# Vaxart, Inc.: Form 10-Q for the period ended Sep 24, 2011

- Company: [Vaxart, Inc.](/companies/vxrt.md) (CIK 72444)
- Form: 10-Q
- Filed: 2011-11-02
- Accepted by EDGAR: Nov 2, 2011, 17:09 ET
- Period: 2011-09-24
- Accession: 0001193125-11-292989
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/72444/000119312511292989/d230474d10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/72444/000119312511292989/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2011-09-24.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2011-06-26 to 2011-09-24 | $1.1m | us-gaap:Revenues |
| Revenue | 9 months, 2010-12-26 to 2011-09-24 | $14.0m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2011-06-26 to 2011-09-24 | $344.0k | us-gaap:CostOfServices |
| Cost of revenue | 9 months, 2010-12-26 to 2011-09-24 | $1.5m | us-gaap:CostOfServices |
| Research and development | 3 months, 2011-06-26 to 2011-09-24 | $4.4m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2010-12-26 to 2011-09-24 | $16.2m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2011-06-26 to 2011-09-24 | −$4.9m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2010-12-26 to 2011-09-24 | −$7.8m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2011-06-26 to 2011-09-24 | −$2.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2010-12-26 to 2011-09-24 | −$2.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2011-06-26 to 2011-09-24 | $78.0k | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2010-12-26 to 2011-09-24 | −$2.5m | us-gaap:NetIncomeLoss |
| Diluted shares (weighted) | 3 months, 2011-06-26 to 2011-09-24 | 42,397,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2010-12-26 to 2011-09-24 | 42,269,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2010-12-26 to 2011-09-24 | −$14.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2010-12-26 to 2011-09-24 | $1.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2011-09-24 | $92.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2011-09-24 | $103.8m | us-gaap:AssetsCurrent |
| Total assets | at 2011-09-24 | $104.1m | us-gaap:Assets |
| Current liabilities | at 2011-09-24 | $9.9m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2011-09-24 | $43.4m | us-gaap:Liabilities |
| Shareholders' equity | at 2011-09-24 | $60.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 27,776 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 conduct and obtain successful results from the second of our two Phase III clinical trials for NicVAX (our first Phase III clinical trial failed to meet its primary endpoint) or our Dutch study of NicVAX in combination with varenicline; GSK’s failure to exercise its option for and successfully commercialize NicVAX; GSK’s failure to successfully develop and commercialize any future generation candidate nicotine vaccine; our ability to commercialize NicVAX if GSK does not exercise its option for NicVAX; our ability to identify an alternative partner or to raise sufficient new capital resources to fully develop and commercialize NicVAX if GSK does not exercise the NicVAX option; our ability to successfully contract with and obtain manufactured NicVAX product from contract manufacturing organizations; our ability to attract, retain and motivate key employees; our ability to collect royalty payments under the PhosLo agreement; the ability to obtain regulatory approval for NicVAX and any future generation candidate nicotine vaccine in the U.S. or other markets; our ability to comply with reporting and payment obligations under government rebate and pricing programs; and loss of full use of our net operating loss carry forwards. 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 25, 2010 filed with the Securities and Exchange Commission. 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- and nine month periods ended September 24, 2011. The discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto.

### OVERVIEW

We are a biopharmaceutical company focused on the development of vaccines for nicotine addiction. We leverage our experience and knowledge in powering the human immune system to target serious unmet medical needs in this area.

In 2006, we initiated a strategic process to enhance shareholder value which resulted in the sale, licensure or grant of an option to acquire all of our marketed products and major pipeline products. Our sole remaining product currently in development is NicVAX, an innovative and proprietary investigational vaccine for the treatment of nicotine addiction and prevention of smoking relapse based on patented technology. In the first quarter of 2010 we granted to GSK (i) an option to exclusively license NicVAX on a worldwide basis and (ii) a license to develop follow-on next-generation nicotine vaccines using our intellectual property combined with GSK proprietary technology including GSK proprietary adjuvants.

