VAXART, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

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 SEC on 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. Vaxart
has 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 California in
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
Vaxart changed 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.



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  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

the WE and around the world. According to US Centers for Disease Control

and Prevention (the “CDC”), an outbreak of COVID-19 began in Wuhan, China,

end of 2019 and quickly spread around the world. By October 2, 2022over 623

million cases of COVID-19 have been identified worldwide, including in the United States

States, where the CDC had reported more than 96 million infections and a

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 2021 that 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 University and 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 2021 and in the peer-reviewed journal Science Translational Medicine in
May 2022. A press release issued in June 2022 described 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 2021 and 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's oral 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.

.



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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 Wuhan and
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 Vaxart vaccine 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 Indiaare under study.

? 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 CDC and Johns Hopkins
    University, published in 2016, the global economic impact of norovirus

illness was estimated at $60 billion, $34 billion of which occurred in high

income countries, including United States, Europe and Japan. An update by

the primary authors estimated the burden in the WE 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 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's bivalent 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's bivalent 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 WE and around the world and, according to the CDConly 49% of

eligible WE citizens were vaccinated in 2018/2019, with

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 billion annually, while lost earnings due to illness and loss of
life amount to $16.3 billion annually.



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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 million contract with the U.S.
Government through 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 2019 to 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 United States with approximately 13,000 new cases diagnosed each year in United States according to 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 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 2019
to support submission of an IND application to support initiation of clinical
testing. Vaxart plans 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 Altesa Biosciences, Inc. (“Altesa”) on July 6, 2021,

allowing Altesa to develop and market this wide range of capsids

    spectrum antiviral.



? 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 Japan. Relenza’s last patent expired in July

2019 and the last patent for Inavir expires in December 2029. The sales of these

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.






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Overview of financial operations


Revenue


Revenue from customer service contracts

We received revenue from a fixed price service contract, as amended, for a total of $617,000which we completed in the first three months of 2021.


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 December 2029.



Non-cash royalty income 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. ("HCRP"). We pay HCRP the first $3 million plus 15% of the next $1 million
of royalties earned in annual periods ending on March 31. At the time of the
Merger, the estimated future benefit to HCRP was remeasured at fair value and
was estimated to be $15.9 million, which we account for as a liability and
amortize using the effective interest method over the remaining estimated life
of the arrangement. 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

trials;

? 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 $22,466 $12,409 $60,595 $33,219





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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 September 30, 2022 and 2021 (in thousands, except percentages):



                              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 %




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Total Revenue


The following table summarizes our revenues for the three and nine months ended
September 30, 2022 and 2021 (in thousands, except percentages):



                                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 $13,000 in 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, 2022 and 2021, was nil and $ 200,000, respectively,
and for the nine months ended September 30,  2022 and  2021, was $ 85,000 and $
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 million net of 5% withholding tax in years ending on
March 31 has been recognized as non-cash royalty revenue related to sale of
future royalties. We recognized no royalty revenue in the years ended March 31,
2022 and 2021, because net royalties were only $448,000 and $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 September 30, 2022 and 2021 (in thousands, except percentages):



                               Three Months Ended September 30,                       Nine Months Ended September 30,
                           2022                2021           % Change            2022               2021          % Change
Research and
development            $      22,466       $      12,409              81 %    $     60,595       $     33,219              82 %
General and
administrative                 6,960               5,042              38 %          22,939             16,136              42 %
Total operating
expenses               $      29,426       $      17,451              69 %    $     83,534       $     49,355              69 %




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.



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Non-operating income (expenses)



The following table presents our non-operating income and expenses for the three
and nine months ended September 30, 2022 and 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       $       26            1,662 %    $      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 $311,000 net 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 $1,080,000 recorded 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 million in the estimated liability.



Provision for Income Taxes


The following table shows our provision for income taxes for the three and nine month periods ended September 30, 2022 and 2021, respectively (in thousands, except percentages):



                                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 $16,000 and $21,000 in the three months
ended September 30, 2022 and 2021, respectively, and $51,000 and $89,000 in
the nine months ended September 30, 2022 and 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 2021 we entered into a Controlled Equity Offering Sales Agreement (the
"September 2021 ATM"), 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 million from the sale of common stock under the September 2021
ATM. We incur direct expenses and pay sales commissions of up to 2.0% of gross
proceeds from the sale of shares under the September 2021 ATM.



From September 30, 2022we had about $114.8 million cash, cash equivalents and marketable securities.



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 million in net proceeds still available to us under
the September 2021 ATM. 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.



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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.



Cash Flows


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 ($92,977)

  $         40,361



Net cash used in operating activities



Vaxart experienced negative cash flow from operating activities for the nine
months ended September 30, 2022 and 2021, in the amounts of $65.6 million and
$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 million and 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 million and 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.



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Net cash used in investment activities



In the nine months ended September 30, 2022, we used $25.5 million to purchase
marketable securities, net of maturities, $5.7 million to purchase property and
equipment and $5.0 million to pay for right-of-use assets. In the nine months
ended September 30, 2021, we used $36.8 million to purchase marketable
securities, net of maturities, and $4.1 million to 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 million from the sale of common stock under the September 2021 ATM
and $216,000 from the exercise of stock options and warrants. In the nine months
ended September 30, 2021, we received net proceeds of $122.2 million from the
sale of common stock under the October 2020 ATM and $3.1 million from 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 September 30, 2022 (in thousands):

Contractual obligation Total

3 – 5 years > 5 years

Long-term debt, HCRP $17,027 $2,552 $5,816

  $       4,638     $     4,021
Operating 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 $3 million plus 15% of the next $1 million royalty income we earn from sales of Inavir each year ending on March, 31st. See

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 million and $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.


Accumulated research and development costs



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.



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Intangible Assets



Intangible assets acquired in the Merger were initially recorded at their
estimated fair values of $20.3 million for 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
million for 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 million as of December 31,
2021, resulting in an impairment loss of $3.0 million being 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. Treasury yield 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.



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