Table of Contents



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

  ☑

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

 

For the quarterly period ended June 30, 2020

 

OR

 

  ☐

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

 

For the transition period from                      to                     

 

Commission file number: 001-35285

 

  

Vaxart, Inc.

  

  

(Exact Name of Registrant as Specified in its Charter)

  

 

  

Delaware

  

59-1212264

  

  

(State or other jurisdiction of incorporation or organization)

  

(IRS Employer Identification No.)

  

 

  

385 Oyster Point Boulevard, Suite 9A, South San Francisco, CA 94080

  

(650) 550-3500

  

  

(Address of principal executive offices, including zip code)

  

(Registrant’s telephone number, including area code)

  

 

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

 

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

 

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

 

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☑ 

Smaller reporting company ☑

Emerging growth company ☐

 

 

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

 

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

 

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

 

  

Title of each class

 

Trading symbol

  

Name of each exchange on which registered  

  

Common stock, $0.0001 par value

 

VXRT

  

The Nasdaq Capital Market  

 

The Registrant had 109,201,829 shares of common stock, $0.0001 par value, outstanding as of August 5, 2020.

 



 

 

 

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2020

TABLE OF CONTENTS

 

 

   

Page

Part I

FINANCIAL INFORMATION

1
         
   

Item 1.

Financial Statements (Unaudited)

1
         
     

Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019

1
         
     

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2020 and 2019

2
         
     

Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2020

3
         
      Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2019 4
         
     

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019

5
         
     

Notes to the Condensed Consolidated Financial Statements

7
         
   

Item 2.

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

20
         
   

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30
         
   

Item 4.

Controls and Procedures

30
         
         

Part II

OTHER INFORMATION

31
         
   

Item 1.

Legal Proceedings

31
         
   

Item 1A.

Risk Factors

31
         
   

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

34
         
   

Item 3.

Defaults Upon Senior Securities

34
         
   

Item 4.

Mine Safety Disclosures

34
         
   

Item 5.

Other Information

34
         
   

Item 6.

Exhibits

35
         

SIGNATURES

  36

 

 

 

PART I FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

VAXART, INC. AND SUBSIDIARIES

 

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)

 

 

   

June 30, 2020

   

December 31, 2019

 

Assets

               

Current assets:

               

Cash and cash equivalents

  $ 44,388     $ 13,526  

Accounts receivable

    227       3,619  

Prepaid expenses and other current assets

    1,111       453  
                 

Total current assets

    45,726       17,598  
                 

Property and equipment, net

    345       210  

Right-of-use assets, net

    1,755       1,990  

Intangible assets, net

    16,227       17,093  

Other long-term assets

    137       141  
                 

Total assets

  $ 64,190     $ 37,032  
                 

Liabilities and Stockholders’ Equity

               

Current liabilities:

               

Accounts payable

  $ 1,166     $ 852  

Current portion of operating lease liability

    804       841  

Liability related to sale of future royalties, current portion

    3,150       2,916  

Other accrued liabilities

    6,378       4,565  
                 

Total current liabilities

    11,498       9,174  
                 

Operating lease liability, net of current portion

    1,120       1,472  

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

    11,319       13,416  

Other long-term liabilities

    18       18  
                 

Total liabilities

    23,955       24,080  
                 

Commitments and contingencies (Note 9)

               
                 

Stockholders’ equity:

               

Preferred stock: $0.0001 par value; 5,000,000 shares authorized; none issued and outstanding as of June 30, 2020 and December 31, 2019

           

Common stock: $0.0001 par value; 150,000,000 shares authorized; 96,140,661 and 48,254,994 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively

    10       5  

Additional paid-in capital

    167,160       129,608  

Accumulated deficit

    (126,935 )     (116,661 )
                 

Total stockholders’ equity

    40,235       12,952  
                 

Total liabilities and stockholders’ equity

  $ 64,190     $ 37,032  

 

 

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

 

 

 

 

VAXART, INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except share and per share amounts)

(Unaudited)

 

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2020

   

2019

   

2020

   

2019

 

Revenue:

                               

Revenue from customer service contracts

  $ 92     $     $ 191     $  

Royalty revenue

    193       69       2,962       3,728  

Non-cash royalty revenue related to sale of future royalties

    238       16       272       1,764  
                                 

Total revenue

    523       85       3,425       5,492  
                                 

Operating expenses:

                               

Research and development

    5,114       3,707       6,656       7,536  

General and administrative

    3,896       1,375       5,886       3,401  

Restructuring costs

    39             103        
                                 

Total operating expenses

    9,049       5,082       12,645       10,937  
                                 

Operating loss

    (8,526 )     (4,997 )     (9,220 )     (5,445 )
                                 

Other income and (expenses):

                               

Interest income

    23       34       64       39  

Interest expense

          (97 )           (204 )

Non-cash interest expense related to sale of future royalties

    (446 )     (516 )     (937 )     (1,060 )

Foreign exchange loss, net

    (2 )     (48 )     (2 )     (43 )
                                 

Total other income and (expenses)

    (425 )     (627 )     (875 )     (1,268 )
                                 

Net loss before income taxes

    (8,951 )     (5,624 )     (10,095 )     (6,713 )
                                 

Provision for income taxes

    26       13       179       263  
                                 

Net loss

  $ (8,977 )   $ (5,637 )   $ (10,274 )   $ (6,976 )
                                 

Net loss per share - basic and diluted

  $ (0.12 )   $ (0.39 )   $ (0.15 )   $ (0.64 )
                                 

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

    74,675,131       14,597,446       67,676,138       10,969,473  

 

 

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

 

 

 

VAXART, INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Stockholders’ Equity

For the Three and Six Months Ended June 30, 2020

(In thousands, except share amounts)

(Unaudited)

 

 

                   

Additional

           

Total

 
   

Common Stock

   

Paid-in

   

Accumulated

   

Stockholders’

 
   

Shares

   

Amount

   

Capital

   

Deficit

   

Equity

 
                                         

Three Months Ended June 30, 2020

                                       
                                         

Balances as of March 31, 2020

    72,004,720     $ 7     $ 149,244     $ (117,958 )   $ 31,293  
                                         

Issuance of common stock upon exercise of common stock warrants

    23,981,166       3       14,306             14,309  
                                         

Issuance of common stock upon exercise of stock options

    154,775             98             98  
                                         

Disgorgement of short-swing profits, net of costs

                652             652  
                                         

Stock-based compensation

                2,860             2,860  
                                         

Net loss

                      (8,977 )     (8,977 )
                                         

Balances as of June 30, 2020

    96,140,661     $ 10     $ 167,160     $ (126,935 )   $ 40,235  
                                         
                                         