Pursuant to the terms of this agreement, we received a $40 million initial payment and we granted to GSK (i) an option to obtain an exclusive worldwide license to develop, commercialize and manufacture NicVAX as it currently exists, as well as certain potential alternative forms of NicVAX together with an adjuvant other than a GSK proprietary adjuvant and/or with different presentation, dosage or administration (NicVAX Alternatives), and (ii) an exclusive worldwide license to develop, commercialize and manufacture certain future generation candidate vaccines for the prevention or treatment of nicotine addiction based on our NicVAX intellectual property (other than NicVAX and NicVAX Alternatives). In addition to the $40 million initial payment, if GSK exercises its option we could receive under the agreement more than $460 million in potential option fees and regulatory, development, manufacturing and sales milestones for NicVAX and follow-on nicotine vaccines. If GSK does not exercise its option but develops the next-generation candidate, our maximum possible milestones under the agreement would be reduced to $290 million. Under the agreement, we are also eligible to receive royalties on global sales of NicVAX should GSK exercise its option and commercialize the product, as well as royalties on global sales of any next-generation nicotine vaccines regardless of whether GSK exercises its option. In the third quarter we announced that the first of our two Phase III clinical trials failed to meet its primary endpoint (see further detail below), which reduces the likelihood that GSK will exercise its option.

The smoking cessation market is estimated to exceed $4 billion annually and is currently considered to be a largely unmet medical need. Nicotine is a non-immunogenic small molecule that, upon inhalation into the lungs, quickly passes into the bloodstream and subsequently reaches the brain by crossing the blood-brain barrier. Once in the brain, the nicotine binds to specific nicotine receptors resulting in the release of stimulants, such as dopamine, a chemical which triggers the highly addictive pleasurable effects experienced by smokers and users of other nicotine products. NicVAX is designed to stimulate the immune system to produce highly specific antibodies that bind to nicotine in the bloodstream. A nicotine molecule attached to specific antibodies is too large to cross the blood-brain barrier and thus is unable to reach the receptors in the brain thereby reducing the pleasure experienced by the smoker making it easier to quit. Pre-clinical animal studies with NicVAX have shown that vaccination prevents the majority of nicotine from reaching the brain and blocks the pharmacological effects of nicotine, including effects that can lead to addiction or can reinforce and maintain addiction.

On July 18, 2011, we announced that NicVAX did not meet its primary endpoint in the first of our two confirmatory Phase III clinical trials. A preliminary assessment of the trial data showed that subjects treated with NicVAX quit smoking at a similar rate of approximately 11% compared to subjects who received placebo. As in previous trials, NicVAX was well-tolerated with a clinically acceptable safety and tolerability profile. The study was a double-blinded, placebo-controlled trial which enrolled approximately 1,000 subjects. The primary endpoint of the study was the abstinence rate for 16 weeks ending at 12 months. Abstinence was evaluated by self-reported cigarette consumption and biologically verified by exhaled carbon monoxide. Secondary endpoints included the abstinence rate at various time intervals, safety and immunogenicity, and the effect of NicVAX on withdrawal symptoms, cigarette consumption, smoking satisfaction and nicotine dependency. Further *post-hoc* analysis of the data indicated that subjects with higher anti-nicotine antibodies quit smoking for 36 weeks (from weeks 17 to 52) at a significantly greater rate than placebo, consistent with earlier finding from the Phase IIb proof-of-concept. These sub-population associations await confirmation in the second Phase III trials.

In March 2010, we initiated the second Phase III trial and announced the completion of enrollment in this Phase III trial in November 2010. The results of this second Phase III clinical trial, which has a similar design and conduct to the first trial, are expected before the end of this year. Data from this second trial may provide clues that could help explain the results from the first trial.

