrant liability as they are valued by using inputs that are unobservable in the market. The determination of the fair values of the convertible promissory notes embedded derivative is discussed in Note 8.

 

The following tables present the Company’s financial assets and liabilities that are measured at fair value at September 30, 2018 and December 31, 2017:

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

September 30, 2018

 

 

 

 

 

(in thousands)

 

 

 

Recurring Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Money Market Funds

 

$

14

 

$

 

$

 

$

14

Corporate Bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

14

 

$

 

$

 

$

14

 

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

September 30, 2018

 

 

 

 

 

(in thousands)

 

 

 

Recurring Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Convertible promissory notes embedded

   derivative liability

 

$

 

$

 

$

 

$

Convertible preferred stock warrant liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

$

 

$

 

$

 

$

 

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

December 31, 2017

 

 

 

 

 

(in thousands)

 

 

 

Recurring Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Money Market Funds

 

$

1,192

 

$

 

$

 

$

1,192

Corporate Bonds

 

 

 

 

1,415

 

 

 

 

1,415

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,192

 

$

1,415

 

$

 

$

2,607

 

 

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Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

December 31, 2017

 

 

 

 

 

(in thousands)

 

 

 

Recurring Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Convertible promissory notes embedded

   derivative liability

 

$

 

$

 

$

 

$

Convertible preferred stock warrant liability

 

 

 

 

 

 

67

 

 

67

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

$

 

$

 

$

67

 

$

67

 

 

The following tables present a reconciliation of all liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2018 and 2017:

 

 

Convertible

Preferred Stock

Warrant Liability

 

Convertible Promissory

Notes Embedded

Derivative Liability

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

(in thousands)

 

 

 

Balance at January 1, 2018

$

67

 

$

 

$

67

Issuances

 

 

 

 

 

Revaluation loss included in gain (loss) on revaluation

   of financial instruments, net

 

3

 

 

 

 

3

Settlements

 

(70)

 

 

 

 

(70)

Balance at September 30, 2018

$

 

$

 

$

 

 

 

 

 

 

 

 

 

Total losses included in other income and (expenses)

    attributable to liabilities still held as of

    September 30, 2018

$

 

$

 

$

 

 

Convertible

Preferred Stock

Warrant Liability

 

Convertible Promissory

Notes Embedded

Derivative Liability

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

(in thousands)

 

 

 

Balance at January 1, 2017

$

134

 

$

3,280

 

$

3,414

Issuances

 

 

 

 

 

Revaluation gains included in gain (loss) on revaluation

     of financial instruments, net

 

(46)

 

 

(920)

 

 

(966)

Settlements

 

 

 

 

 

Balance at September 30, 2017

$

88

 

$

2,360

 

$

2,448

 

 

 

 

 

 

 

 

 

Total gains included in other income and (expenses)

     attributable to liabilities still held as of

     September 30, 2017

$

46

 

$

920

 

$

966

 

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VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

NOTE 5.  Balance Sheet Components

 

(a)     Cash Equivalents and Short-Term Investments

 

Cash equivalents and short‑term investments, all of which are classified as held‑to‑maturity securities and mature within one year, consisted of the following:

 

 

September 30, 2018

 

Amortized

Cost

 

Gross

Unrecognized

Gains

 

Gross

Unrecognized

Losses

 

Estimated

Fair

Value

 

Carrying

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

Money market funds

$

14

 

$

 

$

 

$

14

 

$

14

Corporate bonds

 

 

 

 

 

 

 

 

 

Total

$

14

 

$

 

$

 

$

14

 

$

14

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

$

14

 

$

 

$

 

$

14

 

$

14

Short-term investments

 

 

 

 

 

 

 

 

 

Total

$

14

 

$

 

$

 

$

14

 

$

14

 

 

 

December 31, 2017

 

Amortized

Cost

 

Gross

Unrecognized

Gains

 

Gross

Unrecognized

Losses

 

Estimated

Fair

Value

 

Carrying

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

Money market funds

$

1,192

 

$

 

$

 

