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 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
SECon February 24, 2022. 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 in this Quarterly Report on Form 10-Q. 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 we caution investors against unduly relying upon these statements. In all events, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, change in circumstances, future events or otherwise, and you are advised to consult any additional disclosures that we may make directly to you or through reports that we, in the future, may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
Presentation and background of the company
We are a clinical-stage biotechnology company primarily focused on the development of oral recombinant vaccines based on our Vector-Adjuvant-Antigen Standardized Technology ("VAAST") proprietary oral vaccine platform. Our oral vaccines are designed to generate broad and durable immune responses that may protect against a wide range of infectious diseases and may be useful for the treatment of chronic viral infections and cancer. Our investigational vaccines are administered using a room temperature-stable tablet, rather than by injection. We are developing prophylactic vaccine candidates that target a range of infectious diseases, including SARS-CoV-2 (the virus that causes coronavirus disease 2019 ("COVID-19")), norovirus (a widespread cause of acute gastro-intestinal enteritis) and seasonal influenza. We have completed a Phase 1 clinical trial for our first SARS CoV-2 vaccine candidate and reported that the study met its primary and secondary endpoints. A Phase 2 study with our second SARS CoV-2 vaccine candidate commenced in late 2021 has been completed.
Vaxarthas also initiated preclinical work on COVID-19 vaccine candidates that directly target the Omicron BA.4 and BA.5 subvariants. Several Phase 1 human studies with our norovirus vaccine candidate have been successfully completed. A Phase 2 challenge study evaluating safety and clinical efficacy of our GI.1 norovirus vaccine candidate is currently ongoing. Data indicating that our monovalent H1 influenza vaccine protected participants against H1 influenza infection in a Phase 2 challenge study was published in 2020 (Lancet ID). In addition, we are in early development of a prophylactic vaccine targeting respiratory syncytial virus ("RSV") (a common cause of respiratory tract infection) and of our first therapeutic vaccine targeting cervical cancer and dysplasia caused by human papillomavirus ("HPV"). Vaxart Biosciences, Inc.was originally incorporated in Californiain March 2004, under the name West Coast Biologicals, Inc.and 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 reverse merger (the "Merger"), with Aviragen Therapeutics, Inc.("Aviragen"), pursuant to which Private Vaxart survived as a wholly owned subsidiary of Aviragen. Under the terms of the Merger, Aviragen changed its name to Vaxart, Inc.and Private Vaxartchanged its name to Vaxart Biosciences, Inc.
Business update regarding COVID-19
The COVID-19 outbreak has presented a substantial public health and economic challenge around the world and is affecting employers, 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 in the foreseeable future. However, we are continuing to assess the potential impact of the COVID-19 pandemic and the development of other competing COVID-19 vaccines on our business and operations, including our expenses, supply chain and clinical trials. Our partners are currently operating 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. Any recovery from negative impacts to our business and related economic impact due to the COVID-19 outbreak may also be slowed or reversed by a number of factors, including the emergence of new coronavirus strains. 17
Table of Contents Our Product Pipeline
The following table presents the status of our oral vaccine development programs:[[Image Removed: pipeline2022q2.jpg]]
We are developing the following pill candidate vaccines based on our proprietary platform:
? Coronavirus vaccine. COVID-19, a serious respiratory tract infection caused
by the SARS-CoV-2 virus, is a major cause of hospitalization and death in
and Prevention (the “CDC”), an outbreak of COVID-19 began in
end of 2019 and quickly spread around the world. By
million cases of COVID-19 have been identified worldwide, including in the United States
States, where the
million dead. While most COVID-19 restrictions, such as stay-at-home
orders, have been lifted, COVID-19 continues to spread and remains a public issue
threat to health, especially due to the continuous emergence of new variants.