The results of the first Phase III trial were unexpected in view of the encouraging data from our Phase IIb proof-of-concept announced in November 2007. The Phase IIb demonstrated statistically significant rates of smoking cessation and continuous long-term smoking abstinence at 6 and 12 months for subjects injected with NicVAX who had the highest immune response (top 30%) as compared with subjects injected with placebo. In December 2008, we announced that we reached an agreement with the FDA on an SPA for the pivotal Phase III clinical trials for NicVAX and in June 2009, we announced that we received Scientific Advice from the EMA. In September 2009, we announced that we received a $10 million grant from NIDA to partially offset the cost of the first of two Phase III studies that we are required to conduct by the FDA in support of NicVAX’s licensure. In October 2009, we also announced the initiation of an investigator initiated clinical trial in the Netherlands to test the efficacy of a combined therapy of NicVAX with varenicline, or Chantix/Champix. In November 2009, we announced the initiation of the first of two Phase III efficacy trials in the U.S., which is the first such trial for an addiction vaccine. The results from this trial are discussed above.

In addition to our NicVAX development effort, during the second quarter of 2011 we completed our work to help develop PentaStaph under contract with GSK. PentaStaph is a new pentavalent vaccine designed to prevent *S. aureus* infections including those infections caused by the most dangerous antibiotic-resistant strains of *S. aureus.* In November 2009, we sold PentaStaph to GSK under an Asset Purchase Agreement for a total consideration of $46 million including a $20 million upfront payment and $26 million payable upon achievement of certain milestones. At the same time, we received an additional $1 million for the sale of our *Staphylococcus epidermidis* vaccine program and an additional $0.5 million for transfer of certain specified materials. The final milestone of $5 million was earned in the first quarter of 2011 and we received payment in the second quarter.

### FOR THE THREE MONTHS ENDED SEPTEMBER 24, 2011 AND SEPTEMBER 25, 2010

*Revenue:* Revenue reflects (i) the amortization of upfront fees received under our PentaStaph and NicVAX agreements, (ii) the completion of substantive milestones included in those agreements, and (iii) services provided to GSK. Total revenue in the third quarter of 2011 of $1.1 million included $0.6 million of deferred revenue amortization from the NicVAX agreement, and $0.5 million for services under the PentaStaph and NicVAX agreements. Total revenue in the third quarter of 2010 of $12.3 million included $8 million in milestones from PentaStaph, $3.2 million of deferred revenue amortization from the PentaStaph and NicVAX agreements and $1.1 million for services under the PentaStaph and NicVAX agreements. We expect our revenue for the remainder of 2011 to be significantly less than our revenue in 2010 as a result of the completion of our obligations under the PentaStaph agreement.

*Cost of services:* Cost of services was $0.3 million for the third quarter of 2011 compared to $0.8 million for the third quarter of 2010. These costs include internal labor, external contractors and allocated indirect costs. We expect these costs to decrease in the fourth quarter of 2011 relative to the third quarter as a result of completing the PentaStaph agreement with GSK.

*Research and development expenses:* Research and development expenses were $4.4 million for the third quarter of 2011 compared to $6.8 million for the third quarter of 2010. Research and development expenses for the fourth quarter of 2011 are expected to continue to decline relative to the third quarter costs, as we have completed the first of two Phase III trials and are nearing completion of the second trial.

*General and administrative expenses:* General and administrative expenses, after an allocation of a portion of these expenses to cost of services and research and development expenses, were $1.3 million for the third quarter of 2011 compared to $1.4 million for the third quarter of 2010. In light of the recent results of the first NicVAX Phase III trial, we expect general and administrative expenses in the fourth quarter of 2011 to decline compared to the third quarter, as management intensifies its effort to reduce such costs, including a reduction in force as appropriate.

*Income tax benefit:* Because of the intra-period income tax allocation requirements, we recorded a benefit for income taxes from continuing operations of $2.0 million during the third quarter of 2011, offset in total by an identical income tax provision from discontinued operations. The intra-period income tax allocation considers discontinued operations for purposes of determining the amount of tax benefits that result from our loss from continuing operations. During the third quarter 2010, we recognized an income tax benefit of $1.8 million relating to an expected refund of prior year alternative minimum tax payments.

