vxrt20190319_10q.htm
 

 

Table of Contents



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

  ☑

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

 

For the quarterly period ended March 31, 2019

 

OR

 

  ☐

 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

  

(650) 550-3500

  

  

(Address of principal executive offices, including zip code)

  

(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 ☑   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 ☑   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 ☑ 

Smaller reporting company ☑

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 ☐   No ☑

 

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

 

  

Title of each class

 

Trading symbol

  

Name of each exchange on which registered  

  

Common stock, $0.10 par value

 

VXRT

  

Nasdaq Capital Market  

 

The Registrant had 15,785,735 shares of common stock, $0.10 par value, outstanding as of May 7, 2019.

 



 

 

 

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2019

TABLE OF CONTENTS

 

 

   

Page

Part I

FINANCIAL INFORMATION

1
         
   

Item 1.

Financial Statements (Unaudited)

1
         
     

Condensed Consolidated Balance Sheets

1
         
     

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income

2
         
     

Condensed Consolidated Statements 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

19
         
   

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28
         
   

Item 4.

Controls and Procedures

29
         
         

Part II

OTHER INFORMATION

30
         
   

Item 1.

Legal Proceedings

30
         
   

Item 1A.

Risk Factors

30
         
   

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

67
         
   

Item 3.

Defaults Upon Senior Securities

68
         
   

Item 4.

Mine Safety Disclosures

68
         
   

Item 5.

Other Information

68
         
   

Item 6.

Exhibits

69
         

SIGNATURES

  71

 

 

 

PART I FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

VAXART, INC. AND SUBSIDIARIES

 

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)

 

   

March 31, 2019

   

December 31, 2018

 

Assets

               

Current assets:

               

Cash and cash equivalents

  $ 8,424     $ 11,506  

Accounts receivable

    5,584       1,796  

Prepaid expenses and other current assets

    1,242       1,343  
                 

Total current assets

    15,250       14,645  
                 

Property and equipment, net

    1,559       1,066  

Right-of-use assets, net

    762        

Intangible assets, net

    18,634       19,413  

Other long-term assets

    104       103  
                 

Total assets

  $ 36,309     $ 35,227  
                 

Liabilities and Stockholders’ Equity (Deficit)

               

Current liabilities:

               

Accounts payable

  $ 849     $ 962  

Current portion of secured promissory note payable to Oxford Finance

    1,667       1,667  

Current portion of operating lease liability

    697        

Liability related to sale of future royalties, current portion

    3,610       3,328  

Other accrued liabilities

    1,727       1,518  
                 

Total current liabilities

    8,550       7,475  
                 

Operating lease liability, net of current portion

    312        

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

    13,291       14,413  

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

    1,562       1,944  

Other long-term liabilities

    18       157  
                 

Total liabilities

    23,733       23,989  
                 

Commitments and contingencies (Note 9)

               
                 

Stockholders’ equity (deficit):

               

Preferred Stock: $0.10 par value; 5,000,000 shares authorized; none issued and outstanding as of March 31, 2019 or December 31, 2018

           

Common Stock: $0.10 par value; 100,000,000 shares authorized; 8,341,189 and 7,141,189 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively

    834       714  

Additional paid-in capital

    111,097       108,513  

Accumulated deficit

    (99,355 )     (97,989 )
                 

Total stockholders’ equity

    12,576       11,238  
                 

Total liabilities and stockholders’ equity

  $ 36,309     $ 35,227  

 

 

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

 

 

 

VAXART, INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income

(In thousands, except share and per share amounts)

(Unaudited)

 

 

   

Three Months Ended March 31,

 
   

2019

   

2018

 

Revenue:

               

Revenue from government contract

  $     $ 610  

Royalty revenue

    3,659       893  

Non-cash royalty revenue related to sale of future royalties

    1,748        
                 

Total revenue

    5,407       1,503  
                 

Operating expenses:

               

Research and development

    3,829       3,408  

General and administrative

    2,026       2,010  
                 

Total operating expenses

    5,855       5,418  
                 

Operating loss

    (448 )     (3,915 )
                 

Other income and (expenses):

               

Bargain purchase gain

          6,988  

Interest income

    5       5  

Interest expense

    (107 )     (437 )

Non-cash interest expense related to sale of future royalties

    (544 )     (298 )

Loss on revaluation of financial instruments

          (3 )

Foreign exchange gain, net

    5       2  
                 

Total other income and (expenses)

    (641 )     6,257  
                 

Net (loss) income before income taxes

    (1,089 )     2,342  
                 

Provision for income taxes

    250       28  
                 

Net (loss) income

    (1,339 )     2,314  
                 

Series B and C preferred dividend

          (339 )
                 

Net comprehensive (loss) income attributable to common stockholders

  $ (1,339 )   $ 1,975  
                 

Net (loss) income per share - basic

  $ (0.18 )   $ 0.54  
                 

Net (loss) income per share - diluted

  $ (0.18 )   $ 0.49  
                 

Shares used to compute net (loss) income per share - basic

    7,301,189       3,656,360  
                 

Shares used to compute net (loss) income per share - diluted

    7,301,189       5,299,751  

 

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

 

 

 

VAXART, INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

For the Three Months Ended March 31, 2018 and 2019

(In thousands, except share amounts)

(Unaudited)

 

                                   

Additional

           

Total

 
   

Preferred Stock

   

Common Stock

   

Paid-in

   

Accumulated

   

Stockholders’

 
   

Shares

   

Amount

   

Shares

   

Amount

   

Capital

   

Deficit

   

Equity (Deficit)

 
                                                         

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

                            86             86  
                                                         

Net income

                                  2,314       2,314  
                                                         

Balances as of March 31, 2018

        $       7,141,189     $ 714     $ 108,060     $ (77,668 )   $ 31,106  
                                                         

 

 

                   

Additional

           

Total

 
   

Common Stock

   

Paid-in

   

Accumulated

   

Stockholders’

 
   

Shares

   

Amount

   

Capital

   

Deficit

   

Equity

 
                                         

Balances as of December 31, 2018

    7,141,189     $ 714     $ 108,513     $ (97,989 )   $ 11,238  
                                         

Cumulative effect of adoption of new leases standard

                      (27 )     (27 )
                                         

Balances as of January 1, 2019, as adjusted

    7,141,189     $ 714     $ 108,513     $ (98,016 )   $ 11,211  
                                         

Issuance of common stock and warrants, net of offering costs of $560

    1,200,000       120       2,320             2,440  
                                         

Issuance of common stock warrants to placement agents' designees

                100             100  
                                       

Stock-based compensation

                164             164  
                                         

Net loss

                      (1,339 )     (1,339 )
                                         

Balances as of March 31, 2019

    8,341,189     $ 834     $ 111,097     $ (99,355 )   $ 12,576  

 

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

 

 

 

 

 

 

VAXART, INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

   

Three Months Ended March 31,

 
   

2019

   

2018

 
                 

Cash flows from operating activities:

               

Net (loss) income

  $ (1,339 )   $ 2,314  

Adjustments to reconcile net (loss) income to net cash used in operating activities:

               

Bargain purchase gain

          (6,988 )

Depreciation and amortization

    1,100       511  

Stock-based compensation

    164       86  

Loss on revaluation of financial instruments

          3  

Non-cash interest expense

    35       323  

Amortization of note discount

          18  

Non-cash interest expense related to sale of future royalties

    544       298  

Non-cash revenue related to sale of future royalties

    (1,384 )      

Change in operating assets and liabilities:

               

Accounts receivable

    (3,788 )     1,947  

Prepaid expenses and other assets

    100       (469 )

Accounts payable

    (184 )     (3,097 )

Accrued liabilities

    99       (5,536 )
                 

Net cash used in operating activities

    (4,653 )     (10,590 )
                 

Cash flows from investing activities:

               

Purchase of property and equipment

    (552 )     (140 )

Cash acquired in reverse merger

          25,525  

Cash paid for fractional shares in merger

          (21 )

Purchases of short-term investments

          (573 )

Proceeds from maturities of short-term investments

          1,988  
                 

Net cash (used in) provided by investing activities

    (552 )     26,779  
                 

Cash flows from financing activities:

               

Net proceeds from issuance of common stock in registered direct offering

    2,540        

Repayment of principal on secured promissory note payable to Oxford Finance

    (417 )     (278 )

Proceeds from issuance of common stock upon exercise of stock options

          13  
                 

Net cash provided by (used in) financing activities

    2,123       (265 )
                 

Net (decrease) increase in cash and cash equivalents

    (3,082 )     15,924  
                 

Cash, cash equivalents and restricted cash at beginning of the period

    11,506       1,571  
                 

Cash, cash equivalents and restricted cash at end of the period

  $ 8,424     $ 17,495  

 

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

 

 

VAXART, INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

   

Three Months Ended March 31,

 
   

2019

   

2018

 
                 

Supplemental disclosure of cash flow information:

               

Interest paid

  $ 72     $ 95  
                 
                 

Supplemental disclosure of non-cash financing activity:

               

Issuance of warrants to placement agent's representatives

  $ 100     $  

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

  $ 123     $ 72  

 

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

 

 

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.

 

On March 20, 2019, the Company completed a registered direct offering (the “March 2019 Offering”) of 1,200,000 shares of the Company’s common stock. The total gross proceeds from the offering to the Company were $3.0 million. After deducting placement agent fees and offering expenses payable by the Company, the aggregate net proceeds received by the Company totaled $2.5 million. Pursuant to the terms of the engagement letter with the placement agents, the Company paid the placement agents aggregate fees and reimbursable costs of $320,000. In addition, the Company issued the placement agents’ designees 84,000 common stock warrants at the closing of the March 2019 Offering, each warrant entitling the holder to purchase one share of common stock for $3.125 at any time within five years of their issuance date. The aggregate fair value of these warrants at issuance was estimated to be $100,000 (see Note 10), which was recorded in offering costs.

 

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 March 31, 2019, the Company had an accumulated deficit of $99.4 million and a loan with an outstanding balance of $3.2 million from Oxford Finance, LLC (“Oxford Finance”), repayable in monthly installments by January 2021 (see Note 8).

 

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 $8.4 million held as of March 31, 2019, along with funds raised in April 2019 (see Note 13), are sufficient to fund the Company into, but probably not beyond, the first quarter of 2020.

 

 

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

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.

 

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 Company’s audited financial statements and footnotes related thereto for the year ended December 31, 2018, included in the Company’s Annual Report on Form 10-K filed with the SEC on February 6, 2019 (the “Annual Report”). Except as noted below, there have been no material changes to the Company’s significant accounting policies described in Note 2 to the consolidated financial statements included in the Annual Report. 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.

 

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.

 

Leases – Effective January 1, 2019, the Company records operating leases as right-of-use assets and operating lease liabilities in its condensed consolidated balance sheets for all operating leases with terms exceeding one year. Right-of-use assets represent the right to use an underlying asset for the lease term, including extension options considered reasonably certain to be exercised, and operating lease liabilities to make lease payments. Right-of-use assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term. To the extent that lease agreements do not provide an implicit rate, the Company uses its incremental borrowing rate based on information available at the lease commencement date to determine the present value of lease payments. The expense for operating lease payments is recognized on a straight-line basis over the lease term and is included in operating expenses in the Company’s statement of operations and comprehensive (loss) income. Non-lease components included in lease agreements are accounted for separately.

 

 

 

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

Recently Adopted Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02 Leases (Topic 842), which replaced most current lease guidance when it became effective. This standard update was designed to increase 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 are classified as either finance or operating, with classification affecting the pattern of expense recognition in the statements of operations. The Company adopted the new guidance effective January 1, 2019, using the modified retrospective method, and used the effective date method of adoption, as permitted by ASU 2018-11, Leases (Topic 842): Targeted Improvements, which the FASB issued in July 2018, clarified by ASU 2019-01, Leases (Topic 842): Codification Improvements, which the FASB issued in March 2019, which reduces the disclosure requirements on transition. The Company has elected the short-term lease recognition exemption for all classes of assets, which means that it will not recognize right-of-use assets or lease liabilities for leases with a duration of one year or less. Further, the Company has elected to use all of the practical expedients available on transition, whereby it has not reassessed under the new standard its prior conclusions about lease identification, lease classification and initial direct costs.

 

The adoption of this standard had a material effect on the Company’s condensed consolidated balance sheets, the most significant effects being the recognition of new right-of-use assets and lease liabilities. The Company recognized lease liabilities of $1,229,000, $783,000 of which was current, and right-of-use assets of $953,000 based on the present value of the remaining minimum rental payments for existing operating leases, derecognized liabilities related to deferred rent and lease loss accrual of $249,000, $111,000 of which was current, and recognized an increase of $27,000 to accumulated deficit on adoption of the new accounting policy.

 

The increase in accumulated deficit arose because the right-of-use asset impairment charge that would have been recorded in the three months ended December 31, 2018, under Topic 842 exceeded the lease loss accrual, net of accretion, that was recorded. This impact aside, the adoption had no effect on the Company’s statements of operations or cash flows, other than on related disclosures.

 

Recent Accounting Pronouncements

 

The Company has reviewed all 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.

 

 

NOTE 3.  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.

 

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;

 

 

 

 

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

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 convertible preferred stock warrant liability was classified within Level 3 of the fair value hierarchy as it was valued using inputs that were unobservable in the market.

 

The Company’s only recurring financial assets that are measured at fair value were $15,000 held in money market funds and classified as cash equivalents as of both March 31, 2019 and December 31, 2018, with no recurring financial liabilities held at either date or in the three months ended March 31, 2019. The following table presents a reconciliation of all liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2018:

 

 

   

Convertible

       
   

Preferred Stock

       
   

Warrant Liability

   

Total

 
    (in thousands)  

Balance at January 1, 2018

  $ 67     $ 67  

Issuances

           

Revaluation loss included in loss on revaluation of financial instruments, net

    3       3  

Settlements

    (70 )     (70 )

Balance at March 31, 2018

  $     $  
                 

Total gains included in other income and (expenses) attributable to liabilities still held as of March 31, 2018

  $     $  

 

 

 

NOTE 4.  Balance Sheet Components

 

 

(a)

Cash and Cash Equivalents 

 

Cash and cash equivalents comprises the following:

 

 

   

March 31, 2019

   

December 31, 2018

 
   

(in thousands)

 

Cash at banks

  $ 8,359     $ 11,441  

Restricted cash

    50       50  

Money market funds

    15       15  
Total cash and cash equivalents   $ 8,424     $ 11,506  

 

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

 

(b)

Accounts Receivable 

 

Accounts receivable comprises the following:

 

   

March 31, 2019

   

December 31, 2018

 
   

(in thousands)

 

Royalties receivable

  $ 5,564     $ 1,776  

Government contract - billed

    20       20  

Accounts receivable

  $ 5,584     $ 1,796  

 

The Company has provided no allowance for uncollectible accounts as of March 31, 2019 and December 31, 2018.

