vxrt20190319_10q.htm
 

 

Table of Contents



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

  ☑

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

 

For the quarterly period ended June 30, 2019

 

OR

 

  ☐

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

 

For the transition period from                      to                     

 

Commission file number: 001-35285

 

  

Vaxart, Inc.

  

  

(Exact Name of Registrant as Specified in its Charter)

  

 

  

Delaware

  

59-1212264

  

  

(State or other jurisdiction of incorporation or organization)

  

(IRS Employer Identification No.)

  

 

  

290 Utah Ave., Suite 200, South San Francisco, CA 94080

  

(650) 550-3500

  

  

(Address of principal executive offices, including zip code)

  

(Registrant’s telephone number, including area code)

  

 

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

 

  

Title of each class

 

Trading symbol

  

Name of each exchange on which registered  

  

Common stock, $0.10 par value

 

VXRT

  

The Nasdaq Capital Market  

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☑   No ☐

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

 

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☑ 

Smaller reporting company ☑

Emerging growth company ☐

 

 

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

 

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

 

 

   

 

 

 

   

 

 

 

The Registrant had 15,785,735 shares of common stock, $0.10 par value, outstanding as of August 6, 2019.

 



 

 

 

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2019

TABLE OF CONTENTS

 

 

   

Page

Part I

FINANCIAL INFORMATION

1
         
   

Item 1.

Financial Statements (Unaudited)

1
         
     

Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018

1
         
     

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2019 and 2018

2
         
     

Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the three and six months ended June 30, 2019 and 2018

3
         
     

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018

4
         
     

Notes to the Condensed Consolidated Financial Statements

6
         
   

Item 2.

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

18
         
   

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

27
         
   

Item 4.

Controls and Procedures

28
         
         

Part II

OTHER INFORMATION

29
         
   

Item 1.

Legal Proceedings

29
         
   

Item 1A.

Risk Factors

29
         
   

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

66
         
   

Item 3.

Defaults Upon Senior Securities

67
         
   

Item 4.

Mine Safety Disclosures

67
         
   

Item 5.

Other Information

67
         
   

Item 6.

Exhibits

68
         

SIGNATURES

  70

 

 

 

PART I FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

VAXART, INC. AND SUBSIDIARIES

 

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)

 

   

June 30, 2019

   

December 31, 2018

 

Assets

               

Current assets:

               

Cash and cash equivalents

  $ 16,258     $ 11,506  

Accounts receivable

    35       1,796  

Prepaid expenses and other current assets

    814       1,343  
                 

Total current assets

    17,107       14,645  
                 

Property and equipment, net

    1,517       1,066  

Right-of-use assets, net

    565        

Intangible assets, net

    17,959       19,413  

Other long-term assets

    102       103  
                 

Total assets

  $ 37,250     $ 35,227  
                 

Liabilities and Stockholders’ Equity

               

Current liabilities:

               

Accounts payable

  $ 610     $ 962  

Current portion of secured promissory note payable to Oxford Finance

    1,667       1,667  

Current portion of operating lease liability

    565        

Liability related to sale of future royalties, current portion

    3,150       3,328  

Other accrued liabilities

    1,485       1,518  
                 

Total current liabilities

    7,477       7,475  
                 

Operating lease liability, net of current portion

    216        

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

    12,519       14,413  

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

    1,175       1,944  

Other long-term liabilities

    18       157  
                 

Total liabilities

    21,405       23,989  
                 

Commitments and contingencies (Note 9)

               
                 

Stockholders’ equity:

               

Preferred Stock: $0.10 par value; 5,000,000 shares authorized; none issued and outstanding as of June 30, 2019 or December 31, 2018

           

Common Stock: $0.10 par value; 100,000,000 shares authorized; 15,785,735 and 7,141,189 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively

    1,579       714  

Additional paid-in capital

    119,258       108,513  

Accumulated deficit

    (104,992 )     (97,989 )
                 

Total stockholders’ equity

    15,845       11,238  
                 

Total liabilities and stockholders’ equity

  $ 37,250     $ 35,227  

 

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

 

 

 

VAXART, INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except share and per share amounts)

(Unaudited)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 

Revenue:

                               

Revenue from government contract

  $     $ 520     $     $ 1,130  

Royalty revenue

    69       70       3,728       963  

Non-cash royalty revenue related to sale of future royalties

    16       18       1,764       18  
                                 

Total revenue

    85       608       5,492       2,111  
                                 

Operating expenses:

                               

Research and development

    3,707       5,012       7,536       8,420  

General and administrative

    1,375       1,771       3,401       3,781  

Impairment of intangible assets

          1,600             1,600  
                                 

Total operating expenses

    5,082       8,383       10,937       13,801  
                                 

Operating loss

    (4,997 )     (7,775 )     (5,445 )     (11,690 )
                                 

Other income and (expenses):

                               

Bargain purchase gain

          (328 )           6,660  

Interest income

    34       36       39       41  

Interest expense

    (97 )     (136 )     (204 )     (573 )

Non-cash interest expense related to sale of future royalties

    (516 )     (468 )     (1,060 )     (766 )

Loss on revaluation of financial instruments

                      (3 )

Foreign exchange gain, net

    (48 )     (199 )     (43 )     (197 )
                                 

Total other income and (expenses)

    (627 )     (1,095 )     (1,268 )     5,162  
                                 

Net loss before income taxes

    (5,624 )     (8,870 )     (6,713 )     (6,528 )
                                 

Provision for income taxes

    13       1       263       29  
                                 

Net loss

    (5,637 )     (8,871 )     (6,976 )     (6,557 )
                                 

Series B and C preferred dividend

                      (339 )
                                 