*Discontinued operations:* During the third quarter of 2011, we recognized $3.0 million of income, net of tax of $2.0 million, from discontinued operations relating to the milestone of the first commercial sale of a new liquid formulation from the PhosLo agreement. For the third quarter of 2010, we recorded no activity.

### FOR THE NINE MONTHS ENDED SEPTEMBER 24, 2011 AND SEPTEMBER 25, 2010

*Revenue:* Revenue reflects (i) the amortization of upfront fees received under our PentaStaph and NicVAX agreements, (ii) the completion of substantive milestones included in those agreements, and (iii) services provided to GSK. Total revenue in the first nine months of 2011 of $14.0 million included $7.2 million of deferred revenue amortization from the PentaStaph and NicVAX agreements, $5.0 million for a completed PentaStaph milestone, and $1.8 million for services under the PentaStaph and NicVAX agreements. Total revenue in the first nine months of 2010 of $30.9 million included $12.0 million of deferred revenue amortization, $16.0 million of completed milestones, and $2.9 million for services under the PentaStaph agreement. The decrease in revenue from amortization of upfront fees resulted from a change made in the second quarter of 2010 in the estimated completion date of the

PentaStaph joint steering committee as well as the complete amortization of the upfront fees from the PentaStaph agreement. We expect our revenue for the remainder of 2011 to be significantly less than our revenue in 2010 as a result of the completion of our obligations under the PentaStaph agreement.

*Cost of services:* Cost of services was $1.5 million for the first nine months of 2011 compared to $2.1 million for the first nine months of 2010. These costs include internal labor, external contractors and allocated indirect costs. We expect these costs to decrease in the fourth quarter of 2011 as a result of completing the PentaStaph agreement with GSK.

*Research and development expenses:* Research and development expenses were $16.2 million for the first nine months of 2011 compared to $19.2 million for the first nine months of 2010. The decrease is due to a reduction in NicVAX manufacturing related activities in 2011. Research and development expenses for the fourth quarter of 2011 are expected to continue to decline relative to the third quarter costs, as we have completed the first of two Phase III trials and are nearing completion of the second trial.

*General and administrative expenses:* General and administrative expenses, after an allocation of a portion of these expenses to cost of services and research and development expenses, were $4.1 million for the first nine months of 2011 compared to $4.4 million for the first nine months of 2010. In light of the recent results of the first NicVAX Phase III trial, we expect general and administrative expenses in the fourth quarter of 2011 to decline compared to the third quarter, as management intensifies its effort to reduce such costs, including reduction in force as appropriate.

*Interest expense:* We recorded no interest expense for the third quarter of 2011. Interest expense in 2010 consisted largely of interest expense associated with our Convertible Senior Notes. We repurchased the remaining balance of these notes in April 2010.

*Income tax benefit:* Because of the intra-period income tax allocation requirements, we recorded a benefit for income taxes from continuing operations of $2.0 million for the first nine months of 2011, offset in total by an identical income tax provision from discontinued operations. The intra-period income tax allocation considers discontinued operations for purposes of determining the amount of tax benefits that result from our loss from continuing operations. During the first nine months of 2010, we recognized an income tax benefit of $1.8 million relating to an expected refund of prior year alternative minimum tax payments.

*Discontinued operations:* During the first nine months of 2011, we recognized $3.0 million of income, net of tax of $2.0 million, from discontinued operations relating to the milestone of the first commercial sale of a new liquid formulation from the PhosLo agreement. For the first nine months of 2010, we recorded no activity.

### LIQUIDITY AND CAPITAL RESOURCES

Our cash, cash equivalents and marketable securities at September 24, 2011 totaled $102.0 million compared to $110.7 million on December 25, 2010. The decline is primarily the result of our net cash used in operations of $14.5 million offset in part by net cash provided by investing activities and the $5 million milestone payment received through discontinued operations related to the first commercial sale of the new liquid formulation under the PhosLo agreement.

