Item 7. Management’s 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 the other sections of this Annual Report on Form 10-K, including our consolidated financial statements and notes thereto included elsewhere. This discussion contains a number of forward-looking statements that reflect our plans, estimates and beliefs. 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 the Annual Report on Form 10-K, particularly in Item 1A – “Risk Factors.” The forward-looking statements made in this Annual Report on Form 10-K are made only as of the date hereof.
Company Overview
We are a clinical-stage biotechnology company primarily focused on the development of oral recombinant vaccines based on our Vector-Adjuvant-Antigen Standardized Technology (“VAAST”) proprietary oral vaccine platform. Our oral vaccines are designed to generate broad and durable immune responses that may protect against a wide range of infectious diseases and may be useful for the treatment of chronic viral infections and cancer. Our investigational vaccines are administered using a room temperature-stable tablet, rather than by injection.
We are developing prophylactic vaccine candidates that target a range of infectious diseases, including SARS-CoV-2 (the virus that causes coronavirus disease 2019 (“COVID-19”)), norovirus (a widespread cause of acute gastro-intestinal enteritis), seasonal influenza and respiratory syncytial virus (“RSV”) (a common cause of respiratory tract infections). We have completed human dosing for our Phase 1 clinical trial for our SARS CoV-2 vaccine candidate that commenced in October 2020 and met its primary and secondary endpoints. Three Phase 1 human studies for our norovirus vaccine candidate have been completed, including a study with a bivalent norovirus vaccine which, as we disclosed in September 2019, met its primary and secondary endpoints. Our monovalent H1 influenza vaccine protected participants against H1 influenza infection in a Phase 2 challenge study. In addition, we are developing our first therapeutic vaccine targeting cervical cancer and dysplasia caused by human papillomavirus (“HPV”).
As we previously disclosed, we are no longer prioritizing internal manufacturing and plan to rely primarily on third party manufacturers for the current Good Manufacturing Practice (“cGMP”) manufacturing of our candidate vaccines. In addition, we are focusing our efforts on partnering opportunities utilizing the vaccine programs currently in our pipeline, including the bivalent norovirus vaccine program, our seasonal flu vaccine, and the Universal Influenza vaccine collaboration with Janssen Vaccines & Prevention B.V. Finally, we are focusing on the development of a coronavirus vaccine candidate utilizing our proprietary oral vaccine platform. Pending licensing, partnering or collaboration agreements, our seasonal influenza, RSV and HPV programs are currently on hold.
Through our merger with Aviragen Therapeutics, Inc., or Aviragen, we acquired two royalty-earning products, Relenza and Inavir. We also acquired three Phase 2 clinical stage antiviral compounds, which we have discontinued.
87
Table of Contents
Merger with Aviragen
Vaxart Biosciences, Inc. was originally incorporated in California under the name West Coast Biologicals, Inc. in March 2004 and changed its name to Vaxart, Inc. (“Private Vaxart”) in July 2007, when it reincorporated in the state of Delaware.
On February 13, 2018, Private Vaxart completed a reverse merger (the “Merger”) with Aviragen Therapeutics, Inc. (“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. Immediately prior to the Merger, all Private Vaxart’s convertible promissory notes and convertible preferred stock were converted into common stock, following which each share of common stock was converted into approximately 0.22148 shares of common stock.
Immediately following the completion of the Merger, we effected a reverse stock split at a ratio of one new share for every eleven shares of our common stock outstanding, or the Reverse Stock Split. All share, equity security and per share amounts are presented to give retroactive effect to the Reverse Stock Split. Immediately after the Merger and the Reverse Stock Split there were approximately 7.1 million shares of common stock outstanding. In addition, immediately after the Merger, Private Vaxart’s stockholders, warrantholders and optionholders owned approximately 51% of the common stock of the combined company and the stockholders and optionholders of Aviragen immediately prior to the Merger owned approximately 49% of the common stock of the combined company (on a fully diluted basis).
Financial Operations Overview
Revenue
Revenue from Customer Service Contracts
We have been earning revenue from a fixed price service contract, as amended, for a total of $617,000, which we completed in the first three months of 2021.
Revenue from Government Contract
The government contract with the Department of Health and Human Services, Office of Biomedical Advanced Research and Development Authority (“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 Inavirand, until the patent expired, earned royalty revenue on sales of Relenza (both treatments for influenza) through our licensees Daiichi Sankyo Company, Limited and GlaxoSmithKline, plc, respectively, under royalty agreements with expiry dates in December 2029 and July 2019, respectively, based on fixed percentages of net sales of these drugs.
Non-Cash Royalty Revenue Related to 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. (“HCRP”). We pay HCRP the first $3 million plus 15% of the next $1 million of royalties earned in annual periods ending on March 31. At the time of the Merger, the estimated future benefit to HCRP was remeasured at fair value and was estimated to be $15.9 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 do 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:
88
Table of Contents
● 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 for manufacturing our tablet vaccine candidates, and for 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 period-over-period research and development expenses, identifying external costs that were incurred in each of our vaccine programs and, separately, on preclinical research and process development (in thousands):
Year Ended December 31,
External program costs:
COVID-19 program $ 6,659 $ — $ —
RSV and HPV programs — 21 53
Teslexivir and vapendavir programs 7 63 1,902
Influenza program, funded by BARDA — — 749
Preclinical research and process development 1,899 807 285
We expect that research and development expenses will increase in 2021 and beyond as we advance our tablet vaccine candidates into and through clinical trials, pursue regulatory approval of our tablet vaccine candidates and prepare for a possible commercial launch, all of which will also require a significant investment in manufacturing and inventory related costs. To the extent that we enter into licensing, partnering or collaboration agreements, a significant portion of such costs may be borne by third parties.
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.
89
Table of Contents
Results of Operations
The following table presents period-over-period changes in selected items in the consolidated statements of operations and comprehensive loss, which include the operations of Aviragen for periods after February 13, 2018 (in thousands, except percentages):
Year Ended December 31,
90
Table of Contents
Total Revenues
The following table summarizes the period-over-period changes in our revenues for years ended December 31 (in thousands, except percentages):
Revenue from customer service contracts $ 198 (51 )% $ 406 N/A $ —
Revenue from government contract — N/A (20 ) N/A 1,344
Revenue from Customer Service Contracts
We earned revenue from customer service contracts of $198,000 and $406,000 in the years ended December 31, 2020 and 2019, respectively. This revenue was recognized from a fixed price contract executed in July 2019, as amended, for a total of $617,000, which we have now completed, enabling us to recognize the remaining $13,000 as revenue in the three months ending March 31, 2021. There were no comparable contracts in 2018.
Revenue from Government Contract
We recognized revenue of $1.3 million during the year ended December 31, 2018, of which $20,000 was reversed during the year ended December 31, 2019. As of December 31, 2020, the cumulative revenue recorded from inception under the HHS BARDA contract represents $20,000 less than the maximum amount billable under the contract as presently modified. 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
For the year ended December 31, 2020, royalty revenue decreased by $1.5 million, or 33%, compared to the year ended December 31, 2019, which represented an increase of $3.1 million, or 232%, compared to the year ended December 31,2018. Royalty revenue in the year ended December 31, 2018, excludes comparable revenue of $3.5 million earned in the pre-Merger period, which more than accounts for the increase in 2019.
Royalty revenue was 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. Relenza revenue ceased in 2019 and all our 2020 Inavir royalty revenue was earned in the first quarter. We recognize royalty revenue from sales of Inavir only after the first $3 million net of 5% withholding tax in years ending on March 31 has been recognized as non-cash royalty revenue related to sale of future royalties. We expect our royalty revenue in 2021, if any, will be significantly lower than in 2020, partly because we expect the increase in social distancing and mask wearing due to the COVID-19 pandemic will cause the number of influenza infections to decrease in the year ending March 31, 2021.
Non-cash Royalty Revenue Related to Sale of Future Royalties
For the year ended December 31, 2020, non-cash royalty revenue related to sale of future royalties was $886,000, compared to $5.0 million for the year ended December 31, 2019 and $1.5 million for the year ended December 31,2018. Non-cash royalty revenue of up to $3.3 million may be earned in each year ending on March 31. In 2018, we only recognized $1.5 million related to the year ended March 31, 2019, since all non-cash royalty revenue related to the year ended March 31, 2018, was earned in the pre-Merger period. In 2019, we recorded $1.7 million related to the year ended March 31, 2019, plus $3.3 million related to the year ending March 31, 2020. In the year ended December 31, 2020, we recognized the $34,000 not recognized in 2019 for the year ending March 31, 2020, and $852,000 related to the year ending March 31, 2021, so we expect non-cash royalty revenue related to sale of future royalties to increase in the year ending December 31, 2021.
91
Table of Contents
Total Operating Expenses
The following table summarizes the period-over-period changes in our operating expenses for years ended December 31 (in thousands, except percentages):
Impairment of intangible assets — N/A — (100 )% 1,600
Costs of exit from leased premises — N/A — (100 )% 359
Restructuring charges and (reversals) (849 ) N/A 4,920 N/A —
Research and Development
For 2020, research and development expenses increased by $5.3 million, or 37%, compared to 2019. The increase was principally due to preclinical, manufacturing and clinical expenses related to our COVID-19 vaccine candidate, partially offset by lower costs of manufacturing and clinical trials for our norovirus vaccine candidate and lower depreciation and amortization expense.