$

1,192

 

$

1,192

Corporate bonds

 

1,415

 

 

 

 

 

 

1,415

 

 

1,415

Total

$

2,607

 

$

 

$

 

$

2,607

 

$

2,607

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

$

1,192

 

$

 

$

 

$

1,192

 

$

1,192

Short-term investments

 

1,415

 

 

 

 

 

 

1,415

 

 

1,415

Total

$

2,607

 

$

 

$

 

$

2,607

 

$

2,607

 

(b)     Accounts Receivable, Net of Allowance

 

Accounts receivable, net of allowance, comprises the following:

 

 

September 30,

2018

 

December 31,

2017

 

(in thousands)

Royalties receivable

$

109

 

$

Government contract – billed

 

65

 

 

477

Government contract – unbilled

 

82

 

 

153

Accounts receivable, net of allowance

$

256

 

$

630

 

 

 

 

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VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

 

(c)     Property and Equipment, Net

 

Property and equipment, net consists of the following:

 

September 30,

2018

 

December 31,

2017

 

(in thousands)

Laboratory equipment

$

1,993

 

$

1,565

Office and computer equipment

 

256

 

 

175

Leasehold improvements

 

332

 

 

226

 

 

 

 

 

 

Total property and equipment

 

2,581

 

 

1,966

Less: accumulated depreciation

 

(1,522)

 

 

(1,236)

Property and equipment, net

$

1,059

 

$

730

 

Depreciation expense was $130,000 and $91,000 for the three months ended September 30, 2018 and 2017, respectively, and $349,000 and $292,000 for the nine months ended September 30, 2018 and 2017, respectively. Leasehold improvements and furniture at the Company’s leased premises in Georgia, which has been subleased, commencing in November 2018, for less than the rental that the Company is obligated to pay (see Note 10), were assessed as impaired as of September 30, 2018, and accordingly an impairment charge of $106,000 has been charged to operating expenses.

 

(d)     Intangible Assets

 

Intangible assets consist of the following:

 

September 30,

2018

 

February 13,

2018

 

December 31,

2017

 

 

 

(in thousands)

 

 

Purchased technology

$

22,400

 

$

22,400

 

$

In-process research and development

 

 

 

1,600

 

 

Intellectual property

 

80

 

 

80

 

 

80

Total cost

 

22,480

 

 

24,080

 

 

80

Less accumulated amortization

 

2,070

 

 

40

 

 

40

Intangible assets, net

$

20,410

 

$

24,040

 

$

40

 

Intangible asset amortization expense was $812,000 and $1,000 for the three months ended September 30, 2018 and 2017, respectively, and $2,030,000 and $3,000 for the nine months ended September 30, 2018 and 2017, respectively. Following the results of Phase 2 trials in June 2018, the in-process research and development was assessed as fully impaired in the three months ended June 30, 2018, with the $1.6 million acquired in the Merger (see Note 3) being charged to operating expenses. As of September 30, 2018, the estimated future amortization expense by year is as follows (in thousands):

 

Year Ending December 31,

 

 

2018 (three months remaining)

$

812

2019

 

2,254

2020

 

1,757

2021

 

1,757

2022

 

1,757

Thereafter

 

12,073

Total

$

20,410

 

 

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VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

 

(e)     Other Accrued Liabilities

 

Accrued liabilities consist of the following:

 

September 30,

2018

 

December 31,

2017

 

(in thousands)

Accrued compensation

$

1,015

 

$

1,320

Accrued clinical and manufacturing expenses

 

84

 

 

69

Accrued professional and consulting services

 

64

 

 

113

Reserve for return of royalties

 

327

 

 

Deferred rent

 

38

 

 

21

Convertible preferred stock warrant liability

 

 

 

67

Other

 

149

 

 

15

 

 

 

 

 

 

Total

$

1,677

 

$

1,605

 

 

NOTE 6.  Revenue

 

U.S. Government HHS BARDA Contract

 