Cash (used in) provided by operating activities was ($14.5) million and $41.5 million for the nine months ended September 24, 2011, and September 25, 2010, respectively. The decrease is primarily the result of a reduction in the amount of the payments received from GSK during the first nine months of 2011 compared to the first nine months of 2010.

We believe cash, cash equivalents and marketable securities on hand at September 24, 2011 will be sufficient to meet our anticipated cash requirements for operations for at least the next 12 months.

### CRITICAL ACCOUNTING POLICIES AND ESTIMATES

*New accounting pronouncements:* In October 2009, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update 2009-13, “*Revenue Recognition (Topic 605) Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force,”* or ASU 2009-13. ASU 2009-13 amends existing accounting guidance for separating consideration in multiple-deliverable arrangements. ASU 2009-13 establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific evidence is not available, or the estimated selling price if neither vendor-specific evidence nor third-party evidence is available. ASU 2009-13 eliminates the residual method of allocation and requires that consideration be allocated at the inception of the arrangement to all deliverables using the “relative selling price method.” The relative selling price method allocates any discount in the arrangement proportionately to each deliverable on the basis of each deliverable’s selling price. ASU 2009-13 requires that a vendor determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a stand-alone basis.

The Company adopted the provisions of ASU 2009-13 effective December 26, 2010 for revenue arrangements entered into or materially modified in fiscal years beginning on or after that date. The adoption did not have any material effect on our condensed consolidated balance sheets, condensed consolidated statements of operations and condensed consolidated statements of cash flows for any historical periods or as of, or for, the nine months ended September 24, 2011 because we did not enter into or materially modify any revenue arrangement subsequent to December 26, 2010. We are not able to reasonably estimate the effect of adopting these standards on future periods because the impact will vary based on the nature and volume of new or materially modified revenue arrangements in any given period.

In April 2010, the FASB issued Accounting Standards Update 2010-17, “*Revenue Recognition—Milestone Method (Topic 605) Milestone Method of Revenue Recognition, a consensus of the FASB Emerging Issues Task Force”* or ASU 2010-17. ASU 2010-17 provides guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. A vendor can recognize consideration that is contingent upon achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive. For the milestone to be considered substantive, the consideration earned by achieving the milestone should meet all of the following criteria: (i) be commensurate with either the vendor’s performance to achieve the milestone or the enhancement of the value of the item delivered as a result of a specific outcome resulting from the vendor’s performance to achieve the milestone, (ii) relate solely to past performance, and (iii) be reasonable relative to all deliverables and payment terms in the arrangement. An individual milestone may not be bifurcated and an arrangement may include more than one milestone. Accordingly, an arrangement may contain both substantive and non-substantive milestones.

The Company adopted the provisions of ASU 2010-17 effective December 26, 2010 for milestones achieved on or after that date. Since the Company’s existing policies are consistent with those contained in ASU 2010-17, the adoption of ASU 2010-17 did not have any material effect on our condensed consolidated balance sheets, condensed consolidated statements of operations and condensed consolidated statements of cash flows for any historical periods or as of, or for, the nine months ended September 24, 2011. We believe that the effect of adopting these standards on future periods will not be material.

Note 2 to our condensed consolidated financial statements includes a discussion of our significant accounting policies. A summary of the more significant policies follows:

*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.

*Revenue recognition:* Our revenue generating-arrangements may include multiple elements and deliverables, including licenses, options, research and development activities, participation on joint steering committees, and contract manufacturing, among other elements.

For arrangements entered into prior to December 26, 2010, when we determine that an element has stand-alone value to our customer, we allocate a portion of the total contract price to that element based on its objectively determined and relative fair value, and recognize revenue for that element according to its characteristics. When we cannot reliably and objectively determine fair value of any delivered element, we combine that element with undelivered elements as a single unit of accounting.

