FORM 10-Q




UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


(Mark One)

þ

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


For the quarterly period ended March 31, 2018


OR


o

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


For the transition period from                      to                     


Commission file number: 001-35285


Vaxart, Inc.

(Exact Name of Registrant as Specified in its Charter)


Delaware

59-1212264

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)


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

94080

(Address of principal executive offices)

(Zip Code)


(650) 550-3500

(Registrants telephone number, including area code)



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ   No ¨


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes þ   No ¨


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


Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer ¨ (Do not check if a smaller reporting company)

Smaller reporting company þ

Emerging growth company ¨



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


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


The Registrant had 7,141,189 shares of common stock, $0.10 par value, outstanding as of May 11, 2018.











FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2018

TABLE OF CONTENTS





Page

Part I

FINANCIAL INFORMATION

 






Item 1.

Financial Statements (Unaudited)

1





 


Condensed Consolidated Balance Sheets

1






 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

2






 

 

 

Condensed Consolidated Statement of Stockholders’ Equity (Deficit)

3

 

 

 


 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

4






 

 

 

Notes to the Condensed Consolidated Financial Statements

6






 

 

Item 2.

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

28






 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34






 

 

Item 4.

Controls and Procedures

35











Part II

OTHER INFORMATION







 

 

Item 1.

Legal Proceedings

36






 

Item 1A.

Risk Factors

36






 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

73






 

 

Item 3.

Defaults Upon Senior Securities

73






 

Item 4.

Mine Safety Disclosures

73






Item 5.

Other Information

73






Item 6.

Exhibits

74






SIGNATURES

 

77









 

Table of Contents

 

PART I FINANCIAL INFORMATION


Item 1.  Financial Statements (Unaudited)


VAXART, INC. AND SUBSIDIARIES


Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)


March 31, 2018

 

December 31, 2017

 

Assets

 

(Unaudited)

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

$

17,495

 

$

1,571

 

Short-term investments

 

 

 

1,415

 

Accounts receivable, net of allowance

 

13,349

 

 

630

 

Prepaid expenses and other current assets

 

1,052

 

 

137

 

 

 

 

 

 

 

 

Total current assets

 

31,896

 

 

3,753

 

 

 

 

 

 

 

 

Property and equipment, net

 

1,014

 

 

730

 

Intangible assets, net

 

23,627

 

 

40

 

 

 

 

 

 

 

 

Total assets

$

56,537

 

$

4,523

 

Liabilities and Stockholders’ Equity (Deficit)

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

$

1,744

 

$

1,390

 

Current portion of secured promissory note payable to Oxford Finance

 

1,667

 

 

1,528

 

Short-term note payable

 

214

 

 

 

Liability related to sale of future royalties, current portion

 

2,037

 

 

 

Other accrued liabilities

 

2,139

 

 

1,605

 

 

 

 

 

 

 

 

Total current liabilities

 

7,801

 

 

4,523

 

 

 

 

 

 

 

 

Convertible promissory notes, long-term, related parties

 

 

 

35,282

 

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

 

14,561

 

 

 

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

 

3,069

 

 

3,440

 

 

 

 

 

 

 

 

Total liabilities

 

25,431

 

 

43,245

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

Preferred Stock: $0.10 par value; 5,000,000 shares authorized; none issued and outstanding as of March 31, 2018; 1,221,064 issued and outstanding as of December 31, 2017, with aggregate liquidation value of $39,956

 

 

 

1

 

Common Stock: $0.10 par value; 200,000,000 shares authorized; 7,141,189 and 138,492 shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively

 

714

 

 

 

Additional paid-in capital

 

108,060

 

 

41,259

 

Accumulated deficit

 

(77,668

)

 

(79,982

)

 

 

 

 

 

 

 

Total stockholders’ equity (deficit)

 

31,106

 

 

(38,722

)

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity (deficit)

$

56,537

 

$

4,523

 



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

 

1


 Table of Contents

VAXART, INC. AND SUBSIDIARIES



Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(In thousands, except share and per share amounts)

(Unaudited)


 

 

Three Months Ended March 31,

 

 

 

2018

 

2017

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

Revenue from government contract

 

$

610

 

$

2,310

 

Royalty revenue

 

 

893

 

 

 

Total revenue

 

 

1,503

 

 

2,310

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

 

3,408

 

 

3,879

 

General and administrative

 

 

2,010

 

 

678

 

 

 

 

 

 

 

 

 

Total operating expenses

 

 

5,418

 

 

4,557

 

 

 

 

 

 

 

 

 

Operating loss

 

 

(3,915

)

 

(2,247

)

 

 

 

 

 

 

 

 

Other income and (expenses):

 

 

 

 

 

 

 

Bargain purchase gain

 

 

6,988

 

 

 

Interest income

 

 

5

 

 

13

 

Interest expense

 

 

(437

)

 

(744

)

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

 

 

(298

)

 

 

(Loss) gain on revaluation of financial instruments

 

 

(3

)

 

182

 

Foreign exchange gain, net

 

 

2

 

 

 

 

 

 

 

 

 

 

 

Total other income and (expenses)

 

 

6,257

 

 

(549

)

 

 

 

 

 

 

 

 

Net income (loss) before income taxes

 

 

2,342

 

 

(2,796

)

Provision for income taxes

 

 

28

 

 

 

Net income (loss)

 

 

2,314

 

 

(2,796

)

 

 

 

 

 

 

 

 

Series B and C preferred dividend

 

 

(339

)

 

(710

)

 

 

 

 

 

 

 

 

Net comprehensive income (loss) attributable to common stockholders

 

$

1,975

 

$

(3,506

)

 

 

 

 

 

 

 

 

Net income (loss) per share – basic

 

$

0.54

 

$

(25.84

)

Net income (loss) per share - diluted

 

$

0.49

 

$

(25.84

)

 

 

 

 

 

 

 

 

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

 

 

3,656,360

 

 

135,658

 

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

 

 

5,299,751

 