In September 2015, HHS BARDA awarded the Company a contract to support the advanced development of a more effective and universal influenza vaccine to improve seasonal and pandemic influenza preparedness. On each of May 25 and July 18, 2017, and June 28, 2018, the Company entered into a Modification of Contract with HHS BARDA, the combined effect being to increase the value of the existing $14 million contract by $1.7 million and to extend it through September 30, 2018. The modified contract is a cost-plus-fixed-fee contract, which reimburses the Company for allowable direct contract costs plus allowable indirect costs and a fixed-fee, totaling $15.7 million. The Company recognized revenue of $194,000 and $915,000 during the three months ended September 30, 2018 and 2017, respectively, and $1,324,000 and $5,079,000 during the nine months ended September 30, 2018 and 2017, respectively. Billings under the contract are based on approved provisional indirect billing rates, which permit recovery of fringe benefits, overhead and general and administrative expenses. Indirect rates as well as allowable costs are subject to audit by HHS BARDA on an annual basis. Management believes that revenues recognized to date have been recorded in amounts that are expected to be realized upon final audit and settlement. When the final determination of the allowable costs for any year has been made, revenue and billings may be adjusted accordingly in the period that the adjustments are known and collection is probable. Costs relating to contract acquisition are expensed as incurred.

 

The Company does not consider any of the revenue recorded as of September 30, 2018 or 2017, to be at risk of reversal.

 

Royalty agreements

 

Aviragen entered into a royalty-bearing research and license agreement with GlaxoSmithKline, plc (“GSK”) in 1990 for the development and commercialization of zanamivir, a neuraminidase inhibitor marketed by GSK as Relenza® to treat influenza. Most of the Company’s Relenza® patents have expired and the only substantial remaining intellectual property related to the Relenza® patent portfolio, which is solely owned by the Company and exclusively licensed to GSK, is scheduled to expire in July 2019 in Japan. The post-Merger royalty revenue related to Relenza® recognized in the three and nine months ended September 30, 2018, was $87,000 and $498,000, respectively.

 

The Company also generates royalty revenue from the sale of Inavir® in Japan, pursuant to a collaboration and license agreement that Aviragen entered into with Daiichi Sankyo in 2009. In September 2010, laninamivir octanoate was approved for sale by the Japanese Ministry of Health and Welfare for the treatment of influenza in adults and children, which Daiichi Sankyo markets as Inavir®. Under the agreement, the Company currently receives a 4% royalty on net sales of Inavir® in Japan and was eligible to earn sales milestone payments, including a one-off payment of $5.0 million if net sales exceeded 20 billion Yen in one year. This target was achieved in the three months ended March 31, 2018, prior to the Merger, and Aviragen recognized the related $5.0 million as royalty revenue prior to the Merger. The post-Merger royalty revenue related to Inavir® recognized in the nine months ended September 30, 2018, was $552,000. No such revenue was recognized in the three months ended September 30, 2018, and there was no non-cash royalty revenue payable to HealthCare Royalty Partners III, L.P. (“HCRP”) (See Note 7). Such royalty revenue is subject to a 5% withholding tax in Japan, for which $29,000 was included in income tax expense in the nine months ended September 30, 2018, all in the six months ended June 30, 2018.

 

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VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

NOTE 7.  Liabilities Related to Sale of Future Royalties

 

In April 2016, Aviragen entered into a Royalty Interest Acquisition Agreement (the “HCRP Agreement”) with HCRP. Under the Agreement, HCRP made a $20.0 million cash payment to Aviragen in consideration for acquiring certain royalty rights (“Royalty Rights”) related to the approved product Inavir® in the Japanese market. The Royalty Rights were obtained pursuant to the collaboration and license agreements (the “License Agreement”) and a commercialization agreement that the Company entered into with Daiichi Sankyo Company, Limited. Per the terms of the HCRP Agreement, HCRP is entitled to the first $3.0 million plus 15% of the next $1.0 million in royalties earned in each year commencing on April 1, with any excess revenue being retained by the Company.