For arrangements entered into or materially modified after December 25, 2010, when we determine that an element has stand-alone value to our customer, we allocate a portion of the total contract price to that element based on its relative selling price, determined pursuant to a selling price hierarchy, and recognize revenue for that element according to its characteristics. We did not enter into or materially modify any revenue arrangements subsequent to December 25, 2010.

Accordingly, revenue consists of license fees, milestone payments, and payments for contractual services. License fees received are initially recorded as deferred revenue, and are subsequently recognized as revenue ratably over the period of our participation on joint steering committees. The joint steering committee related to the NicVAX agreement is currently expected to operate for 190 months from the date of the agreement (or through December 2025). The joint steering committee related to the PentaStaph agreement ended in the second quarter of 2011.

For milestones that are deemed substantive, we recognize the contingent revenue when: (i) the milestones have been achieved; (ii) no further performance obligations with respect to the milestones exist; and (iii) collection is reasonably assured. A milestone is considered substantive if all of the following conditions are met: (i) the milestone is nonrefundable; (ii) achievement of the milestone was not reasonably assured at the inception of the arrangement; (iii) substantive effort is involved to achieve the milestone; and (iv) the amount of the milestone appears reasonable in relation to the effort expended with the other milestones in the arrangement and the related risk associated with achievement of the milestone. If a milestone is deemed not to be substantive, the Company would recognize the portion of the milestone payment as revenue that correlates to work already performed; the remaining portion of the milestone payment will be deferred and recognized as revenue as the Company completes its performance obligations.

Payments for contractual services are recognized as revenue when earned, typically when the services are rendered.

*Research and development expenses:* Research and development costs are expensed as incurred; advanced payments are deferred and amortized over the period of performance. 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.

*Share-based compensation:* We currently account for share-based compensation at fair value; accordingly we expense the estimated fair value of share-based awards made in exchange for employee services over the requisite employee service period. 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.

## Market risk

As filed, 150 characters.

There have been no material changes to our market risk as described in Item 7A of our Annual Report on Form 10-K for the year ended December 25, 2010.

## Controls and procedures

As filed, 1,461 characters.

Our Chief Executive Officer currently serves as acting Chief Financial Officer.

### Evaluation of Disclosure Controls and Procedures

An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Accounting Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Accounting Officer concluded that these disclosure controls and procedures were effective.

### Changes in Internal Controls Over Financial Reporting

There has been no change in our internal control over financial reporting during our most recent fiscal quarter 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 with certainty all errors and all fraud.

## Risk factors

As filed, 1,706 characters.

In addition to the changes to our Risk Factors disclosed in our Periodic Report on Form 10-Q for the quarter ended June 25, 2011, the last risk factor disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 25, 2010 has materially changed and is restated as follows:

***Our ability to use our federal and state net operating loss carry forwards to reduce taxable income generated in the future could be substantially limited.***

Our ability to use our net operating losses may be subject to an annual limitation due to ownership changes that may have occurred or that could occur in the future, as determined by Section 382 of the Internal Revenue Code of 1986, as amended, as well as similar state regulations. Depending on the actual amount of any limitation on our ability to use our net operating loss carry forwards, a significant portion of our future taxable income could be subject to federal and/or state income tax, creating federal and/or state income tax liabilities. Additionally, such limitation may result in our net operating losses expiring before we have the ability to use them. Moreover, the Internal Revenue Service may not agree with the amount or timing of prior losses, thereby further limiting our net operating loss carry forward. On August 25, 2011, we entered into a Rights Agreement with American Stock Transfer & Trust Company, LLC, as rights agent, in an effort to prevent an “ownership change” under Section 382 from occurring and thereby protect the value of our net operating losses. There can be no assurance, however, that the Rights Agreement will prevent an ownership change from occurring or protect the value of the net operating losses.

Filed Nov 2, 2011.
Source: SEC EDGAR, the filing index for accession 0001193125-11-292989. Last ingested by Listed: Nov 5, 2026, 18:48 ET. No prices; not investment advice.