# Vaxart, Inc.: Form 10-Q for the period ended Mar 28, 2009

- Company: [Vaxart, Inc.](/companies/vxrt.md) (CIK 72444)
- Form: 10-Q
- Filed: 2009-05-06
- Accepted by EDGAR: May 6, 2009, 21:17 ET
- Period: 2009-03-28
- Accession: 0001193125-09-101718
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/72444/000119312509101718/d10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/72444/000119312509101718/

## Management's discussion and analysis

As filed, 19,878 characters.

### FORWARD LOOKING STATEMENTS

*Statements in this quarterly report that are not strictly historical are forward-looking statements and include statements about products in development, results and analyses of clinical trials and studies, research and development expenses, cash expenditures, licensure applications and approvals, and alliances and partnerships, among other matters. You can identify these forward-looking statements because they involve our expectations, intentions, beliefs, plans, projections, anticipations, or other characterizations of future events or circumstances. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that may cause actual results to differ materially from those in the forward-looking statements as a result of any number of factors. These factors include, but are not limited to, risks relating to our ability to: successfully partner with third parties to fund, develop, manufacture and/or commercialize our products in development; defend against indemnification claims by Biotest; initiate and conduct clinical trials and studies; raise sufficient new capital resources to fully develop and commercialize our products in development; attract, retain and motivate key employees; collect further milestone and royalty payments under the PhosLo Agreement; obtain regulatory approval for our products in the U.S. or other markets; successfully contract with third party manufacturers for the manufacture and supply of NicVAX and PentaStaph; and comply with reporting and payment obligations under government rebate and pricing programs. Some of these factors are more fully discussed, as are other factors, in our Annual Report on Form 10-K for the fiscal year ended December 27, 2008 filed with the Securities and Exchange Commission and under “Risk Factors” in this Quarterly Report. We do not undertake to update any of these forward-looking statements or to announce the results of any revisions to these forward-looking statements except as required by law.*

The following is a discussion and analysis of the major factors contributing to our financial condition and results of operations for the three months ended March 28, 2009 and March 29, 2008. The discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto.

### OVERVIEW

We are a biopharmaceutical company focused on the development of products that address unmet medical needs in the areas of nicotine addiction and infectious disease. We leverage our experience and knowledge in powering the human immune system to target serious medical conditions in these areas. Our products in development are NicVAX \[*Nicotine Conjugate Vaccine*\], an innovative and proprietary investigational vaccine for treatment of nicotine addiction and prevention of smoking relapse, and PentaStaph \[*Pentavalent S.aureus Vaccine*\], a new pentavalent vaccine designed to prevent *S.aureus* infections including those infections caused by the most dangerous antibiotic-resistant strains of *S.aureus*. We were incorporated in Delaware in 1969 and our operations are located in Rockville, Maryland.

#### Products in Development

NicVAX is an investigational vaccine based on patented technology. Nicotine, a non-immunogenic small molecule, can cross the blood-brain barrier and reach specific receptors in the brain, thereby leading to the highly addictive pleasure sensation experienced by smokers and users of nicotine products. NicVAX is designed to stimulate the immune system to produce highly specific antibodies that bind to nicotine. A nicotine molecule attached to an antibody is too large to cross the blood-brain barrier, and thus is unable to reach the receptors in the brain and trigger pleasure sensations. In November 2007, we announced the successful completion of a Phase IIb “proof-of-concept” clinical trial for NicVAX that showed statistically significant rates of smoking cessation and continuous long-term smoking abstinence at 6 and 12 months for subjects injected with NicVAX as compared with subjects injected with placebo. In October 2008, we announced the results of a Phase II schedule optimization immunogenicity study assessing the antibody response and safety of a six-dose immunization schedule. This study showed that significantly higher antibody levels can be generated earlier in a higher percentage of subjects than in previous studies and that the revised dose regimen continued to be well-tolerated. These key results have confirmed the basis of our design for the NicVAX Phase III trials. In December 2008, we announced that we had reached agreement with the FDA on a SPA for the pivotal Phase III clinical trials for NicVAX, which we are in a position to initiate in 2009. The SPA forms the foundation to support approval of a NDA. We are seeking a partner who will assist in further development of the vaccine including the Phase III trials and future commercialization.