For 2019, research and development expenses decreased by $2.7 million, or 16%, compared to 2018. The decrease was principally due to the absence of the teslexivir clinical trials and costs incurred under the HHS BARDA contract, along with decreases in preclinical research, personnel, non-restructuring severance and intangible asset amortization costs, partially offset by increases in manufacturing and clinical trial costs related to our norovirus vaccine tablets.
We expect that research and development expenses will increase in 2021 as we will incur significant expenses for manufacturing and clinical trials related to our COVID-19 vaccine candidate.
General and Administrative
For 2020, general and administrative expenses increased by $9.0 million, or 146%, compared to 2019. The principal reasons for the increase in 2020 are increased legal fees, higher stock-based compensation costs, additional D&O insurance costs, severance expenses for our former Chief Executive Officer and increased costs incurred in upgrading our accounting systems and in line with our corporate growth.
For 2019, general and administrative expenses decreased by $494,000, or 7%, compared to 2018. The decrease was principally due to reductions in legal fees and other costs associated with becoming a public company.
Impairment of Intangible Assets
Impairment of intangible assets represents the write-off in 2018 of the in-process research and development related to teslexivir that we acquired in the Merger. Since the Phase 2 trial completed in May 2018 did not achieve the primary efficacy endpoint and we suspended development activities, we now consider this asset to be fully impaired.
Costs of Exit from Leased Premises
Costs of exit from leasehold premises in 2019 comprise both our lease loss accrual and our write-down of leasehold improvements and furniture at our leased premises in Alpharetta, Georgia. Since this facility had surplus capacity, we subleased these premises, commencing in November 2018, for the remainder of the lease term for less than we are presently paying. Accordingly, we recorded an exit charge consisting of loss on lease obligations for the net discounted future cash flows for rental and associated costs at the cease-use date of $253,000 and a property and equipment impairment charge of $106,000.
92
Table of Contents
Restructuring Charges and (Reversals)
In 2019, in connection with our December restructuring, we accrued costs of $3.2 million representing the amount we were invoiced by Lonza Houston, Inc. (“Lonza”) after the suspension of our norovirus manufacturing work order, representing the maximum amount potentially payable to Lonza. We also accrued $0.4 million for severance and legal expenses and impaired $1.3 million of property and equipment and right-of-use assets, mainly related to manufacturing assets. In 2020, we incurred further costs, principally legal fees, of $0.1 million and we paid $2.3 million in full settlement with Lonza, enabling us to reverse $0.9 million of the 2019 accrual. We do not expect to incur any further charges related to this restructuring.
Other Income and (Expenses)
The following table summarizes the period-over-period changes in our non-operating income and expenses for years ended December 31 (in thousands, except percentages):
Bargain purchase gain $ — N/A $ — (100 )% $ 6,760
Gain (loss) on sale of equipment — (100 )% 1 N/A (11 )
Loss on revaluation of financial instruments — N/A — (100 )% (3 )
Loss on debt extinguishment — (100 )% (100 ) N/A —
Foreign exchange loss, net (13 ) (59 )% (32 ) (88 )% (266 )
Net non-operating income and (expenses) $ (1,812 ) $ (2,370 ) $ 3,858
For 2020 we recorded net non-operating expenses of $1.8 million, compared to net non-operating expenses of $2.4 million in 2019 and net non-operating income of $3.9 million in 2018.
The principal source of non-operating income in 2018 was a bargain purchase gain of $6.8 million, representing the excess of our valuation of the fair value of net assets acquired over the fair value of the common stock issued to acquire them in the Merger.
Interest expense was $315,000 in 2019, decreasing from $821,000 in 2018 due to the absence of an expense of $295,000 related to Private Vaxart’s convertible promissory notes being outstanding for the 43 days prior to the Merger and the lower balance payable on our note due to Oxford Finance LLC, the remaining balance of which was repaid in November 2019, for which we incurred a one-time charge of $100,000 for debt extinguishment. As a result, we incurred no interest expense in 2020.
Non-cash interest expense related to sale of future royalties, which relates to accounting for sums that will become payable to HCRP for royalty revenue earned from Inavir as debt, was $2.1 million in 2019, higher than the $1.9 million in 2020 when the outstanding balance due to HCRP had been paid down, and higher than the $1.9 million in 2018 which related to the shorter post-Merger period.
The foreign exchange loss of $266,000 in 2018 relates to the revaluation of cash and receivables denominated in Australian dollars and British pounds because of the strengthening U.S. dollar. In 2019 and 2020 we held minimal cash and receivables denominated in foreign currency and the loss decreased commensurately.
Provision for Income Taxes
The following table summarizes the period-over-period changes in our provision for income taxes for years ended December 31 (in thousands, except percentages):
Foreign withholding tax on royalty revenue $ 183 (58 )% $ 435 326 % $ 102
Foreign taxes payable on intercompany interest 52 (2 )% 53 1,225 % 4
State income taxes 3 50 % 2 (33 )% 3
The majority of the provision for income taxes in the years ended December 31, 2020, 2019 and 2018, respectively, represents withholding tax on royalty revenue earned on sales of Inavir in Japan, which is potentially recoverable as a foreign tax credit but expensed because we record a 100% valuation allowance against our deferred tax assets. The amount of income tax expense recorded is directly proportional to Inavir royalties, including the portion that we pass through to HCRP, and was low in 2018 because the majority of Inavir sales in the first calendar quarter arise in the first six weeks, so most of the revenue in the 2018 period was earned pre-Merger. In addition, we incurred charges relating to interest on an intercompany loan from a foreign subsidiary and for state income taxes in the United States.
93
Table of Contents
Liquidity and Capital Resources
From its inception until the Merger, Private Vaxart’s operations were financed primarily by net proceeds of $38.9 million and $29.4 million from the sale of convertible preferred stock and the issuance of convertible promissory notes, respectively, all of which were converted into Aviragen common stock in the Merger, and $4.9 million from the issuance of secured promissory notes to Oxford Finance, of which the remaining balance of $2.5 million as of September 30, 2019, was repaid in full on November 4, 2019. Vaxart gained $25.5 million in cash from Aviragen in the Merger, of which $4.9 million was used to pay Aviragen’s Merger-related costs. Since the Merger, through December 31, 2020, we have received net proceeds of $156.8 million from the sale of common stock, pre-funded warrants and common stock warrants and the exercise of pre-funded warrants and common stock warrants from equity financings in March, April and September 2019 and March, July and October 2020 (see Note 1 to the Consolidated Financial Statements in Part II, Item 8 for further information regarding our offerings).
As of December 31, 2020, we had $126.9 million of cash and cash equivalents. Since then, we have received net proceeds of $65.8 million from the sale of common stock under the Open Market Sale Agreement, (the “Sales Agreement”) and $1.6 million from the exercise of common stock warrants. There is approximately $167 million in net proceeds still available to us under the Sales Agreement.
We believe our existing funds (including funds already received in 2021) are sufficient to fund us well into 2022 and possibly beyond. To continue operations thereafter, we expect that we will need to raise further capital, through the sale of additional securities or otherwise. Our operating needs include the planned costs to operate our business, including amounts required to fund working capital and capital expenditures. As of December 31, 2020, we had no commitments for capital expenditures. Our future capital requirements and the adequacy of our available funds will depend on many factors, most notably our ability to successfully commercialize our products and services.
We may fund a significant portion of our ongoing operations through partnering and collaboration agreements which, while reducing our risks and extending our cash runway, will also reduce our share of eventual revenues, if any, from our vaccine product candidates. We may be able to fund certain activities with assistance from government programs including HHS BARDA. We may also need to fund our operations through equity and/or debt financing. The sale of additional equity would result in additional dilution to our stockholders. Incurring debt financing would result in debt service obligations, and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. If we are unable to raise additional capital in sufficient amounts or on acceptable terms, we may be required to delay, limit, reduce, or terminate our product development or future commercialization efforts or grant rights to develop and market vaccine candidates that we would otherwise prefer to develop and market ourselves. Any of these actions could harm our business, results of operations and prospects.
Our future funding requirements will depend on many factors, including the following:
● the timing and costs of our planned clinical trials of our product candidates;
● the amount and timing of royalties received on sales of Inavir;
● the number and characteristics of product candidates that we pursue;
● the outcome, timing and costs of seeking regulatory approvals;
● the extent to which we in-license or acquire other products and technologies.
94
Table of Contents
Cash Flows
The following table summarizes our cash flows for the periods indicated (in thousands):
Year Ended December 31,
Net cash (used in) provided by investing activities (1,220 ) (850 ) 26,212
Net Cash Used in Operating Activities
We experienced negative cash flow from operating activities in 2020, 2019 and 2018 in the amounts of $23.8 million, $13.1 million and $14.5 million, respectively. The cash used in operating activities in 2020 was due to cash used to fund a net loss of $32.2 million, partially offset by adjustments for net non-cash income related to depreciation and amortization, stock-based compensation, non-cash interest expense related to sale of future royalties and non-cash revenue related to sale of future royalties totaling $5.6 million and a decrease in working capital of $2.8 million. The cash used in operating activities in 2019 was due to cash used to fund a net loss of $18.6 million, partially offset by net non-cash expenses related to depreciation and amortization, gain on sale of equipment, impairment charges, stock-based compensation, non-cash interest expense, loss on debt extinguishment, non-cash interest expense related to sale of future royalties and non-cash revenue related to sale of future royalties totaling $4.2 million and a decrease in working capital of $1.3 million. The cash used in operating activities in 2018 was due to a net loss of $18.0 million, partially offset by $1.0 million of adjustments for net non-cash income related to the bargain purchase gain, depreciation and amortization, loss on sale of equipment, impairment charges, stock-based compensation, loss on revaluation of financial instruments, non-cash interest, amortization of note discount, non-cash interest expense related to sale of future royalties and revenue related to sale of future royalties and $2.5 million provided by a change in working capital, principally due to the receipt of accounts receivable of $14.7 million acquired in the Merger.