Net comprehensive loss attributable to common stockholders

  $ (5,637 )   $ (8,871 )   $ (6,976 )   $ (6,896 )
                                 

Net loss per share - basic and diluted

  $ (0.39 )   $ (1.24 )   $ (0.64 )   $ (1.26 )
                                 

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

    14,597,446       7,141,189       10,969,473       5,477,265  

 

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

 

 

 

VAXART, INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

(In thousands, except share amounts)

(Unaudited)

 

                                   

Additional

           

Total

 
   

Preferred Stock

   

Common Stock

   

Paid-in

   

Accumulated

   

Stockholders’

 
   

Shares

   

Amount

   

Shares

   

Amount

   

Capital

   

Deficit

   

Equity (Deficit)

 
                                                         

Balances as of January 1, 2018

    1,221,064     $ 1       138,492           $ 41,259     $ (79,982 )   $ (38,722 )
                                                         

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

                1,571,702       157       35,420             35,577  
                                                         

Issuance of common stock upon conversion of convertible preferred stock

    (1,221,064 )     (1 )     1,918,543       192       (191 )            
                                                         

Reclassification of warrant to equity

                            70             70  
                                                         

Issuance of common stock upon reverse merger

                3,510,439       365       31,403             31,768  
                                                         

Issuance of common stock upon exercise of stock options

                2,013             13             13  
                                                         

Stock-based compensation

                            86             86  
                                                         

Net income

                                  2,314       2,314  
                                                         

Balances as of March 31, 2018

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

Stock-based compensation

                            118             118  
                                                         

Net income

                                  (8,871 )     (8,871 )
                                                         

Balances as of June 30, 2018

                7,141,189     $ 714     $ 108,178     $ (86,539 )   $ 22,353  

 

                   

Additional

           

Total

 
   

Common Stock

   

Paid-in

   

Accumulated

   

Stockholders’

 
   

Shares

   

Amount

   

Capital

   

Deficit

   

Equity

 
                                         

Balances as of December 31, 2018

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

Cumulative effect of adoption of new leases standard

                      (27 )     (27 )
                                         

Balances as of January 1, 2019, as adjusted

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

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

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

Issuance of common stock warrants to placement agents’ designees

                100             100  
                                         

Stock-based compensation

                164             164  
                                         

Net loss

                      (1,339 )     (1,339 )
                                         

Balances as of March 31, 2019

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

Issuance of common stock, pre-funded warrants and common stock warrants, net of offering costs of $1,579

    925,455       93       7,648             7,741  
                                         

Issuance of common stock warrants to underwriters’ designees

                333             333  
                                         

Issuance of common stock upon exercise of pre-funded warrants

    6,519,091       652                   652  
                                         

Stock-based compensation

                180             180  
                                         

Net loss

                      (5,637 )     (5,637 )
                                         

Balances as of June 30, 2019

    15,785,735     $ 1,579     $ 119,258     $ (104,992 )   $ 15,845  

 

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

 

 

 

VAXART, INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

   

Six Months Ended June 30,

 
   

2019

   

2018

 
                 

Cash flows from operating activities:

               

Net loss

  $ (6,976 )   $ (6,557 )

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

               

Bargain purchase gain

          (6,660 )

Depreciation and amortization

    2,097       1,437  
Impairment of intangible assets           1,600  

Stock-based compensation

    344       204  

Loss on revaluation of financial instruments

          3  

Non-cash interest expense

    64       366  

Amortization of note discount

          18  

Non-cash interest expense related to sale of future royalties

    1,060       766  

Non-cash revenue related to sale of future royalties

    (3,132 )      

Change in operating assets and liabilities:

               

Accounts receivable

    1,761       14,735  

Prepaid expenses and other assets

    530       (448 )

Accounts payable

    (347 )     (3,259 )

Accrued liabilities

    (371 )     (5,693 )
                 

Net cash used in operating activities

    (4,970 )     (3,488 )
                 

Cash flows from investing activities:

               

Purchase of property and equipment

    (711 )     (339 )

Cash acquired in reverse merger

          25,525  

Cash paid for fractional shares in merger

          (21 )

Purchases of short-term investments

          (573 )

Proceeds from maturities of short-term investments

          1,988  
                 

Net cash (used in) provided by investing activities

    (711 )     26,580  
                 

Cash flows from financing activities:

               

Net proceeds from issuance of common stock in registered direct offering

    2,540        

Net proceeds from issuance of common stock, pre-funded warrants and common warrants in underwritten offering

    8,074        

Repayment of principal on secured promissory note payable to Oxford Finance

    (833 )     (694 )

Repayment of short-term note

          (61 )

Proceeds from issuance of common stock upon exercise of pre-funded warrants

    652        

Proceeds from issuance of common stock upon exercise of stock options

          13  
                 

Net cash provided by (used in) financing activities

    10,433       (742 )
                 

Net increase in cash and cash equivalents

    4,752       22,350  
                 

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

    11,506       1,571  
                 

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

  $ 16,258     $ 23,921  

 

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

 

 

VAXART, INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

   

Six Months Ended June 30,

 
   

2019

   

2018

 
                 

Supplemental disclosure of cash flow information:

               

Interest paid

  $ 136     $ 189  
                 
                 

Supplemental disclosure of non-cash investing and financing activity:

               

Issuance of warrants to placement agents’ designees

  $ 100     $  

Issuance of warrants to underwriters’ designees

  $ 333     $  

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

  $ 47     $ 14  

 

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

 

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

 

NOTE 1.  Organization and Basis of Presentation

 

General 

 

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

 

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

 

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

 

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

 

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

 

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

 

The total gross proceeds from the April 2019 Offering to the Company were $9.3 million. After deducting underwriting discounts, commissions and offering expenses payable by the Company, the aggregate net proceeds received by the Company were $8.1 million. In addition, as of June 30, 2019, a further $0.6 million had been received from the exercise of pre-funded warrants and 1,646,364 pre-funded warrants remained outstanding.