 

 

(c)

Property and Equipment, Net

 

Property and equipment, net consists of the following:

 

   

March 31, 2019

   

December 31, 2018

 
   

(in thousands)

 

Laboratory equipment

  $ 2,695     $ 2,076  

Office and computer equipment

    227       227  

Leasehold improvements

    337       333  
                 

Total property and equipment

    3,259       2,636  

Less: accumulated depreciation

    (1,700 )     (1,570 )

Property and equipment, net

  $ 1,559     $ 1,066  

 

 

Depreciation expense for the three months ended March 31, 2019 and 2018, was $130,000 and $98,000, respectively. There were no impairments of the Company’s property and equipment recorded in the three months ended March 31, 2019 or 2018.

 

 

(d)

Right-of-Use Assets, Net

 

Right-of-use assets, net consists of the following:

 

   

March 31, 2019

 
   

(in thousands)

 

Facilities

  $ 752  

Office equipment

    10  

Right-of-use assets, net

  $ 762  

 

 

 

(e)

Intangible Assets

 

Intangible assets comprise developed technology, intellectual property and, until it was considered fully impaired, 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. The Company assessed its in-process research and development as fully impaired in the three months ended June 30, 2018. Intangible assets consist of the following:

 

   

March 31, 2019

   

December 31, 2018

 
   

(in thousands)

 

Purchased technology

  $ 22,100     $ 22,100  

Intellectual property

    80       80  

Total cost

    22,180       22,180  

Less: accumulated amortization

    (3,546 )     (2,767 )

Intangible assets, net

  $ 18,634     $ 19,413  

 

Total amortization expense was $779,000 and $413,000 in the three months ended March 31, 2019 and 2018, respectively. 

 

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

As of March 31, 2019, the estimated future amortization expense by year is as follows (in thousands):

 

Year Ending December 31,

 

Amount

 

2019 (nine months remaining)

  $ 1,541  

2020

    1,732  

2021

    1,732  

2022

    1,732  

2023

    1,731  

Thereafter

    10,166  

Total

  $ 18,634  

 

 

(f)

Accrued Liabilities

 

Accrued liabilities consist of the following:

 

   

March 31, 2019

   

December 31, 2018

 
   

(in thousands)

 

Accrued compensation

  $ 658     $ 632  

Accrued clinical and manufacturing expenses

    24       75  

Accrued professional and consulting services

    514       166  

Reserve for return of royalties

    339       339  

Deferred rent and lease loss accrual, current portion

    -       111  

Other liabilities, current portion

    192       195  
                 

Total

  $ 1,727     $ 1,518  

 

 

 

NOTE 5.  Revenue

 

U.S. Government HHS BARDA Contract

 

In September 2015, the Department of Health and Human Services, Office of Biomedical Advanced Research and Development Authority (“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 was a cost-plus-fixed-fee contract, which reimbursed the Company for allowable direct contract costs plus allowable indirect costs and a fixed fee, totaling $15.7 million. The Company recognized revenue of $610,000 during the three months ended March 31, 2018. As of December 31, 2018, the cumulative revenue recorded from inception under the HHS BARDA contract represented the maximum billable under the contract as presently modified, with no further change orders envisaged.

 

Billings under the contract were 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 under this contract in any period 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 royalty revenue related to Relenza recognized in the three months ended March 31, 2019, and in the post-Merger period in the three months ended March 31, 2018, was $695,000 and $341,000, respectively, representing 7% of net sales in Japan.

 

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

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 Company, Limited (“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. The last patent related to Inavir is set to expire in December 2029, at which time royalty revenue will cease. The royalty revenue related to Inavir recognized in the three months ended March 31, 2019, and in the post-Merger period in the three months ended March 31, 2018, was $2,964,000 and $552,000, respectively, representing 4% of net sales in Japan. In addition, the Company recognized non-cash royalty revenue related to the sale of future royalties (see Note 6) of $1,748,000 in the three months ended March 31, 2019, such revenue in the three months ended March 31, 2018, relating solely to the pre-Merger period. Both the royalty revenue and the non-cash royalty revenue related to the sale of future royalties have been subjected to a 5% withholding tax in Japan, for which $236,000 and $28,000 was included in income tax expense in the three months ended March 31, 2019 and 2018, respectively.

 

The Company’s royalty revenue is seasonal, in line with the flu season, so the majority of the Company’s royalty revenue is earned in the first fiscal quarter, with nearly all of the remainder being earned in the fourth fiscal quarter.

 

 

 

NOTE 6. Liabilities Related to Sale of Future Royalties

 

In April 2016, Aviragen entered into a Royalty Interest Acquisition Agreement (the “RIAA”) with HealthCare Royalty Partners III, L.P. (“HCRP”). Under the RIAA, 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. Per the terms of the RIAA, 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 RIAA, this transaction is accounted for as a liability that is being 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. 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 royalties earned in each period that will be passed through to HCRP are recorded as non-cash royalty revenue related to sale of future royalties, with any excess not subject to pass-through being recorded as royalty revenue. When the pass-through royalties are paid to HCRP in the following quarter, the imputed liability related to sale of future royalties is commensurately reduced. The Company periodically assesses the expected royalty payments, and to the extent such payments are greater or less than the initial estimate, the Company adjusts 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, including the related interest, is fully amortized.

 

The following table shows the activity within the liability account in the three months ended March 31, 2019 and 2018, with activity in the three months ended March 31, 2018, commencing on the date of the Merger and based on a preliminary valuation of the fair value of the liability to HCRP:

 

   

Three Months Ended March 31,

 
   

2019

   

2018

 
   

(in thousands)

 

Total liability related to sale of future royalties, start of period

  $ 17,741     $ 16,300  

Non-cash royalty revenue paid to HCRP

    (1,384 )      

Non-cash interest expense recognized

    544       298  

Total liability related to sale of future royalties, end of period

    16,901       16,598  

Current portion

    (3,610 )     (2,037 )

Long-term portion

  $ 13,291     $ 14,561  

 

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

 

NOTE 7.  Leases

 

The Company has obtained the right of use for office and manufacturing facilities under five operating lease agreements, one of which has been subleased, and for equipment under three operating lease agreements with initial terms exceeding one year and under three operating lease agreements with initial terms of one year or less.

 

The Company obtained the right of use of real estate located in South San Francisco, California, in June 2015 that terminates on April 30, 2020. The Company also obtained, via the Merger, the right of use of facilities located in Alpharetta, Georgia, in February 2017 that terminates on February 28, 2021. These facilities were subleased for the remainder of the lease term effective November 30, 2018. In addition, the Company obtained the right of use of facilities located in South San Francisco, California, under three leases that terminate on August 31, 2019, and the right of use of equipment under three leases that terminate between April 2019 and September 2021.

 

As of March 31, 2019, the weighted average discount rate for operating leases with initial terms of more than one year was 10.5% and the weighted average remaining term of these leases was 1.45 years. Discount rates were determined using the Company’s marginal rate of borrowing at the time each lease was executed or extended.

 

The following table summarizes the Company’s undiscounted cash payment obligations for its operating lease liabilities with initial terms of more than twelve months as of March 31, 2019 (in thousands):

 

Year Ending December 31,

       
2019 (excluding the three months ended March 31, 2019)   $ 610  

2020

    415  

2021

    58  

Undiscounted total

    1,083  

Less: imputed interest

    (74 )

Present value of future minimum payments

    1,009  

Current portion of operating lease liability

    (697 )

Operating lease liability, net of current portion

  $ 312  

 

In addition, future obligations under operating leases for equipment with initial terms of one year or less totaled $4,000. The Company presently has no finance leases.

 

Certain operating lease agreements include non-lease costs, such as common area maintenance, which are excluded from operating lease costs. Operating lease expenses for the three months ended March 31, 2019, are summarized as follows:

 

 

Three Months Ended March 31, 2019

 

Lease cost

 

(in thousands)

 

Operating lease cost

  $ 223  

Short-term lease cost

    3  

Sublease income

    (54 )

Total lease cost

  $ 172  

 

Net cash outflows associated with operating leases totaled $199,000 in the three months ended March 31, 2019. Rent expense was $146,000 for the three months ended March 31, 2018.

 

Future minimum payments and sublease income under operating leases as of December 31, 2018, were as follows:

 

Year Ending December 31,

 

Lease Payments

   

Sublease Income

 
   

(in thousands)

 

2019

  $ 859     $ 213  

2020

    411       219  

2021

    56       38  

Thereafter

           

Total

  $ 1,326     $ 470  

 

 

 

 

 

 

 

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

NOTE 8.  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. 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. The loan is secured by substantially all the Company’s assets, except for intellectual property.

 

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”), expiring in December 2026. The fair value of the Warrant at the date of issuance was $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 $106,000, of which $72,000 was paid, during the three months ended March 31, 2019, and $141,000, of which $95,000 was paid, during the three months ended March 31, 2018.

 

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 loss on revaluation of financial instruments line in the statements of operations and comprehensive (loss) income.

 

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 $70,000 on February 13, 2018, was transferred to equity.

 

 

 

NOTE 9. Commitments and Contingencies

 

 

(a)

Leases

 

The Company’s lease commitments are detailed in Note 7.

 

 

(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.

 

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

NOTE 10.  Stockholders’ Equity

 

 

(a)

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 the Company’s 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.

 

 

(b)

Common Stock

 

Except as otherwise required by law or as otherwise provided in any certificate of designation for any series of preferred stock, the holders of common stock possess all voting power for the election of the Company’s directors and all other matters requiring stockholder action. Holders of common stock are entitled to one vote per share on matters to be voted on by stockholders. Holders of common stock are entitled to receive such dividends, if any, as may be declared from time to time by the Company’s board of directors in its discretion out of funds legally available therefore. In no event will any stock dividends or stock splits or combinations of stock be declared or made on common stock unless the shares of common stock at the time outstanding are treated equally and identically. As of March 31, 2019, no dividends had been declared by the board of directors.

 

In the event of the Company’s voluntary or involuntary liquidation, dissolution, distribution of assets or winding-up, the holders of the common stock will be entitled to receive an equal amount per share of all of the Company’s assets of whatever kind available for distribution to stockholders, after the rights of the holders of the preferred stock have been satisfied. There are no sinking fund provisions applicable to the common stock.

 

The Company had shares of common stock reserved for issuance as follows:

 

   

March 31, 2019

   

December 31, 2018

 
                 

Options issued and outstanding

    842,424       865,163  

Available for future grants of equity awards

    246,116       223,377  

Common stock warrants

    94,914       10,914  

Total

    1,183,454       1,099,454  

 

Upon adoption of the 2019 Equity Incentive Plan on April 23, 2019 (see Note 13), the number of shares available for future grants of equity awards increased to 1,600,000.

 

 

(c)

Warrants

 

The Company has outstanding (i) 10,914 common stock warrants issued to Oxford Finance (see Note 8) and (ii) 84,000 common stock warrants issued to the placement agents’ designees at the closing of the March 2019 Offering (see Note 1). Each warrant issued to the placement agents’ designees entitles the holder to purchase one share of common stock for $3.125 at any time within five years of their issuance date. The aggregate fair value of these warrants at issuance was estimated to be $100,000, using the Black-Scholes valuation model, using a closing stock price of $2.08 and assumptions including estimated volatility of 80%, a risk-free interest rate of 2.34%, a zero dividend rate and an estimated remaining term of 5.0 years.

 

 

 

NOTE 11.  Equity Incentive Plans

 

Prior to the Merger, Private Vaxart issued equity awards for compensation purposes to employees, directors and consultants under its 2007 Equity Incentive Plan (the “2007 Plan”). The 2007 Plan expired in July 2017 and no further awards may be made under the 2007 Plan. Each outstanding stock option to acquire shares of Private Vaxart stock, whether vested or unvested, was assumed in the Merger after adjustment for the impact of the Conversion and the Reverse Stock Split.

 

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

In November 2016, Aviragen’s stockholders approved the 2016 Equity Incentive Plan (“2016 Plan”), under which all outstanding awards under Aviragen’s previous plans became available for issuance under the 2016 Plan if such awards were forfeited or otherwise terminated.

 

Under the 2016 Plan, Aviragen was authorized to issue incentive stock options (“ISOs”), non-qualified stock options (“NQSOs”), restricted stock (“RSAs”) and restricted stock units (“RSUs”). Awards that expired or were canceled generally became available for issuance again under the 2016 Plan. Awards have a maximum term of ten years from the grant date and may vest over varying periods, as specified by the Company’s Board of Directors for each grant. Following stockholder approval of the 2019 Equity Incentive Plan (see Note 13), no further awards are available for grant under the 2016 Plan.

 

A summary of stock option transactions in the three months ended March 31, 2019, is as follows:

                   

Weighted

 
   

Shares

   

Number of

   

Average

 
   

Available

   

Options

   

Exercise

 
   

For Grant

   

Outstanding

   

Price

 
                         

Balance at January 1, 2019

    200,650       865,163     $ 8.13  

Canceled

    22,739       (22,739 )   $ 24.85  
                         

Balance at March 31, 2019

    223,389       842,424     $ 7.68  

 

In addition, the 2016 Plan had a reserve of 22,727 shares available for future issuance as RSAs and RSUs. As of March 31, 2019, no such awards had been granted under the 2016 Equity Plan.