 

135,658

 



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


2


Table of Contents


 

Condensed Consolidated Statement of Stockholders Equity (Deficit)

(In thousands, except share amounts)

(Unaudited)


 

 

 

 

 

 

 

 

 

 

 

Additional

Paid-in

Capital

 

 

 

 

Total

Stockholders’

(Deficit) Equity

 

Preferred Stock

 

Common Stock

 

 

Accumulated

Deficit

 

 

Shares

 

Amount

 

Shares

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances as of January 1, 2018

1,221,064

 

$

1

 

138,492

 

$

 

$

41,259

 

$

(79,982)

 

$

(38,722)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock upon conversion of convertible promissory notes, related parties

 

 

 

1,571,702

 

 

157

 

 

35,420

 

 

 

 

35,577

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock upon conversion of  convertible

     preferred stock

(1,221,064)

 

 

(1)

 

1,918,543

 

 

192

 

 

(191)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification of warrant to equity

 

 

 

 

 

 

 

70

 

 

 

 

70

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock upon reverse merger

 

 

 

3,510,439

 

 

365

 

 

31,403

 

 

 

 

31,768

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock upon exercise of stock options

 

 

 

2,013

 

 

 

 

13

 

 

 

 

13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

86

 

 

 

 

86

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

2,314

 

 

2,314

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances as of March 31, 2018

 

$

 

7,141,189

 

$

714

 

$

108,060

 

$

(77,668)

 

$

31,106



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



3


Table of Contents

 

 

VAXART, INC. AND SUBSIDIARIES



Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


 

Three Months Ended March 31,

 

 

2018

 

2017

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income (loss)

$

2,314

 

$

(2,796

)

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

 

 

 

 

 

 

Bargain purchase gain

 

(6,988

)

 

 

Depreciation and amortization

 

511

 

 

97

 

Stock-based compensation

 

86

 

 

124

 

Amortization of discount on short-term investments

 

 

 

5

 

Loss (gain) on revaluation of financial instruments

 

3

 

 

(181

)

Non-cash interest expense

 

323

 

 

651

 

Amortization of note discount

 

18

 

 

36

 

Non-cash interest expense related to sale of future royalties

 

298

 

 

 

Change in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable, net of allowance

 

1,947

 

 

(770

)

Prepaid expenses and other assets

 

(469

)

 

(187

)

Accounts payable

 

(3,097

)

 

(1,424

)

Accrued liabilities

 

(5,536

)

 

169

 

 

 

 

 

 

 

 

Net cash used in operating activities

 

(10,590

)

 

(4,276

)

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Purchase of property and equipment

 

(140

)

 

(79

)

Cash acquired in reverse merger

 

25,525

 

 

 

Cash paid for fractional shares in merger

 

(21

)

 

 

Purchases of short-term investments

 

(573

)

 

(4,430

)

Proceeds from maturities of short-term investments

 

1,988

 

 

3,665

 

 

 

 

 

 

 

 

Net cash provided by (used in) investing activities

 

26,779

 

 

(844

)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Repayment of principal on secured promissory note payable to Oxford Finance

 

(278

)

 

 

Proceeds from issuance of common stock upon exercise of stock options

 

13

 

 

 

 

 

 

 

 

 

 

Net cash used in financing activities

 

(265

)

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

15,924

 

 

(5,120

)

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of the period

 

1,571

 

 

8,405

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of the period

$

17,495

 

$

3,285

 



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





4


Table of Contents




Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)




Three Months Ended March 31,




2018


2017








Supplemental disclosure of cash flow information:








Interest paid


$

95


$

57




Supplemental disclosure of non-cash financing activity:








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


$

31,768


$


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


$

35,577


$


Reclassification of convertible preferred stock warrant liability to equity


$

70


$


Acquisition of property and equipment included in accounts payable


$

72


$




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






5


Table of Contents

 

VAXART, INC. AND SUBSIDIARIES


Notes to the Condensed Consolidated Financial Statements (Unaudited)



NOTE 1.  Organization and Basis of Presentation


General 


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


On February 13, 2018, Private Vaxart completed a business combination with Aviragen Therapeutics, Inc. (Aviragen), pursuant to which Aviragen merged with Private Vaxart, with Private Vaxart surviving as a wholly-owned subsidiary of Aviragen (the Merger). Pursuant to the terms of the Merger, Aviragen changed its name to Vaxart, Inc. (together with its subsidiaries, the Company or “Vaxart”) and Private Vaxart changed its name to Vaxart Biosciences, Inc. All of Private Vaxarts 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 Companys 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 Companys 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 Companys common stock outstanding. Private Vaxarts stockholders, warrantholders and optionholders owned approximately 51% of the fully-diluted common stock of the Company, with Aviragens 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 Vaxarts outstanding stock options and warrants with proportionate adjustments to the number of underlying shares and exercise prices based on an exchange ratio, based on the combined impact of the Conversion and the Reverse Stock Split, of approximately 0.0201346 shares of the Company for each share of Private Vaxart.


The Companys 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, and small-molecule antiviral drugs.


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, 2018, the Company had an accumulated deficit of $77.7 million and a loan with an outstanding balance of $4.7 million from Oxford Finance, LLC (Oxford Finance), repayable in monthly installments by the end of 2020 (see Note 9).

The Company expects to incur increasing costs as research and clinical trials are advanced and, therefore, expects to continue to incur losses and negative operating cash flows for the next several years. Absent additional funding or adjustments to currently planned operating activities, and in view of the uncertainties regarding future royalty revenue on sales of Relenza® and Inavir®, management believes that the Companys cash, cash equivalents and short-term investments, together with funds acquired from Aviragen through the Merger, are only sufficient to fund the Company into the first quarter of 2019.

The Company reviews its operations and clinical plans on a continuing basis and has not yet entered into any commitments for its 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, revenue from its contract with the Department of Health and Human Services, Office of Biomedical Advanced Research and Development Authority (HHS BARDA), 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 Companys 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.