Net Cash (Used in) Provided by Investing Activities
We used $1.2 million, $850,000 and $707,000 in the years ended December 31, 2020, 2019 and 2018, respectively, to purchase property and equipment. In addition, in 2020 we received cash of $3,000 for the sale of equipment and in 2018 we received cash of $25.5 million in the Merger and $1.4 million from maturities of short-term investments, net of purchases and paid $21,000 for fractional shares of common stock in the Merger.
Net Cash Provided by (Used in) Financing Activities
In 2020, we received $9.2 million from the sale of common stock and common stock warrants in a registered direct offering in March, $97.0 million from the sale of common stock under an at-the-market facility in July, $4.9 million from the sale of common stock under an Open Market Sale Agreement that began in October, $26.0 million from the exercise of common stock warrants, $602,000 from the exercise of stock options and net proceeds of $652,000 from the disgorgement of related party short-swing profits. In 2019, we received $2.5 million from the sale of common stock in a registered direct offering in March, $8.1 million from the sale of common stock, pre-funded warrants and common stock warrants in an underwritten public offering in April, $7.8 million from the sale of common stock, pre-funded warrants and common stock warrants in an underwritten public offering in September, $1.2 million from the exercise of pre-funded warrants and $180,000 from the exercise of common stock warrants, partially offset by repayment of principal of $3.8 million on the secured promissory note payable to Oxford Finance. We used $1.5 million in 2018 to repay principal on the secured promissory note payable to Oxford Finance and $214,000 to repay principal on a short-term note, partially offset by $13,000 received upon the exercise of stock options.
95
Table of Contents
Contractual Obligations and Commercial Commitments
We have the following contractual obligations and commercial commitments as of December 31, 2020 (in thousands):
Contractual Obligation Total < 1 Year 1 - 3 Years 3 - 5 Years > 5 Years
Long Term Debt, HCRP. Under an agreement executed in 2016, we are obligated to pay HCRP the first $3 million plus 15% of the next $1 million of royalty revenues that we earn for sales of Inavir in each year ending on March 31. See Note 7 to the Consolidated Financial Statements in Part II, Item 8 for further details.
Operating leases. Operating lease amounts include future minimum lease payments under all our non-cancellable operating leases with an initial term in excess of one year. See Note 8 to the Consolidated Financial Statements in Part II, Item 8 for further details.
Purchase obligations. These amounts include an estimate of all open purchase orders and contractual obligations in the ordinary course of business, including commitments with contract manufacturers and suppliers for which we have not received the goods or services. We consider all open purchase orders, which are generally enforceable and legally binding, to be commitments, although the terms may afford us the option to cancel based on our business needs prior to the delivery of goods or performance of services.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements in the periods presented.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate these estimates and judgments. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources. Actual results may differ materially from these estimates. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
Accrued Research and Development Expenses
We record accrued expenses for estimated costs of research and development activities conducted by third-party service providers, which include the conduct of preclinical studies and clinical trials, and contract manufacturing activities. We record the estimated costs of research and development activities based upon the estimated amount of services provided and include the costs incurred but not yet invoiced within other accrued liabilities in the balance sheets and within research and development expense in the consolidated statements of operations and comprehensive loss. These costs can be a significant component of our research and development expenses.
We estimate the amount of work completed through discussions with internal personnel and external service providers as to the progress or stage of completion of the services and the agreed-upon fee to be paid for such services. We make significant judgments and estimates in determining the accrued balance in each reporting period. As actual costs become known, we adjust our accrued estimates.
Intangible Assets
Intangible assets acquired in the Merger were recorded at their estimated fair values of $20.3 million for developed technology related to Inavir which is being amortized on a straight-line basis over the estimated period of future royalties of 11.75 years, $1.8 million for the developed technology related to Relenza which was fully amortized over the remaining royalty period of 1.3 years, and $1.6 million for in-process research and development related to teslexivir which was considered indefinite-lived until it was assessed as impaired in the three months ended June 30, 2018. These valuations were prepared by an independent third party based on estimated discounted cash flows based on probability-weighted future development expenditures and revenue streams, which are highly subjective.
Recently Issued Accounting Pronouncements
See the “Recent Accounting Pronouncements” in Note 2 to the Consolidated Financial Statements in Part II, Item 8 for information related to the issuance of new accounting standards in 2020, none of which have had, or are expected to have, a material impact on our consolidated financial statements.
96
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity
The primary objective of our investment activities is to preserve principal while at the same time maximize the income we receive from our investments without significantly increasing risk. All our cash is denominated in U.S. dollars and held either in bank accounts or money market funds that presently earn very little interest. Interest rates are sufficiently low that we believe a 1% increase in the borrowing base rate would result in a negligible increase, if any, in the interest we could earn on our cash deposits.
Exchange Rate Sensitivity
Our royalty revenue, which is calculated in U.S. dollars, is based on sales in Japanese yen, so a 1% increase in the strength of the U.S. dollar against the yen would lead to a 1% reduction in royalty revenue. All our other revenue and substantially all of our expenses, assets and liabilities are denominated in U.S. dollars and, as a result, we have not experienced significant foreign exchange gains recently and do not anticipate that foreign exchange gains or losses will be significant in the near future.
97
Table of Contents
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements Page
Report of OUM & Co., LLP - Independent Registered Public Accounting Firm 99
Report of KPMG LLP - Independent Registered Public Accounting Firm 101
Consolidated Balance Sheets 102
Consolidated Statements of Operations and Comprehensive Loss 103
Consolidated Statements of Cash Flows 106
Notes to the Consolidated Financial Statements 108
98
Table of Contents
Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors
Vaxart, Inc.
South San Francisco, California
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Vaxart, Inc. (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive loss, stockholders’ equity (deficit), and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated February 25, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Accrued Clinical and Manufacturing Expenses - Refer to Note 2 to the consolidated financial statements
Critical Audit Matter Description
The Company recognizes costs it incurs for preclinical studies, clinical trials, and manufacturing activities as research and development expenses based on its evaluation of its third-party service providers’ progress toward completion of specific tasks. Payment timing may differ significantly from the period in which the costs are recognized as expense. Costs for services incurred that have not yet been paid are recognized as accrued expenses.
In estimating the vendors’ progress toward completion of specific tasks, the Company uses data such as patient enrollment, clinical site activations or vendor information of actual costs incurred. This data is obtained through reports from or discussions with Company personnel and third-party service providers as to the progress or state of completion of trials, or the completion of services.
Given the number of ongoing preclinical study and clinical trial activities and the subjectivity involved in estimating clinical trial and manufacturing expenses, auditing the accrued clinical and manufacturing expenses involved especially subjective judgment.
99
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to accrued preclinical studies, clinical trials and manufacturing expenses included the following, among others:
o Evaluated management’s judgments compared to the evidence obtained.
/s/ OUM & Co. LLP
San Francisco, California
February 25, 2021
We have served as the Company’s auditor since 2019.
100
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Vaxart, Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Vaxart, Inc. and subsidiaries (the Company) as of December 31, 2018, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity (deficit) and cash flows for the year ended December 31, 2018, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for the year ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has experienced losses and negative cash flows from operations since its inception, has an accumulated deficit, and has debt obligations that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ KPMG LLP
We served as the Company’s auditor from 2014 to 2019.
San Francisco, California
February 6, 2019
101
Table of Contents
VAXART, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
Assets
Current assets:
Prepaid expenses and other current assets 1,327 453
Property and equipment, net 1,480 210
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of operating lease liability 2,052 841
Liability related to sale of future royalties, current portion 2,779 2,916
Other accrued current liabilities 4,799 4,565
Operating lease liability, net of current portion 5,156 1,472
Other long-term liabilities 109 18
Commitments and contingencies (Note 11)
Stockholders’ equity:
Total liabilities and stockholders’ equity $ 152,582 $ 37,032
The accompanying notes are an integral part of these consolidated financial statements.
102
Table of Contents
VAXART, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except share and per share amounts)
Year Ended December 31,
Revenue:
Revenue from customer service contracts $ 198 $ 406 $ —
Revenue from government contract — (20 ) 1,344
Non-cash royalty revenue related to sale of future royalties 886 5,030 1,475
Operating expenses:
Impairment of intangible assets — — 1,600
Costs of exit from leased premises — — 359
Restructuring charges and (reversals) (849 ) 4,920 —
Other income and (expenses):
Bargain purchase gain — — 6,760
Interest expense — (315 ) (821 )
Gain (loss) on sale of equipment — 1 (11 )
Loss on revaluation of financial instruments — — (3 )
Loss on debt extinguishment — (100 ) —
Foreign exchange loss, net (13 ) (32 ) (266 )
Series B and C preferred dividend — — (339 )
Net loss per share – basic and diluted $ (0.36 ) $ (0.86 ) $ (2.90 )
The accompanying notes are an integral part of these consolidated financial statements.
103
Table of Contents
VAXART, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders’ Equity (Deficit)
(In thousands, except share amounts)
Total
Additional Stockholders’
Preferred Stock Common Stock Paid-in Accumulated Equity
Shares Amount Shares Amount Capital Deficit (Deficit)
Reclassification of warrant to equity — — — — 70 — 70
Issuance of common stock upon exercise of stock options — — 2,013 — 13 — 13
Stock-based compensation — — — — 539 — 539
Cumulative effect of adoption of new leases standard — — — — — (27 ) (27 )
The accompanying notes are an integral part of these consolidated financial statements.