PentaStaph is an investigational vaccine based on patented technology, including technology that we have licensed on an exclusive basis from NIH. We are developing PentaStaph for use in patients who are at high risk of *S.aureus* infection and who are able to respond to a vaccine by producing their own antibodies. PentaStaph requires additional development, including preclinical testing and human studies, as well as regulatory approvals before it can be marketed. We announced two significant events in 2008 that will help advance the development of PentaStaph. In September 2008, we entered into a collaboration agreement with the NIAID to conduct pre-clinical toxicology evaluations of two new antigens designed to protect against two of the most virulent and debilitating toxins produced by the bacteria. This testing which is funded by the NIAID will enable the initiation of Phase I clinical trials for these new antigens in 2009. Additionally, in December 2008, we entered into a research and development agreement with the U.S. Department of Defense to conduct a series of collaborative clinical trials for PentaStaph. The U.S. Department of Defense will be responsible for certain aspects of the trial including clinical site costs. With these agreements in place, we will be able to advance the development of PentaStaph much further and faster than we could on our own. Further clinical development of PentaStaph and its components beyond that contemplated by our collaborations with NIAID and with the U.S. Department of Defense will require additional commercialization and development partners or additional commitments from existing partners.

#### Strategic Initiatives

In 2006, we began strategic initiatives to enhance shareholder value. In November 2006, we sold our PhosLo (calcium acetate) product and the product’s related assets to a U.S. subsidiary of Fresenius Medical Care, or Fresenius. Under the sale agreement, we received $65.0 million in cash at closing and received an additional $13.0 million of milestones as of March 11, 2009. We can also receive up to $72.5 million in milestone payments and royalties. The royalties relate to sales of a new product formulation over a base amount for 10 years after the closing date. In June 2007, we sold certain assets related to our product Aloprim (allopurinol sodium for Injection) of $3.7 million. On December 4, 2007, we sold our Biologics SBU and certain corporate shared services assets to Biotest for $185.0 million ($10.0 million of which has been escrowed for indemnification claims asserted on or before March 31, 2009: see Note 4 of the condensed consolidated financial statements for further discussion). As a result of these strategic actions, as of December 29, 2007 we had sold all of our marketed products, moved our corporate headquarters to Rockville, Maryland and focused our efforts on developing and partnering our NicVAX and PentaStaph products.

In 2008, we announced that we had retained a prominent investment bank to assist with our continued exploration of the full range of strategic alternatives available to us to further enhance shareholder value. These alternatives may include, but are not limited to, licensing or development arrangements, joint ventures, strategic alliances, a recapitalization, and the sale or merger of all or part of the company. In addition, we have engaged several other life science strategic advisors to assist with the process.

### RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED MARCH 28, 2009 AND MARCH 29, 2008

In May 2008, the FASB issued FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement),” (“FSP 14-1”). FSP 14-1 clarifies that (1) convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement, are not considered debt instruments within the scope of APB Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants,” (“APB 14”) and (2) issuers of such instruments should separately account for the liability and equity components of those instruments by allocating the proceeds from issuance of the instrument between the liability component and the embedded conversion option (i.e., the equity component). FSP 14-1 is effective for fiscal years beginning after December 15, 2008 and is required to be applied retrospectively to convertible debt instruments that are within the scope of this guidance and were outstanding during any period presented in the financial statements. We adopted FSP 14-1 in the first quarter 2009 and it had a material impact on our prior and current period financial statements; see Note 2 to our condensed consolidated financial statements for further discussion. We also adopted several other new accounting pronouncements in the first quarter 2009, none of which had a material impact on our condensed consolidated financial statements; see Note 3 to our condensed consolidated financial statements for further discussion.

*General and administrative expenses*. General and administrative expenses were $3.1 million for the first quarter of 2009 compared to $5.1 million for the first quarter of 2008. The decrease of $2.0 million reflects our continued efforts to reduce overall infrastructure costs, principally including legal and accounting costs. We expect our full-year 2009 general and administrative expenses to be comparable to or slightly below 2008 levels.

*Research and development expenses*. Research and development expenses were $3.8 million for the first quarter of 2009 compared to $3.2 million for the first quarter of 2008. Research and development increased approximately $0.6 million in 2009 as a result of an increase in focus on our current product candidates. Our research and development costs will increase significantly during the rest of 2009 if we initiate our Phase III NicVAX trials, which we are in a position to initiate this year. We are currently seeking a strategic partner for NicVAX. If we are successful in obtaining a partner for these trials, any payments received from the partner will offset these costs.