Six Months Ended June 30, 2020

                                       
                                         

Balances as of January 1, 2020

    48,254,994     $ 5     $ 129,608     $ (116,661 )     12,952  
                                         

Issuance of common stock and common stock warrants in March 2020, net of offering costs of $1,278

    4,000,000             8,722             8,722  
                                         

Issuance of common stock warrants to placement agents’ designees

                453             453  
                                         

Issuance of common stock upon exercise of common stock warrants

    43,707,286       5       24,653             24,658  
                                         

Issuance of common stock upon exercise of stock options

    178,381             116             116  
                                         

Disgorgement of short-swing profits, net of costs

                652             652  
                                         

Stock-based compensation

                2,956             2,956  
                                         

Net loss

                      (10,274 )     (10,274 )
                                         

Balances as of June 30, 2020

    96,140,661     $ 10     $ 167,160     $ (126,935 )   $ 40,235  

 

 

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

 

 

VAXART, INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Stockholders’ Equity

For the Three and Six Months Ended June 30, 2019

(In thousands, except share amounts)

(Unaudited)

 

 

 

                   

Additional

           

Total

 
   

Common Stock

   

Paid-in

   

Accumulated

   

Stockholders’

 
   

Shares

   

Amount

   

Capital

   

Deficit

   

Equity

 
                                         

Three Months Ended June 30, 2019

                                       
                                         

Balances as of March 31, 2019

    8,341,189     $ 1     $ 111,930     $ (99,355 )   $ 12,576  
                                         

Issuance of common stock, pre-funded warrants and common stock warrants in April 2019, net of offering costs of $1,579

    925,455             7,741             7,741  
                                         

Issuance of common stock warrants to underwriters’ designees in April 2019

                333             333  
                                         
Issuance of common stock upon exercise of pre-funded warrants     6,519,091       1       651             652  
                                         

Stock-based compensation

                180             180  
                                         

Net loss

                      (5,637 )     (5,637 )
                                         

Balances as of June 30, 2019

    15,785,735     $ 2     $ 120,835     $ (104,992 )   $ 15,845  
                                         
                                         

Six Months Ended June 30, 2019

                                       
                                         

Balances as of December 31, 2018

    7,141,189     $ 1     $ 109,226     $ (97,989 )   $ 11,238  
                                         

Cumulative effect of adoption of new leases standard

                      (27 )     (27 )
                                         

Balances as of January 1, 2019, as adjusted

    7,141,189     $ 1     $ 109,226     $ (98,016 )   $ 11,211  
                                         

Issuance of common stock in March 2019, net of offering costs of $560

    1,200,000             2,440             2,440  
                                         

Issuance of common stock warrants to placement agents’ designees in March 2019

                100             100  
                                         

Issuance of common stock, pre-funded warrants and common stock warrants in April 2019, net of offering costs of $1,579

    925,455             7,741             7,741  
                                         

Issuance of common stock warrants to underwriters’ designees in April 2019

                333             333  
                                         
Issuance of common stock upon exercise of pre-funded warrants     6,519,091       1       651             652  
                                         

Stock-based compensation

                344             344  
                                         

Net loss

                      (6,976 )     (6,976 )
                                         

Balances as of June 30, 2019

    15,785,735     $ 2     $ 120,835     $ (104,992 )   $ 15,845  

 

 

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

 

4

 

 

VAXART, INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

   

Six Months Ended June 30,

 
   

2020

   

2019

 
                 

Cash flows from operating activities:

               

Net loss

  $ (10,274 )   $ (6,976 )

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

               

Depreciation and amortization

    1,193       2,097  

Stock-based compensation

    2,956       344  

Non-cash interest expense

          64  

Non-cash interest expense related to sale of future royalties

    937       1,060  

Non-cash revenue related to sale of future royalties

    (2,800 )     (3,132 )

Change in operating assets and liabilities:

               

Accounts receivable

    3,392       1,761  

Prepaid expenses and other assets

    (657 )     530  

Accounts payable

    148       (347 )

Other accrued liabilities

    1,376       (371 )
                 

Net cash used in operating activities

    (3,729 )     (4,970 )
                 

Cash flows from investing activities:

               

Purchase of property and equipment

    (13 )     (711 )

Proceeds from sale of equipment

    3        
                 

Net cash used in investing activities

    (10 )     (711 )
                 

Cash flows from financing activities:

               

Net proceeds from issuance of securities in registered direct offering

    9,175       2,540  
Net proceeds from issuance of common stock, pre-funded warrants and common warrants in April 2019 underwritten offering           8,074  
Proceeds from issuance of common stock upon exercise of pre-funded warrants           652  
Proceeds from issuance of common stock upon exercise of common stock warrants     24,658        

Proceeds from issuance of common stock upon exercise of stock options

    116        
Disgorgement of short-swing profits, net of costs     652        

Repayment of principal on secured promissory note payable to Oxford Finance

          (833 )
                 

Net cash provided by financing activities

    34,601       10,433  
                 

Net increase in cash and cash equivalents

    30,862       4,752  
                 

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

    13,526       11,506  
                 

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

  $ 44,388     $ 16,258  

 

 

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

 

 

VAXART, INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

   

Six Months Ended June 30,

 
   

2020

   

2019

 
                 

Supplemental disclosure of cash flow information:

               

Interest paid

  $     $ 136  
                 
                 

Supplemental disclosure of non-cash financing activity:

               

Issuance of warrants to placement agent’s representatives

  $ 453     $ 100  
Issuance of warrants to underwriters’ designees   $     $ 333  

Acquisition of property and equipment included in accounts payable

  $ 170     $ 47  

 

 

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

 

 

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

NOTE 1.  Organization and Basis of Presentation

 

General 

 

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

 

On February 13, 2018, Private Vaxart completed a business combination with Aviragen Therapeutics, Inc. (“Aviragen”), pursuant to which Aviragen merged with Private Vaxart, with Private Vaxart surviving as a wholly-owned subsidiary of Aviragen (the “Merger”). Pursuant to the terms of the Merger, Aviragen changed its name to Vaxart, Inc. (together with its subsidiaries, the “Company” or “Vaxart”) and Private Vaxart changed its name to Vaxart Biosciences, Inc. All of Private Vaxart’s convertible promissory notes and convertible preferred stock was converted into common stock, following which each share of common stock was converted into approximately 0.22148 shares of the Company’s common stock (the “Conversion”).

 

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. 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. 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 10), which was recorded in offering costs.

 

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 condensed consolidated financial statements, all share, equity security and per share amounts are presented to give retroactive effect to these changes.

 

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.