104
Table of Contents
VAXART, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
(In thousands, except share amounts)
Additional Total
Common Stock Paid-in Accumulated Stockholders’
Shares Amount Capital Deficit Equity
Stock-based compensation — — 627 — 627
Issuance of warrants to placement agents’ designees in March 2019 — — 453 — 453
Issuance of common stock upon exercise of options 414,676 — 602 — 602
Disgorgement of short-swing profits, net of costs — — 652 — 652
Stock-based compensation — — 4,358 — 4,358
The accompanying notes are an integral part of these consolidated financial statements.
105
VAXART, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31,
Cash flows from operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Bargain purchase gain — — (6,760 )
(Gain) loss on sale of equipment — (1 ) 11
Impairment of intangible assets — — 1,600
Impairment of property and equipment and right-of-use assets — 1,272 106
Loss on revaluation of financial instruments — — 3
Non-cash interest expense — 88 448
Amortization of note discount — — 18
Loss on debt extinguishment — 100 —
Non-cash interest expense related to sale of future royalties 1,874 2,073 1,859
Non-cash revenue related to sale of future royalties (3,277 ) (3,482 ) (18 )
Change in operating assets and liabilities:
Prepaid expenses and other assets (1,108 ) 855 (873 )
Cash flows from investing activities:
Purchase of property and equipment (1,223 ) (850 ) (707 )
Proceeds from sale of equipment 3 — —
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 (1,220 ) (850 ) 26,212
Cash flows from financing activities:
Proceeds from issuance of common stock upon exercise of stock options 602 — 13
Disgorgement of short-swing profits, net of costs 652 — —
Repayment of short-term note — — (214 )
Cash and cash equivalents at beginning of the period 13,526 11,506 1,571
The accompanying notes are an integral part of these consolidated financial statements.
106
Table of Contents
VAXART, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
(In thousands)
Year Ended December 31,
Supplemental disclosure of cash flow information:
Supplemental disclosure of non-cash investing and financing activity:
Issuance of warrants to placement agents’ designees $ 453 $ 100 $ —
Issuance of warrants to underwriters’ designees $ — $ 830 $ —
Acquisition of property and equipment included in accounts payable $ 78 $ 4 $ 52
The accompanying notes are an integral part of these consolidated financial statements.
107
Table of Contents
VAXART, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
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 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 Consolidated 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 Consolidated 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 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 the effective date of the March 2019 Offering. The aggregate fair value of these warrants at issuance was estimated to be $100,000 (see Note 12), 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 entitled the holder to purchase one share of common stock for $0.10, was immediately exercisable, subject to certain ownership limitations, and was exercisable at any time until all the pre-funded warrants were 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.
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 12), which was recorded in offering costs.
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 December 31, 2020, the Company had received a further $0.8 million from the exercise of all 8,165,455 pre-funded warrants, $11.3 million from the exercise of 10,228,580 common stock warrants issued to investors and $0.7 million from the exercise of 524,433 common stock warrants issued to underwriters’ designees issued in the April 2019 Offering.
108
Table of Contents
VAXART, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
On September 30, 2019, the Company completed a public underwritten offering (the “September 2019 Offering”) of 26,124,828 shares of common stock (including 3,558,161 shares of common stock issued upon the partial exercise by the underwriters of their option to purchase 4,000,000 shares), 4,100,000 pre-funded warrants, and warrants to purchase 30,666,667 shares of common stock (including 4,000,000 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 $0.30, and each pre-funded warrant with an accompanying common stock warrant was sold for $0.20, with the amount paid for each accompanying common stock warrant being $0.10. Each pre-funded warrant entitled the holder to purchase one share of common stock for $0.10, was immediately exercisable, subject to certain ownership imitations, and was exercisable at any time until all the pre-funded warrants were exercised in full. Each common stock warrant entitles the holder to purchase one share of common stock for $0.30, is exercisable immediately, subject to certain ownership limitations, and will expire five years from the date of issuance.
Pursuant to the terms of an underwriting agreement, the Company paid the underwriters aggregate commissions and reimbursable costs of $713,000. In addition, the Company issued the underwriters’ designees 2,115,738 common stock warrants at the closing of the September 2019 Offering, each warrant entitling the holder to purchase one share of common stock for $0.375 at any time within five years of their issuance date. The aggregate fair value of these warrants at issuance was estimated to be $497,000 (see Note 12), which was recorded in offering costs.
The total gross proceeds from the September 2019 Offering to the Company were $8.7 million. After deducting underwriting discounts, commissions and offering expenses payable by the Company, the aggregate net proceeds received by the Company were $7.7 million. In addition, as of December 31, 2020, the Company had received $0.4 million from the exercise of all 4,100,000 pre-funded warrants, $9.2 million from the exercise of 30,661,667 common stock warrants issued to investors and $0.7 million from the exercise of 1,890,941 common stock warrants issued to underwriters’ designees in the September 2019 Offering.
On March 2, 2020, the Company completed a registered direct offering (the “March 2020 Offering”) of 4,000,000 shares of the Company’s common stock and warrants to purchase 2,000,000 shares of common stock. Each common stock warrant entitles the holder to purchase one share of common stock for $2.50, is exercisable immediately, subject to certain ownership limitations, and will expire five years from the date of issuance. Pursuant to the terms of the engagement letter with the placement agents, the Company paid the placement agents aggregate fees and reimbursable costs of $775,000. In addition, the Company issued the placement agents’ designees 280,000 common stock warrants at the closing of the March 2020 Offering, each warrant entitling the holder to purchase one share of common stock for $3.125 at any time within five years of the effective date of the March 2020 Offering. The aggregate fair value of these warrants at issuance was estimated to be $453,000 (see Note 12), which was recorded in offering costs.
The total gross proceeds from the offering to the Company were $10.0 million. After deducting placement agent fees and offering expenses payable by the Company, the aggregate net proceeds received by the Company totaled $9.2 million. In addition, as of December 31, 2020, the Company had received $4.2 million from the exercise of 1,683,416 common stock warrants issued to investors and 10,504 common stock warrants issued to placement agents’ designees in the March 2020 Offering.
On June 8, 2020, the Company’s shareholders approved an amendment to the Company’s certificate of incorporation to change the par value of its common and preferred stock from $0.10 per share to $0.0001 per share and to increase the number of authorized shares of common stock from 100,000,000 to 150,000,000. Except as otherwise noted in these consolidated financial statements, all share, equity security and per share amounts are presented to give retroactive effect to these changes.
On July 13, 2020, the Company completed the sale of 12,503,806 shares for gross proceeds of $100.0 million from an at-the-market facility (the “ATM Program”) under a sales prospectus agreement dated July 8, 2020. After deducting sales commissions and expenses, aggregate net cash proceeds under the ATM Program totaled $97.0 million.
On October 13, 2020, the Company entered into the Open Market Sale Agreement, (the “Sales Agreement”) pursuant to which it may offer and sell, from time to time through sales agents, shares of its common stock having an aggregate offering price of up to $250 million. The Company incurred direct expenses of approximately $0.3 million in connection with filing a prospectus supplement, dated October 13, 2020, with the SEC, and will pay sales commissions of 4.5% of gross proceeds from the sale of shares. As of December 31, 2020, the Company had sold 692,651 shares for gross proceeds of $5.5 million which, after deducting sales commissions and expenses, resulted in net proceeds to date under the Sales Agreement of $4.9 million.
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.
109
Table of Contents
VAXART, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
NOTE 2. Summary of Significant Accounting Policies
Basis of Presentation – The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Basis of Consolidation – The consolidated financial statements include the financial statements of Vaxart, Inc. and its subsidiaries. All significant transactions and balances between Vaxart, Inc. and its subsidiaries have been eliminated in consolidation.
Use of Estimates – The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities in the financial statements and accompanying notes. Actual results and outcomes could differ from these estimates and assumptions.
Foreign Currencies – Foreign exchange gains and losses for assets and liabilities of the Company’s non-U.S. subsidiaries for which the functional currency is the U.S. dollar are recorded in foreign exchange gain or loss, net within other income and (expenses) in the Company’s consolidated statements of operations and comprehensive loss. The Company has no subsidiaries for which the local currency is the functional currency.
Cash and Cash Equivalents – The Company considers all highly liquid debt investments with an original maturity of three months or less when purchased to be cash equivalents. Cash equivalents, which may consist of amounts invested in money market funds, corporate bonds and commercial paper, are stated at fair value.
Concentration of Credit Risk – Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash, cash equivalents, short-term investments and accounts receivable. The Company places its cash, cash equivalents and short-term investments at financial institutions that management believes are of high credit quality. The Company is exposed to credit risk in the event of default by the financial institutions holding the cash and cash equivalents to the extent such amounts are in excess of the federally insured limits. The Company has not experienced any losses on its deposits since inception.
The primary focus of the Company’s investment strategy is to preserve capital and meet liquidity requirements. The Company’s investment policy addresses the level of credit exposure by limiting the concentration in any one corporate issuer or sector and establishing a minimum allowable credit rating. The Company generally requires no collateral from its customers.
Accounts Receivable – Accounts receivable arise from the Company’s royalty revenue receivable for sales, net of estimated returns, of Inavir and Relenza, and from its contracts with customers and with the Department of Health and Human Services, Office of Biomedical Advanced Research and Development Authority (“HHS BARDA”) (see Note 6), and are reported at amounts expected to be collected in future periods. An allowance for uncollectible accounts will be recorded based on a combination of historical experience, aging analysis, and information on specific accounts, with related amounts recorded as a reserve against revenue recognized. Account balances will be written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company has provided no allowance for uncollectible accounts as of December 31, 2020 and 2019.