The COVID-19 risk remains even greater in developing regions where vaccination rates still remain low. We are developing an oral tablet vaccine to protect against SARS-CoV-2 infection, the virus that causes COVID-19. We generated multiple vaccine candidates based on the published genome of SARS-CoV-2 and evaluated them in preclinical models for their ability to generate both mucosal and systemic immune responses. Of particular interest will be the mucosal immune responses, as coronavirus is primarily an infection of the respiratory tract. 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. Given the recent emergence of coronavirus strains with mutated S proteins that are considered more contagious than the original strain, serum antibodies from injected vaccines may not adequately protect against these SARS-CoV-2 variants over time, whereas a vaccine that is able to create cross-reactive mucosal antibodies and T cells against conserved epitopes may have significant advantages. On
September 14, 2020, we announced that the U.S. Food and Drug Administration(the "FDA") had cleared our Investigational New Drug ("IND") application to allow initiation of human clinical testing of our first oral COVID-19 (S and N proteins) vaccine candidate VXA-CoV2-1. On October 13, 2020, we announced that Phase 1 clinical testing had commenced and on February 3, 2021, we announced the preliminary results of the trial. The study achieved both its primary and secondary endpoints of safety and immunogenicity, respectively. Initial results showing cross-reactive mucosal antibody responses were published in Science Translational Medicine along with animal data described below. Additional detailed study results and mucosal durability data were reported in medRxiv in July 2022. We announced in February 2021that we would evaluate additional vaccine candidates that contain just the Spike protein, and different variant-specific vaccines. After preclinical evaluations (including in non-human primate studies) showed that an improved antibody response could be achieved with a new vaccine candidate that expressed just the Spike protein, we decided to move this candidate forward for clinical evaluation. This new vaccine candidate, VXA-CoV2-1.1-S, was also able to elicit antibody responses against human coronavirus strain variants such as Beta (first identified in South Africa) and Delta (first identified in India) in animals (published in bioRxiv in February 2022). Further, this new vaccine candidate was tested in a vaccine breakthrough/transmission model led by Duke Universityand found to inhibit aerosol transmission to vaccine-naïve animals better than an injected S-protein-based vaccine candidate. These results were published in bioRxiv in October 2021and in the peer-reviewed journal Science Translational Medicine in May 2022. A press release issued in June 2022described a hamster challenge study comparing an S specific vaccine expressing the original parental strain to a variant-specific S vaccine for protection against Omicron. Results showed that both constructs could provide protection, but the Omicron-specific vaccine had slightly better immune responses against the Omicron variant. A new IND was filed for this S-only vaccine candidate in June 2021and was cleared by the FDA in July 2021. We initiated dosing with this candidate in a two-part Phase 2 clinical study in October 2021, with approximately 896 participants planned for enrollment utilizing a two-part study design. The first part of the study ("Part 1") planned enrollment of 48 participants aged 18 to 55 and 48 participants aged 56 to 75, in order to further evaluate safety and immunogenicity and to assess optimal dosage. Further, half the subjects in the trial would be prior vaccinated (have received two doses of an mRNA vaccine) to test the ability of the Vaxart COVID-19 vaccine candidate to boost immune responses and enhance variant-specific cross-reactivity, and half the subjects would be naïve to prior vaccinations. The purpose of the study was to evaluate safety and immunogenicity and to assess optimal dosage. Upon dose selection from Part 1, the second part of the study ("Part 2") planned enrollment of approximately 800 subjects aged 18 to 75. Part 2 is designed to test preliminary vaccine efficacy to protect against SARS-CoV-2 infection. The first part of the study ("Part 1") has been completed. The actual enrollment of participants for Part 1 was less than planned due to the inability to identify vaccine-naïve individuals. Approximately half of the subjects in the trial were prior vaccinated (have received two doses of an mRNA vaccine) to test the ability of the Vaxart COVID-19 vaccine candidate to boost immune responses and enhance variant-specific cross-reactivity. Top-line data from this portion of the trial was announced in September 2022, indicating that the primary and secondary end-points were both met. Vaxart'soral vaccine candidate was able to boost the serum antibody responses for volunteers that previously received an mRNA vaccine (either Pfizer/BioNTech or Moderna). Serum neutralizing antibody responses to SARS-CoV-2 ( Wuhan), a recognized correlate of protection, were boosted in this population from a geometric mean of 481 to 778, a fold rise of 1.6. Volunteers that had lower starting titers had larger increases than subjects that had higher titers. There were also substantial increases in the neutralizing antibody responses to the SARS-CoV-2 Omicron BA4/5 in these volunteers as measured by sVNT assay. Increases in the mucosal IgA antibody responses (antibodies in the nose and mouth) were observed in approximately 50% of subjects. Subjects that had an increase in the mucosal IgA response to SARS-CoV-2 Wuhan S had an increase in IgA responses to other coronaviruses including SARS-CoV-2 Omicron BA4/5 and SARS-CoV-1, demonstrating the cross-reactive nature of these immune readouts. We are currently evaluating the results from Part 1 to determine whether we will proceed to Part 2 of the study. . 18
We have initiated work on vaccine candidates that directly target new Omicron BA.4 and BA.5 subvariants. These candidates are currently in preclinical testing. We are also developing bivalent candidates that contain
Wuhanand Omicron antigens, and will also evaluate these new constructs as part of a potential bivalent vaccine for COVID-19. We will determine the best path forward in developing a vaccine that can hinder viral infection and transmission for current and emerging variants. Our expectation is that these vaccine candidates will be available to evaluate preclinically in the fourth quarter of 2022, and clinically in the first half of 2023. We have announced a partnership with hVivo to test a Vaxartvaccine candidate for efficacy in a SARS-CoV-2 human challenge study. This study is expected to begin in 2023 once hVivo has completed GMP manufacturing and testing of a viral challenge strain.