 

Under the relevant accounting guidance, due to a limit on the amount of royalties that HCRP can earn under the arrangement, this transaction was accounted for as a liability that will be amortized using the interest method over the life of the arrangement. The Company has no obligation to pay any amounts to HCRP other than to pass through to HCRP its share of royalties as they are received from Daiichi Sankyo. In order to record the amortization of the liability, the Company is required to estimate the total amount of future royalty payments to be received under the License Agreement and the payments that will be passed through to HCRP over the life of this agreement. The sum of the pass-through amounts less the net proceeds received will be recorded as non-cash interest expense over the life of the liability. Consequently, the Company imputes interest on the unamortized portion of the liability and records non-cash interest expense using an estimated effective interest rate. The Company will periodically assess the expected royalty payments, and to the extent such payments are greater or less than the initial estimate, the Company will adjust the amortization of the liability and interest rate. As a result of this accounting, even though the Company does not retain HCRP’s share of the royalties, it will continue to record non-cash revenue related to those royalties until the amount of the associated liability and related interest is fully amortized.

 

The following table shows the activity within the liability account since the Merger (in thousands):

 

Total Liability related to sale of future royalties, February 13, 2018

$

16,300

Non-cash royalty revenue paid to HCRP

 

(18)

Non-cash interest expense recognized

 

1,298

Total Liability related to sale of future royalties, September 30, 2018

$

17,580

 

 

NOTE 8.  Convertible Promissory Notes, Related Parties

 

On December 10, 2014, the Company entered into a note purchase agreement with certain existing preferred stockholders under which the Company issued convertible promissory notes during December 2014 for total proceeds of $18.4 million.

 

On November 20, 2015, the Company entered into a second note purchase agreement with certain existing preferred stockholders under which the Company issued convertible promissory notes during November and December 2015 for total proceeds of $11.0 million. These notes were issued with the same terms as the notes issued in 2014.

 

As the holders of the convertible promissory notes each have an equity ownership in the Company, the convertible promissory notes were considered to be a related‑party transaction.

 

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Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

The convertible promissory notes bore interest at a rate of 8.0% per annum. The principal and accrued interest on the notes were automatically convertible, upon a future issuance of convertible preferred stock having total proceeds of at least $25.0 million, into that same stock at a conversion price equal to 90% of the price paid by other investors in the financing event. Upon a liquidation event, such as an acquisition or initial public offering, at the election of the majority of the noteholders in each issuance, the principal and accrued interest on the notes could either (i) be paid in full at the initial closing of the liquidation event, or (ii) automatically convert into the Company’s Series C convertible preferred stock at a conversion price based on a specified valuation.

 

After two years, if the notes had not been converted, the holders of a majority of the principal amount had the option to require the entire principal balance and accrued interest to become due and payable. However, in December 2016, in conjunction with the loan agreement with Oxford Finance (see note 9), all of the holders of convertible promissory notes signed subordination agreements, under which they agreed not to demand or receive any payment until all amounts owed to Oxford Finance under the loan agreement were fully paid in cash, thus extending the due dates of the promissory notes potentially to January 2021. This change reflected a debt modification that was not considered substantially significant. Accordingly, the Company did not apply extinguishment accounting, but accounted for the modification on a prospective basis.

 

The convertible promissory notes had redemption features that were determined to be a compound embedded derivative requiring bifurcation and separate accounting at estimated fair value. The estimated fair value of the embedded derivative upon issuance was a liability of $1.9 million for the notes issued in 2014 and $1.3 million for the notes issued in 2015. The estimated fair value of these derivative instruments was recognized as a debt discount and as an embedded derivative liability on the balance sheet upon issuance of the convertible promissory notes. The embedded derivative required periodic re‑measurements to fair value while the instruments were still outstanding (see Note 4). There was no beneficial conversion feature as the conversion feature value was accounted for in the embedded derivative.