 

 

 
 

NOTE 2.  Summary of Significant Accounting Policies

 

Basis of Presentation – The Company has prepared the accompanying condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to these rules and regulations. These condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and footnotes related thereto for the year ended December 31, 2019, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 19, 2020 (the “Annual Report”). Except as noted below, there have been no material changes to the Company’s significant accounting policies described in Note 2 to the consolidated financial statements included in the Annual Report. In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company’s financial position and the results of its operations and cash flows. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year.

 

 

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

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

 

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

 

Concentration of Credit Risk – Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash, cash equivalents and accounts receivable. The Company places its cash and cash equivalents 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.

 

Reclassification – Prior periods’ data is subject to reclassification to conform to the current presentation. Accordingly, $40,000 and $88,000 that were previously recorded as non-lease costs have been included as variable lease costs and in cash outflows related to leases in the three and six months ended June 30, 2019, respectively. This reclassification had no effect on reported net loss.

 

Recent Accounting Pronouncements

 

The Company believes that the impact of accounting standards updates recently issued that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.

 

 

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

 

NOTE 3.  Fair Value of Financial Instruments

 

Fair value accounting is applied for all financial assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Financial instruments include cash and cash equivalents, 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 held no recurring financial assets that are measured at fair value as of June 30, 2020. The Company held $15,000 in money market funds, classified as cash equivalents, as of December 31, 2019. The Company held no recurring financial liabilities at either date or in the six months ended June 30, 2020 or 2019.

 

 

 

NOTE 4.  Balance Sheet Components

 

 

(a)

Cash and Cash Equivalents 

 

Cash and cash equivalents comprises the following:

 

   

June 30, 2020

   

December 31, 2019

 
   

(in thousands)

 

Cash at banks

  $ 44,388     $ 13,511  

Money market funds

          15  
Total cash and cash equivalents   $ 44,388     $ 13,526  

 

 

 

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

 

(b)

Accounts Receivable 

 

Accounts receivable comprises the following:

   

June 30, 2020

   

December 31, 2019

 
   

(in thousands)

 

Royalties receivable

  $ 227     $ 3,438  

Customer service contracts - billed

          181  

Accounts receivable

  $ 227     $ 3,619  

 

The Company has provided no allowance for uncollectible accounts as of June 30, 2020 and December 31, 2019.

 

 

(c)

Property and Equipment, Net

 

Property and equipment, net consists of the following:

 

   

June 30, 2020

   

December 31, 2019

 
   

(in thousands)

 

Laboratory equipment

  $ 706     $ 537  

Office and computer equipment

    142       132  

Total property and equipment

    848       669  

Less: accumulated depreciation

    (503 )     (459 )

Property and equipment, net

  $ 345     $ 210  

 

Depreciation expense was $25,000 and $125,000 for the three months ended June 30, 2020 and 2019, respectively, and $44,000 and $255,000 for the six months ended June 30, 2020 and 2019, respectively. There were no impairments of the Company’s property and equipment recorded in the six months ended June 30, 2020 or 2019.

 

 

(d)

Right-of-Use Assets, Net

 

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

   

June 30, 2020

   

December 31, 2019

 
   

(in thousands)

 

Facilities

  $ 1,751     $ 1,985  

Office equipment

    4       5  

Right-of-use assets, net

  $ 1,755     $ 1,990  

 

 

(e)

Intangible Assets, Net

 

Intangible assets comprise developed technology and intellectual property. 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 June 30, 2020, developed technology and intellectual property had remaining lives of 9.4 and 7.5 years, respectively. Intangible assets consist of the following:

 

   

June 30, 2020

   

December 31, 2019

 
   

(in thousands)

 

Purchased technology

  $ 22,100     $ 22,100  

Intellectual property

    80       80  

Total cost

    22,180       22,180  

Less: accumulated amortization

    (5,953 )     (5,087 )

Intangible assets, net

  $ 16,227     $ 17,093  

 

Total amortization expense for the three months ended June 30, 2020 and 2019, was $433,000 and $675,000, respectively, and for the six months ended June 30, 2020 and 2019, was $866,000 and $1,454,000, respectively. 

 

 

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

As of June 30, 2020, the estimated future amortization expense by year is as follows (in thousands):

 

Year Ending December 31,

 

Amount

 

2020 (six months remaining)

  $ 866  

2021

    1,732  

2022

    1,731  

2023

    1,732  

2024

    1,732  

Thereafter

    8,434  

Total

  $ 16,227  

 

 

(f)

Other Accrued Liabilities

 

Other accrued liabilities consist of the following:

 

   

June 30, 2020

   

December 31, 2019

 
   

(in thousands)

 

Accrued compensation

  $ 1,009     $ 903  

Accrued clinical and manufacturing expenses

    4,937       3,228  

Accrued professional and consulting services

    49       2  

Reserve for return of royalties

          178  

Other liabilities, current portion

    383       254  
                 

Total

  $ 6,378     $ 4,565  

 

 

 

NOTE 5.  Revenue

 

Service Contracts with Customers

 

Contract Balances. Accounts receivable related to service contracts with customers as of June 30, 2020 and December 31, 2019, was nil and $181,000, respectively. Contract assets, representing unbilled receivables where revenue has been recognized in advance of customer billings, as of June 30, 2020 and December 31, 2019, was $212,000 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 June 30, 2020 and December 31, 2019, there was no deferred revenue and the aggregate amount of RPO was $20,000 and $211,000, respectively, all of which was unbilled contract revenue which is not recorded on the balance sheet. We expect 100% of this amount 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.

 

Royalty Agreements

 

Aviragen entered into a royalty-generating 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. Under the agreement, all Relenza patents owned by the Company were exclusively licensed to GSK.  All of the Company’s Relenza patents have expired, with the last remaining patent expiring in July 2019 in Japan, at which time royalty revenue ceased, although until April 30, 2020, it remained subject to adjustments for sales returns and exchange rate differences. The royalty revenue related to Relenza recognized in the three months ended June 30, 2020 and 2019, was $193,000 and $69,000, respectively, and in the six months ended June 30, 2020 and 2019, was $193,000 and $764,000, respectively, representing 7% of net sales in Japan.

 

 

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

The Company also generates royalty revenue from the sale of Inavir in Japan, pursuant to a collaboration and license agreement that Aviragen entered into with Daiichi Sankyo Company, Limited (“Daiichi Sankyo”) in 2009. In September 2010, laninamivir octanoate was approved for sale by the Japanese Ministry of Health and Welfare for the treatment of influenza in adults and children, which Daiichi Sankyo markets as Inavir. Under the agreement, the Company currently receives a 4% royalty on net sales of Inavir in Japan. The last patent related to Inavir is set to expire in December 2029, at which time royalty revenue will cease. The royalty revenue related to Inavir recognized in the six months ended June 30, 2020 and 2019, was $2,769,000 and $2,964,000, respectively, representing 4% of net sales in Japan. In addition, the Company recognized non-cash royalty revenue related to the sale of future royalties (see Note 6) of $238,000 and $16,000 in the three months ended June 30, 2020 and 2019, respectively, and $272,000 and $1,764,000 in the six months ended June 30, 2020 and 2019, 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 $12,000 and $1,000 was included in income tax expense in the three months ended June 30, 2020 and 2019, respectively, and $152,000 and $237,000 was included in income tax expense in the six months ended June 30, 2020 and 2019, respectively.