 

The Company measures the fair value of all stock-based awards on the grant date and records the fair value of these awards, net of estimated forfeitures, to compensation expense over the service period. Total stock-based compensation recognized for options was as follows:

 

   

Three Months Ended March 31,

 
   

2019

   

2018

 
   

(in thousands)

 

Research and development

  $ 79     $ 44  

General and administrative

    85       42  

Total stock-based compensation

  $ 164     $ 86  

 

As of March 31, 2019, the unrecognized stock-based compensation cost related to outstanding unvested stock options that are expected to vest was $0.9 million, which the Company expects to recognize over an estimated weighted average period of 2.59 years.

 

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

 

NOTE 12.  Net (Loss) Income Per Share Attributable to Common Stockholders

 

The following table presents the calculation of basic and diluted net (loss) income per share (in thousands, except share and per share amounts):

 

   

Three Months Ended March 31,

 
   

2019

   

2018

 
                 

Net (loss) income attributable to common stockholders – basic calculation

  $ (1,339 )   $ 1,975  
                 

Interest charges applicable to convertible promissory notes

          295  
                 

Series B and C preferred dividend

          339  
                 

Series A preferred dividend

          (28 )
                 

Net (loss) income attributable to common stockholders – diluted calculation

  $ (1,339 )     2,581  
                 

Shares used to compute net (loss) income per share – basic

    7,301,189       3,656,360  
                 

Potential common shares from exercise of options

          25,550  
                 

Shares issuable upon conversion of convertible promissory notes, related party

          750,924  
                 

Shares issuable upon conversion of Series B and C convertible preferred stock and accrued dividends

          866,917  
                 

Shares used to compute net (loss) income per share – diluted

    7,301,189       5,299,751  
                 

Net (loss) income per share – basic

  $ (0.18 )   $ 0.54  
                 

Net (loss) income per share – diluted

  $ (0.18 )   $ 0.49  

 

No adjustment has been made to the net loss attributable to common stockholders in the three months ended March 31, 2019, as the effect would be anti-dilutive due to the net loss.

 

The following potentially dilutive securities were excluded from the computation of diluted weighted average shares outstanding because they would have been antidilutive:

 

   

Three Months Ended March 31,

 
   

2019

   

2018

 
                 

Options to purchase common stock

    860,371       529,332  
                 

Warrants to purchase common stock

    22,114       5,700  
                 

Warrant to purchase convertible preferred stock

          3,613  
                 

Total potentially dilutive securities excluded from denominator of the diluted earnings per share computation

    882,485       538,645  

 

 

 

 

NOTE 13.  Subsequent Events

 

 

(a)

Public Offering

 

On April 11, 2019, the Company completed a public underwritten offering (the “April 2019 Offering”) of 925,455 shares of common stock, 8,165,455 pre-funded warrants, and warrants to purchase 10,454,546 shares of common stock (including 1,363,636 common stock warrants issued upon the exercise by the underwriters of their option to purchase such warrants). Each share of common stock with an accompanying common stock warrant were sold for $1.10, and each pre-funded warrant with an accompanying common stock warrant were sold for $1.00, with the amount paid for each accompanying common stock warrant being $0.10. Each pre-funded warrant entitles the holder to purchase one share of common stock for $0.10, is immediately exercisable, subject to certain ownership imitations, and may be exercised at any time until all of the pre-funded warrants are exercised in full. Each common stock warrant entitles the holder to purchase one share of common stock for $1.10, is exercisable immediately, subject to certain ownership limitations, and will expire five years from the date of issuance.

 

The total gross proceeds from the April 2019 Offering to the Company were $9.3 million. After deducting underwriting discounts, commissions and offering expenses payable by the Company, the aggregate net proceeds received by the Company were $8.1 million. In addition, as of May 8, 2019, a further $0.6 million had been received from the exercise of pre-funded warrants and 1,646,364 pre-funded warrants remained outstanding.

 

Pursuant to the terms of an underwriting agreement, the Company paid the underwriters aggregate commissions and reimbursable expenses of approximately $750,000. In addition, the Company issued the underwriters’ designees 636,364 common stock warrants at the closing of the April 2019 Offering, each warrant entitling the holder to purchase one share of common stock for $1.375 at any time within five years of their issuance date. The aggregate fair value of these warrants at issuance was estimated to be $333,000, using the Black-Scholes valuation model, using a closing stock price of $0.89 and assumptions including estimated volatility of 83%, a risk-free interest rate of 2.31%, a zero dividend rate and an estimated remaining term of 5.0 years. This estimated fair value was recorded in offering costs.

 

 

(b)

Authorized Shares of Common Stock

 

On April 23, 2019, the Company’s stockholders approved a Certificate of Amendment to the Company’s Restated Certificate of Incorporation (the “Certificate”), to decrease the authorized number of shares of common stock, par value $0.10, from 200,000,000 to 100,000,000 shares. On April 23, 2019, the Certificate was filed with the Secretary of State of the State of Delaware.

 

 

(c)

2019 Equity Incentive Plan

 

On April 23, 2019, the Company’s stockholders approved the adoption of the 2019 Equity Incentive Plan (the “2019 Plan”), under which the Company is authorized to issue ISOs, NQSOs, stock appreciation rights, RSAs, RSUs, other stock awards and performance awards that may be settled in cash, stock, or other property. The 2019 Plan is designed to secure and retain the services of employees, directors and consultants, provide incentives for the Company's employees, directors and consultants to exert maximum efforts for the success of the Company and its affiliates, and provide a means by which employees, directors and consultants may be given an opportunity to benefit from increases in the value of the Company’s common stock.

 

The aggregate number of shares of common stock that may be issued under the 2019 Plan will not exceed 1,600,000 shares, which can only be increased by stockholder approval, except that all awards are subject to adjustment in the event of a stock split, stock dividend or other extraordinary dividend, or other similar change in the Company’s common stock or capital structure. Awards that expire or are canceled generally become available for issuance again under the 2019 Plan. Awards have a maximum term of ten years from the grant date and may vest over varying periods, as specified by the Company’s board of directors for each grant.

 

 

 

Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on February 6, 2019. This Quarterly Report on Form 10-Q contains 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, which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management's beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “goal,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential” and similar expressions intended to identify forward-looking statements. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in “Risk Factors.” The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date hereof.

 

In addition, statements that “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 filing 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.

 

Company Overview and Background

 

We are a clinical-stage biotechnology company focused on the development of oral recombinant vaccines based on our proprietary oral vaccine platform. Our oral vaccines are designed to generate broad and durable immune responses that protect against a wide range of infectious diseases and may be useful for the treatment of chronic viral infections and cancer. Our vaccines are administered using a convenient room temperature-stable tablet, rather than by injection.

 

We are developing prophylactic vaccine candidates that target a range of infectious diseases. These include norovirus, a widespread cause of acute gastro-intestinal enteritis, for which two Phase 1 human studies have been completed; seasonal influenza, for which our vaccine protected patients in a recent Phase 2 challenge study; and respiratory syncytial virus, or RSV, a common cause of respiratory tract infections. In addition, we are developing our first therapeutic immune-oncology vaccine targeting cervical cancer and dysplasia caused by human papillomavirus, or HPV.

 

Merger with Aviragen

 

Vaxart Biosciences, Inc. was originally incorporated in California in March 2004, under the name West Coast Biologicals, Inc. and changed its name to Vaxart, Inc., or Private Vaxart, in July 2007, and reincorporated in the state of Delaware.  On February 13, 2018, Private Vaxart completed a reverse merger, or the Merger, with Aviragen Therapeutics, Inc., or Aviragen, pursuant to which Private Vaxart survived as a wholly owned subsidiary of Aviragen. Under the terms of the Merger, Aviragen changed its name to Vaxart, Inc. and Private Vaxart changed its name to Vaxart Biosciences, Inc.

 

Our Product Pipeline

 

We are developing the following tablet vaccine candidates, which are based on our proprietary platform:

 

 

Norovirus Vaccine. We are developing an oral tablet vaccine for norovirus, a leading cause of acute gastroenteritis in the United States and Europe. Because norovirus infects the small intestine, we believe that our vaccine, which is designed to produce mucosal antibodies locally in the intestine, in addition to systemic antibodies in the blood, will better protect against norovirus infection than an injectable vaccine. Clinical evidence that vaccines based on our platform technology can protect against infection is described under “Clinical Trial Update” in the “Seasonal Influenza Vaccine” section below.

 

Norovirus is the leading cause of vomiting and diarrhea from acute gastroenteritis among people of all ages in the United States. Each year, on average, norovirus causes 19 to 21 million cases of acute gastroenteritis and contributes to 56,000 to 71,000 hospitalizations and 570 to 800 deaths, mostly among young children and older adults. Typical symptoms include dehydration, vomiting, diarrhea with abdominal cramps, and nausea. In a study conducted by Pittsburg School of Medicine in 2012, the total economic burden of norovirus in the United States was estimated at $5.5 billion. In a more recent study by CDC and Johns Hopkins University, the global economic impact of norovirus disease was estimated at $60 billion, $34 billion of which occurred in high income countries including the United States, Europe and Japan. Virtually all norovirus disease is caused by norovirus GI and GII genotypes, and we are developing a bivalent vaccine designed to protect against both.

 

 

 

Clinical Trial Update. We have completed two Phase 1 clinical trials with our monovalent oral tablet vaccine for the GI.1 norovirus strain. The vaccine was well-tolerated and generated broad systemic and mucosal immune responses. In the clinical Phase 1b dose optimization study in healthy adults in which we evaluated four different dosing regimens, all vaccine recipients (100%) in the high dose group responded as measured by a significant increase in norovirus-specific B cells of both IgA and IgG subtypes. In the same group, there was at least a two-fold increase of norovirus-specific antibody titers in serum in more than 90% of recipients.

 

We have started the norovirus bivalent Phase 1 study designed to assess safety and immunogenicity of our norovirus GI.1 and GII.4 vaccines administered concurrently, and we remain on schedule to initiate a monovalent Phase 2 challenge study designed to assess the protective efficacy of our norovirus GI.1 vaccine against live norovirus GI.1 challenge in humans in the second quarter. The Phase 1 bivalent study and the Phase 2 challenge study are both being conducted under an open IND.

 

The challenge study is conducted using only the norovirus GI.1 vaccine. We have manufactured new lots of bulk GI.1 vaccine that are scheduled to be tableted in the coming weeks. If tableting is successful and the vaccine passes all required release testing, the norovirus GI.1 vaccine tablets are expected to become available for the challenge study during the second quarter of 2019.

 

 

Seasonal Influenza Vaccine. Influenza is a major cause of morbidity and mortality in the U.S. and worldwide and, according to the CDC, only 42% of eligible U.S. citizens were vaccinated in 2017/2018, with particularly low vaccination rates among adults between ages 18 and 49. We believe our oral tablet vaccine has the potential to improve the protective efficacy of currently available influenza vaccines and increase flu vaccination rates.

 

Influenza is one of the most common global infectious diseases, causing mild to life-threatening illness and even death. An estimated that at least 350 million cases of seasonal influenza occur annually worldwide, of which three to five million cases are considered severe, causing 290,000 to 650,000 deaths per year globally. During the most recent flu season 2017 – 2018, there were 79,400 flu related deaths in the U.S. alone, according to the CDC. Very young children and the elderly are at the greatest risk. In the United States, between 5% and 20% of the population contracts influenza, 226,000 people are hospitalized with complications of influenza, and between 3,000 and 49,000 people die from influenza and its complications each year, with up to 90% of the influenza-related deaths occurring in adults older than 65. The total economic burden of seasonal influenza has been estimated to be $87.1 billion, including medical costs which average $10.4 billion annually, while lost earnings due to illness and loss of life amount to $16.3 billion annually.

 

We believe our tablet vaccine candidate has the potential to address many of the limitations of current injectable egg-based influenza vaccines, because: our tablet vaccine candidates are designed to create broad and durable immune responses, which may provide more effective immunity and protect against additional strain variants; our vaccine is delivered as a room temperature-stable tablet, which should provide a more convenient method of administration to enhance patient acceptance, and should simplify distribution and administration; and, by using recombinant methods, we believe our tablet vaccine may be manufactured more rapidly than vaccines manufactured using egg-based methods, and should eliminate the risk of allergic reactions to egg protein.

 

Clinical Trial Update. In September 2018, we completed a $15.7 million contract with the U.S. Government through the Department of Health and Human Services, Office of Biomedical Advanced Research and Development Authority, or HHS BARDA, under which a Phase 2 challenge study of our H1N1 flu vaccine candidate was conducted. Previously, we had announced that, in healthy volunteers immunized and then experimentally infected with H1 influenza, our H1 influenza oral tablet vaccine resulted in a 39% reduction in clinical disease relative to placebo, a result that was superior to Fluzone, the market-leading injectable quadrivalent influenza vaccine, which reduced clinical disease by only 27%. Our tablet vaccine also showed a favorable safety profile, indistinguishable from placebo. On October 4, 2018, we presented data from the study demonstrating that our vaccine elicited a significant expansion of mucosal homing receptor plasmablasts to approximately 60% of all activated B cells, while Fluzone only maintained baseline levels of 20%. We believe plasmablasts are a key indicator of a protective mucosal immune response and a unique feature of our vaccines. This data also provided evidence that our vaccines protect through mucosal immunity, the first line of defense against mucosal infections such as flu, norovirus, RSV and others, a potential key advantage over injectable vaccines for these indications.

 

At this time, we aim to finance development and commercialization of our seasonal quadrivalent influenza oral tablet vaccine through third-party collaboration and licensing arrangements, and/or non-dilutive funding. In the future, we may also consider equity offerings and/or debt financings to fund the program.

 

 

 

HPV Therapeutic Vaccine. Our first therapeutic oral vaccine candidate targets HPV-16 and HPV-18, the two strains responsible for 70% of cervical cancers and precancerous cervical dysplasia.

Cervical cancer is the fourth most common cancer in women worldwide and in the United States with about 13,000 new cases diagnosed annually in the United States according to the National Cervical Cancer Coalition.

 

We have tested our HPV-16 vaccine candidate in two different HPV-16 solid tumor models in mice. The vaccine elicited T cell responses and promoted migration of the activated T cells into the tumors, leading to tumor cell killing. Mice that received the Vaxart HPV-16 vaccine showed a significant reduction in volume of their established tumors.