*Interest income*. Interest income was $0.2 million and $2.0 million for the first quarters of 2009 and 2008, respectively. Interest income in the first quarter 2008 related to interest earnings on investments of our cash which averaged over $200 million for the quarter. During 2008, we repurchased some of our outstanding common shares and convertible senior notes, resulting in a significantly lower average balance of our outstanding investments during the first quarter 2009. The prevailing interest rates in money market funds were also lower in the first quarter of 2009 as compared to the first quarter of 2008.

*Interest expense.* Interest expense was $0.4 million and $1.6 million for the first quarters of 2009 and 2008, respectively. The decrease in interest expense reflects the impact of the repurchase of over $57 million of our Convertible Senior Notes in 2008.

*Income taxes*. During 2009 and consistent with 2008, we recorded a full valuation allowance against all net deferred tax assets. As a result of this valuation allowance, the effective tax rate for continuing operations for both years is approximately 0%. Because of the intra-period income tax allocation requirements, we recorded a benefit for income taxes from continuing operations of $195 thousand in the first quarter of 2008 offset in total by an identical income tax provision from discontinued operations.

### LIQUIDITY AND CAPITAL RESOURCES

Our cash, cash equivalents and marketable securities at March 28, 2009 totaled $123.3 million as compared to $130.3 million at December 27, 2008. This decline is primarily the result of our net cash flows used in operations along with the payments of approximately $0.7 million for the repurchases of shares of our common stock. At March 28, 2009, we had restricted cash of $10.2 million related to discontinued operations that is held in escrow subject to valid indemnification claims by Biotest related to the sale of our Biologics SBU; in the first quarter 2009 Biotest asserted indemnification claims against us (see Note 4 of the condensed consolidated financial statements for further discussion).

Cash used in operating activities from continuing operations for the three months ended March 28, 2009 was $6.5 million, compared to $5.3 million for the three months ended March 29, 2008. The increase in cash used was primarily associated with the continued development of our current products. Cash provided by investing activities from continuing operations for the three months ended March 28, 2009 was $14.7 million, consisting largely of net proceeds from the sales and maturities of our marketable securities.

In 2007, our Board of Directors approved the repurchase of up to $65 million of our common stock in the open market or in privately negotiated transactions. In the first quarter of 2009, we acquired a total of 127,742 shares for a total cost of $0.4 million under the program. As purchases of treasury shares are accounted for on the trade date, the settlement of trades executed in the fourth quarter of 2008 which were settled in the first quarter of 2009 increased the cash used to purchase treasury shares in the first quarter by $0.3 million to $0.7 million as reported in the Condensed Consolidated Statement of Cash Flows. At March 28, 2009, $27.7 million remains available for share repurchase under the current authorization. Repurchased shares have been accounted for as treasury stock using the cost method.

In 2005, we issued $112.4 million of Convertible Senior Notes through a private offering to qualified institutional buyers as defined under Rule 144A of the Securities Act of 1933, as amended, the Securities Act. Net cash proceeds from the offering totaled $108.7 million. In 2007 we repurchased $38.8 million of our Convertible Senior Notes and in 2008 we repurchased an additional $57.3 million of our Convertible Senior Notes. Interest on our Convertible Senior Notes is payable on each April 15 and October 15, beginning October 15, 2005. We can redeem our Convertible Senior Notes at 100% of their principal amount, plus accrued and unpaid interest, any time on or after April 18, 2010. Holders of our Convertible Senior Notes may require us to repurchase our Convertible Senior Notes for 100% of their principal amount, plus accrued and unpaid interest, on April 15, 2010, April 15, 2012, April 15, 2015 and April 15, 2020, or following the occurrence of a change in control as defined in the indenture agreement governing the Notes. We may continue to repurchase our Convertible Senior Notes in the open market or in privately negotiated transactions. Subsequent to quarter end through April 24, 2009, we have repurchased an additional $10.4 million of our Convertible Senior Notes; we paid $10.1 million for the notes.

We believe cash, cash equivalents and marketable securities on hand at March 28, 2009 will be sufficient to meet our anticipated cash requirements for operations and debt service for at least the next 12 months.

### CRITICAL ACCOUNTING POLICIES

Note 3 to our condensed consolidated financial statements includes a discussion of our significant accounting policies. We believe that the following policies and estimates are critical because they involve significant judgments, assumptions and estimates. We have discussed the development and selection of our critical accounting estimates with the Audit Committee of our Board of Directors and the Audit Committee has reviewed the disclosures presented below relating to those policies and estimates:

*Accounting estimates:* The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period, including such amounts related to discontinued operations. Actual results could differ from those estimates.