Property and Equipment – Property and equipment is carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets. Depreciation begins at the time the asset is placed in service. Maintenance and repairs are charged to operations as incurred. Upon sale or retirement of assets, the cost and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss is reflected in other income and (expenses) in the period realized.
The useful lives of the property and equipment are as follows:
Laboratory equipment (in years) 5
Office and computer equipment (in years) 3
Leasehold improvements Shorter of remaining lease term or estimated useful life
110
Table of Contents
VAXART, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Intangible Assets – Intangible assets comprise developed technology, intellectual property and, until it was considered fully impaired (see Note 5), in-process research and development. Intangible assets are carried at cost less accumulated amortization. Amortization is computed using the straight-line method over useful lives ranging from 1.3 to 11.75 years for developed technology and 20 years for intellectual property. In-process research and development is considered to be indefinite-lived and is not amortized, but is subject to impairment testing. The Company assessed its in-process research and development as fully impaired in the year ended December 31, 2018 (see Note 5).
Impairment of Long-Lived Assets – The Company reviews its long-lived assets, including property and equipment and intangible assets with finite lives, for impairment whenever events or changes in circumstances indicate the carrying amount of these assets may not be recoverable. Recoverability of these assets is measured by comparison of the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate over its remaining life. When indications of impairment are present and the estimated undiscounted future cash flows from the use of these assets is less than the assets’ carrying value, the related assets will be written down to fair value. The Company assessed leasehold improvements and furniture at its leased offices in Alpharetta, Georgia as impaired in the year ended December 31, 2018 (see Notes 5 and 8). The Company also assessed its manufacturing equipment and its right-of-use asset and leasehold improvements at its manufacturing premises as impaired in the year ended December 31, 2019 (see Note 15).
Accrued Clinical and Manufacturing Expenses – The Company accrues for estimated costs of research and development activities conducted by third-party service providers, which include the conduct of preclinical studies and clinical trials, and contract manufacturing activities. The Company records the estimated costs of research and development activities based upon the estimated amount of services provided and includes the costs incurred but not yet invoiced within other accrued liabilities in the balance sheets and within research and development expense in the consolidated statements of operations and comprehensive loss. These costs can be a significant component of the Company’s research and development expenses.
The Company estimates the amount of services provided through discussions with internal personnel and external service providers as to the progress or stage of completion of the services and the agreed-upon fee to be paid for such services. The Company makes significant judgments and estimates in determining the accrued balance in each reporting period. As actual costs become known, it adjusts its accrued estimates. Although the Company does not expect its estimates to be materially different from amounts actually incurred, its understanding of the status and timing of services performed, the number of subjects enrolled, and the rate of enrollment may vary from its estimates and could result in the Company reporting amounts that are too high or too low in any particular period. The Company’s accrued expenses are dependent, in part, upon the receipt of timely and accurate reporting from contract research organizations and other third-party service providers. To date, the Company has not experienced any material differences between accrued costs and actual costs incurred.
Leases – Effective January 1, 2019, the Company records operating leases as right-of-use assets and operating lease liabilities in its 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 consolidated statement of operations and comprehensive loss. The Company has elected to not separate lease and non-lease components of facilities leases, whereas non-lease components of equipment leases are accounted for separately from lease components.
Convertible Preferred Stock Warrant Liability – The Company has issued certain convertible preferred stock warrants. These warrants were recorded within other accrued liabilities in the consolidated balance sheets at fair value due to down-round protection features contained in the convertible preferred stock into which the warrants were exercisable. At the end of each reporting period, changes in fair value of the warrants since the prior period were recorded as a component of gain or loss on revaluation of financial instruments within other income and (expenses) in the consolidated statements of operations and comprehensive loss. In the event that the terms of the warrant change such that liability accounting is no longer required, the fair value on the date of such change is released to equity.
111
Table of Contents
VAXART, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Revenue Recognition – The Company recognizes revenue when it transfers control of promised goods or services to its customers, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. To determine revenue recognition, the Company performs the following five steps:
(i) identification of the promised goods or services in the contract;
Revenue from royalties earned as a percentage of sales, including milestone payments based on achieving a specified level of sales, where a license is deemed to be the predominant item to which the royalties relate, is recognized as revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied), as required under the sales- and usage-based royalty exception.
Revenue from contracts with customers is recognized ratably, based on costs incurred, as the Company provides promised services to its customers in amounts that reflect the consideration that the Company expects to receive for those services.
The Company performed research and development work under its cost-plus-fixed-fee contract with HHS BARDA. The Company recognizes revenue under research contracts only when a contract has been executed and the contract price is fixed or determinable. Revenue from the HHS BARDA contract is recognized in the period during which the related costs are incurred and the related services are rendered, provided that the applicable conditions under the contract have been met. Costs of contract revenue are recorded as a component of operating expenses in the consolidated statements of operations and comprehensive loss.
Under cost reimbursable contracts, the Company recognizes revenue as allowable costs are incurred and the fixed fee is earned. Reimbursable costs under the contract primarily include direct labor, subcontract costs, materials, equipment, travel, and approved overhead and indirect costs. Fixed fees under cost reimbursable contracts are earned in proportion to the allowable costs incurred in performance of the work relative to total estimated contract costs, with such costs incurred representing a reasonable measurement of the proportional performance of the work completed.
Payments to the Company under cost reimbursable contracts, such as this contract, are provisional payments subject to adjustment upon annual audit by the government. Management believes that revenue for periods not yet audited has been recorded in amounts that are expected to be realized upon final audit and settlement. When the final determination of the allowable costs for any year has been made, revenue and billings may be adjusted accordingly in the period that the adjustment is known.
Research and Development Costs – Research and development costs are expensed as incurred. Research and development costs consist primarily of salaries and benefits, stock-based compensation, consultant fees, third-party costs for conducting clinical trials and the manufacture of clinical trial materials, certain facility costs and other costs associated with clinical trials. Payments made to other entities are under agreements that are generally cancelable by the Company. Advance payments for research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the related services are performed.
Stock-Based Compensation – The Company measures the fair value of all stock-based awards, including stock options, to employees and, since April 1, 2018, to nonemployees, on the grant date and records the fair value of these awards, net of estimated forfeitures, to compensation expense over the service period. Prior to April 1, 2018, the fair value of awards to nonemployees was measured on the date of performance at the fair value of the consideration received or the fair value of the equity instruments issued, whichever was more reliably measured. The fair value of options is estimated using the Black-Scholes valuation model. The expected term of each option is estimated by taking the arithmetic average of its original contractual term and its average vesting term.
112
Table of Contents
VAXART, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Net Income (Loss) Per Share Attributable to Common Stockholders – Basic net income (loss) per share is computed by dividing net income (loss), as adjusted for dividends on the Series B and Series C convertible preferred stock in the period, by the weighted average number of common shares outstanding during the period, without consideration of potential common shares.
Diluted net income (loss) per common share is computed giving effect to all potential dilutive common shares, comprising common stock issuable upon exercise of stock options and warrants. The Company uses the treasury-stock method to compute diluted income (loss) per share with respect to its stock options and warrants. For purposes of this calculation, options and warrants to purchase common stock are considered to be potential common shares and are only included in the calculation of diluted net income per share when their effect is dilutive. In the event of a net loss, the effects of all potentially dilutive shares are excluded from the diluted net loss per share calculation as their inclusion would be antidilutive.
Reclassification
Prior year data is subject to reclassification to conform to current year presentation.
Recently Adopted Accounting Pronouncements
The Company did not adopt any new accounting policies in fiscal 2020.
Recent Accounting Pronouncements
In August 2020, the FASB issued Accounting Standards Update (ASU) 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in an Entity’s Own Equity (Subtopic 815-40). In addition to simplifying the accounting for certain debt and equity instruments, none of which the Company presently has outstanding, this standard update provides guidance on how certain instruments should be treated in the computation of earnings per share. The Company plans to adopt the new guidance effective January 1, 2021. Its adoption will have an immaterial impact on the number of shares used in the computation of year-to-date basic and diluted earnings per share.
The Company has reviewed all other significant newly-issued accounting pronouncements that are not yet effective and concluded that they are either not applicable to its operations or their adoption will not have a material impact on its financial position or results of operations.
113
Table of Contents
VAXART, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
NOTE 3. Business Combination
On February 13, 2018, the Company acquired Aviragen in a reverse merger (see Note 1). On the date of the Merger, Aviragen had in-process research and development as it was conducting a Phase 2 trial, it had previously developed drugs that were licensed to others who brought them to market and it had a workforce that was considered to have the necessary skills, knowledge, and experience to perform a process that, when applied to the in-process research and development, was critical to the ability to convert it into outputs. Based on this evaluation, the Company determined that the Merger should be accounted for as a business combination.
Since the date of the Merger, the results of Aviragen’s operations have been included in the consolidated financial statements. As a result of the acquisition, the Company eliminated the majority of its debt and acquired a significant cash balance in exchange for equity securities.
The total purchase price for Aviragen is summarized as follows (in thousands):
In connection with the Aviragen acquisition, the Company allocated the total purchase consideration to the net assets and liabilities acquired, including identifiable intangible assets, based on their respective fair values at the acquisition date.