6


Table of Contents

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



NOTE 2.  Summary of Significant Accounting Policies


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


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


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


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


Cash and Cash Equivalents  The Company considers all highly liquid debt investments with an original maturity of three months or less when purchased to be cash equivalents. Cash equivalents, which may consist of amounts invested in money market funds, corporate bonds and commercial paper, are stated at fair value.


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


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 shortterm 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 Companys investment strategy is to preserve capital and meet liquidity requirements. The Companys 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.

 

7


Table of Contents

Accounts Receivable  Accounts receivable arise from the Companys royalty revenue receivable for sales, net of estimated returns, of Inavir® and Relenza®, and from its contract with HHS BARDA (see Note 6), and are reported at amounts expected to be collected in future periods. An allowance for uncollectible accounts will be recorded based on a combination of historical experience, aging analysis, and information on specific accounts, with related amounts not recorded as a reserve against revenue recognized. Account balances will be written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.


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


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


Laboratory equipment

5 years

Office and computer equipment

3 years

Leasehold improvements

Shorter of remaining lease term or estimated useful life


Intangible Assets  Intangible assets comprise developed technology, in-process research and development and intellectual property and are carried at cost less accumulated amortization. Amortization is computed using the straight-line method over useful lives ranging from 1.3 to 11.75 years for developed technology and 20 years for intellectual property. In-process research and development is considered to be indefinite-lived and is not amortized.


Impairment of Long-Lived Assets  The Company reviews its long lived assets, including property and equipment and intangible assets, for impairment whenever events or changes in circumstances indicate the carrying amount of these assets may not be recoverable. Recoverability of these assets is measured by comparison of the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate over its remaining life. When indications of impairment are present and the estimated undiscounted future cash flows from the use of these assets is less than the assets carrying value, the related assets will be written down to fair value. There have been no impairments of the Companys long lived assets for the periods presented.


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


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


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

 

8


Table of Contents

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


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

(i)

identification of the promised goods or services in the contract;

(ii)

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

(iii)

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

(iv)

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

(v)

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

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

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

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


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


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

 

9


Table of Contents

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


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


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


Recently Adopted Accounting Pronouncements


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


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


In January 2017, the FASB issued ASU No. 2017 01, Business Combinations (Topic 805) Clarifying the Definition of a Business (ASU 2017 01), which will simplify the goodwill impairment calculation by eliminating Step 2 from the current goodwill impairment test. The new standard clarifies the definition of a business to help companies evaluate whether acquisition or disposal transactions should be accounted for as asset groups or as businesses. The Company adopted this standard when it became effective on January 1, 2018, and its adoption had no effect on the Companys financial condition or results of operations, although it was applied in the Companys determination that the Merger should be accounted for as a business combination.


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


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

 

10


Table of Contents

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


Recent Accounting Pronouncements


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


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



NOTE 3.  Business Combination


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


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


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


Common stock


$

31,789







Total


$

31,789



11


Table of Contents


 

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


The following table summarizes the preliminary allocation of the purchase price to the fair value of the respective assets and liabilities acquired (in thousands):

 

Cash and cash equivalents


$

25,525


Accounts receivable



14,666


Prepaid expenses



446


Property and equipment



170


Intangible assets:





Developed technology (1)



22,400


In-process research and development (2)



1,600


Total assets



64,807







Accounts payable



(3,379

)

Other current liabilities



(6,351

)

Liability related to sale of future royalties



(16,300

)

Net assets acquired



38,777







Purchase price



(31,789

)






Bargain purchase gain (3)


$

6,988


__________


(1)

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

(2)

In-process research and development relates to teslexivir, or BTA074, a direct-acting antiviral that is being developed as a treatment for genital warts and is presently undergoing Phase 2 clinical trials. The preliminary valuation was prepared by an independent third party based on estimated discounted cash flows based on probability-weighted future development expenditures and revenue streams provided by the Companys management.

(3)

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


12


Table of Contents

 

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


Selected amounts related to Aviragens business included in the Companys condensed consolidated statement of operations for the three months ended March 31, 2018, are as follows:


Revenue


$

893,000







Net loss


$

(362,000

)


The unaudited pro forma information in the table below summarizes the combined results of operations of Vaxart Biosciences, Inc. with those of Aviragen as though these entities were combined as of January 1, 2017. The results of Aviragens business for the three months ended March 31, 2017, are based on the actual unaudited financial statements prepared for the three months ended March 31, 2017, and for the three months ended March 31, 2018, are based on the Companys results of operations, increased by Aviragens activities in the forty-three days prior to the closing of the Merger. The pro forma financial information for all periods presented also includes the removal of direct acquisition-related costs, the reduction in interest expense on borrowing converted into equity in the reverse merger, and the actual depreciation and amortization that would have been charged assuming the fair value adjustments to property and equipment and intangible assets had been applied as of January 1, 2017. This unaudited pro forma information is summarized as follows:




Three Months Ended March 31,




2018


2017


 

 

 

(in thousands)

 

Total revenue


$

13,039


$

7,176










Net income (loss)


$

5,899

 

$

(7,915)

 



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

 

13


Table of Contents

NOTE 4.  Fair Value of Financial Instruments


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


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


The following tables present the Companys financial assets and liabilities that are measured at fair value at March 31, 2018 and December 31, 2017:




Level 1


Level 2


Level 3


Total


March 31, 2018






(in thousands)





Recurring Financial Assets:














Money Market Funds


$

5,600


$


$


$

5,600


Corporate Bonds
























Total assets


$

5,600


$


$


$

5,600






Level 1


Level 2


Level 3


Total


March 31, 2018






(in thousands)





Recurring Financial Liabilities:














Convertible promissory notes embedded derivative liability


$


$


$


$


Convertible preferred stock warrant liability
























Total liabilities


$


$


$


$


 

14


Table of Contents



Level 1


Level 2


Level 3


Total


December 31, 2017






(in thousands)





Recurring Financial Assets:














Money Market Funds


$

1,192


$


$


$

1,192


Corporate Bonds





1,415





1,415
















Total assets


$

1,192


$

1,415


$


$

2,607






Level 1


Level 2


Level 3


Total


December 31, 2017






(in thousands)





Recurring Financial Liabilities:














Convertible promissory notes embedded derivative liability


$


$


$


$


Convertible preferred stock warrant liability







67



67
















Total liabilities


$


$


$

67


$

67




The following tables present a reconciliation of all liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2018 and 2017:










 

 



Convertible


Convertible Promissory






Preferred Stock


Notes Embedded






Warrant Liability


Derivative Liability


Total








(in thousands)





Balance at January 1, 2018


$

67


$


$

67


Issuances








Revaluation loss included in (loss) gain 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


$


$


$











 

 



Convertible


Convertible Promissory






Preferred Stock


Notes Embedded






Warrant Liability


Derivative Liability


Total








(in thousands)





Balance at January 1, 2017


$

134


$

3,280


$

3,414


Issuances








Revaluation gains included in (loss) gain on revaluation of financial instruments, net



(32

)


(150

)


(182

)

Settlements








Balance at March 31, 2017


$

102


$

3,130


$

3,232













Total gains included in other income and (expenses) attributable to liabilities still held as of March 31, 2017


$

32


$

150


$

182


 

15


Table of Contents

NOTE 5.  Balance Sheet Components


(a)

Cash Equivalents and Short Term Investments


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



March 31, 2018







Gross


Gross


Estimated






Amortized


Unrecognized


Unrecognized


Fair


Carrying




Cost


Gains


Losses


Value


Value











(in thousands)








Money market funds


$

5,600


$


$


$

5,600


$

5,600


Corporate bonds












Total


$

5,600


$


$


$

5,600


$

5,600


Reported as:

















Cash equivalents


$

5,600


$


$


$

5,600


$

5,600


Short-term investments












Total


$

5,600


$


$


$

5,600


$

5,600






December 31, 2017







Gross


Gross


Estimated






Amortized


Unrecognized


Unrecognized


Fair


Carrying




Cost


Gains


Losses


Value


Value











(in thousands)








Money market funds


$

1,192


$


$


$

1,192


$

1,192


Corporate bonds



1,415







1,415



1,415


Total


$

2,607


$


$


$

2,607


$

2,607


Reported as:

















Cash equivalents


$

1,192


$


$


$

1,192


$

1,192


Short-term investments



1,415







1,415



1,415


Total


$

2,607


$


$


$

2,607


$

2,607



(b)

Accounts Receivable, Net of Allowance

Accounts receivable, net of allowance, comprises the following:




March 31, 2018


December 31, 2017


(in thousands)

Royalties receivable


$

11,939


$


Government contract - billed

 

 

230

 

477

Government contract - unbilled

112

 

153

            Tax credit receivable

1,068

—  

Accounts receivable, net of allowance


$

13,349


$

630


 

16


Table of Contents

(c)

Property and Equipment, Net

Property and equipment, net consists of the following:




March 31, 2018


December 31, 2017




(in thousands)


Laboratory equipment


$

1,771


$

1,565


Office and computer equipment



296



175


Leasehold improvements



281



226










Total property and equipment



2,348



1,966


Less: accumulated depreciation



(1,334

)


(1,236

)

Property and equipment, net


$

1,014


$

730



Depreciation expense for the three months ended March 31, 2018 and 2017, was $98,000 and $96,000, respectively.


(d)

Intangible Assets

Intangible assets consist of the following:




March 31, 2018


December 31, 2017




(in thousands)


Purchased technology


$

22,400


$


In-process research and development



1,600




Intellectual property



80



80


Total cost



24,080



80


Less accumulated amortization



453



40


Intangible assets, net


$

23,627


$

40



Total amortization expense was $413,000 and $1,000 in the three-month periods ended March 31, 2018 and 2017, respectively. As of March 31, 2018, the estimated future amortization expense by year is as follows (in thousands):




December 31, 2017







2018 (nine months remaining)


$

2,428


2019



2,254


2020



1,757


2021



1,758


2022



1,757


Thereafter



12,073


Total


$

22,027



(e)

Accrued Liabilities


Accrued liabilities consist of the following:




March 31, 2018


December 31, 2017




(in thousands)


Accrued compensation


$

1,076


$

1,320


Accrued clinical and manufacturing expenses



359



69


Accrued professional and consulting services



254



113


Convertible preferred stock warrant liability





67


Other



450



36










Total


$

2,139


$

1,605


 

17


Table of Contents

NOTE 6.  Revenue


U.S. Government HHS BARDA Contract


In September 2015, HHS BARDA awarded the Company a contract to support the advanced development of a more effective and universal influenza vaccine to improve seasonal and pandemic influenza preparedness. On each of May 25 and July 18, 2017, 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 June 30, 2018. The modified contract is a cost plus fixed fee contract, which reimburses the Company for allowable direct contract costs plus allowable indirect costs and a fixed fee, totaling $15.7 million. During the three months ended March 31, 2018 and 2017, the Company recognized revenue of $0.6 million and $2.3 million, respectively. Billings under the contract are based on approved provisional indirect billing rates, which permit recovery of fringe benefits, overhead and general and administrative expenses. Indirect rates as well as allowable costs are subject to audit by HHS BARDA on an annual basis. Management believes that revenues recognized to date have been recorded in amounts that are expected to be realized upon final audit and settlement. When the final determination of the allowable costs for any year has been made, revenue and billings may be adjusted accordingly in the period that the adjustments are known and collection is probable. Costs relating to contract acquisition are expensed as incurred.


The Company does not consider any of the revenue recorded as of March 31, 2018 or 2017, to be at risk of reversal.