*Research and development expenses:* Except for advance payments, research and development costs are expensed as incurred. We use our research and development resources, including employees, equipment and facilities, across multiple drug development programs. Research and development expenses include direct labor costs as well as the costs of contractors and other direct and indirect expenses, (including an allocation of the costs of facilities). We expense amounts payable to third parties under collaborative product development agreements at the earlier of the milestone achievement or as payments become contractually due. In circumstances where we receive grant income (which is a reimbursement to research and development costs incurred), we record the income as an offset to the related expense.

*Equity-based compensation*: We currently account for equity-based compensation under the fair value recognition provisions of SFAS No. 123R, “Share-Based Payment,” which establish accounting for share-based awards in exchange for employee services and require companies to expense the estimated fair value of these awards over the requisite employee service period. Under SFAS No. 123R, share-based compensation cost is determined at the grant date using an option pricing model. The value of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the employee’s requisite service period.

### NEW ACCOUNTING PRONOUNCEMENTS

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141R, “Business Combinations,” (“SFAS 141R”). SFAS 141R requires the acquiring entity in a business combination to record all assets acquired and liabilities assumed at their fair values, changes the recognition of assets acquired and liabilities assumed arising from contingencies, changes the recognition and measurement of contingent consideration, and requires the expensing of acquisition-related costs as incurred. SFAS 141R also requires additional disclosure of information surrounding a business combination, so that users of the financial statements can fully understand the nature and financial impact of the business combination. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. SFAS 141R will only impact our financial statements if we are a party to a business combination.

## Controls and procedures

As filed, 2,038 characters.

Our Chief Executive Officer currently serves as acting Chief Financial Officer and we rely on external financial consultants to provide the majority of our internal accounting functions.

As of the end of the period covered by this Quarterly Report, management performed, with the participation of our Chief Executive Officer and Chief Accounting Officer, an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Securities Exchange Act of 1934, as amended, or the Exchange Act, Rules 13a-15(e) and 15d-15(e)). Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Accounting Officer, to allow timely decisions regarding required disclosures. Based on this evaluation, management, including our Chief Executive Officer and Chief Accounting Officer, has concluded that as of March 28, 2009, the Company’s disclosure controls and procedures were effective.

There has been no change in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during our fiscal quarter ended March 28, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met, and therefore, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. We do not expect that our disclosure controls and procedures or our internal control over financial reporting are able to prevent all errors and all fraud.

## Risk factors

As filed, 2,153 characters.

The following risk factor titled “Under the Biologics strategic business unit asset purchase agreement, we will have continuing obligations to indemnify Biotest, and may be subject to other liabilities” appearing in our Annual Report on Form 10-K for the year ended December 27, 2008 has changed materially and is updated as follows:

We *have continuing obligations to indemnify Biotest under the Biologics strategic business unit asset purchase agreement which could adversely affect our business.*

In connection with the sale of our Biologics SBU and certain corporate shared services assets to Biotest, we agreed to indemnify Biotest for a number of specified matters including for losses in connection with the breach of our representations, warranties and covenants contained in the asset purchase agreement. Under the Asset Purchase Agreement with Biotest, our maximum liability for indemnification claims for breaches of representations and warranties is capped at 25% of the purchase price paid to us, or approximately $46 million. In addition, $10.0 million of the total cash consideration from the sale was deposited into an escrow account to secure our indemnification obligations to Biotest following the closing. The escrow was scheduled to be released to Nabi on April 15, 2009, subject to any pending indemnification claims.

On March 31, 2009, we received a claim notice from Biotest seeking indemnification for losses estimated by Biotest to be approximately $56 million in connection with our alleged breach of representations and warranties under the terms of the Asset Purchase Agreement with Biotest. We have denied Biotest’s claims. Biotest alleges that we breached representations and warranties in the agreement relating to an assigned contract and local permitting on the construction of our manufacturing facility in Boca Raton, Florida. Pending resolution of these claims, the $10 million in escrowed proceeds will continue to be held in escrow.

If Biotest is successful in prevailing on some or all of its indemnification claims, this could have a material adverse effect on our financial position and continuing business.

Filed May 6, 2009.
Source: SEC EDGAR, the filing index for accession 0001193125-09-101718. Last ingested by Listed: Nov 5, 2026, 18:48 ET. No prices; not investment advice.