The following table summarizes the preliminary allocation of the purchase price to the fair value of the respective assets and liabilities acquired, adjustments made since the acquisition date and the final allocation as of December 31, 2018 (in thousands):
Property and equipment 170 — 170
Intangible assets:
In-process research and development (2) 1,600 — 1,600
Liability related to sale of future royalties (16,300 ) 400 (15,900 )
114
Table of Contents
VAXART, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
NOTE 4. Fair Value of Financial Instruments
Fair value accounting is applied for all financial assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Financial instruments include cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities that approximate fair value due to their relatively short maturities.
Assets and liabilities recorded at fair value on a recurring basis in the balance sheets are categorized based upon the level of judgment associated with inputs used to measure their fair values. The accounting guidance for fair value provides a framework for measuring fair value and requires certain disclosures about how fair value is determined. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance also establishes a three-level valuation hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based upon whether such inputs are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the reporting entity.
The three-level hierarchy for the inputs to valuation techniques is briefly summarized as follows:
Level 1 – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2 – Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and
Level 3 – Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.
The 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 by using inputs that are unobservable in the market.
The Company’s only recurring financial assets that are measured at fair value were $60,005,000, $15,000 and $15,000 held in money market funds and classified as cash equivalents as of December 31, 2020, 2019 and 2018, respectively, with no recurring financial liabilities held at any of those dates or in either of the years ended December 31, 2020 and 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 year ended December 31, 2018 (in thousands):
Convertible Preferred Stock Warrant Liability Total
Issuances — —
Revaluation loss included in loss on revaluation of financial instruments 3 3
Settlements (70 ) (70 )
Balance at December 31, 2018 $ — $ —
NOTE 5. Balance Sheet Components
(a)Cash and Cash Equivalents
Cash and cash equivalents comprises the following (in thousands):
115
Table of Contents
VAXART, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(b)Accounts Receivable
Accounts receivable comprises the following (in thousands):
Customer service contracts – billed — 181
(c)Property and Equipment, Net
Property and equipment, net consists of the following (in thousands):
Office and computer equipment 294 132
Total property and equipment 2,053 669
Less: accumulated depreciation (573 ) (459 )
Property and equipment, net $ 1,480 $ 210
Depreciation expense was $114,000, $504,000 and $476,000 for the years ended December 31, 2020, 2019 and 2018, respectively. Property and equipment and leasehold improvements at one of the Company’s leased premises in California that were used in the Company’s manufacturing operations (see Note 15) were assessed as impaired as of December 31, 2019, and accordingly an impairment charge of $1,152,000 was recorded as a component of restructuring costs within operating expenses. Leasehold improvements and furniture at the Company’s leased premises in Georgia, which has been subleased, commencing in November 2018, for less than the rental that the Company is obligated to pay (see Note 8), were assessed as impaired as of September 30, 2018, and accordingly an impairment charge of $106,000 was recorded as a component of costs of exit from leased premises within operating expenses.
(d) Right-of-Use Assets, Net
Right-of-use assets consist of the following (in thousands):
Office equipment 2 5
The right of use of one of the Company’s leased premises in California used in the Company’s manufacturing operations (see Note 15) was assessed as impaired as of December 31, 2019, and accordingly an impairment charge of $120,000 was recorded as a component of restructuring costs within operating expenses.
(e)Intangible Assets, Net
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. As of December 31, 2020, developed technology and intellectual property had remaining lives of 8.9 and 7.0 years, respectively. Intangible assets consist of the following (in thousands):
Intellectual property 80 80
Less accumulated amortization (5,019 ) (5,087 )
116
Table of Contents
VAXART, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Intangible asset amortization expense was $1,732,000, $2,320,000 and $2,727,000 for the years ended December 31, 2020, 2019 and 2018, respectively. Following the results of Phase 2 trials in June 2018, the in-process research and development was assessed as fully impaired in the three months ended June 30, 2018, with the $1.6 million acquired in the Merger (see Note 3) being charged to operating expenses.
As of December 31, 2020, the estimated future amortization expense by year is as follows (in thousands):
Year Ending December 31, Amount
(f)Other Accrued Liabilities
Other accrued liabilities consist of the following (in thousands):
Accrued clinical and manufacturing expenses 1,772 3,228
Accrued professional and consulting services 777 2
Reserve for return of royalties — 178
NOTE 6. Revenue
Service Contracts with Customers
Contract Balances. Accounts receivable related to service contracts with customers as of December 31, 2020 and 2019, was nil and $181,000, respectively. Contract assets, representing unbilled receivables where revenue has been recognized in advance of customer billings, as of December 31, 2020 and 2019, was $219,000 and $21,000, respectively, which is included in prepaid expenses and other current assets.
Remaining Performance Obligations. Remaining Performance Obligations (“RPO”) comprise deferred revenue plus unbilled contract revenue. As of December 31, 2020 and 2019, there was no deferred revenue and the aggregate amount of RPO was $13,000 and $211,000, respectively, all of which was unbilled contract revenue which is not recorded on the balance sheet. We expect 100% of the balance as of December 31, 2020, to be recognized as revenue within the next three months. Unbilled contract revenue represents non-cancelable contracts under which the Company has an obligation to perform, for which revenue has not yet been recognized in the financial statements and the fixed amounts billable have not yet been invoiced.
U.S. Government HHS BARDA Contract
In September 2015, HHS BARDA awarded the Company a contract to support the advanced development of a more effective and universal influenza vaccine to improve seasonal and pandemic influenza preparedness. On each of May 25 and July 18, 2017, and June 28, 2018, the Company entered into a Modification of Contract with HHS BARDA, the combined effect being to increase the value of the original $14 million contract by $1.7 million and to extend it through September 30, 2018. The modified contract is a cost-plus-fixed-fee contract, which reimburses the Company for allowable direct contract costs plus allowable indirect costs and a fixed-fee, totaling $15.7 million. The Company recognized revenue of $1,344,000 during the year ended December 31, 2018, of which $20,000 was reversed during the year ended December 31, 2019. As of December 31, 2020, the cumulative revenue recorded from inception under the HHS BARDA contract represents $20,000 less than the maximum amount billable under the contract as presently modified, with no further change orders envisaged.
Billings under the contract are based on approved provisional indirect billing rates, which permit recovery of fringe benefits, overhead and general and administrative expenses. Indirect rates as well as allowable costs are subject to audit by HHS BARDA on an annual basis. Management believes that revenues recognized to date have been recorded in amounts that are expected to be realized upon final audit and settlement. When the final determination of the allowable costs for any year has been made, revenue and billings may be adjusted accordingly in the period that the adjustments are known and collection is probable. Costs relating to contract acquisition are expensed as incurred. In the three months ended December 31, 2019, the Company reversed $20,000 in revenue that was invoiced late in 2018 to correct prior undercharges but which may never be received, and does not consider any of the revenue recorded as of December 31, 2020, to be at risk of reversal.
117
Table of Contents
VAXART, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Royalty agreements
Aviragen entered into a royalty-bearing research and license agreement with GlaxoSmithKline, plc (“GSK”) in 1990 for the development and commercialization of zanamivir, a neuraminidase inhibitor marketed by GSK as Relenza,to treat influenza. All 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, at which time royalty revenue ceased, although it remained subject to minor adjustments for sales returns and exchange rate differences. Royalty revenue related to Relenza in 2020, 2019, and in the post-Merger period in 2018, was $193,000, $778,000 and $788,000, respectively, representing 7% of net sales in Japan.
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 in Japan, at which time royalty revenue will cease. The royalty revenue related to Inavir recognized in 2020, 2019, and in the post-Merger period in 2018, was $2,769,000, $3,668,000 and $552,000, respectively. In addition, the Company recognized non-cash royalty revenue related to sale of future royalties (see Note 7) of $886,000, $5,030,000 and $1,475,000 in 2020, 2019 and 2018, respectively. Both the royalty revenue and the non-cash royalty revenue related to sale of future royalties have been subjected to a 5% withholding tax in Japan, for which $183,000, $435,000 and $102,000 was included in income tax expense in the years ended December 31, 2020, 2019 and 2018, respectively.
NOTE 7.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 was accounted for as a liability that is being amortized using the effective 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. 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 during the year ended December 31, 2020 (in thousands):
Total liability related to sale of future royalties, start of year $ 16,332
Non-cash royalty revenue paid to HCRP (3,277 )
Non-cash interest expense recognized 1,874
Total liability related to sale of future royalties, end of year 14,929
Current portion (2,779 )
Long-term portion $ 12,150
NOTE 8. Leases
The Company has obtained the right of use for office and manufacturing facilities under six operating lease agreements, one of which has been subleased, and for equipment under an operating lease agreement with an initial term 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 November 2020 under a lease that terminates on September 30, 2025, with no extension option. The Company also obtained the right of use of real estate located in South San Francisco, California, in June 2015 that was scheduled to terminate on April 30, 2020, with a five-year extension option that the Company exercised in July 2019, extending the lease until April 30, 2025. The right of use of these premises was assessed as partially impaired as of December 31, 2019 (see Note 15). Further, the Company obtained, via the Merger in February 2018, the right of use of facilities located in Alpharetta, Georgia, 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 has the right of use of two facilities located in South San Francisco, California, under leases that terminate on July 31, 2021, with no extension options, and the right of use of equipment under a lease that terminates in September 2021. Further, the Company has identified an embedded lease for the rental of facilities in Burlingame, California, within a Statement of Work for the manufacture of bulk vaccine product that is expected to be completed early in 2022.