 

In October 2018, we filed a pre-IND meeting request for our HPV therapeutic vaccines, VXA-HPV16.1 and VXA-HPV18.1, with the FDA, and we subsequently submitted a pre-IND briefing package. We received feedback from the FDA in January 2019 providing guidance for the IND we plan to submit. Based on this feedback, we expect to be able to file an IND for this product candidate in the course of 2019.

 

 

RSV Vaccine. RSV is a major respiratory pathogen with a significant burden of disease in the very young and in the elderly.

 

Based on the positive results of our cotton rat study, we believe our proprietary oral vaccine platform is the optimal delivery system for RSV, offering significant advantages over injectable vaccines. We aim to develop a tablet RSV vaccine by licensing one or more RSV protein antigens that have demonstrated protection against RSV infection in clinical studies, or by partnering with a third party with RSV antigens that can be delivered with our platform.

 

Anti-Virals

 

 

Through our merger with Aviragen Therapeutics, Inc., or Aviragen, we acquired two royalty earning products, Relenza and Inavir, and three Phase 2 clinical stage antiviral compounds which we have discontinued.

 

 

Relenza and Inavir are antivirals for the treatment of influenza that are marketed by GlaxoSmithKline, plc, or GSK, and Daiichi Sankyo Company, Limited, or Daiichi Sankyo, respectively. We earn royalties on the net sales of Relenza and Inavir in Japan. Sales of Relenza and Inavir vary significantly from one year to the next, depending on the intensity of the flu season and competition from other antivirals such as Tamiflu. Importantly, on February 23, 2018, Xofluza, a new drug to treat influenza developed by Shionogi, was approved in Japan. The drug may gain significant market share, substantially reducing sales of Inavir.

 

Our Pipeline

 

The following table outlines the status of our oral vaccine development programs and our two marketed products:

 

 

 

Financial Operations Overview

 

Revenue

 

Revenue from Government Contract

 

The government contract with HHS BARDA, as modified, was a cost-plus-fixed-fee contract, under which we were reimbursed for allowable direct contract costs plus allowable indirect costs and a fixed-fee totaling $15.7 million from September 2015 through September 30, 2018. Activities were completed in 2018 and no future revenue is expected from this contract.

 

Royalty Revenue

 

We earn royalty revenue on sales of Relenza and Inavir, both treatments for influenza, by our licensees, GSK and Daiichi Sankyo, respectively, based on fixed percentages of net sales of these drugs.

 

Non-Cash Royalty Revenue Related to the Sale of Future Royalties

 

In April 2016, Aviragen sold certain royalty rights related to Inavir in the Japanese market for $20.0 million to HealthCare Royalty Partners III, L.P., or HCRP. At the time of the Merger, the estimated future benefit to HCRP was remeasured at fair value and was preliminarily estimated, as of March 31, 2018, to be $16.3 million, which we account for as a liability and amortize using the effective interest method over the remaining estimated life of the arrangement. Even though we did not retain the related royalties under the transaction, as the amounts are remitted to HCRP, we will continue to record revenue related to these royalties until the amount of the associated liability and related interest is fully amortized.

 

Research and Development Expenses

 

Research and development expenses represent costs incurred to conduct research, including the development of our tablet vaccine platform, and the manufacturing, preclinical and clinical development activities of our tablet vaccine candidates. We recognize all research and development costs as they are incurred. Research and development expenses consist primarily of the following:

 

 

employee-related expenses, which include salaries, benefits and stock-based compensation;

 

expenses incurred under agreements with contract research organizations, or CROs, that conduct clinical trials on our behalf;

 

manufacturing materials, analytical and release testing services required for our production of vaccine candidates used primarily in clinical trials;

 

process development expenses incurred internally and externally to improve the efficiency and yield of the bulk vaccine and tablet manufacturing activities;

 

laboratory supplies and vendor expenses related to its preclinical research activities;

 

consultant expenses for services supporting our clinical, regulatory and manufacturing activities; and

 

facilities, depreciation and allocated overhead expenses.

 

We do not allocate our internal expenses to specific programs. Our employees and other internal resources are not directly tied to any one research program and are typically deployed across multiple projects. Internal research and development expenses are presented as one total.

 

We incur significant external costs on manufacturing our tablet vaccine candidates, and on CROs that conduct clinical trials on our behalf. We capture these expenses for each vaccine program. We do not allocate external costs incurred on preclinical research or process development to specific programs.

 

 

The following table shows our research and development expenses for the three months ended March 31, 2019 and 2018, identifying external costs that were incurred in each of our vaccine programs and, separately, on preclinical research and process development:

 

   

Three Months Ended March 31,

 
   

2019

   

2018

 
   

(in thousands)

 

External program costs:

               

Influenza program, funded by HHS BARDA

  $ -     $ 386  

Norovirus program

    865       345  

RSV and HPV programs

    13       26  

Teslexivir and vapendavir programs

    17       424  

Preclinical research and process development

    53       81  

Total external costs

    948       1,262  

Internal costs

    2,881       2,146  
    $ 3,829     $ 3,408  

 

We expect that our research and development expenses will increase significantly over the next several years as we advance our tablet vaccine candidates into and through clinical trials, pursue regulatory approval of our tablet vaccine candidates and prepare for a possible commercial launch, all of which will also require a significant investment in manufacturing and inventory related costs.

 

The process of conducting clinical trials necessary to obtain regulatory approval is costly and time consuming. We may never succeed in achieving marketing approval for our tablet vaccine candidates. The probability of successful commercialization of our tablet vaccine candidates may be affected by numerous factors, including clinical data obtained in future trials, competition, manufacturing capability and commercial viability. As a result, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our tablet vaccine candidates.

 

General and Administrative Expense

 

General and administrative expenses consist of personnel costs, allocated expenses and expenses for outside professional services, including legal, audit, accounting, public relations, market research and other consulting services. Personnel costs consist of salaries, benefits and stock-based compensation. Allocated expenses consist of rent, depreciation and other facilities-related expenses.

 

 

Results of Operations

 

The following table presents selected items in the condensed consolidated statements of operations and comprehensive (loss) income for the three months ended March 31, 2019 and 2018, which include the operations of Aviragen for the three months ended March 31, 2019 and the period from February 13, 2018 to March 31, 2018:

 

   

Three Months Ended March 31,

 
   

2019

   

2018

 
   

(in thousands)

 

Revenue:

               

Revenue from government contract

  $     $ 610  

Royalty revenue

    3,659       893  

Non-cash royalty revenue related to sale of future royalties

    1,748       -  
                 

Total revenue

    5,407       1,503  
                 

Operating expenses:

               

Research and development

    3,829       3,408  

General and administrative

    2,026       2,010  
                 

Total operating expenses

    5,855       5,418  
                 

Operating loss

    (448 )     (3,915 )
                 

Other income and (expenses):

               

Bargain purchase gain

          6,988  

Interest income

    5       5  

Interest expense

    (107 )     (437 )

Non-cash interest expense on liability related to sale of future royalties

    (544 )     (298 )

Loss on revaluation of financial instruments

          (3 )

Foreign exchange gain, net

    5       2  
                 

Total other income and (expenses)

    (641 )     6,257  
                 

Net (loss) income before income taxes

    (1,089 )     2,342  
                 

Provision for income taxes

    250       28  
                 

Net (loss) income

  $ (1,339 )   $ 2,314  

 

Revenue from Government Contract

 

The following table presents our revenue from a government contract for the three months ended March 31, 2019 and 2018, respectively:

 

Three Months Ended March 31,

 

2019

   

2018

   

% Change

 

(dollars in thousands)

         
$     $ 610       (100

)%

 

We earned no revenue from our government contract in the three months ended March 31, 2019, compared to $610,000 in the three months ended March 31, 2018. The active phase of the contract occurred in 2016 and 2017. In 2018 activities were wound down and completed and no future revenue is expected from this contract.

 

 

Royalty Revenue

 

The following table presents our royalty revenue for the three months ended March 31, 2019 and 2018, respectively:

 

Three Months Ended March 31,

 

2019

   

2018

   

% Change

 

(dollars in thousands)

         
$ 3,659     $ 893       310

%

 

For the three months ended March 31, 2019, royalty revenue increased by $2.8 million, or 310%, compared to the three months ended March 31, 2018. Royalty revenue is earned on sales of Relenza and Inavir, both treatments for influenza, which were acquired in the Merger and is based on fixed percentages of net sales of these drugs in the period. Royalty revenue in the three months ended March 31, 2018, excludes comparable revenue of $3.5 million earned in the pre-Merger period.

 

Non-cash Royalty Revenue Related to Sale of Future Royalties

 

The following table presents our non-cash royalty revenue related to sale of future royalties for the three months ended March 31, 2019 and 2018, respectively:

 

Three Months Ended March 31,

 

2019

   

2018

   

% Change

 

(dollars in thousands)

         
$ 1,748     $       N/A  

 

For the three months ended March 31, 2019, royalty revenue related to sale of future royalties was $1.7 million. All such revenue in the three months ended March 31, 2018, was recorded prior to the Merger.

 

Research and Development

 

The following table presents our research and development expenses for the three months ended March 31, 2019 and 2018, respectively:

 

Three Months Ended March 31,

 

2019

   

2018

   

% Change

 

(dollars in thousands)

         
$ 3,829     $ 3,408       12

%

 

For the three months ended March 31, 2019, research and development expenses increased by $421,000, or 12%, compared to the three months ended March 31, 2018. The increase in the 2019 period is principally due to an increase in manufacturing costs, principally related to the Norovirus vaccine, increased amortization of intangible assets acquired in the Merger, higher Norovirus clinical trial costs and increases in personnel costs and facilities costs, partially offset by lower expenditures on the clinical trials of teslexivir, the absence of costs incurred under the HHS BARDA contract and reduced costs of laboratory supplies used in preclinical research. We expect that research and development expenses will increase in the near term as we plan to conduct two norovirus clinical trials in 2019, which will only be partially offset by the elimination of expenses that we were formerly incurring for teslexivir trials and for work on the HHS BARDA contract.

 

General and Administrative

 

The following table presents our general and administrative expenses for the three months ended March 31, 2019 and 2018, respectively:

 

Three Months Ended March 31,

 

2019

   

2018

   

% Change

 

(dollars in thousands)

         
$ 2,026     $ 2,010       1

%

 

For the three months ended March 31, 2019, general and administrative expenses increased by $16,000, or 1%, compared to the three months ended March 31, 2018. The increase in the 2019 period is due to higher personnel costs, substantially offset by lower legal and other third-party costs, due mainly to the absence of $0.5 million in costs related directly to the Merger that were incurred in the three months ended March 31, 2018.

 

 

Other Income and (Expenses)

 

The following table presents our non-operating income and expenses for the three months ended March 31, 2019 and 2018, respectively:

 

Three Months Ended March 31,

 

2019

   

2018

   

% Change

 

(dollars in thousands)

         
$ (641 )   $ 6,257       N/A  

 

For the three months ended March 31, 2019, we recorded net non-operating expenses of $641,000, compared to net non-operating income of $6.3 million in the three months ended March 31, 2018. The principal source of non-operating income in the three months ended March 31, 2018, was a bargain purchase gain of $7.0 million, representing the excess of our preliminary valuation of the fair value of net assets acquired over the fair value of the common stock issued to acquire them in the Merger. Interest expense was $107,000 in the 2019 period, decreasing from $437,000 in the 2018 period principally due to the absence of an expense of $295,000 related to Private Vaxart’s convertible promissory notes being outstanding for the 43 days prior to the Merger. Non-cash interest expense on liability related to sale of future royalties, which relates to accounting for sums that will become payable to HCRP for royalty revenue earned from Inavir as debt, was $544,000 in the 2019 period, compared to $298,000 related to the 47 days in the post-Merger period in 2018.

 

Provision for income taxes

 

The following table presents our provision for income taxes for the three months ended March 31, 2019 and 2018, respectively:

 

Three Months Ended March 31,

 

2019

   

2018

   

% Change

 

(dollars in thousands)

         
$ 250     $ 28       793

%

 

The provision for income taxes comprises $250,000 and $28,000 in the three months ended March 31, 2019 and 2018, respectively. For the three months ended March 31, 2019, $14,000 relates to foreign taxes payable on intercompany interest. The remaining $236,000 in the 2019 period and the full $28,000 in the 2018 period represent withholding tax on royalty revenue earned on sales of Inavir in Japan, which is potentially recoverable as a foreign tax credit but expensed because we record a 100% valuation allowance against our deferred tax assets. The increase arose principally because the majority of Inavir sales in the first calendar quarter arise prior to February 13, so most of the revenue in the 2018 period was earned pre-Merger.

 

Liquidity and Capital Resources

 

Since inception, through March 31, 2019, Vaxart’s operations have been financed primarily by net proceeds of $38.9 million and $29.4 million from the sale of its convertible preferred stock and the issuance of convertible promissory notes, respectively, all of which were converted into common stock in the Merger, $2.5 million from the sale of common stock and $4.9 million from the issuance of secured promissory notes to Oxford Finance, repayable by January 2021. Vaxart gained $25.5 million in cash from Aviragen in the Merger, of which $4.9 million was used to pay for severance, financial advisory fees, director and officer insurance, legal fees and other professional costs incurred by Aviragen prior to, or upon the closing of, the Merger. In April 2019, we received net proceeds of $8.7 million in a public offering from the sale of common stock, pre-funded warrants and common stock warrants, plus the exercise of pre-funded warrants (see Note 1 to the Condensed Consolidated Financial Statements in Part I, Item 1 for further information regarding our April 2019 public offering).

 

As of March 31, 2019, we had $8.4 million of cash and cash equivalents. We believe these funds, along with the funds raised in April 2019 and projected revenue, are sufficient to fund us into, but probably not beyond, the first quarter of 2020. Our independent registered public accounting firm included an explanatory paragraph in their report on our financial statements as of and for the year ended December 31, 2018, indicating that, because we have experienced losses and negative cash flows from operations and have an accumulated deficit and debt obligations, there is substantial doubt about our ability to continue as a going concern.

 

To continue operations thereafter, we will need to raise further capital, through the sale of additional securities or otherwise. Our operating needs include the planned costs to operate our business, including amounts required to fund working capital and capital expenditures. As of March 31, 2019, we had no material commitments for capital expenditures. Our future capital requirements and the adequacy of our available funds will depend on many factors, most notably our ability to successfully commercialize our products and services.