 

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

 

 

 

NOTE 6. Liabilities Related to Sale of Future Royalties

 

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

 

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

 

The following table shows the activity within the liability account during the six months ended June 30, 2020 (in thousands):

 

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

  $ 16,332  

Non-cash royalty revenue paid to HCRP

    (2,800 )

Non-cash interest expense recognized

    937  

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

    14,469  

Current portion

    (3,150 )

Long-term portion

  $ 11,319  

 

 

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

 

NOTE 7.  Leases

 

The Company has obtained the right of use for office and manufacturing facilities under four 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 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 14). The Company also 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.

 

As of June 30, 2020, the weighted average discount rate for operating leases with initial terms of more than one year was 10.53% and the weighted average remaining term of these leases was 3.55 years. Discount rates were determined using the Company’s marginal rate of borrowing at the time each lease was executed or extended.

 

The following table summarizes the Company’s undiscounted cash payment obligations for its operating lease liabilities with initial terms of more than twelve months as of June 30, 2020 (in thousands):

 

Year Ending December 31,

       
2020 (excluding the six months ended June 30, 2020)   $ 526  

2021

    620  

2022

    336  
2023     348  
2024     360  
Thereafter     122  

Undiscounted total

    2,312  

Less: imputed interest

    (388 )

Present value of future minimum payments

    1,924  

Current portion of operating lease liability

    (804 )

Operating lease liability, net of current portion

  $ 1,120  

 

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 three and six months ended June 30, 2020 and 2019, are summarized as follows:

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2020

   

2019

   

2020

   

2019

 

Lease cost

 

(in thousands)

   

(in thousands)

 

Operating lease cost

  $ 212     $ 222     $ 401     $ 445  

Short-term lease cost

    3       4       6       7  

Variable lease cost

    13       40       24       88  

Sublease income

    (55 )     (55 )     (109 )     (109 )

Total lease cost

  $ 173     $ 211     $ 322     $ 431  

 

Net cash outflows associated with operating leases totaled $237,000 and $240,000 in the three months ended June 30, 2020 and 2019, respectively, and $474,000 and $487,000 in the six months ended June 30, 2020 and 2019, respectively.

 

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

 

NOTE 8.  Secured Promissory Note Payable to Oxford Finance

 

On December 22, 2016, the Company entered into a loan and security agreement (the “Loan Agreement”) with Oxford Finance, under which the Company borrowed $5.0 million. The $5.0 million loan, which bore interest at the 30-day U.S. LIBOR 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. Upon repayment, an additional final payment equal to $325,000 was due, which was accreted as interest expense over the term of the loan using the effective-interest method. The loan was secured by substantially all the Company’s assets, except for intellectual property.

 

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 $96,000 and $202,000 during the three and six months ended June 30, 2019, respectively, of which $64,000 and $136,000, respectively, was paid. The note was repaid in full on November 4, 2019.

 

 

 

NOTE 9. Commitments and Contingencies

 

 

(a)

Leases

 

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

 

 

(b)

Indemnifications

 

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

 

 

(c)

Litigation

 

From time to time the Company may be involved in 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 successfully run our business, and could have a material adverse impact on our 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. The complaint names 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 damages and attorneys’ fees and costs. The complaint also asserts a claim for aiding and abetting breach of fiduciary duty against Armistice Capital, LLC (“Armistice”). The claims are based on allegations that certain stock options issued to the Company’s officers and directors between June 8, 2020 and June 15, 2020 were manipulated and that certain warrants held by Armistice were amended on June 8, 2020 for no consideration. The complaint purports to bring the lawsuit on behalf of and for the benefit of the Company and names Vaxart as a “nominal defendant” against which no damages are sought. The Company believes that the allegations in the complaint are without merit.  As of the time of this filing, the Company has not been served with the complaint.

 

 

 

NOTE 10.  Stockholders’ Equity

 

 

(a)

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 the Company’s common stock. The issuance of preferred stock could adversely affect the voting power of holders of common stock and the likelihood that such holders will receive dividend payments and payments upon liquidation. In addition, the issuance of preferred stock could have the effect of delaying, deterring or preventing a change of control or other corporate action. No shares of preferred stock are currently outstanding, and we have no present plan to issue any shares of preferred stock.

 

 

14

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

 

(b)

Common Stock

 

At the Company’s annual meeting of stockholders held on June 8, 2020, the Company’s shareholders approved an amendment to the Company’s certificate of incorporation to increase the authorized number of shares of common stock from 100,000,000 shares to 150,000,000 shares and decrease the par value of the Company’s capital stock from $0.10 to $0.0001. On June 8, 2020, the Company filed a Certificate of Amendment with the Secretary of State of the State of Delaware to effect the amendment.

 

Except as otherwise required by law or as otherwise provided in any certificate of designation for any series of preferred stock, the holders of common stock possess all voting power for the election of the Company’s directors and all other matters requiring stockholder action. Holders of common stock are entitled to one vote per share on matters to be voted on by stockholders. Holders of common stock are entitled to receive such dividends, if any, as may be declared from time to time by the Company’s board of directors in its discretion out of funds legally available therefore. In no event will any stock dividends or stock splits or combinations of stock be declared or made on common stock unless the shares of common stock at the time outstanding are treated equally and identically. As of June 30, 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 of the Company’s assets of whatever kind available for distribution to stockholders, after the rights of the holders of the preferred stock have been satisfied. There are no sinking fund provisions applicable to the common stock.