Royalty agreements

 

Aviragen entered into a royalty-bearing research and license agreement with GlaxoSmithKline, plc (GSK) in 1990 for the development and commercialization of zanamivir, a neuraminidase inhibitor (NI) marketed by GSK as Relenza® to treat influenza. Most of the Companys Relenza® patents have expired and the only substantial remaining intellectual property related to the Relenza® patent portfolio, which is solely owned by the Company and exclusively licensed to GSK, is scheduled to expire in July 2019 in Japan. The post-Merger royalty revenue related to Relenza® recognized in the three months ended March 31, 2018, was $341,000.

 

The Company also generates royalty revenue from the sale of Inavir® in Japan, pursuant to a collaboration and license agreement that Aviragen entered into with Daiichi Sankyo in 2009. In September 2010, laninamivir octanoate was approved for sale by the Japanese Ministry of Health and Welfare for the treatment of influenza in adults and children, which Daiichi Sankyo markets as Inavir®. Under the agreement, the Company currently receives a 4% royalty on net sales of Inavir® in Japan and was eligible to earn sales milestone payments, including a one-off payment of $5.0 million if net sales exceeded 20 billion Yen in one year. This target was achieved in the three months ended March 31, 2018, prior to the Merger, and Aviragen recognized the related $5.0 million as royalty revenue prior to the Merger. The post-Merger royalty revenue related to Inavir® recognized in the three months ended March 31, 2018, was $552,000. Such royalty revenue is subject to a 5% withholding tax in Japan, for which $28,000 was included in income tax expense.


Under the Inavir® collaboration and license agreement, the Company and Daiichi Sankyo have cross-licensed the world-wide rights to develop and commercialize the related intellectual property, and have agreed to share equally in any royalties, license fees, or milestone or other payments received from any third-party licenses outside of Japan. Patents on the composition of matter for LANI in Japan generally expire in 2024.

 

In April 2016, Aviragen entered into a Royalty Interest Acquisition Agreement (the HCRP Agreement) with HealthCare Royalty Partners III, L.P. (HCRP) (See Note 7). Under the Agreement, HCRP made a $20.0 million cash payment to Aviragen in consideration for acquiring certain royalty rights (Royalty Rights) related to the approved product Inavir® in the Japanese market. The Royalty Rights were obtained pursuant to the collaboration and license agreements (the License Agreement) and a commercialization agreement that the Company entered into with Daiichi Sankyo Company, Limited.

 

18


Table of Contents


NOTE 7.  Liabilities Related to Sale of Future Royalties


In April 2016, Aviragen sold certain royalty rights related to the approved product Inavir®, sold by Daiichi Sankyo in the Japanese market, for $20.0 million to HCRP. Under the relevant accounting guidance, due to a limit on the amount of royalties that HCRP can earn under the arrangement, this transaction was accounted for as a liability that will be amortized using the interest method over the life of the arrangement. The Company has no obligation to pay any amounts to HCRP other than to pass through to HCRP its share of royalties as they are received from Daiichi Sankyo. In order to record the amortization of the liability, the Company is required to estimate the total amount of future royalty payments to be received under the License Agreement and the payments that will be passed through to HCRP over the life of this agreement. The sum of the pass-through amounts less the net proceeds received will be recorded as non-cash interest expense over the life of the liability. Consequently, the Company imputes interest on the unamortized portion of the liability and records non-cash interest expense using an estimated effective interest rate. The Company will periodically assess the expected royalty payments, and to the extent such payments are greater or less than the initial estimate, the Company will adjust the amortization of the liability and interest rate. As a result of this accounting, even though the Company does not retain HCRPs share of the royalties, it will continue to record non-cash revenue related to those royalties until the amount of the associated liability and related interest is fully amortized.


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

 

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


$

16,300


Non-cash interest expense recognized



298


Total Liability related to sale of future royalties, March 31, 2018


$

16,598




NOTE 8.  Convertible Promissory Notes, Related Parties


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


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


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


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


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

19


Table of Contents


 

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


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


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


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


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

 

20


Table of Contents

NOTE 9.  Secured Promissory Note Payable to Oxford Finance


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


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


In connection with the Loan Agreement, the Company issued a warrant to Oxford Finance to purchase 7,563 shares of its Series C convertible preferred stock at an exercise price of $33.11 per share (the Warrant). The fair value of the Warrant at the date of issuance was approximately $134,000, which was recorded as debt discount and is being amortized as interest expense over the term of the loan using the effective interest method. The annual effective interest rate of the note, including the accretion of the final payment and the amortization of the debt discount, is approximately 10.5%. The Company recorded interest expense related to the Loan Agreement of $130,000, of which $95,000 was paid, during the three months ended March 31, 2018, and $126,000, of which $57,000 was paid, during the three months ended March 31, 2017.


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


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


21


Table of Contents

NOTE 10.  Commitments and Contingencies


(a)

Leases

The Company has leased four office and research and development facilities in South San Francisco, California, under noncancelable operating leases. The first lease, for office and research and development premises, expired on July 31, 2017, following the landlords exercise of its six-month termination option on January 31, 2017. The second lease, for office and research and development premises, expires in April 2020, subject to the Companys option to extend the lease at the then market rate for an additional five year period. The third lease, for office premises, was entered in May 2017 and has been extended until December 31, 2018. The fourth lease, for office premises, began in April 2018 and expires on December 31, 2018. In addition, following the Merger, the Company also leases office space in Alpharetta, Georgia, under a lease expiring on February 28, 2021. Rent expense is recognized on a straight line basis over the noncancelable term of each operating lease and, accordingly, the Company records the difference between cash rent payments and the recognition of rent expense as a deferred rent liability, which is included within accrued expenses. Rent expense was $146,000 and $161,000 for the three months ended March 31, 2018 and 2017, respectively. Under the terms of the lease agreements, the Company is also responsible for certain insurance, property tax and maintenance expenses. Future minimum payments under the facility leases as of December 31, 2018 as follows (in thousands):







Year ending December 31,

  




2018 (9 months remaining)

  

$

548

 

2019

  

 

568

 

2020

  


411

 

2021

  

 

56

 

Thereafter

  


 

Total

  

 $

1,583

 


(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 Companys operating results for any particular future period, depending on the level of income or loss for such period.