Additionally, international phase 1b and phase 2 trials in COVID-19, including a placebo-controlled efficacy trial in
? Norovirus vaccine. Norovirus is the leading cause of acute gastroenteritis
symptoms, such as vomiting and diarrhea, in people of all ages
United States. Each year, on average, norovirus causes up to 21 million cases of acute gastroenteritis and contributes up to 109,000 hospitalizations and 900 deaths, mostly among young children and older adults. Typical symptoms include dehydration, vomiting, diarrhea with abdominal cramps, and nausea. In a study by the CDCand Johns Hopkins University, published in 2016, the global economic impact of norovirus
illness was estimated at
income countries, including
the primary authors estimated the burden in the
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 that, if approved, the vaccine will be a
once-annual administration before the winter season when norovirus
incidence is at its peak, similar to the influenza season. In 2019, we completed the active phase of a Phase 1b clinical trial with our bivalent oral tablet vaccines 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 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'sbivalent vaccine (GI.1 and GII.4 co-administered) 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, when compared to 86% and 90%, respectively, for the two monovalent cohorts of the study. These results indicate that co-administration of the two vaccines, the intended approach for proceeding into Phase 2 and 3 trials, shows no cross-interference, or reduction from the response observed with individual (monovalent) vaccine delivery. We resumed clinical development of our norovirus vaccine candidate in late 2020 by planning the conduct of three clinical trials. In early 2021 we initiated dosing a subset of subjects (second dose after more than one year) in the Phase 1b bivalent study. In results announced on July 29, 2021, we reported that we were able to successfully boost immune responses with the G1.1 norovirus tablets in prior vaccinated subjects. These responses include IgA antibody secreting cells, as well as IgG and IgA serum antibody responses. In mid-2021 we started a placebo-controlled, dose ranging study in elderly adult subjects aged 55 to 80 to evaluate the safety and immunogenicity of the vaccine in the older population. The top-line results were disclosed in June of 2022. The immune response to the vaccine was similar in healthy older individuals (ages 55 to 80) as it was in younger individuals in a previous study as measured by the numbers of antibody secreting cells (IgA ASC) and serum antibodies. Lastly, we also conducted an open-label trial to evaluate the optimal timing of boost administration in young adults in which 3 cohorts of subjects received their second dose (boost) at varying timepoints between 1 and 3 months post initial vaccination. This study was performed as data from trials with adenovirus vaccines indicate that boost administration at a later timepoint (e.g., 12 weeks) may offer a more robust immune response. The top-line results from this study were disclosed in June of 2022. Data indicated that the vaccine candidate was able to successfully boost antibody responses, with antibody responses trending better with administration spread out over 3 months versus a shorter interval. We are also conducting additional Phase 2 clinical trials with our norovirus vaccine candidates. The first trial, which was initiated in early 2022, is a Phase 2 norovirus challenge study which will evaluate safety, immunogenicity and clinical efficacy of a norovirus GI.1 vaccine compared to a placebo control post norovirus challenge. A futility analysis is expected in fourth quarter of 2022, and if positive, efficacy results are expected end of the first quarter of 2023. The second clinical trial will be a Phase 2 multi-center, placebo-controlled dose confirmation trial evaluating the safety and immunogenicity of Vaxart'sbivalent norovirus vaccine in subjects aged 18 years and older. This trial is expected to begin in late 2022 or early 2023. The data from these Phase 2 studies is expected to form the basis (safety, immunogenicity and preliminary efficacy data) for an End of Phase 2 Meeting with the FDA to gain concurrence on the scope and design of the Phase 3 pivotal efficacy study in adults over 18 years of age.
? Seasonal flu vaccine. Influenza is a major cause of morbidity and
mortality in the
immunization rate among adults aged 18-49. We believe our
the vaccine in tablet form has the potential to improve the protective efficacy of
currently available influenza vaccines and increase influenza vaccination rates.