 

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

 

   

June 30, 2020

   

December 31, 2019

 
                 

Options issued and outstanding

    6,382,232       1,811,652  
PRSUs issued and outstanding     411,000        

Available for future grants of equity awards

    1,620,028       295,180  

Common stock warrants

    1,942,654       43,370,162  

Total

    10,355,914       45,476,994  

 

 

(c)

Warrants

 

The following warrants were outstanding as of June 30, 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:

 

Securities into which warrants are convertible

 

Warrants outstanding

 

Exercise Price

 

Expiration Date

             

Common Stock

 

171,667

 

$

0.30

 

September 2024

Common Stock

 

241,169

 

$

0.375

 

September 2024

Common Stock

 

225,966

 

$

1.10

 

April 2024

Common Stock

 

163,068

 

$

1.375

 

April 2024

Common Stock

 

766,584

 

$

2.50

 

March 2025

Common Stock

 

280,000

 

$

3.125

 

February 2025

Common Stock

 

83,286

 

$

3.125

 

March 2024

Common Stock

 

10,914

 

$

22.99

 

December 2026

Total

 

1,942,654

         

 

The 280,000 common stock warrants issued to placement agents’ designees at the closing of the March 2020 Offering (see Note 1) each entitle the holder to purchase one share of common stock for $3.125 at any time within five years of February 27, 2020, the effective date of the March 2020 Offering. The aggregate fair value of these warrants at issuance was estimated to be $453,000, using the Black-Scholes valuation model, using a closing stock price of $2.34 and assumptions including estimated volatility of 98%, a risk-free interest rate of 0.88%, a zero dividend rate and an estimated remaining term of 4.99 years.

 

In the event of a Fundamental Transaction (a transfer of ownership of the Company as defined in the warrant) within the Company’s control, the holders of 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.

 

 

15

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

 

NOTE 11.  Equity Incentive Plans

 

On April 23, 2019, the Company’s stockholders approved the adoption of the 2019 Equity Incentive Plan (the “2019 Plan”), under which the Company is authorized to issue ISOs, NQSOs, stock appreciation rights, RSAs, RSUs, other stock awards and performance awards that may be settled in cash, stock, or other property. The 2019 Plan is designed to secure and retain the services of employees, directors and consultants, provide incentives for the Company’s employees, directors and consultants to exert maximum efforts for the success of the Company and its affiliates, and provide a means by which employees, directors and consultants may be given an opportunity to benefit from increases in the value of the Company’s common stock. Following adoption of the 2019 Plan, all previous plans were frozen, and on forfeiture, cancellation and expiration, awards under those plans are not assumed by the 2019 Plan.

 

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.

 

In March 2020, the Company granted 411,000 performance-based restricted stock unit (“PRSU”) awards to employees which vest upon the achievement of certain performance conditions, subject to each employee’s continued service relationship with the Company. As of June 30, 2020, all of these 411,000 PRSUs were outstanding. The related compensation cost, which is based on the grant date fair value of the Company’s common stock multiplied by the number of PRSUs granted, is recognized as an expense ratably over the estimated vesting period when achievement of the performance condition is considered probable. Based on the Company’s evaluation of the probability of achieving the performance condition as of June 30, 2020, the Company recognized $531,000 of related expense during the three and six months ended June 30, 2020.

 

A summary of stock option transactions in the six months ended June 30, 2020, is as follows:

                   

Weighted

 
   

Shares

   

Number of

   

Average

 
   

Available

   

Options

   

Exercise

 
   

For Grant

   

Outstanding

   

Price

 
                         

Balance at January 1, 2020

    295,180       1,811,652     $ 2.74  
2019 Plan Amendment     6,400,000                  
PRSUs granted, net of tax forfeitures     (278,535 )         $  
Granted     (4,892,100 )     4,892,100     $ 2.04  
Exercised           (178,381 )   $ 0.65  
Forfeited     85,910       (85,992 )   $ 0.39  

Canceled

    9,573       (57,147 )   $ 10.50  
                         

Balance at June 30, 2020

    1,620,028       6,382,232     $ 2.22  

 

As of June 30, 2020, there were 6,382,232 options outstanding with a weighted average exercise price of $2.22, a weighted average remaining term of 9.37 years and an aggregate intrinsic value of $43.1 million. Of these options, 1,431,750 were vested, with a weighted average exercise price of $3.22, a weighted average remaining term of 8.31 years and an aggregate intrinsic value of $8.8 million. The Company received $116,000 for the 178,381 options exercised during the six months ended June 30, 2020, which had an intrinsic value of $524,000. No options were exercised during the six months ended June 30, 2019.

 

On March 24, 2020, the board of directors of the Company approved the grant of an aggregate of 2,610,000 options with an exercise price of $1.70 per share (the closing price of the Company’s common stock on March 24, 2020) (the “March Option Awards”), which vests as to 25% of the underlying shares of common stock on the date of grant and thereafter in twenty-four (24) equal monthly installments thereafter; provided that the stock options were not exercisable until the approval by the stockholders of an amendment to the 2019 Plan. On June 8, 2020, the stockholders approved the Plan Amendment and at such time the March Option Awards became exercisable, subject to the vesting schedule noted previously.

 

On June 15, 2020, the Company awarded 900,000 performance-based options and 845,280 time-based options with an exercise price of $2.46 per share (the closing price of the Company’s common stock on the grant date) to its new Chief Executive Officer. Vesting of the time-based options will be as follows: 25% on the first anniversary of the Grant Date and 75% in equal monthly installments over the three-year period commencing on such first anniversary, with accelerated vesting with respect to 50% of any then-unvested option shares upon a substantial strategic agreement, as determined by the Board, and with accelerated vesting in full in the event of a “Change in Control” (as defined under the 2019 Plan).

 

16

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

Vesting of the performance-based options would occur if the Company achieved a specified closing price during any ten consecutive trading days by November 30, 2020, with one-third based on a closing price of $5.00, one-third based on a closing price of $7.50 and one-third based on a closing price of $10.00, subject to continuing employment. Utilizing a Monte Carlo Simulation and assumptions of the fair value of Common Stock of $2.46, estimated volatility of 105%, a risk-free interest rate of 0.35%, a zero dividend rate and an expected term of 5.23 years, the Company determined the weighted average fair value of these options on the issuance date to be $0.31 per share, or $279,000, which was initially being expensed over the estimated vesting term, assuming vesting occurs by November 30, 2020, for each tranche.

 

The tranches based on closing prices of $5.00, $7.50 and $10.00 vested on July 9, 2020, July 20, 2020 and July 24, 2020, respectively, so the unamortized balance of $242,000 will be expensed in the three months ending September 30, 2020. The weighted average grant date fair value of all other options awarded in the six months ended June 30, 2020 and 2019, was $1.92 and $0.55, respectively. Fair values were estimated using the following assumptions:

 

 

Six Months Ended June 30,

 

2020

 

2019

       

Risk-free interest rate

0.44% - 0.88%

 

1.89% - 2.31%

Expected term

5.22 - 10.00 Years

 

5.39 - 6.08 Years

Expected volatility

94% - 104%

 

83% - 85%

Dividend yield

—%

 

—%

 

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

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2020

   

2019

   

2020

   

2019

 
   

(in thousands)

   

(in thousands)

 

Research and development

  $ 1,115     $ 80     $ 1,137     $ 159  

General and administrative

    1,745       100       1,819       185  

Total stock-based compensation

  $ 2,860     $ 180     $ 2,956     $ 344  

 

As of June 30, 2020, the unrecognized stock-based compensation cost related to outstanding unvested stock options and PRSUs that are expected to vest was $5.9 million, which the Company expects to recognize over an estimated weighted average period of 2.21 years.