NOTE 11.  Stockholders Equity


(a)

Convertible Preferred Stock

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

22


Table of Contents

 

All of Private Vaxarts convertible preferred stock was converted into common stock on February 13, 2018, in conjunction with the Merger. As of December 31, 2017, convertible preferred stock consisted of the following:




Shares
authorized


Shares
outstanding


Net
carrying
value


Liquidation
preference







(in thousands)


(in thousands)

Series A


94,988


94,988


$

2,949


$

2,737

Series B


747,095


520,973



16,115



17,219

Series C


820,088


605,103



19,877



20,000

Total


1,662,171


1,221,064


$

38,941


$

39,956


Significant provisions of the convertible preferred stock were as follows:


Dividends The holders of Series C convertible preferred stock were entitled to receive non-compounding cumulative dividends, in preference to any dividends payable to holders of Series B and Series A convertible preferred stock or common stock, at an annual dividend rate of $2.64416 per share, as adjusted for any stock splits, stock dividends, recapitalizations, or the like. Such cumulative dividends were payable within ten days of demand of the holders of at least a majority of the then outstanding Series C convertible preferred stock, or automatically upon a liquidation event. Dividends accumulated from the date of issuance and were payable, whether or not declared, before any dividend on Series B and Series A convertible preferred stock or common stock could be paid or declared. Series C convertible preferred stock shares issued as stock dividends were not entitled to cumulative dividends. The holders of Series C convertible preferred stock could elect whether the cumulative dividends would be paid in cash or in shares of Series C convertible preferred stock based on the original issue price of Series C convertible preferred stock of $33.05196 per share. In the event the board of directors declared a cash dividend in addition to the above cumulative dividends (a Special Dividend), the holders of Series C convertible preferred stock would have been entitled to receive, in preference to any dividends payable to the holders of Series B and Series A convertible preferred stock or common stock, a per share amount equal to the sum of: (a) the original issue price of Series C convertible preferred stock, and (b) all accrued and/or declared but unpaid dividends on such Series C convertible preferred stock, including the cumulative dividends. No dividends were declared during any of the periods presented. As of February 13, 2018, when the convertible preferred stock was converted into common stock, and December 31, 2017, accumulated and undeclared dividends for Series C convertible preferred stock were $7.3 million and $7.1 million, respectively ($12.06 per share and $11.74 per share, respectively, of the outstanding Series C convertible preferred stock). On February 13, 2018, in conjunction with the Merger, the Series C convertible preferred stock and the related accumulated dividends were converted into 696,028 and 253,851 shares of common stock, respectively.


The holders of Series B convertible preferred stock were entitled to receive non-compounding cumulative dividends, in preference to any dividends payable to holders of Series A convertible preferred stock or common stock, at the annual dividend rate of $2.64416 per share, as adjusted for any stock splits, stock dividends, recapitalizations, or the like. Such cumulative dividends were payable within ten days of demand of the holders of at least a majority of the then outstanding Series B convertible preferred stock or automatically upon a liquidation event. Dividends accumulated from the date of issuance and were payable, whether or not declared, before any dividend on Series A convertible preferred stock or common stock could be paid or declared. Series B convertible preferred shares issued as stock dividends were not entitled to cumulative dividends. The holders of Series B convertible preferred stock could elect whether the cumulative dividends would be paid in cash or in shares of Series B convertible preferred stock based on the original issue price of Series B convertible preferred stock of $33.05196 per share. In the event the board of directors declared a cash dividend in addition to the above cumulative dividends (a Special Dividend), the holders of Series B convertible preferred stock would have been entitled to receive, in preference to any dividends payable to the holders of Series A convertible preferred stock or common stock, a per share amount equal to the sum of: (a) the original issue price of Series B convertible preferred stock, and (b) all accrued and/or declared but unpaid dividends on such Series B convertible preferred stock, including the cumulative dividends. No dividends were declared during any of the periods presented. As of February 13, 2018, when the convertible preferred stock was converted into common stock, and December 31, 2017, accumulated and undeclared dividends for Series B convertible preferred stock were $7.6 million and $7.5 million, respectively ($15.78 per share and $15.56 per share, respectively, of the 483,387 shares of outstanding Series B convertible preferred stock on which dividends accrued). On February 13, 2018, in conjunction with the Merger, the Series B convertible preferred stock and the related accumulated dividends were converted into 599,259 and 265,340 shares of common stock, respectively.

 

23


Table of Contents


 

The holders of Series A convertible preferred stock were entitled to receive noncumulative dividends, in preference to any dividends payable to holders of common stock, at the annual dividend rate of $2.30449 per share, as adjusted for any stock splits, stock dividends, recapitalizations, or the like, if declared by the board of directors. On February 13, 2018, in conjunction with the Merger, the Series A convertible preferred stock was converted into 104,065 shares of common stock.


Conversion At the option of the holder, each share of convertible preferred stock was convertible, one for one, subject to adjustment for anti dilution protection, into shares of common stock. Each share automatically converted into the number of shares of common stock into which the shares were convertible at the then applicable conversion ratio upon: (1) the closing of the sale of the Companys common stock in a public offering provided the offering price per share was not less than three times the Series C convertible preferred stock original issue price of $33.05196 and the aggregate gross proceeds were not less than $30.0 million, or (2) upon receipt of a written consent of the holders of a majority of the then outstanding shares of convertible preferred stock voting as a single class on an as converted basis.