Influenza is one of the most common global infectious diseases, causing mild to life-threatening illness and even death. Approximately 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. 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 billionannually, while lost earnings due to illness and loss of life amount to $16.3 billionannually. 19
We believe our tablet vaccine candidate may potentially address many of the limitations presented by injectable egg-based influenza vaccines for the following reasons: (i) 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; (ii) our vaccine is delivered as a room temperature-stable tablet, which we believe would provide a more convenient method of administration, enhancing patient acceptance and simplifying the distribution and administration process; (iii) we believe our tablet vaccine may be manufactured more rapidly than vaccines manufactured using egg-based methods by using recombinant methods; and (iv) using our tablet vaccine in lieu of egg-based vaccines would eliminate the risk of experiencing allergic reactions to egg protein. In
September 2018, we completed a $15.7 millioncontract with the U.S. Governmentthrough the Department of Health and Human Services, Office of Biomedical Advanced Research and Development Authority("HHS BARDA") under which a Phase 2 challenge study of our H1N1 flu vaccine candidate was conducted. We 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. Fluzone, the market-leading injectable quadrivalent influenza vaccine, 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. 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 indicates that our vaccines provide protection by inducing mucosal immunity (the first line of defense against mucosal infections such as flu, norovirus and RSV), marking what could be a key advantage over injectable vaccines. In addition to our conventional seasonal flu vaccine, we entered into a research collaboration agreement with Janssen Vaccines & Prevention B.V. ("Janssen") in July 2019to evaluate our proprietary oral vaccine platform for the Janssen universal influenza vaccine program. Under the agreement, we produced a non-GMP oral vaccine candidate containing certain proprietary antigens from Janssen and tested the product in a preclinical challenge model. The preclinical study has been completed and we have submitted a report to Janssen.
? 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 preclinical cotton rat study, we believe our proprietary oral vaccine platform has the potential to be the optimal vaccine delivery system for RSV, offering significant advantages over injectable vaccines.
? Therapeutic HPV vaccine. Our first therapeutic oral vaccine candidate
targets HPV 16 and HPV 18, the two strains responsible for 70% of
cancers and precancerous cervical dysplasia.
Cervical cancer is the fourth most common cancer in women worldwide and in
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 with the FDA for our first therapeutic vaccine targeting HPV 16 and HPV 18 and we subsequently submitted our pre-IND briefing package. We received feedback from the FDA in January 2019to support submission of an IND application to support initiation of clinical testing. Vaxartplans to initiate its clinical program of an oral HPV tableted vaccine with a clinical trial in young adult women with HPV 16 or HPV 18-associated High-grade Squamous Intraepithelial Lesion (HSIL), pending regulatory and IRB/EC approvals. The trial would evaluate the safety, immunogenicity and preliminary clinical efficacy with repeat dose vaccine administration against a placebo control group. Antivirals
? Through the merger, we acquired two royalty-generating products, Relenza and
Inavi. We also acquired three clinical-stage Phase 2 antiviral compounds,
whose independent clinical development we have discontinued. However, for
one of them, Vapendavir, we have entered into a world exclusive
license agreement with
allowing Altesa to develop and market this wide range of capsids
? Relenza and Inavir are antivirals for the treatment of influenza, marketed
by GlaxoSmithKline, plc (“GSK”) and Daiichi Sankyo Company, Limited
(“Daiichi Sankyo”), respectively. We earned royalties on net sales
of Relenza and Inavir in
2019 and the last patent for Inavir expires in
antivirals vary widely from trimester to trimester, as the activity of the influenza virus
exhibits strong seasonal cycles, and by year depending on the intensity and
duration of the flu season, the impact that COVID-19 has had and may continue to
have, on seasonal influenza, and competition from other antivirals such as Tamiflu and Xofluza. 20
Overview of financial operations
Revenue from customer service contracts
We received revenue from a fixed price service contract, as amended, for a total of
Royalty Revenue We earn royalty revenue, net of amounts recognized as non-cash royalty revenue related to the sale of future royalties, based on a fixed percentage of net sales of Inavir, a treatment for influenza, from our licensee, Daiichi Sankyo, under a royalty agreement which will expire in
Non-cash royalty income related to the sale of future royalties
April 2016, Aviragen sold certain royalty rights related to Inavir in the Japanese market for $20.0 millionto HealthCare Royalty Partners III, L.P.("HCRP"). We pay HCRP the first $3 millionplus 15% of the next $1 millionof royalties earned in annual periods ending on March 31. At the time of the Merger, the estimated future benefit to HCRP was remeasured at fair value and was estimated to be $15.9 million, which we account for as a liability and amortize using the effective interest method over the remaining estimated life of the arrangement. The estimated future benefit was remeasured as of December 31, 2021, when the fair value was estimated to be $11.5 million, resulting in a revaluation gain of $3.8 million. Even though we do not retain the related royalties under the transaction, as the amounts are remitted to HCRP, we will continue to record revenue related to these royalties until the amount of the associated liability and related interest is fully amortized.
Research and development costs
Research and development expenses represent costs incurred to conduct research, such as developing our tablet vaccine platform and supporting preclinical and clinical development activities for our tablet vaccine candidates. We accrue all research and development costs as incurred. Research and development expenses mainly consist of the following items:
? personnel expenses, which include salaries, benefits and shares
compensation; ? expenses incurred under agreements with contract research organizations ("CROs"), that conduct clinical trials on our behalf;
? expenses incurred under agreements with contract manufacturing organizations
("CMOs"), that manufacture product used in the clinical trials; ? expenses incurred in procuring materials and for analytical and release
testing services necessary for the production of candidate vaccines used in the clinic
? process development expenses incurred internally and externally to improve
the efficiency and performance of vaccine and bulk pill manufacturing operations;
? laboratory supplies and vendor expenses related to preclinical research activities;
? consultant fees for services supporting our clinical, regulatory and
manufacturing activities; and ? facilities, depreciation and allocated overhead expenses. We do not allocate our internal expenses to specific programs. Our employees and other internal resources are not directly tied to any one research program and are typically deployed across multiple projects. Internal research and development expenses are presented as one total.