118
Table of Contents
VAXART, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
As of December 31, 2020, the weighted average discount rate for operating leases with initial terms of more than one year was 9.94% and the weighted average remaining term of these leases was 4.07 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 December 31, 2020 (in thousands):
Year Ending December 31, Amount
Undiscounted total 8,772
Less: imputed interest (1,564 )
Present value of future minimum payments 7,208
Current portion of operating lease liability (2,052 )
Operating lease liability, net of current portion $ 5,156
The Company presently has no finance leases and no future obligations under operating leases for equipment with initial terms of one year or less.
Certain operating lease agreements for facilities include non-lease costs, such as common area maintenance, which are recorded as variable lease costs. Operating lease expenses for the years ended December 31, 2020 and 2019, are summarized as follows (in thousands):
Year Ended December 31,
Lease cost
Short-term lease cost 13 15
Net cash outflows associated with operating leases totaled $1,111,000 and $983,000 in the years ended December 31, 2020 and 2019, respectively.
When the Company subleased its facilities located in Alpharetta, Georgia, for less than it is required to pay under the head lease, it recorded a lease loss charge of $253,000 on the cease-use date in the three months ending December 31, 2018, which, along with the related impairment of property and equipment (see Note 5), was recorded as a component of costs of exit from leased premises within operating expenses.
Liabilities related to costs of exit from leased premises are summarized as follows (in thousands):
Balance as of January 1, 2018 $ —
Costs of exit from leased premises 359
Deferred rent on cease-use date 19
Impairment of property and equipment (106 )
Cash paid, net of receipts (41 )
Accretion charges, included in rent expense 2
Prior to December 31, 2018, rent expense was recognized on a straight-line basis over the noncancelable term of each operating lease and, accordingly, the Company recorded the difference between cash rent payments and the recognition of rent expense as a deferred rent liability, which was included within accrued expenses. Rent expense was $875,000 for the year ended December 31, 2018.
119
Table of Contents
VAXART, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
NOTE 9. Convertible Promissory Notes, Related Parties
On December 10, 2014, the Company entered into a note purchase agreement with certain existing preferred stockholders under which the Company issued convertible promissory notes during December 2014 for total proceeds of $18.4 million.
On November 20, 2015, the Company entered into a second note purchase agreement with certain existing preferred stockholders under which the Company issued convertible promissory notes during November and December 2015 for total proceeds of $11.0 million. These notes were issued with the same terms as the notes issued in 2014.
As the holders of the convertible promissory notes each had an equity ownership in the Company, the convertible promissory notes were considered to be a related-party transaction.
The convertible promissory notes bore interest at a rate of 8.0% per annum.
As of December 31, 2017, the balance of the convertible promissory notes was $35.3 million, comprising principal of $29.4 million plus accrued interest associated with the convertible promissory notes of $6.3 million, offset by unamortized debt discount of $0.4 million. Interest expense related to the convertible promissory notes, including amortization of debt discount, totaled $0.3 million in the year ended December 31, 2018, all related to the 43 days prior to the Merger.
On February 13, 2018, the balance of the convertible promissory notes was $35.6 million, comprising principal of $29.4 million plus accrued interest of $6.6 million, offset by the unamortized debt discount to $0.4 million. On that date, in conjunction with the Merger, the convertible promissory notes were exchanged for 1,571,702 shares of the Company’s common stock which, based on the closing stock price of $9.05, had a value of $14.2 million. The difference of $21.4 million was recorded as a capital contribution.
NOTE 10. 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 bore interest at the 30-day U.S. LIBOR rate plus 6.17%, was evidenced by a secured promissory note and was repayable over four years, with interest only payable over the first 12 months and the balance fully amortized over the subsequent 36 months. The loan was secured by substantially all the Company’s assets, except for intellectual property.
In conjunction with the execution of the Loan Agreement, all the holders of convertible promissory notes signed subordination agreements, under which they agreed to subordinate in favor of Oxford Finance all amounts due under their promissory notes and any security interest in the Company’s property. In addition, the holders of the notes agreed that they would not demand or receive any payment until all amounts owed to Oxford Finance under the Loan Agreement had been fully paid in cash. Upon repayment, an additional final payment equal to $325,000 would be due, which was accreted as interest expense over the term of the loan using the effective-interest method.
In connection with the Loan Agreement, the Company issued a warrant to Oxford Finance to purchase 7,563 shares of its Series C convertible preferred stock at an exercise price of $33.11 per share (the “Warrant”). The fair value of the Warrant at the date of issuance was approximately $134,000 which, along with other initial costs, was recorded as debt discount and was amortized as interest expense over the term of the loan using the effective-interest method.
The Warrant provided that if the share price at the next equity financing was less than the Warrant exercise price, then the Warrant would be for the new class of shares, the exercise price would be the new class share price, and the number of shares would be calculated by dividing $250,000 by the new class share price. Due to this anti-dilution protection, the Company determined that the Warrant needed to be recorded as a liability, and therefore estimated the fair value of the Warrant upon issuance and at each balance sheet date, with any changes in the fair value being recorded within loss on revaluation of financial instruments in other income and (expenses) in the consolidated statements of operations and comprehensive loss.
Due to the antidilution protection, following the Merger, the Warrant was amended to allow the holder to purchase 10,914 shares of common stock at an exercise price of $22.99 per share. Since the amended Warrant contains no non-standard antidilution protections or similar features, the fair value of approximately $70,000 on February 13, 2018, was reclassified to equity (see Note 4).
The annual effective interest rate of the note, including the accretion of the final payment and the amortization of the debt discount, was approximately 10.5%. The Company recorded interest expense related to the Loan Agreement of $311,000 and $526,000 during the years ended December 31, 2019 and 2018, respectively, of which $223,000 and $356,000 was paid, respectively. The note was repaid in full on November 4, 2019. At that date, the unamortized deferred financing costs of $98,000 plus $2,000 reimbursed to Oxford Finance for legal fees were expensed as loss on debt extinguishment within other income and (expenses).
120
Table of Contents
VAXART, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
NOTE 11. Commitments and Contingencies
(a)Purchase Commitments
As of December 31, 2020, the Company had approximately $24.6 million of non-cancelable purchase commitments, principally for contract manufacturing and clinical services which are expected to be paid within the next eighteen months. In addition, the Company has operating lease commitments as detailed in Note 8.
(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 also entered into indemnification agreements with its directors and officers that 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 legal proceedings 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, is not material to its consolidated financial condition or cash flows. However, any current or future dispute resolution or legal proceeding, regardless of the merits of any such proceeding, could result in substantial costs and a diversion of management’s attention and resources that are needed to run the Company successfully, and could have a material adverse impact on its business, financial condition and results of operations.
On August 4, 2020, a purported shareholder derivative complaint was filed in the Superior Court of California, San Mateo County, entitled Godfrey v. Latour, et al. An amended complaint was filed on September 4, 2020, and the case was re-named Ennis v. Latour, et al. A second amended complaint was filed on November 25, 2020. The second amended complaint names certain of Vaxart’s officers and directors as defendants, asserting claims against them for breach of fiduciary duty, unjust enrichment, and waste and seeking, among other things, an award of unspecified damages, certain equitable relief, and attorneys’ fees and costs. The complaint also asserts claims for breach of fiduciary duty, unjust enrichment, and aiding and abetting breach of fiduciary duty against Armistice Capital, LLC (“Armistice”). The claims challenge certain stock options granted to certain of the Company’s officers and directors between March 24, 2020 and June 15, 2020 and certain amendments to two warrants held by Armistice, as disclosed on June 8, 2020. The second amended complaint purports to bring the lawsuit derivatively on behalf of and for the benefit of the Company and names the Company as a “nominal defendant” against which no damages are sought. On December 30, 2020, all defendants in the action filed a demurrer with the court addressing the second amended complaint, seeking to have the entire case dismissed.
On September 8, 2020, a purported shareholder derivative complaint was filed in the Chancery Court in the State of Delaware, entitled Galjour v. Floroiu, et al. On October 20, 2020, a purported shareholder derivative and class action complaint, entitled Jaquith v. Vaxart, Inc., was filed in the Court of Chancery of the State of Delaware. The complaints name as defendants certain of Vaxart’s current and former directors, asserting claims against them for breach of fiduciary duty, unjust enrichment, and waste and seeking, among other things, an award of unspecified damages, certain equitable relief, and attorneys’ fees and costs. The complaints also assert claims against Armistice. The complaints challenge certain stock options granted to certain of the Company’s officers and directors between March 24, 2020 and June 15, 2020 and certain amendments made to two warrants held by Armistice, as disclosed on June 8, 2020. Both complaints purport to bring suit derivatively on behalf of and for the benefit of the Company, and the Jaquith complaint also purports to assert a direct claim for breach of fiduciary duty on behalf of a class of Vaxart stockholders. Both complaints name the Company as a “nominal defendant” against which no claims are asserted and no damages are sought. On October 9, 2020, all defendants moved to dismiss the Galjour complaint and to stay the action pending disposition of the Ennis action in California. On November 12, 2020, the Galjour and Jaquith actions were consolidated under the caption In re Vaxart, Inc. Stockholder Litigation and the complaint filed in the Jaquith v. Latour action was deemed the operative pleading. On January 4, 2021, all defendants filed motions to dismiss, seeking to have the case dismissed.