 

Pursuant to the terms of an underwriting agreement, the Company paid the underwriters aggregate commissions and reimbursable costs of $750,000. In addition, the Company issued the underwriters’ designees 636,364 common stock warrants at the closing of the April 2019 Offering, each warrant entitling the holder to purchase one share of common stock for $1.375 at any time within five years of their issuance date. The aggregate fair value of these warrants at issuance was estimated to be $333,000 (see Note 10), which was recorded in offering costs.

 

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

 

 

 

 

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

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 June 30, 2019, the Company had an accumulated deficit of $105.0 million and a loan with an outstanding balance of $2.8 million from Oxford Finance, LLC (“Oxford Finance”), repayable in monthly installments by January 2021 (see Note 8).

 

The Company expects to incur increasing costs as research and clinical trials are advanced and, therefore, expects to continue to incur losses and negative operating cash flows for the next several years. Absent additional funding or adjustments to currently planned operating activities, management believes that the Company’s cash and cash equivalents of $16.3 million held as of June 30, 2019, are sufficient to fund the Company into, but probably not beyond, the first quarter of 2020.

 

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

 

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

 

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

 

 

 

NOTE 2.  Summary of Significant Accounting Policies

 

Basis of Presentation – The Company has prepared the accompanying condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to these rules and regulations. These condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and footnotes related thereto for the year ended December 31, 2018, included in the Company’s Annual Report on Form 10-K filed with the SEC on February 6, 2019 (the “Annual Report”). Except as noted below, there have been no material changes to the Company’s significant accounting policies described in Note 2 to the consolidated financial statements included in the Annual Report. In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company’s financial position and the results of its operations and cash flows. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year.

 

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

 

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

 

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

 

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

 

 

 

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

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

 

Recently Adopted Accounting Pronouncements

 

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

 

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

 

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

 

Recent Accounting Pronouncements

 

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

 

 

NOTE 3.  Fair Value of Financial Instruments

 

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

 

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


 

 

 

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

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

 

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

 

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

 

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

 

The Company’s money market funds are classified within Level 1 of the fair value hierarchy and are valued based on quoted prices in active markets for identical securities. The Company’s convertible preferred stock warrant liability was classified within Level 3 of the fair value hierarchy as it was valued using inputs that were unobservable in the market.

 

The Company’s only recurring financial assets that are measured at fair value were $15,000 held in money market funds and classified as cash equivalents as of both June 30, 2019 and December 31, 2018, with no recurring financial liabilities held at either date or in the six months ended June 30, 2019. The following table presents a reconciliation of all liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 30, 2018:

 

 

   

Convertible

         
   

Preferred Stock

         
   

Warrant Liability

   

Total

 
   

(in thousands)

 

Balance at January 1, 2018

  $ 67     $ 67  

Issuances

           

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

    3       3  

Settlements

    (70 )     (70 )

Balance at June 30, 2018

  $     $  
                 

Total gains included in other income and (expenses) attributable to liabilities still held as of June 30, 2018

  $     $  

 

 

 

NOTE 4.  Balance Sheet Components

 

 

(a)

Cash and Cash Equivalents 

 

Cash and cash equivalents comprises the following:

 

   

June 30, 2019

   

December 31, 2018

 
   

(in thousands)

 

Cash at banks

  $ 16,243     $ 11,441  

Restricted cash

          50  

Money market funds

    15       15  

Total cash and cash equivalents

  $ 16,258     $ 11,506  

 

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

 

(b)

Accounts Receivable 

 

Accounts receivable comprises the following:

 

   

June 30, 2019

   

December 31, 2018

 
   

(in thousands)

 

Royalties receivable

  $ 15     $ 1,776  

Government contract - billed

    20       20  

Accounts receivable

  $ 35     $ 1,796  

 

The Company has provided no allowance for uncollectible accounts as of June 30, 2019 or December 31, 2018.

 

 

(c)

Property and Equipment, Net

 

Property and equipment, net consists of the following:

 

   

June 30, 2019

   

December 31, 2018

 
   

(in thousands)

 

Laboratory equipment

  $ 2,775     $ 2,076  

Office and computer equipment

    227       227  

Leasehold improvements

    340       333  
                 

Total property and equipment

    3,342       2,636  

Less: accumulated depreciation

    (1,825 )     (1,570 )

Property and equipment, net

  $ 1,517     $ 1,066  

 

Depreciation expense was $125,000 and $121,000 for the three months ended June 30, 2019 and 2018, respectively, and $255,000 and $219,000 for the six months ended June 30, 2019 and 2018, respectively. There were no impairments of the Company’s property and equipment recorded in the six months ended June 30, 2019 or 2018.

 

 

(d)

Right-of-Use Assets, Net

 

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

 

   

June 30, 2019

 
   

(in thousands)

 

Facilities

  $ 557  

Office equipment

    8  

Right-of-use assets, net

  $ 565  

 

 

 

(e)

Intangible Assets

 

Intangible assets comprise developed technology, intellectual property and, until it was considered fully impaired, in-process research and development. Intangible assets are carried at cost less accumulated amortization. Amortization is computed using the straight-line method over useful lives ranging from 1.3 to 11.75 years for developed technology and 20 years for intellectual property. Intangible assets consist of the following:

 

   

June 30, 2019

   

December 31, 2018

 
   

(in thousands)

 

Purchased technology

  $ 22,100     $ 22,100  

Intellectual property

    80       80  

Total cost

    22,180       22,180  

Less: accumulated amortization

    (4,221 )     (2,767 )

Intangible assets, net

  $ 17,959     $ 19,413  

 

Intangible asset amortization expense for the three months ended June 30, 2019 and 2018, was $675,000 and $805,000 respectively, and for the six months ended June 30, 2019 and 2018, was $1,454,000 and $1,218,000, respectively. Following the results of Phase 2 trials of teslexivir in June 2018, the in-process research and development was assessed as fully impaired in the three months ended June 30, 2018, with the related $1.6 million acquired in the Merger (see Note 1) being charged to operating expenses.