 

 

We plan to continue to fund our operations and capital funding needs through equity and/or debt financing. We may also enter into government funding programs and consider selectively partnering for clinical development and commercialization. The sale of additional equity would result in additional dilution to our stockholders. Incurring debt financing would result in debt service obligations, and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. If we are unable to raise additional capital in sufficient amounts or on acceptable terms, we may be required to delay, limit, reduce, or terminate our product development or future commercialization efforts or grant rights to develop and market vaccine candidates that we would otherwise prefer to develop and market ourselves. Any of these actions could harm our business, results of operations and prospects.

 

Our future funding requirements will depend on many factors, including the following:

 

 

the timing and costs of our planned clinical trials for our product candidates;

 

 

the timing and costs of our planned preclinical studies of our product candidates;

 

 

our success in establishing and scaling commercial manufacturing capabilities;

 

 

the amount and timing of royalties received on sales of Relenza and Inavir;

 

 

the number and characteristics of product candidates that we pursue;

 

 

the outcome, timing and costs of seeking regulatory approvals;

 

 

revenue received from commercial sales of our future products, which will be subject to receipt of regulatory approval;

 

 

the terms and timing of any future collaborations, licensing, consulting or other arrangements that we may enter into;

 

 

the amount and timing of any payments that may be required in connection with the licensing, filing, prosecution, maintenance, defense and enforcement of any patents or patent applications or other intellectual property rights; and

 

 

the extent to which we in-license or acquire other products and technologies.

 

Cash Flows

 

The following table summarizes our cash flows for the periods indicated:

 

   

Three Months Ended March 31,

 
   

2019

   

2018

 
   

(in thousands)

 

Net cash used in operating activities

  $ (4,653 )   $ (10,590 )

Net cash (used in) provided by investing activities

    (552 )     26,779  

Net cash provided by (used in) financing activities

    2,123       (265 )
                 

Net (decrease) increase in cash and cash equivalents

  $ (3,082 )   $ 15,924  

 

Net Cash Used in Operating Activities

 

Vaxart experienced negative cash flow from operating activities for the three months ended March 31, 2019 and 2018, in the amounts of $4.7 million and $10.6 million, respectively. The cash used in operating activities in the three months ended March 31, 2019, was due to cash used to fund a net loss of $1.3 million and an increase in working capital of $3.8 million, partially offset by net non-cash expenses related to depreciation and amortization, stock-based compensation, non-cash interest expense, non-cash interest expense related to sale of future royalties and non-cash revenue related to sale of future royalties totaling $459,000. The cash used in operating activities in the three months ended March 31, 2018, was due to net income of $2.3 million being offset by $5.7 million of adjustments for net non-cash income related to the bargain purchase gain, depreciation and amortization, stock-based compensation, loss on revaluation of financial instruments, non-cash interest, amortization of note discount and non-cash interest expense related to sale of future royalties and $7.2 million used by a change in working capital.

 

Net Cash (Used in) Provided by Investing Activities

 

In the three months ended March 31, 2019, we used $552,000 to purchase property and equipment. In the three months ended March 31, 2018, Vaxart received cash of $25.5 million in the Merger and $1.4 million from maturities of short-term investments, net of purchases. This was partially offset by $140,000 to purchase property and equipment and $21,000 to pay for fractional shares of common stock in the Merger.

 

 

Net Cash Provided by (Used in) Financing Activities

 

We received $2.5 million in the three months ended March 31, 2019, from the sale of common stock in a registered direct offering, partially offset by repayment of principal of $417,000 on the secured promissory note payable to Oxford Finance. We used $278,000 in the three months ended March 31, 2018, in repayment of principal on the secured promissory note payable to Oxford Finance, partially offset by $13,000 received for the exercise of stock options.

 

Critical Accounting Policies and Estimates

 

Our management’s discussion and analysis of financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate these estimates and judgments. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources. Actual results may differ materially from these estimates. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

 

Accrued Research and Development Expenses

 

We record accrued expenses for estimated costs of research and development activities conducted by third-party service providers, which include the conduct of clinical and contract formulation and contract manufacturing activities. We record the estimated costs of research and development activities based upon the estimated amount of services provided and include the costs incurred but not yet invoiced within accrued liabilities in the condensed consolidated balance sheets and within research and development expense in the condensed consolidated statement of operations and comprehensive (loss) income. These costs can be a significant component our research and development expenses.

 

We estimate the amount of work completed 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. We make significant judgments and estimates in determining the accrued balance in each reporting period. As actual costs become known, we adjust our accrued estimates.

 

Intangible Assets

 

Intangible assets acquired in the Merger were recorded at preliminary estimates of their fair values of $20.6 million (subsequently adjusted to $20.3 million when estimates were refined) and $1.8 million for developed technologies Inavir and Relenza, respectively, which are being amortized on a straight-line basis over the estimated periods of future royalties of 11.75 and 1.3 years, respectively, and $1.6 million for in-process research and development related to teslexivir which was indefinite-lived until it was assessed as impaired in the three months ended June 30, 2018. These valuations were prepared by an independent third party based on estimated discounted cash flows based on probability-weighted future development expenditures and revenue streams, which are highly subjective.

 

Off-Balance Sheet Arrangements

 

We had no off-balance sheet arrangements in the periods presented.

 

Recent Accounting Pronouncements

 

See the “Recent Accounting Pronouncements” in Note 2 to the Condensed Consolidated Financial Statements in Part I, Item 1 for information related to the issuance of new accounting standards in the first quarter of 2019, none of which had a material impact on our condensed consolidated financial statements.

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

 

Item 4.  Controls and Procedures

 

Managements Report on Internal Control over Financial Reporting

 

Our management, with the participation of our President and Chief Executive Officer (who serves as our principal executive officer and principal financial officer), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our management has concluded that as of March 31, 2019, our disclosure controls and procedures were not effective at a reasonable assurance level as a result of the material weakness described below.

 

Material Weakness

 

We identified the following material weakness in our internal controls over financial reporting as of March 31, 2019:

 

We lacked consistent processes to appropriately perform effective and timely review of account reconciliations and non-routine transactions. Therefore, there was a risk that a potential material misstatement of the financial statements would occur without being prevented or detected on a timely basis.

 

We have taken certain steps to remediate this material weakness, including increasing the depth and experience within our accounting and finance organization and designing and implementing improved processes and internal controls. However, our efforts to remediate this material weakness may not be effective or prevent any future material weakness or significant deficiency in our internal control over financial reporting. If our efforts are not successful, or other material weaknesses or control deficiencies occur in the future, we may be unable to report our financial results accurately on a timely basis, which could cause our reported financial results to be materially misstated and result in the loss of investor confidence and cause the market price of our common stock to decline.

 

Changes in Internal Control over Financial Reporting

 

During 2018, we hired a full-time Corporate Controller and a full-time Associate Director of SEC Reporting, both Certified Public Accountants with active licenses. Since then, we have implemented procedures in our finance department including formal approval procedures for all journal entries and account reconciliations, and increased management oversight of financial reporting. This was done to address a material weakness relating to our lack of sufficient qualified resources and adequate processes to appropriately segregate duties and perform effective and timely review of account reconciliations and nonroutine transactions that was originally identified in the audit of our financial statements for the year ended December 31, 2015 and was previously reported in Item 9A in our Annual Report on Form 10-K for the year ended December 31, 2018. While we believe these procedures will be effective in remediating the material weakness, they were not yet fully operational as of March 31, 2019.

 

Other than the implementation of these new procedures, there was no material change in our internal control over financial reporting that occurred during the quarter ended March 31, 2019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Inherent Limitations on Effectiveness of Controls

 

Our management, including our President and Chief Executive Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Vaxart have been detected.

 

 

PART II OTHER INFORMATION

 

 

Item 1.  Legal Proceedings

 

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

 

 

Item 1A.  Risk Factors

 

You should carefully consider the following risk factors, as well as the other information in this Quarterly Report on Form 10-Q, including our financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, as well as our other public filings. The occurrence of any of the following risks could harm our business, financial condition, results of operations and/or growth prospects or cause our actual results to differ materially from those contained in forward-looking statements we have made in this Quarterly Report on Form 10-Q and those we may make from time to time. You should consider all of the risk factors described when evaluating our business.

 

We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. This discussion highlights some of the risks that may affect future operating results. These are the risks and uncertainties we believe are most important to consider. We cannot be certain that we will successfully address these risks. If we are unable to address these risks, our business may not grow, our stock price may suffer and we may be unable to stay in business. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations. We have marked with an asterisk (*) those risks described below that reflect substantive changes from, or additions to, the risks described in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

Risks Related to Our Business, Financial Position and Capital Requirements

 

We have a limited operating history and have generated only limited product revenue.

 

Even though we generate royalty revenue from our two commercialized influenza products, we are at an early stage in our clinical development process and have not yet successfully completed a large-scale, pivotal clinical trial, obtained marketing approval, manufactured our tablet vaccine candidates at commercial scale, or conducted sales and marketing activities that will be necessary to successfully commercialize our product candidates. Consequently, predictions about our future success or viability may not be as accurate as they could be if we had a longer operating history or a history of successfully developing and commercializing product candidates.

 

Our ability to generate significant revenue and achieve and maintain profitability will depend upon our ability to successfully complete the development of our tablet vaccine candidates for the treatment of norovirus, seasonal influenza, respiratory syncytial virus, or RSV, cervical cancer and dysplasia caused by human papillomavirus, or HPV, and other infectious diseases, and to obtain the necessary regulatory approvals.

 

Even if we receive regulatory approval for the sale of any of our product candidates, we do not know when we will begin to generate significant revenue, if at all. Our ability to generate significant revenue depends on a number of factors, including our ability to:

 

 

set an acceptable price for our product candidates and obtain coverage and adequate reimbursement from third-party payors;

 

 

receive royalties on our products and product candidates including in connection with sales of Relenza and Inavir;

 

 

establish sales, marketing, manufacturing and distribution systems;

 

 

 

add operational, financial and management information systems and personnel, including personnel to support our clinical, manufacturing and planned future clinical development and commercialization efforts and operations as a public company;

 

 

develop manufacturing capabilities for bulk materials and manufacture commercial quantities of our product candidates at acceptable cost levels;

 

 

achieve broad market acceptance of our product candidates in the medical community and with third-party payors and consumers;

 

 

attract and retain an experienced management and advisory team;

 

 

launch commercial sales of our product candidates, whether alone or in collaboration with others; and

 

 

maintain, expand and protect our intellectual property portfolio.

 

Because of the numerous risks and uncertainties associated with vaccine development and manufacturing, we are unable to predict the timing or amount of increased development expenses, or when we will be able to achieve or maintain profitability, if at all. Our expenses could increase beyond expectations if we are required by the U.S. Food and Drug Administration, or the FDA, or comparable non-U.S. regulatory authorities, to perform studies or clinical trials in addition to those we currently anticipate. Even if our product candidates are approved for commercial sale, we anticipate incurring significant costs associated with the commercial launch of and the related commercial-scale manufacturing requirements for our product candidates. If we cannot successfully execute on any of the factors listed above, our business may not succeed.

 

We have incurred significant losses since our inception and expect to continue to incur significant losses for the foreseeable future and may never achieve or maintain profitability.

 

We have generated only limited product revenues and we expect to continue to incur substantial and increasing losses as we continue to develop our product candidates. Our product candidates have not been approved for marketing in the United States and may never receive such approval. As a result, we are uncertain when or if we will achieve profitability and, if so, whether we will be able to sustain it. Our ability to generate significant revenue and achieve profitability is dependent on our ability to complete development, obtain necessary regulatory approvals, and have our product candidates manufactured and successfully marketed. We cannot be sure that we will be profitable even if we successfully commercialize one of our product candidates. If we do successfully obtain regulatory approval to market our tablet vaccine candidates, our revenues will be dependent, in part, upon the size of the markets in the territories for which regulatory approval is received, the number of competitors in such markets, the price at which we can offer our product candidates and whether we own the commercial rights for that territory. If the indication approved by regulatory authorities is narrower than we expect, or the treatment population is narrowed by competition, physician choice or treatment guidelines, we may not generate significant revenue from sales of our product candidates, even if approved. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. If we fail to become and remain profitable, the market price of our common stock and our ability to raise capital and continue operations will be adversely affected.

 

We expect research and development expenses to increase significantly for any of our tablet vaccines, including those for the prevention of norovirus, influenza and RSV infection, as well as those for the treatment of HPV related dysplasia and cancer, and any other chronic viral infections and cancer. In addition, even if we obtain regulatory approval, significant sales and marketing expenses will be required to commercialize the tablet vaccine candidates. As a result, we expect to continue to incur significant and increasing operating losses and negative cash flows for the foreseeable future. These losses have had and will continue to have an adverse effect on our financial position and working capital. As of March 31, 2019, we had an accumulated deficit of $99.4 million.

 

 

We are largely dependent on the success of our tablet vaccine for the prevention of norovirus infection which is still in early-stage clinical development, and if this tablet vaccine does not receive regulatory approval or is not successfully commercialized, our business may be harmed.