 

The Company estimated the fair value of the compound embedded derivative utilizing a Monte Carlo Simulation model. The inputs used to determine the estimated fair value of the embedded derivative instrument included the probability of an underlying event triggering the redemption event and its timing prior to the maturity date of the convertible promissory notes. The fair value measurement was based upon significant inputs not observable in the market, including a valuation of the Company performed by an independent third-party at each balance sheet date. By December 31, 2017, the embedded derivative had zero value because the Merger (see Note 1), which was considered 90% probable of occurring, would not have triggered redemption and, had the Merger not occurred, it was unlikely that the Company would have found an alternative source of financing on favorable terms, so there would have been zero redemption value. The embedded derivative was extinguished when the Merger occurred on February 13, 2018.

 

The Company incurred total debt issuance costs of $20,000 in connection with the 2014 issuance and $7,000 in connection with the 2015 issuance. The debt issuance costs, which were recorded as an additional debt discount, were being amortized over the term of the notes.

 

The Company’s accrued interest associated with the convertible promissory notes amounted to $6.3 million and the unamortized debt discount to $0.4 million as of December 31, 2017.

 

On February 13, 2018, the balance of the convertible promissory notes was $35.6 million, comprising accrued interest associated with the convertible promissory notes amounted to $6.6 million plus principal of $29.4 million, offset by the unamortized debt discount to $0.4 million. On that date, in conjunction with the Merger, the convertible promissory notes were exchanged for 1,571,702 shares of the Company’s common stock which, based on the closing stock price of $9.05, had a value of $14.2 million. The difference of $21.4 million was recorded as a capital contribution.

 

 

NOTE 9.  Secured Promissory Note Payable to Oxford Finance

 

On December 22, 2016, the Company entered into a loan and security agreement (the “Loan Agreement”) with Oxford Finance, under which the Company borrowed $5.0 million. The $5.0 million loan, which bears interest at 30-day U.S. LIBOR plus 6.17%, is evidenced by a secured promissory note and is repayable over four years, with interest only payable over the first 12 months and the balance fully amortized over the subsequent 36 months. The loan is secured by substantially all the Company’s assets, except for intellectual property.

 

In conjunction with the execution of the Loan Agreement, all the holders of convertible promissory notes signed subordination agreements, under which they agreed to subordinate in favor of Oxford Finance all amounts due under their promissory notes and any security interest in the Company’s property. In addition, the holders of the notes agreed that they would not demand or receive any payment until all amounts owed to Oxford Finance under the Loan Agreement have been fully paid in cash. Upon repayment, an additional final payment equal to $325,000 is due, which is being accreted as interest expense over the term of the loan using the effective‑interest method.

 

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Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

In connection with the Loan Agreement, the Company issued a warrant to Oxford Finance to purchase 7,563 shares of its Series C convertible preferred stock at an exercise price of $33.11 per share (the “Warrant”). The fair value of the Warrant at the date of issuance was approximately $134,000, which was recorded as debt discount and is being amortized as interest expense over the term of the loan using the effective‑interest method. The annual effective interest rate of the note, including the accretion of the final payment and the amortization of the debt discount, is approximately 10.5%. The Company recorded interest expense related to the Loan Agreement of $114,000 and $131,000 during the three months ended September 30, 2018 and 2017, respectively, of which $87,000 and $93,000 was paid, respectively, and recorded interest expense of $366,000 and $386,000 during the nine months ended September 30, 2018 and 2017, respectively, of which $276,000 and $241,000 was paid, respectively.

 

The Warrant provided that if the share price at the next equity financing was less than the Warrant exercise price, then the Warrant would be for the new class of shares, the exercise price would be the new class share price, and the number of shares would be calculated by dividing $250,000 by the new class share price. Due to this anti-dilution protection, the Company determined that the Warrant needed to be recorded as a liability, and therefore estimated the fair value of the Warrant upon issuance and at each balance sheet date, with any changes in the fair value being recorded within the gain (loss) on revaluation of financial instruments line in the statements of operations and comprehensive loss.

 

Due to the antidilution protection, following the Merger, the Warrant was amended to allow the holder to purchase 10,914 shares of common stock at an exercise price of $22.99 per share. Since the amended Warrant contains no non-standard antidilution protections or similar features, the fair value of approximately $70,000 on February 13, 2018, was transferred to equity.