We have incurred significant external costs for CROs who conduct clinical trials on our behalf and for CMOs who manufacture our vaccine candidates in tablet form, although these costs have decreased in 2022 as we now perform the majority of our business in-house manufacturing. We captured these external costs for each vaccination program. We do not allocate external costs incurred for preclinical research or process development to specific programs.
The following table shows our period-over-period research and development expenses, identifying external costs that were incurred in each of our vaccine programs and, separately, on preclinical research and process development (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 External program costs: COVID-19 program $ 2,287 $ 1,860 $ 5,244 $ 8,020 Norovirus program 2,491 1,202 6,229 2,746 All other programs 52 - 171 - Preclinical research 317 870 1,267 1,811 Process development 634 386 1,820 1,680 Total external costs 5,781 4,318 14,731 14,257 Internal costs 16,685 8,091 45,864 18,962
Total research and development
We expect that research and development expenses will increase in 2022 and beyond as we advance our tablet vaccine candidates into and through clinical trials, pursue regulatory approval of our tablet vaccine candidates and prepare for a possible commercial launch, all of which will also require a significant investment in manufacturing and inventory related costs. To the extent that we enter into licensing, partnering or collaboration agreements, a significant portion of such costs may be borne by third parties. The process of conducting clinical trials necessary to obtain regulatory approval is costly and time consuming. We may never succeed in achieving marketing approval for our tablet vaccine candidates. The probability of successful commercialization of our tablet vaccine candidates may be affected by numerous factors, including clinical data obtained in future trials, competition, manufacturing capability and commercial viability. As a result, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our tablet vaccine candidates.
General and administrative costs
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 sets forth certain items of the condensed consolidated statements of earnings and comprehensive income for the three and nine months ended
Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 % Change 2022 2021 % Change Revenue $ -
$ 200(100 )% $ 85 $ 818(90 )% Operating expenses 29,426 17,451 69 % 83,534 49,355 69 % Operating loss (29,426 ) (17,251 ) 71 % (83,449 ) (48,537 ) 72 % Net non-operating income (expense) 133 (311 ) (143 )% (340 ) (1,080 ) (69 )% Loss before income taxes (29,293 ) (17,562 ) 67 % (83,789 ) (49,617 ) 69 % Provision for income taxes 16 21 (24 )% 51 89 (43 )% Net loss $ (29,309 ) $ (17,583 )67 % $ (83,840 ) $ (49,706 )69 % 22
Table of Contents Total Revenue
The following table summarizes our revenues for the three and nine months ended
Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 % Change 2022 2021 % Change Revenue from customer service contracts $ - $ - N/A $ -
$ 13(100 )% Non-cash royalty revenue related to sale of future royalties - 200 (100 )% 85 805 (89 )% Total revenue $ - $ 200(100 )% $ 85 $ 818(90 )%
Revenue from customer service contracts
We earned revenue from customer service contracts of
$13,000in the nine months ended September 30, 2021, all in the first quarter. This revenue was recognized from a fixed price contract executed in July 2019, as amended, for a total of $617,000, which we have now completed.