Liquidation In the event of any liquidation, dissolution or winding up of the Company, including a merger or acquisition where the beneficial owners of the Companys common and convertible preferred stock owned less than 50% of the surviving entity, or a sale of all or substantially all assets, the holders of Series C convertible preferred stock would have been entitled to receive a per share amount equal to $33.05196 (subject to adjustment for stock splits, stock dividends, recapitalizations, or the like), plus all dividends accrued, payable and/or in arrears (whether or not declared) minus the amount of any Special Dividends previously paid. After payment of the full liquidation preference of Series C convertible preferred stock, the holders of Series B convertible preferred stock would have been entitled to receive a per share amount equal to $33.05196 (subject to adjustment for stock splits, stock dividends, recapitalizations, or the like), plus all dividends accrued, payable and/or in arrears (whether or not declared) minus the amount of any Special Dividends previously paid. After payment of the full liquidation preference of Series B convertible preferred stock, the holders of Series A convertible preferred stock would have been entitled to receive an amount equal to $28.80613 per share, as adjusted, plus all declared but unpaid dividends prior and in preference to any distribution to the holders of common stock. In each case, if the proceeds of such an event were insufficient to permit the liquidation payment to a particular class, any proceeds legally available for distribution to that class would have been distributed ratably among the holders of that class in proportion to the preferential amounts that each holder was entitled to receive. Following payment of all convertible preferred stock preferences, any remaining legally available assets of the Company would have been distributed to the holders of common stock and convertible preferred stock pro rata, based on the greatest number of shares of common stock held on an as converted basis.


Voting The holders of convertible preferred stock were entitled to the number of votes equal to the number of shares of common stock into which each share of Series A, Series B, and Series C convertible preferred stock could have been converted on the record date for the vote or consent of the stockholders, except as otherwise required by law, and had voting rights and powers equal to the voting rights and powers of the common stockholders. The holders of Series A convertible preferred stock, voting as a separate class, were entitled to elect one member of the board of directors. As long as a specified investor held at least one share of Series C convertible preferred stock, the specified investor was able to designate one member of the board of directors, who would have been elected by the holders of Series C convertible preferred stock voting as a separate class. As long as a specified investor held least one share of Series B convertible preferred stock, the specified investor was able to designate one member of the board of directors, who would have been elected by the holders of Series B convertible preferred stock voting as a separate class. The holders of common stock, voting as a separate class, were entitled to elect two members of the board of directors, one of whom was the duly appointed chief executive officer of the Company.

 

24


Table of Contents

Protective Provisions So long as at least 20,134 shares of Series C convertible preferred stock remained outstanding and for so long as at least 20,134 shares of Series B convertible preferred stock remained outstanding, Series C holders and Series B holders, voting as a single class on an asconverted basis, needed to approve certain specified corporate actions such as amending the certificate of incorporation, authorizing additional shares of stock or additional directors, redeeming stock and entering into certain strategic relationships.


Redemption The convertible preferred stock was not redeemable. There were no liquidation events under the control of preferred stockholders that could have resulted in liquidation in which only the preferred stockholders would have participated. Accordingly, the convertible preferred stock was classified within stockholders equity (deficit) on the Companys condensed consolidated balance sheets.


(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 Companys 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 Companys 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, 2018, no dividends had been declared by the board of directors.

In the event of the Companys 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 Companys 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, 2018


December 31, 2017






Convertible preferred stock outstanding



1,221,064

Options issued and outstanding


832,942


304,850

Available for future grants of equity awards


380,426


Cumulative convertible preferred stock dividends



441,096

Convertible preferred stock warrants


10,914


10,914

Total


1,224,282


1,977,924



NOTE 12.  Equity Incentive Plans


Prior to the Merger, the Company issued equity awards for compensation purposes to employees, directors and consultants under the Companys 2007 Equity Incentive Plan (the 2007 Plan). The 2007 Plan expired in July 2017. As of March 31, 2018, the Company had no shares of common stock available for issuance under the 2007 Plan. Equity awards under the 2007 Plan do not become available for future issuance if such awards are forfeited or otherwise terminate. Each stock option to acquire shares of Private Vaxart stock, whether vested or unvested, that had not previously been exercised was assumed in the Merger.


In November 2016, Aviragens stockholders approved the 2016 Equity Incentive Plan (2016 Equity Plan), under which all outstanding awards under their previous plans became available for issuance under the 2016 Equity Plan if such awards are forfeited or otherwise terminate. The purpose of the 2016 Equity Plan is to assist the Company in attracting and retaining valued employees, consultants and non-employee directors by offering them a greater stake in the Companys success and a closer identity with it, and to encourage ownership of the Companys shares by such persons.

 

25


Table of Contents

 

Under the 2016 Equity Plan, the Company is authorized to issue incentive stock options (ISOs), non-qualified stock options (NQSOs), restricted stock (RSAs) and restricted stock units (RSUs). Awards that expire or are canceled generally become available for issuance again under the 2016 Equity Plan. The number of shares of the Companys common stock available under the 2016 Equity Plan will be subject to adjustment in the event of a stock split, stock dividend or other extraordinary dividend, or other similar change in the Companys common stock or capital structure. Awards may vest over varying periods, as specified by the Companys Board of Directors for each grant, and have a maximum term of ten years from the grant date.


A summary of stock option transactions in the three months ended March 31, 2018, is as follows:








Weighted




Shares


Number of


Average




Available


Options


Exercise




For Grant


Outstanding


Price











Balance at January 1, 2018



304,850


$

9.50


Assumed on consummation of Merger


291,102


627,106


$

24.14


Exercised



(2,013

)

$

6.49


Forfeited



(17,208

)

$

8.83


Canceled


66,597


(79,793

)

$

23.53











Balance at March 31, 2018


357,699


832,942


$

19.20



In addition, the 2016 Equity Plan has a reserve of 22,727 shares available for future issuance as RSAs and RSUs. As of March 31, 2018, no such awards have been granted under the 2016 Equity Plan.

Total stock based compensation recognized for options was as follows:




Three Months Ended March 31.




2018


2017




(in thousands)


Research and development


$

44


$

69


General and administrative



42



55


Total stock-based compensation


$

86


$

124



As of March 31, 2018, the unrecognized stock based compensation cost related to outstanding unvested stock options that are expected to vest was $0.4 million, which the Company expects to recognize over an estimated weighted average period of 1.90 years.