 

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

As of June 30, 2019, the estimated future amortization expense by year is as follows (in thousands):

 

Year Ending December 31,

 

Amount

 

2019 (six months remaining)

  $ 866  

2020

    1,732  

2021

    1,732  

2022

    1,732  

2023

    1,731  

Thereafter

    10,166  

Total

  $ 17,959  

 

 

(f)

Accrued Liabilities

 

Accrued liabilities consist of the following:

 

   

June 30, 2019

   

December 31, 2018

 
   

(in thousands)

 

Accrued compensation

  $ 773     $ 632  

Accrued clinical and manufacturing expenses

    18       75  

Accrued professional and consulting services

    48       166  

Reserve for return of royalties

    339       339  

Deferred rent and lease loss accrual, current portion

          111  

Other liabilities, current portion

    307       195  
                 

Total

  $ 1,485     $ 1,518  

 

 

 

NOTE 5.  Revenue

 

U.S. Government HHS BARDA Contract

 

In September 2015, the Department of Health and Human Services, Office of Biomedical Advanced Research and Development Authority (“HHS BARDA”) awarded the Company a contract to support the advanced development of a more effective and universal influenza vaccine to improve seasonal and pandemic influenza preparedness. On each of May 25 and July 18, 2017, and June 28, 2018, the Company entered into a Modification of Contract with HHS BARDA, the combined effect being to increase the value of the existing $14 million contract by $1.7 million and to extend it through September 30, 2018. The modified contract was a cost-plus-fixed-fee contract, which reimbursed the Company for allowable direct contract costs plus allowable indirect costs and a fixed fee, totaling $15.7 million. The Company recognized revenue of $520,000 and $1,130,000 during the three and six months ended June 30, 2018, respectively. As of December 31, 2018, the cumulative revenue recorded from inception under the HHS BARDA contract represented the maximum billable under the contract as presently modified, with no further change orders envisaged.

 

Billings under the contract were based on approved provisional indirect billing rates, which permit recovery of fringe benefits, overhead and general and administrative expenses. Indirect rates as well as allowable costs are subject to audit by HHS BARDA on an annual basis. Management believes that revenues recognized to date have been recorded in amounts that are expected to be realized upon final audit and settlement. When the final determination of the allowable costs for any year has been made, revenue and billings may be adjusted accordingly in the period that the adjustments are known and collection is probable. Costs relating to contract acquisition are expensed as incurred. The Company does not consider any of the revenue recorded under this contract in any period to be at risk of reversal.

 

Royalty Agreements

 

Aviragen entered into a royalty-bearing research and license agreement with GlaxoSmithKline, plc (“GSK”) in 1990 for the development and commercialization of zanamivir, a neuraminidase inhibitor marketed by GSK under the name Relenza to treat influenza. All of the Company’s Relenza patents have expired, the last remaining intellectual property related to the Relenza patent portfolio, which is solely owned by the Company and exclusively licensed to GSK, having expired in July 2019 in Japan. The royalty revenue related to Relenza recognized in the three months ended June 30, 2019 and 2018, was $69,000 and $70,000, respectively, and in the six months ended June 30, 2019, and in the post-Merger period in the six months ended June 30, 2018, was $764,000 and $411,000, respectively, representing 7% of net sales in Japan.

 

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

The Company also generates royalty revenue from the sale of Inavir in Japan, pursuant to a collaboration and license agreement that Aviragen entered into with Daiichi Sankyo Company, Limited (“Daiichi Sankyo”) in 2009. In September 2010, laninamivir octanoate was approved for sale by the Japanese Ministry of Health and Welfare for the treatment of influenza in adults and children, which Daiichi Sankyo markets as Inavir. Under the agreement, the Company currently receives a 4% royalty on net sales of Inavir in Japan. The last patent related to Inavir is set to expire in December 2029, at which time royalty revenue will cease. The royalty revenue related to Inavir recognized in the six months ended June 30, 2019, and in the post-Merger period in the six months ended June 30, 2018, was $2,964,000 and $552,000, respectively, representing 4% of net sales in Japan. No such revenue was recognized in the three months ended June 30, 2019 or 2018, since the sums receivable, net of withholding tax, of $16,000 and $18,000, respectively, were payable to Healthcare Royalty Partners III, L.P. (“HCRP”) (see Note 6). Both the royalty revenue and the non-cash royalty revenue related to the sale of future royalties have been subjected to a 5% withholding tax in Japan, for which $1,000 and $1,000 was included in income tax expense in the three months ended June 30, 2019 and 2018, respectively, and $237,000 and $29,000 was included in income tax expense in the six months ended June 30, 2019 and 2018, respectively.

 

The Company’s royalty revenue is seasonal, in line with the flu season. The majority of the Company’s royalty revenue is earned in the first and fourth fiscal quarters.