 

NOTE 10.  Commitments and Contingencies

 

(a)     Leases

 

The Company has five office and research and development facilities in South San Francisco, California, under noncancelable operating leases. The principal lease, for office and research and development premises, expires on April 30, 2020, subject to the Company’s option to extend the lease at the then market rate for an additional five‑year period. The remaining four leases all expire between December 31, 2018 and August 31, 2019. In addition, as a result of the Merger, the Company also leases office space in Alpharetta, Georgia, under a lease expiring on February 28, 2021, which, commencing in November 2018, the Company has subleased for the remainder of the lease term for less than it is required to pay under the head lease and accordingly it will record a lease loss charge of approximately $0.2 million on the cease-use date in the three months ending December 31, 2018 (see Note 5).

 

Rent expense is recognized on a straight‑line basis over the noncancelable term of each operating lease and, accordingly, the Company records the difference between cash rent payments and the recognition of rent expense as a deferred rent liability, which is included within accrued expenses. Rent expense was $623,000 and $456,000 for the nine months ended September 30, 2018 and 2017, respectively. Under the terms of the lease agreements, the Company is also responsible for certain insurance, property tax and maintenance expenses. The Company also leases equipment under three operating leases that expire between May and September 2019.

 

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Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

 

Future minimum payments under operating leases as of September 30, 2018, are as follows (in thousands):

 

Year ending December 31,

2018 (three months remaining)

$

271

2019

 

781

2020

411

2021

 

56

Thereafter

Total

 $

1,519

 

(b)     Indemnifications

 

In the ordinary course of business, the Company enters into agreements that may include indemnification provisions. Pursuant to such agreements, the Company may indemnify, hold harmless and defend indemnified parties for losses suffered or incurred by the indemnified party. Some of the provisions will limit losses to those arising from third‑party actions. In some cases, the indemnification will continue after the termination of the agreement. The maximum potential amount of future payments the Company could be required to make under these provisions is not determinable. The Company has never incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. The Company has also entered into indemnification agreements with its directors and officers that may require the Company to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers to the fullest extent permitted by Delaware corporate law. The Company currently has directors’ and officers’ insurance.

 

(c)     Litigation

 

From time to time the Company may be involved in claims arising in connection with its business. Based on information currently available, the Company believes that the amount, or range, of reasonably possible losses in connection with any pending actions against it in excess of established reserves, in the aggregate, not to be material to its consolidated financial condition or cash flows. However, losses may be material to the Company’s operating results for any particular future period, depending on the level of income or loss for such period.

 

NOTE 11.  Stockholders’ Equity

 

(a)     Convertible Preferred Stock

 

The Company is authorized to issue 5,000,000 shares of preferred stock, $0.10 par value per share. The Company’s board of directors may, without further action by the stockholders, fix the rights, preferences, privileges and restrictions of up to an aggregate of 5,000,000 shares of preferred stock in one or more series and authorize their issuance. These rights, preferences and privileges could include dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of such series, any or all of which may be greater than the rights of our common stock. The issuance of preferred stock could adversely affect the voting power of holders of common stock and the likelihood that such holders will receive dividend payments and payments upon liquidation. In addition, the issuance of preferred stock could have the effect of delaying, deterring or preventing a change of control or other corporate action. No shares of preferred stock are currently outstanding, and we have no present plan to issue any shares of preferred stock.

 

All of Private Vaxart’s convertible preferred stock was converted into common stock on February 13, 2018, in conjunction with the Merger.

 

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Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

As of December 31, 2017, convertible preferred stock consisted of the following:

Shares
authorized

Shares
outstanding

Net
carrying
value

Liquidation
preference

 

 

 

 

 

(in thousands)

 

(in thousands)

Series A

94,988

94,988

 

$

2,949

 

$

2,737

Series B

747,095

520,973

 

 

16,115

 

 

17,219

Series C

820,088

605,103

 

 

19,877