Non-cash royalty income related to the sale of future royalties
Non-cash royalty revenue related to sale of future royalties for the three months ended
September 30, 2022and 2021, was nil and $ 200,000, respectively, and for the nine months ended September 30, 2022and 2021, was $ 85,000and $ 805,000, respectively, the decrease in both periods being due to a reduction in sales of Inavir in Japan. We do not recognize any royalty revenue from sales of Inavir until the first $3 millionnet of 5% withholding tax in years ending on March 31has been recognized as non-cash royalty revenue related to sale of future royalties. We recognized no royalty revenue in the years ended March 31, 2022and 2021, because net royalties were only $448,000and $1.3 million, respectively. We believe royalties have been abnormally low for the last two years primarily because social distancing and mask wearing due to the COVID-19 pandemic have caused the number of influenza infections to decline. Due to the unpredictability of the impact of COVID-19 on future flu seasons we are unable to forecast the amount of royalty revenue, if any, and non-cash royalty revenue related to sale of future royalties that we will earn in the future. Total Operating Expenses
The following table presents our operating expenses for the three, three and nine months ended
Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 % Change 2022 2021 % Change Research and development
$ 22,466 $ 12,40981 % $ 60,595 $ 33,21982 % General and administrative 6,960 5,042 38 % 22,939 16,136 42 % Total operating expenses $ 29,426 $ 17,45169 % $ 83,534 $ 49,35569 % Research and Development For the three months ended September 30,2022, research and development expenses increased by $10.1 million, or 81%, compared to the three months ended September 30,2021. The increase is primarily due to increased personnel costs, including stock-based compensation, facilities allocation and recruitment costs, higher in-house manufacturing costs, increased clinical trial expenses and higher depreciation, partially offset by a decrease in CMO costs. For the nine months ended September 30, 2022, research and development expenses increased by $27.4 million, or 82%, compared to the nine months ended September 30, 2021. The increase is primarily due to increased personnel costs, including stock-based compensation and facilities allocation related to headcount increases, higher in-house manufacturing costs, increased clinical trial expenses related to our vaccine candidates and higher depreciation, partially offset by a decrease in CMO costs related to our vaccine candidate. We expect that research and development expenses will be significantly higher in 2022 and beyond than in 2021 as we continue to increase our headcount and incur significant expenditures on manufacturing and clinical trials for our COVID-19 and norovirus vaccine candidates. General and Administrative For the three months ended September 30, 2022, general and administrative expenses increased by $1.9 million, or 38%, compared to the corresponding period in 2021, The principal reasons for the increase are increased personnel costs, including non-cash stock-based compensation expense, and increases in legal fees. For the nine months ended September 30, 2022, general and administrative expenses increased by $6.8 million, or 42%, compared to the nine months ended September 30, 2021. The principal reasons for the increase are the cost of settling shareholder litigation, increased personnel costs, including non-cash stock-based compensation expense not related to award modifications, and increases in legal and other professional fees, partially offset by the absence of a one-off non-cash expense for modifying the terms of outstanding options awarded to our former Chairman of the Board. 23
Non-operating income (expenses)
The following table presents our non-operating income and expenses for the three and nine months ended
September 30, 2022and 2021, respectively (in thousands, except percentages): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 % Change 2022 2021 % Change Interest income, net $ 458 $ 261,662 % $ 650$ 58 1,021 % Non-cash interest expense related to sale of future royalties (325 ) (337 ) (4 )% (988 ) (1,137 ) (13 )% Foreign exchange loss, net - - N/A (2 ) (1 ) 100 % Net non-operating income (expense) $ 133 $ (311 )(143 )% $ (340 ) $ (1,080 )(69 )% For the three months ended September 30, 2022, we recorded net non-operating income of $133,000, a 143% decrease from the $311,000net expense recorded in the three months ended September 30, 2021. For the nine months ended September 30, 2022, we recorded net non-operating expenses of $340,000, a 69% decrease from the $1,080,000recorded in the nine months ended September 30, 2021. Interest income increased in the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, due to higher interest rates. Non-cash interest expense related to sale of future royalties, which relates to accounting for amounts that will become payable to HCRP for royalty revenue earned from Inavir as debt, decreased in the three and nine months ended September 30, 2022, compared to the corresponding period in the prior year, as the outstanding balance due to HCRP was revalued as of December 31, 2021, resulting in a reduction of $3.8 millionin the estimated liability. Provision for Income Taxes
The following table shows our provision for income taxes for the three and nine month periods ended
Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 % Change 2022 2021 % Change Foreign withholding tax on royalty revenue $ -
$ 10(100 )% $ 4 $ 40(90 )% Foreign taxes payable on intercompany interest 16 15 7 % 45 48 (6 )% State income taxes - (4 ) (100 )% 2 1 100 % Provision for income taxes $ 16 $ 21(24 )% $ 51 $ 89(43 )% The provision for income taxes comprises $16,000and $21,000in the three months ended September 30, 2022and 2021, respectively, and $51,000and $89,000in the nine months ended September 30, 2022and 2021, respectively. The tax charge relates primarily to interest on an intercompany loan from a foreign subsidiary and a 5% withholding tax on royalty revenue earned on sales of Inavir in Japan, which is potentially recoverable as a foreign tax credit but expensed because we record a 100% valuation allowance against our deferred tax assets.
Cash and capital resources
Our primary source of financing is from the sale and issuance of common stock and common stock warrants in public offerings, along with proceeds from the exercise of warrants. In the past, we have also obtained funds from the issuance of secured debt and preferred stock and from collaboration agreements. In
September 2021we entered into a Controlled Equity Offering Sales Agreement (the " September 2021ATM"), under which we may offer and sell, from time to time through sales agents, shares of our common stock having an aggregate offering price of up to $100 million. As of September 30, 2022, we had received net proceeds of $8.6 millionfrom the sale of common stock under the September 2021ATM. We incur direct expenses and pay sales commissions of up to 2.0% of gross proceeds from the sale of shares under the September 2021ATM.