 

None of our product candidates are in late-stage clinical development or approved for commercial sale and we may never be able to develop marketable tablet vaccine candidates. We expect that a substantial portion of our efforts and expenditures over the next few years will be devoted to our tablet vaccine candidate for norovirus. Accordingly, our business currently depends heavily on the successful development, regulatory approval and commercialization of our norovirus tablet vaccine. Our norovirus tablet vaccine may not receive regulatory approval or be successfully commercialized even if regulatory approval is received. The research, testing, manufacturing, labeling, approval, sale, marketing and distribution of tablet vaccine candidates are and will remain subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries that each have differing regulations. We are not permitted to market our norovirus tablet vaccine in the United States until we receive approval of a biologics license application, or BLA, from the FDA, or in any foreign countries until we receive the requisite approval from such countries. To date, we have only completed Phase 1 clinical trials for one of the two strains necessary for our bivalent norovirus tablet vaccine candidate. As a result, we have not submitted a BLA to the FDA or comparable applications to other regulatory authorities and do not expect to be in a position to do so for the foreseeable future. Obtaining approval of a BLA is an extensive, lengthy, expensive and inherently uncertain process, and the FDA may delay, limit or deny approval of our norovirus tablet vaccine for many reasons, including:

 

 

We may not be able to demonstrate that our norovirus tablet vaccine is safe and effective to the satisfaction of the FDA;

 

 

the FDA may not agree that the completed Phase 1 clinical trials of the norovirus vaccine satisfy the FDA’s requirements and may require us to conduct additional testing;

 

 

the results of our clinical trials may not meet the level of statistical or clinical significance required by the FDA for marketing approval;

 

 

the FDA may disagree with the number, design, size, conduct or implementation of one or more of our clinical trials;

 

 

the contract research organizations, or CROs, that we retain to conduct clinical trials may take actions outside of our control that materially and adversely impact our clinical trials;

 

 

the FDA may not find the data from our preclinical studies and clinical trials sufficient to demonstrate that the clinical and other benefits of our tablet vaccines outweigh the safety risks;

 

 

the FDA may disagree with our interpretation of data from our preclinical studies and clinical trials;

 

 

the FDA may not accept data generated at our clinical trial sites;

 

 

if our NDA or BLA is reviewed by an advisory committee, the FDA may have difficulties scheduling an advisory committee meeting in a timely manner or the advisory committee may recommend against approval of our application or may recommend that the FDA require, as a condition of approval, additional preclinical studies or clinical trials, limitations on approved labeling or distribution and use restrictions;

 

 

the FDA may require development of a risk evaluation and mitigation strategy, or REMS, as a condition of approval;

 

 

the FDA may identify deficiencies in our manufacturing processes or facilities; or

 

 

the FDA may change its approval policies or adopt new regulations.

 

We believe that there is substantial doubt about our ability to continue as a going concern.

 

We have concluded that there is substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued. Our independent registered public accounting firm included an explanatory paragraph in their report on our financial statements as of and for the year ended December 31, 2018, indicating that, because we have experienced losses and negative cash flows from operations and have an accumulated deficit and debt obligations, there is substantial doubt about our ability to continue as a going concern. We do not believe that this substantial doubt has been alleviated. As of March 31, 2019, we had $8.4 million of cash and cash equivalents. We believe these funds, along with funds raised in April 2019 from an underwritten offering and projected revenue, are sufficient to fund our operations into, but probably not beyond, the first quarter of 2020. If we are unable to continue as a going concern, we may be forced to liquidate our assets and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements.

 

We will require additional capital to fund our operations, and if we fail to obtain necessary financing, we may not be able to complete the development and commercialization of our tablet vaccine candidates.

 

We expect to spend substantial amounts to complete the development of, seek regulatory approvals for and commercialize our tablet vaccine candidates. We will require substantial additional capital to complete the development and potential commercialization of our tablet vaccine candidates for norovirus, seasonal influenza, RSV, HPV, and the development of other product candidates. If we are unable to raise capital or find appropriate partnering or licensing collaborations, when needed or on acceptable terms, we could be forced to delay, reduce or eliminate one or more of our development programs or any future commercialization efforts. In addition, attempting to secure additional financing may divert the time and attention of our management from day-to-day activities and harm our development efforts.

 

 

Raising finance via the issuance of securities to the public generally entails filing documents with the SEC and, in the normal course of business, obtaining regulatory approval. The process is time-consuming and can result in delays in seeking potential investors. Further, the recent partial shutdown of the government means that SEC staff were furloughed and were not available to review registration statements. This caused a delay in one potential source of financing via a registration statement that we filed with the SEC on December 27, 2018, and any future government shutdown impacting the SEC may have a similar impact in preventing or delaying our ability to obtain additional capital.

 

As of March 31, 2019, we had $8.4 million of cash and cash equivalents. We believe these funds, along with the funds raised in April 2019 and projected revenue, are sufficient to fund our operations under our current operating plan into, but probably not beyond, the first quarter of 2020. Our estimate as to what we will be able to accomplish is based on assumptions that may prove to be inaccurate, and we could exhaust our available capital resources sooner than is currently expected. Because the length of time and activities associated with successful development of our product candidates is highly uncertain, we are unable to estimate the actual funds we will require for development and any approved marketing and commercialization activities. Our future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:

 

 

the initiation, progress, timing, costs and results of our planned clinical trials;

 

 

the outcome, timing and cost of meeting regulatory requirements established by the FDA, the European Medicines Agency, or EMA, and other comparable foreign regulatory authorities;

 

 

the cost of filing, prosecuting, defending and enforcing our patent claims and other intellectual property rights;

 

 

the cost of defending potential intellectual property disputes, including any patent infringement actions brought by third parties against us now or in the future;

 

 

the effect of competing technological and market developments;

 

 

the cost of establishing sales, marketing and distribution capabilities in regions where we choose to commercialize our product candidates on our own; and

 

 

the initiation, progress, timing and results of the commercialization of our product candidates, if approved, for commercial sale.

 

Additional funding may not be available on acceptable terms, or at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of our product candidates or potentially discontinue operations.

 

Raising additional funds by issuing securities may cause dilution to existing stockholders, and raising funds through lending and licensing arrangements may restrict our operations or require us to relinquish proprietary rights.

 

We expect that significant additional capital will be needed in the future to continue our planned operations. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, royalties, debt financings, strategic alliances and license and development agreements in connection with any collaborations. We do not currently have any committed external source of funds. To the extent that we raise additional capital by issuing equity securities, our existing stockholders’ ownership may experience substantial dilution, and the terms of these securities may include liquidation or other preferences that adversely affect our common stockholders’ rights. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, declaring dividends, creating liens, redeeming our stock or making investments.

 

If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, or through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties on acceptable terms, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise develop and market ourselves.

 

 

The terms of our debt facility place restrictions on our operating and financial flexibility.

 

In December 2016, we entered into a loan and security agreement, or the Loan Agreement, with Oxford Finance, LLC, or Oxford, as amended, under which we borrowed $5 million. Our outstanding debt facility with Oxford is collateralized by substantially all of our assets, except for intellectual property, which is subject to a negative pledge, and contains customary financial and operating covenants limiting our ability to transfer or dispose of assets, merge with or acquire other companies, make investments, pay dividends, incur additional indebtedness and liens and conduct transactions with affiliates. We therefore may not be able to engage in any of the foregoing transactions until our current debt obligations are paid in full or we obtain the consent from Oxford. Compliance with these covenants may limit our flexibility in operating our business and our ability to take actions that might be advantageous to us and our stockholders.

 

Under the Loan Agreement, an event of default will occur if, among other things:

 

 

we fail to make payments when due under the Loan Agreement;

 

 

we breach any of our covenants under the Loan Agreement, subject to specified cure periods with respect to certain breaches;

 

 

there occurs an event that has a material adverse effect on:

 

 

our business, operations, properties, assets or financial condition;

 

 

our ability to perform or satisfy our obligations under the Loan Agreement as they become due or Oxford’s ability to enforce its rights or remedies with respect to our obligations under the Loan Agreement; or

 

 

the collateral or liens securing our obligations under the Loan Agreement;

 

 

we or our assets become subject to certain legal proceedings, such as bankruptcy or insolvency proceedings, or attachments;

 

 

we are unable to pay our debts as they become due; or

 

 

we default on certain contracts with third parties which would permit Oxford to accelerate the maturity of such indebtedness or that could have a material adverse effect on us.

 

We may not have enough available cash or be able to raise additional funds through equity or debt financings to repay such indebtedness to Oxford at the time any such event of default occurs. In that case, we may be required to delay, limit, reduce or terminate our clinical development efforts or grant rights to develop and market product candidates to others that we would otherwise prefer to develop and market ourselves. Oxford could also exercise its rights as collateral agent to take possession and dispose of the collateral securing the Loan Agreement for its benefit as the secured lender. Our business would be harmed as a result of any of these events.

 

Our stock price is expected to be volatile, and the market price of our common stock has fallen since the Merger.

 

The market price of our common stock has been subject to significant fluctuations following the Merger. Market prices for securities of early-stage pharmaceutical, biotechnology and other life sciences companies have historically been particularly volatile. Some of the factors that cause the market price of our common stock to fluctuate include:

 

 

our ability to develop product candidates and conduct clinical trials that demonstrate our product candidates are safe and effective;

 

 

our ability to negotiate and receive royalty payments on the sales of our product candidates including Relenza and Inavir;

 

 

our ability to obtain regulatory approvals for our product candidates, and delays or failures to obtain such approvals;

 

 

failure of any of our product candidates to demonstrate safety and efficacy, receive regulatory approval and achieve commercial success;

 

 

failure to maintain our existing third-party license, manufacturing and supply agreements;

 

 

our failure, or that of our licensors, to prosecute, maintain, or enforce our intellectual property rights;

 

 

changes in laws or regulations applicable to our product candidates;

 

 

 

any inability to obtain adequate supply of product candidates or the inability to do so at acceptable prices;

 

 

adverse regulatory authority decisions;

 

 

introduction of new or competing products by our competitors;

 

 

failure to meet or exceed financial and development projections that we may provide to the public;

 

 

the perception of the pharmaceutical industry by the public, legislatures, regulators and the investment community;

 

 

announcements of significant acquisitions, strategic partnerships, joint ventures, or capital commitments by us or our competitors;

 

 

disputes or other developments relating to proprietary rights, including patents, litigation matters, and our ability to obtain intellectual property protection for our technologies;

 

 

additions or departures of key personnel;

 

 

significant lawsuits, including intellectual property or stockholder litigation;

 

 

if securities or industry analysts do not publish research or reports about us, or if they issue adverse or misleading opinions regarding our business and stock;

 

 

changes in the market valuations of similar companies;

 

 

general market or macroeconomic conditions;

 

 

sales of our common stock by our existing stockholders in the future;

 

 

trading volume of our common stock;

 

 

adverse publicity relating to our markets generally, including with respect to other products and potential products in such markets;

 

 

changes in the structure of health care payment systems; and

 

 

period-to-period fluctuations in our financial results.

 

Moreover, the stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may also adversely affect the trading price of our common stock.

 

In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm our operations, financial performance and reputation.

 

We do not anticipate that we will pay any cash dividends in the foreseeable future.

 

The current expectation is that we will retain our future earnings, if any, to fund the development and growth of our business. As a result, capital appreciation, if any, of our common stock will be the sole source of gain, if any, for our stockholders.

 

Future sales of shares by existing stockholders could cause our stock price to decline.

 

If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market, the trading price of our common stock could decline. Sales of a substantial number of shares of our common stock in the public market, or the perception that the sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that sales may have on the prevailing market price of our common stock.

 

* One stockholder owns a significant percentage of our stock and may be able to exert significant control over matters subject to stockholder approval.

 

As of April 30, 2019, entities affiliated with Care Capital, a venture capital fund, owned 17.7% of our common stock and have significant ability to influence decisions through their ownership position. For example, this concentration of ownership may enable entities affiliated with Care Capital to influence or control elections of directors, amendments to our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction.

 

 

Because the Merger in February 2018 resulted in an ownership change under Section 382 of the Code for Vaxart, Inc. (formerly Aviragen), our pre-Merger U.S. net operating loss carryforwards and certain other tax attributes are subject to limitations.

 

If a corporation undergoes an “ownership change” within the meaning of Section 382 of the Code, the corporation’s U.S. net operating loss carryforwards and certain other tax attributes arising from before the ownership change are subject to limitations on use after the ownership change. In general, an ownership change occurs if there is a cumulative change in the corporation’s equity ownership by certain stockholders that exceeds 50% over a three-year period. Similar rules may apply under state and foreign tax laws. The Merger resulted in an ownership change for Vaxart, Inc. (formerly Aviragen), and probably Vaxart Biosciences; accordingly, our U.S. net operating loss carryforwards and certain other tax attributes are subject to limitations on their use. Annual usage may be restricted to 1.97% of the combined organization’s value on February 13, 2018. Additional ownership changes in the future could result in additional limitations on the combined organization’s net operating loss carryforwards. Consequently, even if we achieve profitability, we may not be able to utilize a material portion of our net operating loss carryforwards and other tax attributes, which could have a material adverse effect on cash flow and results of operations.

 

Changes in tax laws and regulations or in our operations may impact our effective tax rate and may adversely affect our business, financial condition and operating results.

 

Changes in tax laws in any jurisdiction in which we operate, or adverse outcomes from any tax audits that we may be subject to in any such jurisdictions, could result in an unfavorable change in our effective tax rate in the future, which could adversely affect our business, financial condition, and operating results.

 

Anti-takeover provisions under Delaware law could make an acquisition more difficult and may prevent attempts by our stockholders to replace or remove our management.

 

Because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the DGCL, which prohibits stockholders owning in excess of 15% of the outstanding company voting stock from merging or combining with the company. Although we believe these provisions collectively provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with our board of directors, they would apply even if the offer was considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of management.

 

If we fail to obtain or maintain adequate reimbursement and insurance coverage for our product candidates, our ability to generate significant revenue could be limited.

 

The availability and extent of reimbursement by governmental and private payors is essential for most patients to be able to afford expensive treatments. Sales of any of our product candidates that receive marketing approval will depend substantially, both in the United States and internationally, on the extent to which the costs of our product candidates will be paid by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or reimbursed by government health administration authorities, private health coverage insurers and other third-party payors. If reimbursement is not available, or is available only on a limited basis, we may not be able to successfully commercialize our product candidates. Even if coverage is provided, the approved reimbursement amount may not be high enough to allow us to establish or maintain adequate pricing that will allow us to realize a sufficient return on our investment.

 

Outside the United States, international operations are generally subject to extensive governmental price controls and other market regulations, and we believe the increasing emphasis on cost-containment initiatives in Europe, Canada and other countries may cause us to price our product candidates on less favorable terms that we currently anticipate. In many countries, particularly the countries of the European Union, the prices of medical products are subject to varying price control mechanisms as part of national health systems. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidates to other available therapies. In general, the prices of products under such systems are substantially lower than in the United States. Other countries allow companies to fix their own prices for products, but monitor and control company profits. Additional foreign price controls or other changes in pricing regulation could restrict the amount that we are able to charge for our product candidates. Accordingly, in markets outside the United States, the level of reimbursement for our products is likely to be reduced compared with the United States and may be insufficient to generate commercially reasonable revenues and profits.