 

 

 

NOTE 12.  Related Party Transaction

 

In April 2020 the Company recorded a net amount of $652,000 related to the disgorgement of stockholder short-swing profits under Section 16(b) of the Securities Exchange Act of 1934, as amended. The Company recognized these related party proceeds as an increase to contributed capital on the condensed consolidated balance sheet.

 

17

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

 

NOTE 13.  Net Loss Per Share

 

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

 

   

Three Months Ended June 30,

   

Three Months Ended June 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Net loss

  $ (8,977 )   $ (5,637 )   $ (10,274 )   $ (6,976 )
                                 

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

    74,675,131       14,597,446       67,676,138       10,969,473  
                                 

Net loss per share – basic and diluted

  $ (0.12 )   $ (0.39 )   $ (0.15 )   $ (0.64 )

 

No adjustment has been made to the net loss in the three and six months ended June 30, 2020 or 2019, as the effect would be anti-dilutive due to the net loss.

 

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

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

2020

 

2019

 

2020

 

2019

               

Options to purchase common stock

2,654,144

 

1,561,067

 

2,216,462

 

1,212,654

               

PRSUs

411,000

 

 

223,566

 

               

Warrants to purchase common stock

23,522,891

 

11,802,695

 

28,729,806

 

5,944,948

               

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

26,588,035

 

13,363,762

 

31,169,834

 

7,157,602

 

 

 

 

VAXART, INC. AND SUBSIDIARIES

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

 

NOTE 14.  Restructuring Costs

 

Restructuring liabilities primarily consist of the estimated future obligations for contract suspension costs. These restructuring liabilities, all of which are expected to be paid in the year ending December 31, 2020, are recorded in other accrued liabilities in the condensed consolidated balance sheets.

 

The Company approved a reduction-in-force during the year ended December 31, 2019, for which it accrued severance and benefits charges, all of which were paid in the three months ended March 31, 2020. The Company also accrued the maximum amount potentially payable under a manufacturing work order which it suspended, recorded impairment charges against property and equipment and right-of-use assets formerly used for manufacturing covering the period in which no benefits were expected to be derived, and incurred legal fees and accretion costs in connection with the restructuring. The Company recorded costs in the six months ended June 30, 2020, for legal fees and for accretion related to the manufacturing premises and expects to record further charges in 2020 for legal fees, broker commissions and accretion and, potentially, further impairment of a right-of-use asset if it is unable to sublease the manufacturing premises, which it is presently using again for a short-term manufacturing project and recording such cost as research and development expense, for as much as it is presently paying, or if subleasing takes longer than expected. The Company has not agreed to pay the full amount accrued with respect to the suspended manufacturing work order and expects to reverse part of the related charge following negotiations with the vendor.

 

Cumulative restructuring costs incurred and a reconciliation of the change in related liabilities during the six months ended June 30, 2020, is as follows:

 

   

Suspension

   

Severance

   

Impairment

                 
   

of Contract

   

Benefits

   

Charges

   

Other

   

Total

 
   

(in thousands)

 
                                         

Cumulative cost incurred as of June 30, 2020

  $ 3,223     $ 368     $ 1,272     $ 160     $ 5,023  
                                         

Reconciliation of liabilities:

                                       

Balance at December 31, 2019

  $ 3,223     $ 368     $     $ 57     $ 3,648  

Period charges

                      103       103  

Payments and settlements

          (368 )           (150 )     (518 )

Balance at June 30, 2020

  $ 3,223     $     $     $ 10     $ 3,233  

 

 

 

NOTE 15.  Subsequent Events

 

On July 13, 2020, the Company completed the sale of 12,503,806 shares for gross proceeds of approximately $100 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, net cash proceeds under the ATM Program were approximately $97 million.

 

Since June 30, 2020, the Company has issued 531,013 shares of common stock upon the exercise of warrants for cash proceeds totaling $1.2 million.

 

 

 

 

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

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on March 19, 2020. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “goal,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential” and similar expressions intended to identify forward-looking statements and reflect our beliefs and opinions on the relevant subject. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in “Risk Factors.” The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date hereof. These statements are based upon information available to us as of the filing date of this Quarterly Report on Form 10-Q , and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

 

Company Overview and Background

 

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

 

We are developing prophylactic vaccine candidates for several targets. These include SARS-CoV-2, a coronavirus currently causing an epidemic throughout the world; norovirus, a widespread cause of acute gastro-intestinal enteritis, for which three Phase 1 human studies have been completed, including a study with a bivalent norovirus vaccine which, as we announced in September, met its primary and secondary endpoints; seasonal influenza, for which our monovalent H1 influenza vaccine protected patients against H1 influenza infection in a recent Phase 2 challenge study; and respiratory syncytial virus, or RSV, a common cause of respiratory tract infections. In addition, we are developing our first therapeutic vaccine targeting cervical cancer and dysplasia caused by human papillomavirus, or HPV.

 

Merger with Aviragen

 

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

 

Business Update Regarding COVID-19

 

The current coronavirus disease 2019 (“COVID-19”) outbreak has presented a substantial public health and economic challenge around the world and is affecting our employees, patients, communities and business operations, as well as the U.S. economy and financial markets. The full extent to which the COVID-19 outbreak will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets.

 

To date, we have been able to continue our operations and do not anticipate any material interruptions, for the foreseeable future. However, we are continuing to assess the potential impact of the COVID-19 pandemic on our business and operations, including our expenses, supply chain and clinical trials. Our office-based employees have been mostly working from home since mid-March 2020 and will continue to do so for the foreseeable future. Our partners have mostly continued to operate their facilities at or near normal levels. While we currently do not anticipate any interruptions in our operations, it is possible that the COVID-19 pandemic and response efforts may have an impact in the future on our operations and/or the operations of our third-party suppliers and partners.

 

Recent Developments

 

On July 13, 2020, we completed the sale of 12,503,806 shares of our common stock for gross proceeds of approximately $100 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, net cash proceeds under the ATM Program were approximately $97 million.

 

Since June 30, 2020, the Company has issued 531,013 shares of common stock upon the exercise of warrants for cash proceeds totaling approximately $1.2 million.

 

20

 

Our Product Pipeline

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

 

1.

Bivalent GI.1 - GII.4 Norovirus vaccine generated IgA ASC response rates of 78 – 86% for GI.1 and 90 – 93% for GII.4. Program on hold pending partnering process.