 

 

 

NOTE 6. Liabilities Related to Sale of Future Royalties

 

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

 

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

 

The following table shows the activity within the liability account in the six months ended June 30, 2019 (in thousands):

 

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

  $ 17,741  

Non-cash royalty revenue paid to HCRP

    (3,132 )

Non-cash interest expense recognized

    1,060  

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

    15,669  

Current portion

    (3,150 )

Long-term portion

  $ 12,519  

 

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

NOTE 7.  Leases

 

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

 

The Company obtained the right of use of real estate located in South San Francisco, California, in June 2015 that terminates on April 30, 2020, with a five-year extension option. The Company also obtained, via the Merger, the right of use of facilities located in Alpharetta, Georgia, in February 2018 that terminates on February 28, 2021, with no extension option. These facilities were subleased for the remainder of the lease term effective November 30, 2018. In addition, the Company obtained the right of use of facilities located in South San Francisco, California, under three leases that terminate on August 31, 2019, with no extension options, and the right of use of equipment under three leases that terminate between July 2019 and September 2021.

 

As of June 30, 2019, the weighted average discount rate for operating leases with initial terms of more than one year was 10.5% and the weighted average remaining term of these leases was 1.32 years. Discount rates were determined using the Company’s marginal rate of borrowing at the time each lease was executed or extended.

 

The following table summarizes the Company’s undiscounted cash payment obligations for its operating lease liabilities with initial terms of more than twelve months as of June 30, 2019 (in thousands):

 

Year Ending December 31,

       

2019 (excluding the six months ended June 30, 2019)

  $ 361  

2020

    414  
Thereafter     58  

Undiscounted total

    833  

Less: imputed interest

    (52 )

Present value of future minimum payments

    781  

Current portion of operating lease liability

    (565 )

Operating lease liability, net of current portion

  $ 216  

 

In addition, future obligations under operating leases for equipment with initial terms of one year or less totaled $1,000. The Company presently has no finance leases.

 

Certain operating lease agreements include non-lease costs, such as common area maintenance, which are excluded from operating lease costs. Operating lease expenses for the three and six months ended June 30, 2019, are summarized as follows:

 

    Three Months Ended     Six Months Ended  
    June 30, 2019     June 30, 2019  

Lease cost

 

(in thousands)

 

Operating lease cost

  $ 222     $ 445  

Short-term lease cost

    4       7  

Sublease income

    (55 )     (109 )

Total lease cost

  $ 171     $ 343  

 

Net cash outflows associated with operating leases totaled $200,000 and $399,000 in the three and six months ended June 30, 2019, respectively. Rent expense was and $222,000 and $368,000 for the three and six months ended June 30, 2018, respectively.

 

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

 

Year Ending December 31,

 

Lease Payments

   

Sublease Income

 
   

(in thousands)

 

2019

  $ 859     $ 213  

2020

    411       219  

2021

    56       38  

Thereafter

           

Total

  $ 1,326     $ 470  

 

 

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

 

NOTE 8.  Secured Promissory Note Payable to Oxford Finance

 

On December 22, 2016, the Company entered into a loan and security agreement (the “Loan Agreement”) with Oxford Finance, under which the Company borrowed $5.0 million. The $5.0 million loan, which bears interest at 30-day U.S. LIBOR plus 6.17%, is evidenced by a secured promissory note and is repayable over four years, with interest only payable over the first 12 months and the balance fully amortized over the subsequent 36 months. Upon repayment, an additional final payment equal to $325,000 is due, which is being accreted as interest expense over the term of the loan using the effective-interest method. The loan is secured by substantially all the Company’s assets, except for intellectual property.

 

In connection with the Loan Agreement, the Company issued a warrant to Oxford Finance to purchase 7,563 shares of its Series C convertible preferred stock at an exercise price of $33.11 per share (the “Warrant”), expiring in December 2026. The fair value of the Warrant at the date of issuance was $134,000, which was recorded as debt discount and is being amortized as interest expense over the term of the loan using the effective-interest method. The annual effective interest rate of the note, including the accretion of the final payment and the amortization of the debt discount, is approximately 10.5%. The Company recorded interest expense related to the Loan Agreement of $96,000 and $138,000 during the three months ended June 30, 2019 and 2018, respectively, of which $64,000 and $94,000 was paid, respectively, and recorded interest expense of $202,000 and $279,000 during the six months ended June 30, 2019 and 2018, respectively, of which $136,000 and $189,000 was paid, respectively.

 

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

 

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

 

 

 

NOTE 9. Commitments and Contingencies

 

 

(a)

Leases

 

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

 

 

(b)

Indemnifications

 

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

 

 

(c)

Litigation

 

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

 

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

NOTE 10.  Stockholders’ Equity

 

 

(a)

Preferred Stock

 

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

 

 

(b)

Common Stock

 

On April 23, 2019, the Company’s stockholders approved a Certificate of Amendment to the Company’s Restated Certificate of Incorporation (the “Certificate”), to decrease the authorized number of shares of common stock, par value $0.10, from 200,000,000 to 100,000,000 shares. On April 23, 2019, the Certificate was filed with the Secretary of State of the State of Delaware. Except as otherwise required by law or as otherwise provided in any certificate of designation for any series of preferred stock, the holders of common stock possess all voting power for the election of the Company’s directors and all other matters requiring stockholder action. Holders of common stock are entitled to one vote per share on matters to be voted on by stockholders. Holders of common stock are entitled to receive such dividends, if any, as may be declared from time to time by the Company’s board of directors in its discretion out of funds legally available therefore. In no event will any stock dividends or stock splits or combinations of stock be declared or made on common stock unless the shares of common stock at the time outstanding are treated equally and identically. As of June 30, 2019, no dividends had been declared by the board of directors.