 

26


Table of Contents

NOTE 13.  Net Loss Per Share Attributable to Common Stockholders


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


 

Three Months Ended March 31,

 

 

2018

 

2017

 

 

 

 

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

$

1,975

 

$

(3,506

)

 

 

 

 

 

 

 

Interest charges applicable to convertible promissory notes

 

295

 

 

 

 

 

 

 

 

 

 

Series B and C preferred dividend

 

339

 

 

 

 

 

 

 

 

 

 

Series A preferred dividend

 

(28)

 

 

 

 

 

 

 

 

 

 

Net income (loss) used for net income (loss) per share – diluted calculation

 

2,581

 

 

(3,506

)

 

 

 

 

 

 

 

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

 

3,656,360

 

 

135,658

 

 

 

 

 

 

 

 

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 income (loss) per share – diluted

 

5,299,751

 

 

135,658

 

 

 

 

 

 

 

 

Net income (loss) per share – basic

$

0.54

 

$

(25.84

)

 

 

 

 

 

 

 

Net income (loss) per share – diluted

$

0.49

 

$

(25.84

)


No adjustment has been made to the net loss attributable to common stockholders in the three months ended March 31, 2017, 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,

 

 

 

 

2018

 

2017

 

 

 

 

 

 

Options to purchase common stock

 

 

529,332

 

272,287

 

 

 

 

 

 

 

 

Warrant to purchase common stock

 

 

5,700

 

 

 

 

 

 

 

 

 

Warrant to purchase convertible preferred stock

 

 

3,613

 

7,563

 

 

 

 

 

 

 

 

Series B and C convertible preferred stock outstanding, including cumulative dividends

 

 

 

1,501,566

 

 

 

 

 

 

 

 

Series A convertible preferred stock outstanding

 

 

 

94,988

 

 

 

 

 

 

 

 

Convertible promissory notes, related party (as converted)

 

 

 

687,362

 

 

 

 

 

 

 

 

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

 

 

538,645

 

2,563,766

 


27


Table of Contents


 

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


You should carefully consider the following risk factors, as well as the other information in this Quarterly Report on Form 10-Q, and in 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.

Forward-Looking Statements

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


Company Overview and Background


The Company is a clinical-stage company focused on the development of oral recombinant protein vaccines based on its proprietary oral vaccine platform and of small-molecule antiviral drugs. Recombinant vaccines rely on a genetically engineered antigen to generate an immune response. The tablet vaccine candidates are based on a proprietary vector-based technology platform and are designed to generate broad and durable immune responses to protect against infectious diseases. Management believes that tablet vaccines are easier to distribute and administer than injectable vaccines and have the potential to increase vaccination rates. The initial tablet vaccine candidates target a variety of infectious diseases, including: seasonal influenza, for which positive topline results were recently reported from a Phase 2 challenge study; norovirus, a widespread cause of the stomach flu, for which positive safety and immunogenicity results were recently reported from a Phase 1b study; respiratory syncytial virus, or RSV, a common cause of respiratory tract infections; and human papillomavirus, or HPV, a cause of cervical cancer.

The Company also has three Phase 2 clinical stage antiviral compounds: BTA074, or teslexivir, an antiviral treatment for condyloma caused by human papillomavirus types 6 & 11; vapendavir, a capsid inhibitor for the prevention or treatment of rhinovirus upper respiratory infections; and BTA585, or enzaplatovir, a fusion protein inhibitor in development for the treatment of RSV infections.

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

·

the timing and costs of its planned clinical trials for its product candidates, both tablet vaccines and small-molecule antiviral drugs;

·

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

·

its 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 it pursues;

·

the outcome, timing and costs of seeking regulatory approvals;

28


Table of Contents

 

·

revenue received from commercial sales of its product candidates, which will be subject to receipt of regulatory approval;

·

the terms and timing of any future collaborations, licensing, consulting or other arrangements that it 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 Vaxart in-licenses or acquires other products and technologies.

Recent Events

On February 13, 2018, the Company completed the Merger with Aviragen and all of Private Vaxarts convertible promissory notes and convertible preferred stock were converted into common stock, following which each share of common stock was converted into approximately 0.22148 shares of the Companys common stock.


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 its common stock outstanding, or the Reverse Stock Split. Except as otherwise noted in this Quarterly Report on Form 10-Q, all share, equity security and per share amounts are presented to give retroactive effect to the Reverse Stock Split.


Immediately after the Merger and the Reverse Stock Split there were approximately 7.1 million shares of the Companys common stock outstanding. In addition, immediately after the Merger, Private Vaxarts stockholders, warrantholders and optionholders owned approximately 51% of the common stock of the Company and the stockholders and optionholders of Aviragen immediately prior to the Merger owned approximately 49% of the common stock of the Company (on a fully diluted basis.

29


Table of Contents

Results of Operations


The following table presents selected items in the condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2018 and 2017, which include the operations of Aviragen for the period from February 13, 2018 to March 31, 2018:



 

Three Months Ended March 31,

 

 

2018

 

2017

 

 

 

(in thousands)

 

Revenue:

 

 

 

 

 

 

Revenue from government contract

$

610

 

$

2,310

 

Royalty revenue

 

893

 

 

 

Total revenue

 

1,503

 

 

2,310

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

Research and development

 

3,408

 

 

3,879

 

General and administrative

 

2,010

 

 

678

 

 

 

 

 

 

 

 

Total operating expenses

 

5,418

 

 

4,557

 

 

 

 

 

 

 

 

Operating loss

 

(3,915

)

 

(2,247

)

 

 

 

 

 

 

 

Other income and (expenses):

 

 

 

 

 

 

Bargain purchase gain

 

6,988

 

 

 

Interest income

 

5

 

 

13

 

Interest expense

 

(437

)

 

(744

)

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

 

(298

)

 

 

(Loss) gain on revaluation of financial instruments

 

(3

)

 

182

 

Foreign exchange gain, net

 

2