 

2.

Monovalent H1 flu vaccine completed phase 2 Proof of Concept efficacy study. Quadrivalent flu Phase 1 on hold pending partnering process.

 

3.

Janssen collaboration. Janssen has an option to negotiate an exclusive license.

 

4.

RSV program to be partnered with new antigen partner, pending which the program is on hold.

 

5.

HPV therapeutic pre-IND feedback received. Program presently on hold.

 

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

 

 

Coronavirus Vaccine. We are developing an oral tablet vaccine for coronavirus SARS-CoV-2. We generated multiple vaccine candidates based on the published genome of SARS-CoV-2 and have been evaluating them in preclinical models for their ability to generate both mucosal and systemic immune responses. One of these was chosen for GMP production and additional animal efficacy testing. We believe the logistical advantages of an oral vaccine that is administered using a convenient room temperature stable tablet could be of critical benefit when rolling out a major public health vaccination campaign.

 

According to the Center for Disease Control and Prevention, or CDC, in late 2019 an outbreak of COVID-19, caused by the virus SARS-CoV-2, began in Wuhan, China. The disease spread rapidly and person-to-person transmission has been widely documented. On March 6, 2020, President Trump signed an $8.3 billion emergency spending bill to confront the COVID-19 with the aim of ensuring rapid evaluation and care of patients, limitation of further transmission and the development of treatments. Stay-at-home orders or similar mandates were issued in all 50 states and on March 27, 2020, President Trump signed a $2.2 trillion coronavirus relief bill to mitigate the financial and economic damage caused, with a further $1 trillion relief bill expected to be signed in August. By August 5, 2020, more than 18 million COVID-19 cases had been identified in over 200 countries and territories worldwide, including the United States, where the CDC had reported over 4.7 million infections and 156,000 deaths.

 

On June 26, 2020, we announced that our oral COVID-19 vaccine was selected to participate in a non-human primate challenge study, organized and funded by Operation Warp Speed, a new national program aiming to provide substantial quantities of safe and effective vaccine for Americans by January 2021. The study is designed to test the efficacy of our oral COVID-19 vaccine candidate. Operation Warp Speed is a public-private partnership initiated by the federal government to facilitate, at an unprecedented pace, the development, manufacturing, and distribution of vaccines, therapeutics and other countermeasures to address the COVID-19 epidemic throughout the world. The rules and regulations governing Operation Warp Speed are uncertain and may rapidly evolve as the program progresses, including the procedures and analysis used to select participating companies that will receive federal funds through the program. Our oral COVID-19 vaccine candidate may not prove to be efficacious, and we may be unable to produce an effective vaccine that successfully immunizes humans against SARS-CoV-2 in a timely matter, if at all. In addition, we cannot assure you that Operation Warp Speed will have a positive impact on our financial results. See “Part II, Item 1A. Risks Factors — The regulatory regime governing Operation Warp Speed is uncertain, and new regulations or policies may materially adversely affect our business and the development of our COVID-19 vaccine candidate.”
 

 

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

 

Norovirus is the leading cause of vomiting and diarrhea from acute gastroenteritis among people of all ages in the United States. Each year, on average, norovirus causes 19 to 21 million cases of acute gastroenteritis and contributes to 56,000 to 71,000 hospitalizations and 570 to 800 deaths, mostly among young children and older adults. Typical symptoms include dehydration, vomiting, diarrhea with abdominal cramps, and nausea. In a study by the CDC and Johns Hopkins University, published in 2016, the global economic impact of norovirus disease was estimated at $60 billion, $34 billion of which occurred in high income countries including the United States, Europe and Japan. An update by the lead authors estimated the burden in the U.S. alone to be $10.5 billion in 2018. Virtually all norovirus disease is caused by norovirus GI and GII genotypes, and we are developing a bivalent vaccine designed to protect against both. We anticipate the vaccine will be an annual, one-time administration ahead of the winter season when norovirus incidence is at its peak, similar to the influenza season.

 

21

 

Clinical Trial Update. In 2019, we completed the active phase of a Phase 1 clinical trial with our bivalent oral tablet vaccine for the GI.1 and GII.4 norovirus strains. Both the oral norovirus GI.1 and GII.4 vaccines were well tolerated, with no serious treatment-related adverse events reported. Most solicited and unsolicited adverse events were mild in severity, and there were no significant differences observed between the vaccine and placebo treatment groups.

 

Vaxart’s bivalent vaccine demonstrated robust immunogenicity, with an IgA ASC response rate of 78% for the GI.1 strain and 93% for the GII.4 strain for the bivalent cohort of the study, and 86% and 90%, respectively, for the two monovalent cohorts of the study. There was no interference observed in the bivalent arm of the study.

 

Following a review of the development strategy for norovirus, Vaxart has put all clinical development on hold pending a search for a partner to fund the program. If a partner is found, the next step in the clinical development program would most likely be a Phase 2 safety and dose confirmation study with Vaxart’s bivalent norovirus vaccine in subjects age 18 to 64. The study may be expanded to include subjects age 65 and over. A Phase 2 challenge study may also be considered, and could be conducted in parallel with, before or after the Phase 2 dose confirmation study. The Phase 2 dose confirmation study would be followed by a Phase 3 efficacy study in subjects age 18 and over, assuming FDA concurrence.

 

 

Seasonal Influenza Vaccine. Influenza is a major cause of morbidity and mortality in the U.S. and worldwide and, according to the CDC, only 49% of eligible U.S. citizens were vaccinated in 2018/2019, with particularly low vaccination rates among adults between ages 18 and 49. We believe our oral tablet vaccine has the potential to improve the protective efficacy of currently available influenza vaccines and increase flu vaccination rates.

 

Influenza is one of the most common global infectious diseases, causing mild to life-threatening illness and even death. An estimated 350 million cases of seasonal influenza occur annually worldwide, of which three to five million cases are considered severe, causing 290,000 to 650,000 deaths per year globally. During the flu season of 2018/2019 there were 34,200 flu related deaths in the U.S. alone, according to the CDC. Very young children and the elderly are at the greatest risk. In the United States, between 5% and 20% of the population contracts influenza, 226,000 people are hospitalized with complications of influenza, and between 3,000 and 49,000 people die from influenza and its complications each year, with up to 90% of the influenza-related deaths occurring in adults older than 65. The total economic burden of seasonal influenza has been estimated to be $87.1 billion, including medical costs which average $10.4 billion annually, while lost earnings due to illness and loss of life amount to $16.3 billion annually.