 

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

 

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

 

   

June 30, 2019

   

December 31, 2018

 
                 

Options issued and outstanding

    2,166,800       865,163  

Available for future grants of equity awards

    186,410       223,377  

Common stock warrants

    12,832,188       10,914  

Total

    15,185,398       1,099,454  

 

 

(c)

Warrants

 

The Company has the following warrants outstanding as of June 30, 2019, all of which contain standard anti-dilution protections in the event of subsequent rights offerings, stock splits, stock dividends or other extraordinary dividends, or other similar changes in the Company’s common stock or capital structure, and none of which have any participating rights for any losses:

 

 

Securities into which warrants are convertible

 

Warrants outstanding

 

Exercise Price

 

Expiration Date

             

Common Stock

 

1,646,364

 

$

0.10

 

April 2024

Common Stock

 

10,454,546

 

$

1.10

 

April 2024

Common Stock

 

636,364

 

$

1.375

 

April 2024

Common Stock

 

84,000

 

$

3.125

 

March 2024

Common Stock

 

10,914

 

$

22.99

 

December 2026

Total

 

12,832,188

         

 

The aggregate fair value at issuance of the warrants entitling the holder to purchase one share of common stock for $3.125 that were issued to the placement agents’ designees at the closing of the March 2019 Offering (see Note 1) was estimated to be $100,000, using the Black-Scholes valuation model, using a closing stock price of $2.08 and assumptions including estimated volatility of 80%, a risk-free interest rate of 2.34%, a zero dividend rate and an estimated remaining term of 5.0 years. The aggregate fair value at issuance of the warrants entitling the holder to purchase one share of common stock for $1.375 that were issued to the underwriters’ designees at the closing of the April 2019 Offering (see Note 1) was estimated to be $333,000, using the Black-Scholes valuation model, using a closing stock price of $0.89 and assumptions including estimated volatility of 83%, a risk-free interest rate of 2.31%, a zero dividend rate and an estimated remaining term of 5.0 years.

 

In the event of a Fundamental Transaction (a transfer of ownership of the Company as defined in the warrant) within the Company’s control, the holders of unexercised common stock warrants exercisable for $1.10 shall be entitled to receive cash consideration equal to a Black-Scholes valuation, as defined in the warrant. If such Fundamental Transaction is not within the Company’s control, the warrantholders would only be entitled to receive the same form of consideration (and in the same proportion) as the holders of the Company’s common stock, hence these warrants are classified as a component of permanent equity.

 

 

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

 

NOTE 11.  Equity Incentive Plans

 

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

 

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

 

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

 

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

 

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

 

A summary of stock option transactions in the six months ended June 30, 2019, is as follows:

 

                   

Weighted

 
   

Shares

   

Number of

   

Average

 
   

Available

   

Options

   

Exercise

 
   

For Grant

   

Outstanding

   

Price

 
                         

Balance at January 1, 2019

    200,650       865,163     $ 8.13  

Authorized under 2019 Plan

    1,600,000           $  

Removed from 2016 Plan

    (223,389 )         $  

Granted

    (1,413,590 )     1,413,590     $ 0.76  

Forfeited

          (7,399 )   $ 5.35  

Canceled

    22,739       (104,554 )   $ 11.00  
                         

Balance at June 30, 2019

    186,410       2,166,800     $ 3.19  

 

The weighted average grant date fair value of options awarded in the six months ended June 30, 2019 and 2018, was $0.55 and $3.59, respectively. Fair values were estimated using the following assumptions:

 

 

 

Six Months Ended June 30,

 

2019

 

2018

Risk-free interest rate

1.89% - 2.31%

 

2.79% - 2.80%

Expected term

5.39 - 6.08 Years

 

5.84 - 6.05 Years

Expected volatility

83% - 85%

 

78% - 80%

Dividend yield

—%

 

—%

 

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

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 
   

(in thousands)

   

(in thousands)

 

Research and development

  $ 80     $ 59     $ 159     $ 103  

General and administrative

    100       59       185       101  

Total stock-based compensation

  $ 180     $ 118     $ 344     $ 204  

 

As of June 30, 2019, the unrecognized stock-based compensation cost related to outstanding unvested stock options that are expected to vest was $1.4 million, which the Company expects to recognize over an estimated weighted average period of 2.82 years.

 

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

 

NOTE 12.  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 June 30,

   

Six Months Ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Net loss

  $ (5,637 )   $ (8,871 )   $ (6,976 )   $ (6,557 )
                                 

Series B and C preferred dividend

                      (339 )
                                 

Net loss attributable to common stockholders – diluted calculation

  $ (5,637 )   $ (8,871 )   $ (6,976 )   $ (6,896 )
                                 

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

    14,597,446       7,141,189       10,969,473       5,477,265  
                                 

Net loss per share – basic and diluted

  $ (0.39 )   $ (1.24 )   $ (0.64 )   $ (1.26 )

 

No adjustment has been made to the net loss attributable to common stockholders as the effect would be antidilutive 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 June 30,

   

Six Months Ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Options to purchase common stock

    1,561,067       878,555       1,212,654       765,702  
                                 

Warrants to purchase common stock

    11,802,695       10,794       5,944,948       8,230  
                                 

Warrant to purchase convertible preferred stock

                      1,797  
                                 

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

                      431,064  
                                 

Series A convertible preferred stock outstanding

                      24,723  
                                 

Convertible promissory notes, related party (as converted)

                      373,388  
                                 

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

    13,363,762       889,349       7,157,602       1,604,904  

 

 

 

 

 

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

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on February 6, 2019. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management's beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “goal,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential” and similar expressions intended to identify forward-looking statements. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in “Risk Factors.” The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date hereof.