 

 

Moreover, increasing efforts by governmental and third-party payors, in the United States and internationally, to cap or reduce healthcare costs may cause such organizations to limit both coverage and level of reimbursement for newly approved products and, as a result, they may not cover or provide adequate payment for our product candidates. We expect to experience pricing pressures in connection with the sale of any of our product candidates due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative changes. The downward pressure on healthcare costs in general, particularly prescription drugs and surgical procedures and other treatments, has become very intense. As a result, increasingly high barriers are being erected to the entry of new products into the healthcare market.

 

Our future success depends on our ability to retain executive officers and attract, retain and motivate qualified personnel.

 

We are highly dependent on our executive officers and the other principal members of the executive and scientific teams, particularly our President and Chief Executive Officer, Wouter W. Latour, M.D. and our Chief Scientific Officer, Sean N. Tucker, Ph.D. The employment of our executive officers is at-will and our executive officers may terminate their employment at any time. The loss of the services of any of our senior executive officers could impede the achievement of our research, development and commercialization objectives. We do not maintain “key person” insurance for any executive officer or employee.

 

Recruiting and retaining qualified scientific, clinical, manufacturing and sales and marketing personnel is also critical to our success. We may not be able to attract and retain these personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions. Our industry has experienced an increasing rate of turnover of management and scientific personnel in recent years. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in devising our research and development and commercialization strategy. Our consultants and advisors may be employed by third parties and have commitments under consulting or advisory contracts with other entities that may limit their availability to advance our strategic objectives. If any of these advisors or consultants can no longer dedicate a sufficient amount of time to us, our business may be harmed.

 

We will need to expand our organization, and may experience difficulties in managing this growth, which could disrupt operations.

 

Our future financial performance and our ability to commercialize our product candidates, continue to earn royalties and compete effectively will depend, in part, on our ability to effectively manage any future growth. As of March 31, 2019, we had 35 full-time employees. We expect to hire additional employees for our managerial, clinical, scientific and engineering, operational, manufacturing, sales and marketing teams. We may have operational difficulties in connection with identifying, hiring and integrating new personnel. Future growth would impose significant additional responsibilities on our management, including the need to identify, recruit, maintain, motivate and integrate additional employees, consultants and contractors. Also, our management may need to divert a disproportionate amount of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities. We may not be able to effectively manage the expansion of our operations, which may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. Our expected growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of our product candidates. If we are unable to effectively manage our growth, our expenses may increase more than expected, our ability to generate and/or grow revenues could be reduced, and we may not be able to implement our business strategy.

 

Many of the other pharmaceutical companies that we compete against for qualified personnel and consultants have greater financial and other resources, different risk profiles and a longer history in the industry than us. They may also provide more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high-quality candidates and consultants than what we are able to offer. If we are unable to continue to attract and retain high-quality personnel and consultants, the rate and success at which we can select and develop our product candidates and our business will be limited.

 

 

Our employees, independent contractors, principal investigators, consultants, commercial collaborators, service providers and other vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could have an adverse effect on our results of operations.

 

We are exposed to the risk that our employees and contractors, including principal investigators, consultants, commercial collaborators, service providers and other vendors may engage in fraudulent or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or other unauthorized activities that violate the laws and regulations of the FDA and other similar regulatory bodies, including those laws that require the reporting of true, complete and accurate information to such regulatory bodies, manufacturing standards, federal and state healthcare fraud and abuse and health regulatory laws and other similar foreign fraudulent misconduct laws, or laws that require the true, complete and accurate reporting of financial information or data. Misconduct by these parties may also involve the improper use or misrepresentation of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. It is not always possible to identify and deter third-party misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business and financial results, including the imposition of significant civil, criminal and administrative penalties, damages, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, reputational harm, diminished profits and future earnings, and curtailment of our operations, any of which could adversely affect our ability to operate our business and our results of operations.

 

Our business and operations would suffer in the event of system failures.

 

Our computer systems and those of our service providers, including our CROs, are vulnerable to damage from computer viruses, unauthorized access, natural disasters (including earthquakes), terrorism, war and telecommunication and electrical failures. If such an event were to occur and cause interruptions in our or their operations, it could result in a material disruption of our development programs. For example, the loss of preclinical or clinical trial data from completed, ongoing or planned trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach were to result in a loss of or damage to data or applications, or inappropriate disclosure of personal, confidential or proprietary information, we could incur liability and the further development of our product candidates could be delayed.

 

We have identified a material weakness in our internal control over financial reporting, and if we are unable to maintain proper and effective internal controls over financial reporting, the accuracy and timeliness of our financial reporting may be adversely affected.

 

In connection with the audits of our financial statements for each of the years ended December 31, 2015 through 2018, our management and our independent auditors identified a material weakness in our internal control over financial reporting. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness relates to us lacking consistent processes to appropriately perform effective and timely review of account reconciliations and non-routine transactions.

 

We have already taken steps to remediate this material weakness. We have increased the depth and experience within our accounting and finance organization, in part by hiring a Corporate Controller and an Associate Director of SEC Reporting. We are also designing and implementing improved processes and internal controls. However, our efforts to remediate this material weakness may not be effective or prevent any future material weakness or significant deficiency in our internal control over financial reporting. If our efforts are not successful, or other material weaknesses or control deficiencies occur in the future, we may be unable to report our financial results accurately on a timely basis, which could cause our reported financial results to be materially misstated and result in the loss of investor confidence and cause the market price of our common stock to decline.

 

We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a quarterly report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment needs to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. Our independent registered public accounting firm will be required to attest annually to the effectiveness of our internal control over financial reporting in the future should our public float exceed $75 million. We are required to disclose changes made in our internal control over financial reporting on a quarterly basis.

 

 

We may be subject to securities litigation, which is expensive and could divert management attention.

 

The market price of our common stock has been and may continue to be volatile, and in the past companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert management’s attention from other business concerns, which could seriously harm our business.

 

If securities or industry analysts do not publish research, or publish inaccurate or unfavorable rating, about our business, our stock price and trading volume could decline.

 

The trading market for our common stock is influenced by independent research and reports that securities or industry analysts publish about us or our business from time to time. At present, there are no analysts covering our stock, which means we have low visibility in the financial markets, which could cause a low trading volume, which would tend to cause our stock price to decline. There can be no assurance that analysts will cover our stock in the future or, if they do, provide favorable ratings. If any analysts who cover us downgrade our stock, change their opinion of our stock or disseminate negative information regarding our business, our share price may decline.

 

Our outstanding warrants to purchase common stock are speculative in nature and there is no public market for such warrants.

 

There is no established public trading market for our outstanding warrants to purchase common stock and we do not expect a market to develop. In addition, we do not intend to apply to list our warrants on any securities exchange or nationally recognized trading system, including the Nasdaq Capital Market. Without an active market, the liquidity of our outstanding warrants is limited. Our warrants do not confer any rights of common stock ownership on their holders, such as voting rights or the right to receive dividends, but rather merely represent the right to acquire shares of common stock at a fixed price. The market value of our warrants is uncertain and there can be no assurance that that the market price of the common stock will ever equal or exceed the exercise price such warrants, and consequently, whether it will ever be profitable for holders of the such warrants to exercise such warrants.

 

Risks Related to Clinical Development, Regulatory Approval and Commercialization

 

If we fail to continue to develop and refine the formulations of our tablet vaccine candidates, we may not obtain regulatory approvals, and even if approved, the commercial acceptance of our tablet vaccine candidates would likely be limited.

 

In our H1N1 influenza Phase 2 trial we used vaccine tablets that contained approximately 1.5 x 1010 IU of vaccine. Accordingly, subjects in this trial were required to take 7 tablets in a single setting to reach the aggregate dose of 1 x 1011 IU, the target dose for this trial. We believe that in order to fully capture the commercial success of our seasonal influenza vaccine candidate, we will need to continue to refine our formulation and develop influenza vaccine tablets that contain the desired dose for each vaccine strain in a single tablet, resulting in a vaccination regime of no more than four tablets. Increasing the potency of the vaccine tablets may affect the stability profile of the vaccine and we may not be able to reduce the vaccination regime for an influenza strain to a single tablet or combine the four influenza strains into one vaccine tablet. In addition, increasing the potency of the vaccine tablets or combining the influenza strains necessary to create a quadrivalent vaccine may adversely affect manufacturing yields and render such tablets too costly to manufacture at commercial scale. Our efforts to develop tablet vaccine candidates for norovirus and RSV face similar formulation challenges. If we are unable to further develop and refine the formulations of our tablet vaccine candidates, we may be unable to obtain regulatory approval from the FDA or other regulatory authorities, and even if approved, the commercial acceptance of our tablet vaccine candidates would likely be limited.

 

 

Clinical trials are very expensive, time-consuming, difficult to design and implement and involve an uncertain outcome, and if they fail to demonstrate safety and efficacy to the satisfaction of the FDA, or similar regulatory authorities, we will be unable to commercialize our tablet vaccine candidates.

 

Our tablet vaccine candidates for norovirus and seasonal influenza are still in early-stage clinical development. Both will require extensive additional clinical testing before we are prepared to submit a BLA for regulatory approval for either indication or for any other treatment regime. We cannot predict with any certainty if or when we might submit a BLA for regulatory approval for any of our tablet vaccine candidates, which are currently in clinical development, or whether any such BLAs will be approved by the FDA. Human clinical trials are very expensive and difficult to design and implement, in part because they are subject to rigorous regulatory requirements. For instance, the FDA may not agree with our proposed endpoints for any clinical trial we propose, which may delay the commencement of our clinical trials. The clinical trial process is also time-consuming. We estimate that the clinical trials we need to conduct to be in a position to submit BLAs for our tablet vaccine candidates for seasonal influenza, norovirus and RSV will take several years to complete. Furthermore, failure can occur at any stage of the trials, and we could encounter problems that cause us to abandon or repeat clinical trials. Our vaccine candidates in the later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical studies and initial clinical trials. Also, the results of early clinical trials of the tablet vaccine candidates for seasonal influenza, norovirus and RSV may not be predictive of the results of subsequent clinical trials. Furthermore, the FDA may impose additional requirements to conduct preclinical studies to advance the HPV therapeutic vaccine candidates which could delay initiation of Phase 1 studies. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials.

 

Moreover, preclinical and clinical data are often susceptible to multiple interpretations and analyses. Many companies that have believed their vaccine candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval of their products. Success in preclinical testing and early clinical trials does not ensure that later clinical trials, which involve many more subjects and, for influenza, all four strains rather than the one strain we have studied in Phase 1 clinical trials to date and the results of later clinical trials may not replicate the results of prior clinical trials and preclinical testing.

 

We may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent our ability to receive marketing approval or commercialize our tablet vaccine candidates, including that:

 

 

regulators or institutional review boards may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;

 

 

we may experience delays in reaching or fail to reach agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites;

 

 

clinical trials of our tablet vaccine candidates may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon product development programs;

 

 

the number of subjects required for clinical trials of our tablet vaccine candidates may be larger than we anticipate; enrollment in these clinical trials may be slower than we anticipate, or participants may drop out of these clinical trials at a higher rate than we anticipate;

 

 

Our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;

 

 

regulators or institutional review boards may require that we or our investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or a finding that the participants are being exposed to unacceptable health risks;

 

 

the cost of clinical trials of our tablet vaccine candidates may be greater than we anticipate; and

 

 

the supply or quality of our tablet vaccine candidates or other materials necessary to conduct clinical trials may be insufficient or inadequate.

 

If we are required to conduct additional clinical trials or other testing of our tablet vaccine candidates beyond those that we currently contemplate, if we are unable to successfully complete clinical trials of our tablet vaccine candidates or other testing, if the results of these trials or tests are not positive or are only modestly positive or if there are safety concerns, we may:

 

 

be delayed in obtaining marketing approval for our tablet vaccine candidates;

 

 

not obtain marketing approval at all;

 

 

obtain approval for indications or patient populations that are not as broad as intended or desired;

 

 

obtain approval with labeling that includes significant use or distribution restrictions or safety warnings, including boxed warnings;

 

 

 

be subject to additional post-marketing testing requirements; or

 

 

have the product removed from the market after obtaining marketing approval.

 

Product development costs will also increase if we experience delays in testing or in receiving marketing approvals. We do not know whether any clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or at all. Significant clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our tablet vaccine candidates, could allow our competitors to bring products to market before we do, and could impair our ability to successfully commercialize our tablet vaccine candidates, any of which may harm our business and results of operations.

 

Our platform includes a novel vaccine adjuvant and all of our current tablet vaccine candidates include this novel adjuvant, which may make it difficult for us to predict the time and cost of tablet vaccine development as well as the requirements the FDA or other regulatory agencies may impose to demonstrate the safety of the tablet vaccine candidates.

 

Novel vaccine adjuvants, included in some of our tablet vaccine candidates, may pose an increased safety risk to patients. Adjuvants are compounds that are added to vaccine antigens to enhance the activation and improve immune response and efficacy of vaccines. Development of vaccines with novel adjuvants requires evaluation in larger numbers of patients prior to approval than would be typical for therapeutic drugs. Guidelines for evaluation of vaccines with novel adjuvants have been established by the FDA and other regulatory bodies and expert committees. Our current tablet vaccine candidates, including for norovirus, include a novel adjuvant, and future vaccine candidates may also include one or more novel vaccine adjuvants. Any vaccine, because of the presence of an adjuvant, may have side effects considered to pose too great a risk to patients to warrant approval of the vaccine. Traditionally, regulatory authorities have required extensive study of novel adjuvants because vaccines typically get administered to healthy populations, in particular infants, children and the elderly, rather than to people with disease. Such extensive study has often included long-term monitoring of safety in large general populations that has at times exceeded 10,000 subjects. This contrasts with the few thousand subjects typically necessary for approval of novel therapeutics. To date, the FDA and other major regulatory agencies have only approved vaccines containing five adjuvants, which makes it difficult to determine how long it will take or how much it will cost to obtain regulatory approvals for our tablet vaccine candidates in the United States or elsewhere.