 

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

 

Clinical Trial Update. In September 2018, we completed a $15.7 million contract with the U.S. Government through the Department of Health and Human Services, Office of Biomedical Advanced Research and Development Authority, or HHS BARDA, under which a Phase 2 challenge study of our H1N1 flu vaccine candidate was conducted. Previously, we had announced that, in healthy volunteers immunized and then experimentally infected with H1 influenza, our H1 influenza oral tablet vaccine reduced clinical disease by 39% relative to placebo, a result that was superior to that of Fluzone, the market-leading injectable quadrivalent influenza vaccine, which reduced clinical disease by only 27%. Our tablet vaccine also showed a favorable safety profile, indistinguishable from placebo.

 

On October 4, 2018, we presented data from the study demonstrating that our vaccine elicited a significant expansion of mucosal homing receptor plasmablasts to approximately 60% of all activated B cells, while Fluzone only maintained baseline levels of 20%. We believe these mucosal plasmablasts are a key indicator of a protective mucosal immune response and a unique feature of our vaccines. This data also provided evidence that our vaccines protect through mucosal immunity, the first line of defense against mucosal infections such as flu, norovirus, RSV and others, a potential key advantage over injectable vaccines for these indications.

 

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

 

In addition to our conventional seasonal flu vaccine, we entered into a research collaboration agreement with Janssen Vaccines & Prevention B.V., or Janssen, to evaluate our proprietary oral vaccine platform for the Janssen universal influenza vaccine program. Under the agreement, we produced non-GMP oral vaccine containing certain proprietary antigens from Janssen and tested the product in a preclinical challenge model. The study has been completed and we are compiling a report for Janssen. Janssen has an option to negotiate an exclusive worldwide license to our technology encompassing the Janssen antigens.

 

22

 

 

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

 

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

 

 

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

 

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

 

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

 

In October 2018, we filed a pre-IND meeting request for our first therapeutic vaccine targeting HPV16 and HPV18 with the FDA, and we subsequently submitted a pre-IND briefing package. We received feedback from the FDA in January 2019. The program is currently on hold while the Company is focusing its efforts on the COVID-19 vaccine.
 

Anti-Virals

 

 

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

 

 

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

 

Financial Operations Overview

 

Revenue

 

Revenue from Customer Service Contracts

 

We are earning revenue from a fixed price service contract, as amended, for a total of $617,000, which we expect to complete by September 30, 2020.

 

Royalty Revenue

 

We earn royalty revenue on sales of Inavir and, until the patent expired, Relenza, both treatments for influenza, from our licensees, Daiichi Sankyo and GSK, respectively, under royalty agreements 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 the Sale of Future Royalties

 

In April 2016, Aviragen sold certain royalty rights related to Inavir in the Japanese market for $20.0 million to HealthCare Royalty Partners III, L.P., or HCRP. At the time of the Merger, the fair value of the estimated future benefit to HCRP was $15.9 million, which we recorded as a liability that we are amortizing using the effective interest method over the remaining estimated life of the arrangement. Even though we did not retain the related royalties under the transaction, as the amounts are remitted to HCRP, we will continue to record revenue related to these royalties until the amount of the associated liability and related interest is fully amortized.

 

23

 

Research and Development Expenses

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

facilities, depreciation and allocated overhead expenses.

 

Our preclinical research activities in the six months ended June 30, 2020, have related principally to COVID-19 and to our customer service contract, whereas in the six months ended June 30, 2019, they related principally to norovirus. Our clinical activities related almost exclusively to norovirus in both years and were not significant in the six months ended June 30, 2020.

 

We expect that research and development expenses will increase in the second half of 2020 as clinical trials for COVID-19 ramp up and manufacturing runs are completed. We expect that the total costs of research and development related to our product candidates will increase significantly over the next several years as we advance our tablet vaccine candidates into and through clinical trials, pursue regulatory approval of our tablet vaccine candidates and prepare for a possible commercial launch, all of which will also require a significant investment in manufacturing and inventory related costs. We are seeking potential partners and collaborators to bear a significant portion of such costs.

 

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

 

General and Administrative Expense

 

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

 

 

 

Results of Operations

 

The following table presents selected items in the condensed consolidated statements of operations and comprehensive loss for the three months ended June 30, 2020 and 2019:

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2020

   

2019

   

2020

   

2019

 
   

(in thousands)

   

(in thousands)

 

Revenue:

                               

Revenue from customer service contracts

  $ 92     $     $ 191     $  

Royalty revenue

    193       69       2,962       3,728  

Non-cash royalty revenue related to sale of future royalties

    238       16       272       1,764  
                                 

Total revenue

    523       85       3,425       5,492  
                                 

Operating expenses:

                               

Research and development

    5,114       3,707       6,656       7,536  

General and administrative

    3,896       1,375       5,886       3,401  

Restructuring costs

    39             103        
                                 

Total operating expenses

    9,049       5,082       12,645       10,937  
                                 

Operating loss

    (8,526 )     (4,997 )     (9,220 )     (5,445 )
                                 

Other income and (expenses):

                               

Interest income

    23       34       64       39  

Interest expense

          (97 )           (204 )

Non-cash interest expense related to sale of future royalties

    (446 )     (516 )     (937 )     (1,060 )

Foreign exchange loss, net

    (2 )     (48 )     (2 )     (43 )
                                 

Total other income and (expenses)

    (425 )     (627 )     (875 )     (1,268 )
                                 

Net loss before income taxes

    (8,951 )     (5,624 )     (10,095 )     (6,713 )
                                 

Provision for income taxes

    26       13       179       263  
                                 

Net loss

  $ (8,977 )   $ (5,637 )   $ (10,274 )   $ (6,976 )

 

Revenue from Customer Service Contracts

 

The following table presents our revenue from customer service contracts for the three and six months ended June 30, 2020 and 2019, respectively:

 

Three Months Ended June 30,

   

Six Months Ended June 30,

 

2020

   

2019

   

% Change

   

2020

   

2019

   

% Change

 

(dollars in thousands)

           

(dollars in thousands)

         
$ 92     $       N/A

 

  $ 191     $       N/A

 

 

We earned revenue from customer service contracts of $92,000 and $191,000 in the three and six months ended June 30, 2020, respectively. This revenue was recognized from a fixed price contract executed in July 2019, as amended, for a total of $617,000, which we expect to be completed by September 30, 2020, enabling us to recognize the remaining $20,000 as revenue. There were no comparable contracts in the six months ended June 30, 2019.

 

 

Royalty Revenue

 

The following table presents our royalty revenue for the three and six months ended June 30, 2020 and 2019, respectively:

 

Three Months Ended June 30,

   

Six Months Ended June 30,

 

2020

   

2019

   

% Change

   

2020

   

2019

   

% Change

 

(dollars in thousands)

           

(dollars in thousands)

         
$ 193     $ 69