 

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

 

Company Overview and Background

 

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

 

We are developing prophylactic vaccine candidates that target a range of infectious diseases. These include norovirus, a widespread cause of acute gastro-intestinal enteritis, for which two Phase 1 human studies have been completed and a Phase 1 bivalent study is in process; seasonal influenza, for which our vaccine demonstrated that it protected healthy volunteers against infection with H1 influenza in a recent Phase 2 human challenge study; and respiratory syncytial virus, or RSV, a common cause of respiratory tract infections. In addition, we are developing our first therapeutic immune-oncology vaccine targeting cervical cancer and dysplasia caused by human papillomavirus, or HPV.

 

Merger with Aviragen

 

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

 

Our Product Pipeline

 

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

 

 

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

 

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

 

 

 

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

 

The bivalent norovirus Phase 1 study, designed to assess safety and immunogenicity of our norovirus GI.1 and GII.4 vaccines administered concurrently, is currently underway and we expect to announce topline results early in the fourth quarter of 2019.

 

Following a review of the development strategy for norovirus, Vaxart has deprioritized the monovalent GI.1 challenge study. Instead, the Company is preparing to initiate a Phase 2 safety and immunogenicity study with Vaxart’s bivalent norovirus vaccine in 2020, to be followed by a Phase 3 efficacy study, assuming FDA concurrence.

 

 

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

 

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

 

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

 

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

 

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

 

In addition to our conventional seasonal flu vaccine, we entered into a research collaboration agreement with Janssen Vaccines & Prevention B.V., or Janssen, to evaluate our proprietary oral vaccine platform for the Janssen universal influenza vaccine program. Under the agreement, we will produce an oral vaccine containing certain proprietary antigens from Janssen and test the product in a preclinical challenge model. Upon completion of the study, Janssen will have an option to negotiate an exclusive worldwide license to our technology encompassing the Janssen antigens.

 

 

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

 

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

 

 

 

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

 

In October 2018, we filed a pre-IND meeting request for our HPV therapeutic vaccines, VXA-HPV16.1 and VXA-HPV18.1, with the FDA, and we subsequently submitted a pre-IND briefing package. We received feedback from the FDA in January 2019 providing guidance for the IND we plan to submit. Based on this feedback, we expect to be able to file an IND for this product candidate in the course of 2020.

 

 

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

 

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

 

Anti-Virals

 

 

Through the Merger, we acquired two royalty earning products, Relenza and Inavir. We also acquired three Phase 2 clinical stage antiviral compounds which we have discontinued.

 

 

Relenza and Inavir are antivirals for the treatment of influenza that are marketed by GlaxoSmithKline, plc, or GSK, and Daiichi Sankyo Company, Limited, or Daiichi Sankyo, respectively. We have earned royalties on the net sales of Relenza and Inavir in Japan. The last patent for Relenza expired in July 2019 and the last patent for Inavir expires in December 2029. Sales of these antivirals vary significantly from quarter to quarter due to the seasonality of flu, and from one year to the next depending on the intensity of the flu season and competition from other antivirals such as Tamiflu. Importantly, on February 23, 2018, Xofluza, a new drug to treat influenza developed by Shionogi, was approved in Japan. The drug has gained significant market share, substantially reducing sales of Inavir.

 

Our Pipeline

 

The following table outlines the status of our oral vaccine development programs:

 

 
 
 

 

Financial Operations Overview

 

Revenue

 

Revenue from Government Contract

 

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

 

Royalty Revenue

 

We earn royalty revenue on sales of Inavir and, until the patent expired, Relenza, both treatments for influenza, from our licensees, Daiichi Sankyo and GSK, respectively, under royalty agreements expiring in July 2019 and December 2029, respectively, based on fixed percentages of net sales of these drugs.

 

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

 

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

 

Research and Development Expenses

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

facilities, depreciation and allocated overhead expenses.

 

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

 

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

 

 

The following table shows our research and development expenses for the three and six months ended June 30, 2019 and 2018, identifying external costs that were incurred in each of our vaccine programs and, separately, on preclinical research and process development:

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 
    (in thousands)     (in thousands)  

External program costs:

                               

Influenza program, funded by HHS BARDA

  $       272     $     $ 658  

Norovirus program

    1,035       372       1,900       717  

RSV and HPV programs

    8             21       26  

Teslexivir and vapendavir programs

    2       689       19       1,113  

Preclinical research and process development

    56       112       109       193  

Total external costs

    1,101       1,445       2,049       2,707  

Internal costs

    2,606       3,567       5,487       5,713  
    $ 3,707       5,012     $ 7,536     $ 8,420  

 

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

 

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

 

General and Administrative Expense

 

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

 

 

Results of Operations

 

The following table presents selected items in the condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2019 and 2018, which include the operations of Aviragen for the six months ended June 30, 2019 and the period from February 13, 2018 to June 30, 2018:

 

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 
   

(in thousands)

   

(in thousands)

 

Revenue:

                               

Revenue from government contract

  $     $ 520     $     $ 1,130  

Royalty revenue

    69       70       3,728       963  

Non-cash royalty revenue related to sale of future royalties

    16       18       1,764       18  
                                 

Total revenue

    85       608       5,492       2,111  
                                 

Operating expenses:

                               

Research and development

    3,707       5,012       7,536       8,420  

General and administrative

    1,375       1,771       3,401       3,781  
Impairment of intangible assets           1,600             1,600  
                                 

Total operating expenses

    5,082       8,383       10,937       13,801  
                                 

Operating loss

    (4,997 )     (7,775 )     (5,445 )     (11,690 )
                                 

Other income and (expenses):

                               

Bargain purchase gain

          (328 )           6,660  

Interest income

    34       36       39       41  

Interest expense

    (97 )     (136 )     (204 )     (573 )

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

    (516 )     (468 )     (1,060 )     (766 )

Loss on revaluation of financial instruments

                      (3 )