 

Enrollment and retention of subjects in clinical trials is an expensive and time-consuming process and could be made more difficult or rendered impossible by multiple factors outside our control.

 

We may encounter delays in enrolling, or be unable to enroll, a sufficient number of participants to complete any of our clinical trials. Once enrolled, we may be unable to retain a sufficient number of participants to complete any of our trials. Late-stage clinical trials of our tablet vaccine candidate for norovirus, in particular, will require the enrollment and retention of large numbers of subjects. Subject enrollment and retention in clinical trials depends on many factors, including the size of the subject population, the nature of the trial protocol, the existing body of safety and efficacy data with respect to the study drug, the number and nature of competing treatments and ongoing clinical trials of competing drugs for the same indication, the proximity of subjects to clinical sites and the eligibility criteria for the study. Further, since there are no reliable animal models to norovirus infection, human challenge studies have been used to understand viral activity and possible immune correlates that prevent infection making trials costlier than animal-based studies.

 

Furthermore, any negative results we may report in clinical trials of our tablet vaccine candidates may make it difficult or impossible to recruit and retain participants in other clinical trials of that same tablet vaccine candidate. Delays or failures in planned subject enrollment or retention may result in increased costs, program delays or both, which could have a harmful effect on our ability to develop our tablet vaccine candidates or could render further development impossible. In addition, we expect to rely on CROs and clinical trial sites to ensure proper and timely conduct of our future clinical trials and, while we intend to enter into agreements governing their services, we will be limited in our ability to compel their actual performance in compliance with applicable regulations. Enforcement actions brought against these third parties may cause further delays and expenses related to our clinical development programs.

 

We face significant competition from other biotechnology and pharmaceutical companies, and our operating results will suffer if we fail to compete effectively.

 

Vaccine development is highly competitive and subject to rapid and significant technological advancements. We face competition from various sources, including larger and better funded pharmaceutical, specialty pharmaceutical and biotechnology companies, as well as academic institutions, governmental agencies and public and private research institutions. In particular, our influenza vaccine candidate would compete with products that are available and have gained market acceptance as the standard treatment protocol. Further, it is likely that additional drugs or other treatments will become available in the future for the treatment of the diseases we are targeting.

 

 

For tablet vaccines, we face competition from approved vaccines, against which new tablet vaccines must demonstrate compelling advantages in efficacy, convenience, tolerability and safety, and from competitors working to patent, discover, develop or commercialize medicines before we can do the same with tablet vaccines.

 

Many of our existing or potential competitors have substantially greater financial, technical and human resources than we do and significantly greater experience in the discovery and development of products for the treatment of diseases, as well as in obtaining regulatory approvals of those products in the United States and in foreign countries. Our current and potential future competitors also have significantly more experience commercializing drugs that have been approved for marketing. Mergers and acquisitions in the pharmaceutical and biotechnology industries could result in even more resources being concentrated among a small number of our competitors.

 

Competition may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in these industries. Our competitors may succeed in developing, acquiring or licensing, on an exclusive basis, drugs that are more effective or less costly than any tablet vaccine candidate that we may develop.

 

We will face competition from other drugs currently approved or that will be approved in the future for the treatment of the other infectious diseases we are currently targeting. Therefore, our ability to compete successfully will depend largely on our ability to:

 

 

develop and commercialize tablet vaccine candidates that are superior to other vaccines in the market;

 

 

demonstrate through our clinical trials that our tablet vaccine candidates are differentiated from existing and future therapies;

 

 

attract qualified scientific, vaccine development and commercial personnel;

 

 

obtain patent or other proprietary protection for our tablet vaccine candidates;

 

 

obtain required regulatory approvals;

 

 

obtain coverage and adequate reimbursement from, and negotiate competitive pricing with, third-party payors; and

 

 

successfully develop and commercialize, independently or with collaborators, new tablet vaccine candidates.

 

The availability of our competitors’ vaccines could limit the demand, and the price we are able to charge, for any tablet vaccine candidate we develop. The inability to compete with existing or subsequently introduced vaccines would have an adverse impact on our business, financial condition and prospects.

 

Established pharmaceutical companies may invest heavily to accelerate discovery and development of novel compounds or to in-license novel compounds that could make any of our tablet vaccine candidates less competitive. In addition, any new vaccine that competes with an approved vaccine must demonstrate compelling advantages in efficacy, convenience, tolerability and safety in order to overcome price competition and to be commercially successful. Accordingly, our competitors may succeed in obtaining patent protection, discovering, developing, receiving the FDA’s approval for or commercializing medicines before we do, which would have an adverse impact on our business and results of operations.

 

The biotechnology and pharmaceutical industries are characterized by intense competition to develop new technologies and proprietary products. While we believe that our proprietary tablet vaccine candidates provide competitive advantages, we face competition from many different sources, including biotechnology and pharmaceutical companies, academic institutions, government agencies, as well as public and private research institutions. Any products that we may commercialize will have to compete with existing products and therapies as well as new products and therapies that may become available in the future.

 

There are other organizations working to improve existing therapies, vaccines or delivery methods, or to develop new vaccines, therapies or delivery methods for their selected indications. Depending on how successful these efforts are, it is possible they may increase the barriers to adoption and success of our vaccine candidates, if approved.

 

 

We anticipate that we will face intense and increasing competition as new vaccines enter the market and advanced technologies become available. We expect any tablet or other oral delivery vaccine candidates that we develop and commercialize to compete on the basis of, among other things, efficacy, safety, convenience of administration and delivery, price, availability of therapeutics, the level of generic competition and the availability of reimbursement from government and other third-party payors.

 

Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any products that we may develop. Our competitors also may obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for our vaccine candidates, which could result in our competitors establishing a strong market position before we are able to enter the market. In addition, our ability to compete may be affected in many cases by insurers or other third-party payors seeking to encourage the use of generic products.

 

We believe our seasonal influenza vaccine candidate will compete directly with approved vaccines in the market, which include non-recombinant and recombinant products that are administered via injection or intranasally. The major non-recombinant injectable vaccine competitors include Astellas Pharma Inc., Abbott Laboratories, AstraZeneca UK Limited, Baxter International Inc., Research Foundation for Microbial Diseases of Osaka University, Seqirus-bioCSL Inc., GlaxoSmithKline plc, or GlaxoSmithKline, Sanofi S.A., or Sanofi, Pfizer Inc., and Takeda Pharmaceutical Company Limited, or Takeda. Non-recombinant intranasal competition includes MedImmune, Inc., or MedImmune, and potentially others. Recombinant injectable competitors include Sanofi and Novavax, Inc., or Novavax. Many other groups are developing new or improved flu vaccine or delivery methods.

 

There is currently no approved norovirus vaccine for sale globally. While we are not aware of all of our competitors’ efforts, we believe that Takeda is also developing a virus-like particle-based norovirus vaccine that would be delivered by injection.

 

There is currently no approved RSV vaccine for sale globally; however, a number of vaccine manufacturers, academic institutions and other organizations currently have, or have had, programs to develop such a vaccine. In addition, many other companies are developing products to prevent disease caused by RSV using a variety of technology platforms, including monoclonal antibodies, small molecule therapeutics, as well as various viral vector and VLP based vaccine technologies. While we are not aware of all of our competitors’ efforts, we believe that several companies are in various stages of developing an RSV vaccine including GlaxoSmithKline, Johnson & Johnson, Bavarian Nordic, Astellas, MedImmune, Novavax, and Sanofi, as well as the National Institute of Allergy and Infectious Diseases, an institute under the U.S. National Institutes of Health, and possibly others.

 

There is currently no approved HPV therapeutic vaccine for sale globally; however, a number of vaccine manufacturers, academic institutions and other organizations currently have, or have had, programs to develop such a vaccine. We believe that several companies are in various stages of developing an HPV therapeutic vaccine including Inovio, Advaxis, Genexine, and possibly others.

 

Our tablet vaccine candidates may cause adverse effects or have other properties that could delay or prevent their regulatory approval or limit the scope of any approved label or market acceptance.

 

Adverse events caused by our tablet vaccine candidates could cause reviewing entities, clinical trial sites or regulatory authorities to interrupt, delay or halt clinical trials and could result in the denial of regulatory approval. If an unacceptable frequency or severity of adverse events are reported in clinical trials for our tablet vaccine candidates, our ability to obtain regulatory approval for such tablet vaccine candidates may be negatively impacted.

 

Furthermore, if any of our tablet vaccines are approved and then cause serious or unexpected side effects, a number of potentially significant negative consequences could result, including:

 

 

regulatory authorities may withdraw their approval of the tablet vaccine candidates or impose restrictions on their distribution or other risk management measures;

 

 

regulatory authorities may require the addition of labeling statements, such as warnings or contraindications;

 

 

we may be required to change the way our tablet vaccine candidates are administered or to conduct additional clinical trials;

 

 

we could be sued and held liable for injuries sustained by patients;

 

 

 

we could be subject to the Vaccine Injury Compensation Program;

 

 

we could elect to discontinue the sale of our tablet vaccine candidates; and

 

 

our reputation may suffer.

 

Any of these events could prevent us from achieving or maintaining market acceptance of the affected tablet vaccine candidate and could substantially increase the costs of commercialization.

 

If we are not able to obtain, or if there are delays in obtaining, required regulatory approvals, we will not be able to commercialize, or will be delayed in commercializing, our tablet vaccine candidates, and our ability to generate significant revenue will be impaired.

 

Our tablet vaccine candidates and the activities associated with their development and commercialization, including their design, testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States and by comparable authorities in other countries. Failure to obtain marketing approval for a tablet vaccine candidate will prevent us from commercializing the tablet vaccine candidate. We have not received approval to market any of our tablet vaccine candidates from regulatory authorities in any jurisdiction. We have only limited experience in filing and supporting the applications necessary to gain marketing approvals and expect to rely on CROs to assist us in this process. Securing regulatory approval requires the submission of extensive preclinical and clinical data and supporting information to the various regulatory authorities for each therapeutic indication to establish the tablet vaccine candidate’s safety and efficacy. Securing regulatory approval also requires the submission of information about the product manufacturing process to, and inspection of manufacturing facilities by, the relevant regulatory authority. Our tablet vaccine candidates may not be effective, may be only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude us obtaining marketing approval or prevent or limit commercial use.

 

The process of obtaining marketing approvals, both in the United States and elsewhere, is expensive, may take many years and can vary substantially based upon a variety of factors, including the type, complexity and novelty of the tablet vaccine candidates involved. We cannot be sure that we will ever obtain any marketing approvals in any jurisdiction. Changes in marketing approval policies during the development period, changes in or the enactment of additional statutes or regulations or changes in regulatory review for each submitted product application may cause delays in the approval or rejection of an application. The FDA and comparable authorities in other countries have substantial discretion in the approval process and may refuse to accept any application or may decide that our data is insufficient for approval and require additional preclinical or other studies, and clinical trials. In addition, varying interpretations of the data obtained from preclinical testing and clinical trials could delay, limit or prevent marketing approval of a tablet vaccine candidate. Additionally, any marketing approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the approved product not commercially viable.

 

Even if we obtain FDA approval in the United States, we may never obtain approval for or commercialize our tablet vaccine candidates in any other jurisdiction, which would limit our ability to realize each product’s full market potential.

 

In order to market any of our tablet vaccine candidates in a particular jurisdiction, we must establish and comply with numerous and varying regulatory requirements on a country-by-country basis regarding safety and efficacy. Approval by the FDA in the United States does not ensure approval by regulatory authorities in other countries or jurisdictions. In addition, clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and regulatory approval in one country does not guarantee regulatory approval in any other country. Approval processes vary among countries and can involve additional tablet vaccine candidate testing and validation and additional administrative review periods. Seeking foreign regulatory approval could result in difficulties and costs for us and require additional preclinical studies or clinical trials which could be costly and time consuming. Regulatory requirements can vary widely from country to country and could delay or prevent the introduction of our tablet vaccine candidates in those countries. We do not have any tablet vaccine candidates approved for sale in any jurisdiction, including in international markets, and we do not have experience in obtaining regulatory approval in international markets. If we fail to comply with regulatory requirements in international markets or to obtain and maintain required approvals, or if regulatory approvals in international markets are delayed, our target market will be reduced and our ability to realize the full market potential of any tablet vaccine candidate we develop will be unrealized.

 

 

Even if we obtain regulatory approval, we will still face extensive ongoing regulatory requirements and our tablet vaccine candidates may face future development and regulatory difficulties.

 

Any tablet vaccine candidate for which we obtain marketing approval, along with the manufacturing processes, post- approval clinical data, labeling, packaging, distribution, adverse event reporting, storage, recordkeeping, export, import, advertising and promotional activities for such tablet vaccine candidate, among other things, will be subject to extensive and ongoing requirements of and review by the FDA and other regulatory authorities. These requirements include submissions of safety, efficacy and other post-marketing information and reports, establishment registration and drug listing requirements, continued compliance with current Good Manufacturing Practice, or cGMP, requirements relating to manufacturing, quality control, quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of samples to physicians and recordkeeping and current GCP requirements for any clinical trials that we conduct post-approval. Even if marketing approval of a tablet vaccine candidate is granted, the approval may be subject to limitations on the indicated uses for which the tablet vaccine candidates may be marketed or to the conditions of approval. If a tablet vaccine candidate receives marketing approval, the accompanying label may limit the approved use of that tablet vaccine, which could limit sales.

 

The FDA may also impose requirements for costly post-marketing studies or clinical trials and surveillance to monitor the safety and/or efficacy of our tablet vaccine candidates. The FDA closely regulates the post-approval marketing and promotion of drugs to ensure drugs are marketed only for the approved indications and in accordance with the provisions of the approved labeling. The FDA imposes stringent restrictions on manufacturers’ communications regarding off-label use and if we do not market our tablet vaccine candidates for their approved indications, we may be subject to enforcement action for off-label marketing. Violations of the Federal Food, Drug, and Cosmetic Act relating to the promotion of prescription drugs may lead to FDA enforcement actions and investigations alleging violations of federal and state health care fraud and abuse laws, as well as state consumer protection laws.

 

In addition, later discovery of previously unknown adverse events or other problems with our tablet vaccine candidates, manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may yield various results, including:

 

 

restrictions on manufacturing such tablet vaccine candidate;