We believe our existing funds are sufficient to fund us for at least one year from the date of issuance of this Quarterly Report. To continue operations thereafter, we expect that we will need to raise further capital, through the sale of additional securities or otherwise. As of
September 30, 2022, we had approximately $87 millionin net proceeds still available to us under the September 2021ATM. Our future capital requirements and the adequacy of our available funds will depend on many factors, most notably our ability to successfully commercialize our products and services. 24
We may fund a portion of our ongoing operations through partnering and collaboration agreements which, while reducing our risks and extending our cash runway, may also reduce our share of eventual revenues, if any, from our vaccine product candidates. We may be able to fund certain activities with assistance from government programs. The sale of additional equity would result in additional dilution to our stockholders. We may also fund our operations through debt financing, which would result in debt service obligations, and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. If we are unable to raise additional capital in sufficient amounts or on acceptable terms, we may be required to delay, limit, reduce, or terminate our product development or future commercialization efforts or grant rights to develop and market vaccine candidates that we would otherwise prefer to develop and market ourselves. Any of these actions could harm our business, results of operations and prospects.
Our future funding needs will depend on many factors, including the following:
? the timing and costs of our planned preclinical studies for our product candidates;
? the timing and costs of our planned clinical trials of our product candidates;
? our manufacturing capabilities, including the availability of contract
manufacturing organizations to provide our product candidates at reasonable prices
cost; ? the number and characteristics of product candidates that we pursue; ? the outcome, timing and costs of seeking regulatory approvals;
? revenue from commercial sales of our future products, which would be
subject to receipt of regulatory approval;
? the terms and timing of any future collaboration, license, advice or
other arrangements that we may enter into;
? the amount and timing of any payment that may be required in connection with
the licensing, filing, prosecution, maintenance, defense and enforcement of
any patent or patent application or other intellectual property right; and
? the extent to which we license or acquire other products and technologies.
The following table summarizes our cash flows for the periods indicated:
Nine Months Ended September 30, 2022 2021 Net cash used in operating activities
$ (65,627 ) $ (44,018 )Net cash used in investing activities (36,216 ) (40,920 ) Net cash provided by financing activities 8,866 125,299
(Decrease) net increase in cash and cash equivalents
Vaxartexperienced negative cash flow from operating activities for the nine months ended September 30, 2022and 2021, in the amounts of $65.6 millionand $44.0 million, respectively. The cash used in operating activities in the nine months ended September 30, 2022, was due to cash used to fund a net loss of $83.8 millionand a decrease in working capital of $3.3 million, further decreased by adjustments for net non-cash income related to depreciation and amortization, accretion of premium on investments, stock-based compensation, non-cash interest expense related to sale of future royalties and non-cash revenue related to sale of future royalties totaling $14.9 million. The cash used in operating activities in the nine months ended September 30, 2021, was due to cash used to fund a net loss of $49.7 millionand an increase in working capital of $3.6 million, partially offset by adjustments for net non-cash income related to depreciation and amortization, accretion of premium on investments, stock-based compensation, non-cash interest expense related to sale of future royalties and non-cash revenue related to sale of future royalties totaling $9.3 million. 25
In the nine months ended
September 30, 2022, we used $25.5 millionto purchase marketable securities, net of maturities, $5.7 millionto purchase property and equipment and $5.0 millionto pay for right-of-use assets. In the nine months ended September 30, 2021, we used $36.8 millionto purchase marketable securities, net of maturities, and $4.1 millionto purchase property and equipment.
Net cash provided by financing activities
In the nine months ended
September 30, 2022, we received net proceeds of $8.7 millionfrom the sale of common stock under the September 2021ATM and $216,000from the exercise of stock options and warrants. In the nine months ended September 30, 2021, we received net proceeds of $122.2 millionfrom the sale of common stock under the October 2020ATM and $3.1 millionfrom the exercise of common stock warrants and stock options.
Contractual obligations and commercial commitments
We have the following contractual obligations and trade commitments as of
Contractual obligation Total
3 – 5 years > 5 years
Long-term debt, HCRP
$ 4,638 $ 4,021Operating Leases 30,814 4,098 8,513 10,150 8,053 Purchase Obligations 13,696 13,696 - - - Total $ 61,537 $ 20,346 $ 14,329 $ 14,788 $ 12,074
Long-term debt, HCRP. Under an agreement signed in 2016, we are obliged to pay the HCRP the first
Note 6 to the condensed consolidated financial statements in Part I, point 1 for further details.