Foreign exchange gain, net

    (48 )     (199 )     (43 )     (197 )
                                 

Total other income and (expenses)

    (627 )     (1,095 )     (1,268 )     5,162  
                                 

Net loss before income taxes

    (5,624 )     (8,870 )     (6,713 )     (6,528 )
                                 

Provision for income taxes

    13       1       263       29  
                                 

Net loss

  $ (5,637 )   $ (8,871 )   $ (6,976 )   $ (6,557 )

 

Revenue from Government Contract

 

The following table presents our revenue from a government contract for the three and six months ended June 30, 2019 and 2018, respectively:

 

Three Months Ended June 30,

   

Six Months Ended June 30,

 

2019

   

2018

   

% Change

   

2019

   

2018

   

% Change

 

(dollars in thousands)

           

(dollars in thousands)

         
$     $ 520       (100

)%

  $     $ 1,130       (100

)%

 

We earned no revenue from our government contract in 2019, compared to $520,000 and $1.1 million in the three and six months, respectively, ended June 30, 2018. The active phase of the contract occurred in 2016 and 2017. In 2018 activities were wound down and completed and no future revenue is expected from this contract.

 

 

Royalty Revenue

 

The following table presents our royalty revenue for the three and six months ended June 30, 2019 and 2018, respectively:

 

Three Months Ended June 30,

   

Six Months Ended June 30,

 

2019

   

2018

   

% Change

   

2019

   

2018

   

% Change

 

(dollars in thousands)

           

(dollars in thousands)

         
$ 69     $ 70       (1

)%

  $ 3,728     $ 963       287

%

 

For the three months ended June 30, 2019, royalty revenue decreased by $1,000, or 1%, compared to the three months ended June 30, 2018. This royalty revenue was earned solely from sales of Relenza, which is not significant in the second calendar quarter as influenza is not prevalent. For the six months ended June 30, 2019, royalty revenue increased by $2.8 million, or 287%, compared to the six months ended June 30, 2018. Royalty revenue is earned on sales of Relenza and Inavir, both treatments for influenza, which were acquired in the Merger and is based on fixed percentages of net sales of these drugs in the period. Royalty revenue in the six months ended June 30, 2018, excludes comparable revenue of $3.5 million earned in the pre-Merger period.

 

Non-cash Royalty Revenue Related to Sale of Future Royalties

 

The following table presents our non-cash royalty revenue related to sale of future royalties for the three and six months ended June 30, 2019 and 2018, respectively:

 

Three Months Ended June 30,

   

Six Months Ended June 30,

 

2019

   

2018

   

% Change

   

2019

   

2018

   

% Change

 

(dollars in thousands)

           

(dollars in thousands)

         
$ 16       18       (11

)%

  $ 1,764       18       9,700

%

 

For the three months ended June 30, 2019, non-cash royalty revenue related to sale of future royalties decreased by $2,000, or 11%, compared to the three months ended June 30, 2018. This royalty revenue was earned solely from sales of Inavir, which is not significant in the second calendar quarter as influenza is not prevalent. For the six months ended June 30, 2019, non-cash royalty revenue related to sale of future royalties increased by $1.7 million, or 9700%, compared to the six months ended June 30, 2018. Non-cash royalty revenue related to sale of future royalties in the six months ended June 30, 2018, was all earned in the pre-Merger period, so we recorded no such revenue for that fiscal quarter.

 

Research and Development

 

The following table presents our research and development expenses for the three and six months ended June 30, 2019 and 2018, respectively:

 

Three Months Ended June 30,

   

Six Months Ended June 30,

 

2019

   

2018

   

% Change

   

2019

   

2018

   

% Change

 

(dollars in thousands)

           

(dollars in thousands)

         
$ 3,707     $ 5,012       (26

)%

  $ 7,536     $ 8,420       (10

)%

 

For the three months ended June 30, 2019, research and development expenses decreased by $1.3 million, or 26%, compared to the three months ended June 30, 2018. The decrease in the 2019 period is principally due to the absence of the teslexivir clinical trials, severance costs and costs incurred under the HHS BARDA contract, along with decreases in preclinical research, personnel costs and amortization of intangible assets acquired in the Merger, partially offset by increases in manufacturing and clinical trial costs related to our norovirus vaccine tablets.

 

For the six months ended June 30, 2019, research and development expenses decreased by $884,000, or 10%, compared to the six months ended June 30, 2018. The decrease in the 2019 period is principally due to the absence of the teslexivir clinical trials, costs incurred under the HHS BARDA contract and severance costs, along with decreases in preclinical research and consultancy costs, partially offset by increases in manufacturing and clinical trial costs related to our norovirus vaccine tablets, along with increased costs for personnel and amortization of intangible assets acquired in the Merger.

 

We expect that research and development expenses will increase in the near term as we continue to conduct clinical trials of our norovirus product candidates, which will only be partially offset by the elimination of expenses that we were formerly incurring for teslexivir trials and for work on the HHS BARDA contract.

 

General and Administrative

 

The following table presents our general and administrative expenses for the three and six months ended June 30, 2019 and 2018, respectively:

 

Three Months Ended June 30,

   

Six Months Ended June 30,

 

2019

   

2018

   

% Change

   

2019

   

2018

   

% Change

 

(dollars in thousands)

           

(dollars in thousands)

         
$ 1,375     $ 1,771       (22

)%

  $ 3,401     $ 3,781       (10

)%

 

For the three months ended June 30, 2019, general and administrative expenses decreased by $396,000, or 22%, compared to the three months ended June 30, 2018. The decrease in the 2019 period is principally due to reductions in legal and professional costs and personnel costs. 

 

For the six months ended June 30, 2019, general and administrative expenses decreased by $380,000, or