On September 17, 2020, a purported derivative complaint was filed in the U.S. District Court for the Northern District of California, entitled Stachowski v. Boyd, et al. The complaint names as defendants certain of Vaxart’s current directors, asserting claims against them for breach of fiduciary duty and unjust enrichment and seeking, among other things, an award of unspecified damages, certain equitable relief, and attorneys’ fees and costs. The complaint also alleges a violation of §14(a) of the Securities Exchange Act of 1934 for allegedly false statements or omissions in the Company’s April 24, 2020, proxy statement regarding the Company’s options practices. The complaint also asserts a claim for breach of fiduciary duty against Armistice. The claims are based on allegations that certain stock options granted to certain of the Company’s officers and directors between March 24, 2020 and June 15, 2020, were allegedly improper and that certain warrants held by Armistice were amended on June 8, 2020, allegedly for no consideration. The complaint purports to bring the lawsuit derivatively on behalf of and for the benefit of the Company and names the Company as a “nominal defendant” against which no claims are asserted and no damages are sought. On November 13, 2020, plaintiffs voluntarily withdrew their claims and the case was dismissed.
121
VAXART, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Two substantially similar securities class actions were filed in the U.S. District Court for the Northern District of California, the first, titled Himmelberg v. Vaxart, Inc. et al. was filed on August 24, 2020 (the “Himmelberg Action”), and the second action, titled Hovhannisyan v. Vaxart, Inc. et al. was filed on September 1, 2020 (the “Hovhannisyan Action,” and together, the “Putative Class Actions”). On September 17, 2020, the court issued an order that the Putative Class Actions were related and would proceed as one consolidated action. On December 9, 2020, the court appointed the lead plaintiffs and lead plaintiffs’ counsel and on January 29, 2021, the lead plaintiffs filed their consolidated amended complaint. The consolidated amended complaint names as defendants certain of Vaxart’s current and former executive officers and directors, and Armistice. It claims two violations of federal civil securities laws, violation of SEC Rule 10b-5, as against all defendants; violation of Section 20(a) of the Exchange Act, as against all defendants except for Vaxart; and violation of Section 20A of the Exchange Act against Armistice. The consolidated amended complaint alleges that the defendants violated securities laws by misstating and omitting information regarding the Company’s development of a norovirus vaccine, the vaccine manufacturing capabilities of a business counterparty, as well as the Company’s Operation Warp Speed (“OWS”) involvement to deceive the investing public and inflate Vaxart’s stock price. The consolidated amended complaint seeks to be certified as a class action for similarly situated shareholders and seek, among other things, an uncertain amount of damages and attorneys’ fees and costs.
On October 23, 2020, a purported shareholder derivative complaint was filed in the U.S. District Court for the Southern District of New York, entitled Roth v. Armistice Capital LLC, et al. The complaint names Armistice and an Armistice-affiliated Company director as defendants, asserting a violation of Exchange Act Section 16(b) and seeking the disgorgement of short-swing profits obtained in violation thereof. The complaint purports to bring the lawsuit derivatively on behalf of and for the benefit of the Company and names the Company as a “nominal defendant” against which no damages are sought.
On January 8, 2021, a purported shareholder, Phillip Chan, commenced a pro se lawsuit in the U.S. District Court for the Northern District of California titled Chan v. Vaxart, Inc. et al. (the “Opt-Out Action”). This complaint is nearly identical to an earlier version of the complaint filed in the Putative Class Actions, naming the same defendants, certain of Vaxart’s current and former executive officers and directors and Armistice, and asserting identical legal claims relating to the same factual allegations. The complaint asserts two violations of federal civil securities laws, violation of Section 10(b) of the Exchange Act and SEC Rule 10b-5, as against all defendants, and violation of Section 20(a) of the Exchange Act, as against the individual defendants. The Opt-Out Action alleges that the defendants violated securities laws by misstating and omitting information regarding the Company’s development of a Covid-19 vaccine as well as its OWS involvement to deceive the investing public and inflate Vaxart’s stock price.
On February 4, 2021, a purported shareholder, Stephen Barker, commenced a lawsuit in the Delaware Court of Chancery titled Barker v. Vaxart, Inc. et al. The complaint names as defendants the Company and its current board of directors. The complaint asserts a single claim for declaratory relief seeking a declaration that one of the Company’s bylaws, which requires a supermajority vote to remove a Company director from office, is in violation of Delaware General Corporate Law Section 141(k). It does not seek damages.
The Company’s legal costs incurred in its defense against these claims are expensed as incurred.
NOTE 12. Stockholders’ Equity
(a)Convertible Preferred Stock
The Company is authorized to issue 5,000,000 shares of preferred stock, $0.0001 par value per share. The Company’s board of directors may, without further action by the stockholders, fix the rights, preferences, privileges and restrictions of up to an aggregate of 5,000,000 shares of preferred stock in one or more series and authorize their issuance. These rights, preferences and privileges could include dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of such series, any or all of which may be greater than the rights of our common stock. The issuance of preferred stock could adversely affect the voting power of holders of common stock and the likelihood that such holders will receive dividend payments and payments upon liquidation. In addition, the issuance of preferred stock could have the effect of delaying, deterring or preventing a change of control or other corporate action.
No shares of preferred stock are currently outstanding, and the Company has no present plan to issue any shares of preferred stock. Prior to February 13, 2018, there were three classes of convertible preferred stock outstanding, all of which were converted into common stock in conjunction with the Merger (see Note 1). Significant provisions of the convertible preferred stock were as follows:
Series C – Shares of series C convertible preferred stock were issued in 2013 for net proceeds of $20.0 million. The holders of Series C convertible preferred stock were entitled to receive non-compounding cumulative dividends, in preference to any dividends payable to holders of Series B and Series A convertible preferred stock or common stock, at an annual dividend rate of 8%. Dividends accumulated from the date of issuance and were payable, whether or not declared, before any dividend on Series B and Series A convertible preferred stock or common stock could be paid or declared. Since no dividends were ever declared, holders were entitled to receive additional shares of common stock on conversion. As of February 13, 2018, when the convertible preferred stock was converted into common stock, accumulated and undeclared dividends for Series C convertible preferred stock were $7.3 million, of which $188,000 related to the pre-Merger period in 2018. On February 13, 2018, in conjunction with the Merger, the Series C convertible preferred stock and the related accumulated dividends were converted into 696,028 and 253,851 shares of common stock, respectively.
122
VAXART, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Series B – Shares of series B convertible preferred stock were issued between 2009 and 2014 for net proceeds of $16.0 million. The holders of Series B convertible preferred stock were entitled to receive non-compounding cumulative dividends, in preference to any dividends payable to holders of Series A convertible preferred stock or common stock, at the annual dividend rate of 8%. Dividends accumulated from the date of issuance and were payable, whether or not declared, before any dividend on Series A convertible preferred stock or common stock could be paid or declared. Since no dividends were ever declared, holders were entitled to receive additional shares of common stock on conversion. As of February 13, 2018, when the convertible preferred stock was converted into common stock, accumulated and undeclared dividends for Series B convertible preferred stock were $7.6 million, of which $151,000 related to the pre-Merger period in 2018. On February 13, 2018, in conjunction with the Merger, the Series B convertible preferred stock and the related accumulated dividends were converted into 599,259 and 265,340 shares of common stock, respectively.
Series A – Shares of series A convertible preferred stock were issued between 2007 and 2012 for net proceeds of $2.9 million. The holders of Series A convertible preferred stock were entitled to receive noncumulative dividends, in preference to any dividends payable to holders of common stock, if declared by the board of directors. No dividends were ever declared. On February 13, 2018, in conjunction with the Merger, the Series A convertible preferred stock was converted into 104,065 shares of common stock.
(b)Common Stock
Except as otherwise required by law or as otherwise provided in any certificate of designation for any series of preferred stock, the holders of common stock possess all voting power for the election of the Company’s directors and all other matters requiring stockholder action. Holders of common stock are entitled to one vote per share on matters to be voted on by stockholders. Holders of common stock are entitled to receive such dividends, if any, as may be declared from time to time by the Company’s board of directors in its discretion out of funds legally available therefore. In no event will any stock dividends or stock splits or combinations of stock be declared or made on common stock unless the shares of common stock at the time outstanding are treated equally and identically. As of December 31, 2020, 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 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:
(c)Warrants
The Company has the following warrants outstanding as of December 31, 2020, 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:
123
VAXART, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
The aggregate fair value at issuance of the warrants issued to the placement agents’ designees at the closing of the March 2019 Offering and the March 2020 Offering and to the underwriters’ designees at the closing of the April 2019 Offering and the September 2019 Offering (see Note 1) were estimated to be $100,000, $453,000, $333,000 and $497,000, respectively, using the Black-Scholes valuation model and using parameters and assumptions tabulated as follows:
Dividend yield — % — % — % — %
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 the unexercised common stock warrants exercisable for $0.30, $0.375, $1.10 and $2.50 and those exercisable for $3.125 expiring in February 2025 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.
NOTE 13. Equity Incentive Plans
Prior to the Merger, Private Vaxart issued equity awards for compensation purposes to employees, directors and consultants under the Company’s 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 their previous plans became available for issuance under the 2016 Plan if such awards are forfeited or otherwise terminated. Under the 2016 Plan, the Company was authorized to issue incentive stock options (“ISOs”), non-qualified stock options (“NQSOs”), restricted stock (“RSAs”) and restricted stock units (“RSUs”). Awards have a maximum term of ten years from the grant date and 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 authorized for issuance under the 2019 Plan was initially 1,600,000 shares, which was increased through an amendment to the 2019 Plan adopted by the Company’s stockholders on June 8, 2020, to 8,000,000 (the “Plan Amendment”), subject to standard adjustments 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. Further amendments to the 2019 Plan to increase the share reserve would require stockholder approval. 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.
124
VAXART, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
A summary of stock option transactions in each of the three years ended December 31, 2020, is as follows:
Weighted