Operating leases. Operating lease amounts include future minimum lease payments under all our non-cancellable operating leases with an initial term in excess of one year. See Note 7 to the Condensed Consolidated Financial Statements in Part I, Item 1 for further details of leases. Purchase obligations. These amounts include an estimate of all open purchase orders and contractual obligations in the ordinary course of business, including commitments with contract manufacturers and suppliers for which we have not received the goods or services. We consider all open purchase orders, which are generally enforceable and legally binding, to be commitments, although the terms may afford us the option to cancel based on our business needs prior to the delivery of goods or performance of services. Share based payment arrangements. Since we were a private company, we have issued stock options to all full-time new hires other than interns and have also issued options to these employees annually. Beginning in 2022, we have shifted from awarding options only to issuing a mixture of options and restricted stock units ("RSUs"). As of
September 30, 2022, unrecognized stock-based compensation cost related to outstanding unvested stock options and RSUs expected to vest was $36.2 millionand $2.2 million, respectively, which we expect to recognize over an estimated weighted average period of 3.03 and 3.46 years, respectively. In addition, we have adopted an Employee Stock Purchase Plan which we expect will become effective on December 15, 2022.
Significant Accounting Policies and Estimates
Our management's discussion and analysis of financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in
the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate these estimates and judgments. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources. Actual results may differ materially from these estimates. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates.
We record accrued expenses for estimated costs of research and development activities conducted by third-party service providers, which include the conduct of preclinical studies, clinical trials and manufacturing activities. We record the estimated costs of research and development activities based upon the estimated amount of services provided and include the costs incurred but not yet invoiced within accrued liabilities in the condensed consolidated balance sheets and within research and development expense in the condensed consolidated statements of operations and comprehensive loss. These costs can be a significant component of our research and development expenses. We estimate the amount of work completed through discussions with internal personnel and external service providers as to the progress or stage of completion of the services and the agreed-upon fee to be paid for such services. We make significant judgments and estimates in determining the accrued balance in each reporting period. As actual costs become known, we adjust our accrued estimates. 26
Table of Contents Intangible Assets Intangible assets acquired in the Merger were initially recorded at their estimated fair values of
$20.3 millionfor developed technology related to Inavir which was, until it was revalued, being amortized on a straight-line basis over the estimated period of future royalties of 11.75 years and $1.8 millionfor the developed technology related to Relenza which was fully amortized over the remaining royalty period of 1.3 years. The developed technology related to Inavir was revalued at $10.6 millionas of December 31, 2021, resulting in an impairment loss of $3.0 millionbeing recorded. The fair value is being amortized on a straight-line basis over 7.9 years, the estimated period of future royalties remaining as of December 31, 2021, when it was revalued. These valuations were prepared by an independent third party based on discounted cash flows of estimated future revenue streams, which are highly subjective, especially since the start of the COVID-19 pandemic due to the unpredictability of the duration of its impact on future flu seasons. Stock-Based Compensation We measure the fair value of all stock option awards to employees, non-executive directors and consultants on the grant date, and record the fair value of these awards, net of estimated forfeitures, as compensation expense over the service period. The fair value of options is estimated using the Black-Scholes valuation model and the expense recorded is affected by subjective assumptions regarding a number of variables, as follows: Expected term - This represents the period that our stock-based awards granted are expected to be outstanding and is determined using the simplified method (the arithmetic average of its original contractual term and its average vesting term). We have very limited historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior for our stock-based awards. Based on the weighted average applied to options awarded in nine months ended September 30, 2022, a notional 10% decrease in expected term would have reduced the fair value and the related compensation expense by approximately 2.2%. Expected volatility - This is a measure of the amount by which our common stock price has fluctuated or is expected to fluctuate. We measure volatility based on the historical volatility of our own stock over the retrospective period corresponding to the expected term of the options on the measurement date. Based on the weighted average applied to options awarded in nine months ended September 30, 2022, a notional 10% decrease in expected volatility (from 125% to 113%) would have reduced the fair value and the related compensation expense by approximately 4.4%. Risk-Free Interest Rate - This is based on the U.S. Treasuryyield curve on the measurement date corresponding with the expected term of the stock-based awards. Based on the weighted average applied to options awarded in nine months ended September 30, 2022, a notional doubling of the risk-free interest rate would have increased the fair value and the related compensation expense by approximately 0.9%. Expected Dividend - We have not made any dividend payments and do not plan to pay dividends in the foreseeable future. Therefore, we use an expected dividend yield of zero. Forfeiture Rate - This is a measure of the number of awards that are expected to not vest and is reassessed quarterly. An increase in the estimated forfeiture rate will cause a small decrease the related compensation expense early in the service period, but since the final expense recorded for each award is the number of options vested times their grant date fair value, it has no impact on the total expense recorded.
Recent accounting pronouncements
See the "Recent Accounting Pronouncements" in Note 2 to the Condensed Consolidated Financial Statements in Part I, Item 1 for information related to the issuance of new accounting standards in the first nine months of 2022, none of which had a material impact on our condensed consolidated financial statements. 27
© Edgar Online, source