Vaxart, Inc.: Form 10-Q for the period ended May 2, 2017

FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In most cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “forecast,” “potential,” “likely” or “possible”, as well as the negative of such expressions, and similar expressions intended to identify forward-looking statements. These forward-looking statements include, without limitation, statements relating to:

• our expectations as to when enrollment will be completed and top-line safety and efficacy data for BTA074 are expected;
• our anticipation that we will generally incur net losses from operations in the future due to our intention to continue to support the preclinical and clinical development of our product candidates;
• our future financing requirements, the factors that may influence the timing and amount of those requirements and our ability to fund them;
• the number of months that our current cash, cash equivalents, investments and anticipated future proceeds from existing royalty-bearing licenses will allow us to operate;
• a wide range of strategic alternatives that the Company plans to explore that may include a business combination or strategic merger, in-licensing clinical stage programs, an acquisition, or other transaction that would complement the Company’s current pipeline;

Various important factors could cause actual results, performance, events or achievements to materially differ from those expressed or implied by forward-looking statements, including the U.S. Food and Drug Administration (“FDA”) or a similar regulatory body in another country, a data safety monitoring board, or an institutional review board delaying, limiting, suspending or terminating any of the Company’s clinical development programs at any time for a lack of safety, efficacy, tolerability, anti-viral activity, commercial viability, regulatory or manufacturing issues, or any other reason whatsoever; the Company's ability to secure, manage and retain qualified third-party clinical research, preclinical research, data management and contract manufacturing organizations upon which it relies to assist in the design, development, implementation and execution of the clinical and preclinical development of all its product candidates; and these third-party organizations fulfilling their contractual obligations on a timely and satisfactory basis; the safety or efficacy data from planned or ongoing future preclinical and clinical studies of any of its product candidates not supporting the clinical development of that product candidate; the successful enrollment of the requisite number of study participants on a timely basis; the Company’s ability to comply with applicable government regulations in various countries and regions in which we are conducting, or expect to conduct, clinical trials; the Company’s ability to retain and recruit sufficient staff, including key executive management and employees, to manage our business; the Company’s ability to maintain, protect or defend its proprietary rights from unauthorized use by others, or not infringe on the intellectual property rights of others; our ability to successfully manage our expenses, operating results and financial position in line with our plans and expectations; the condition of the financial equity and debt markets and our ability to raise sufficient funding in such markets; changes in the general economic business or competitive conditions in the industry or with respect to our product candidates; potential employee resignations on short notice; provisions in certificate of incorporation, bylaws and laws of Delaware containing provisions that could delay or discourage a change in control of the Company; the success of our strategic alternatives exploration process and other cautionary statements contained elsewhere in this Quarterly Report on Form10-Q and in the Company’s Annual Report on Form 10-K for the year ended June 30, 2016, as filed with the U.S. Securities and Exchange Commission on September 13, 2016.

There may be events in the future that we are unable to predict accurately, or over which we have no control. You should completely read this Form 10-Q and the documents that we reference herein that have been filed or incorporated by reference as exhibits and with the understanding that our actual future results may be materially different from what we expect. Our business, financial condition, results of operations, and prospects may change. We may not update these forward-looking statements, even though our situation may change in the future, unless we have an obligation under the federal securities laws to update and disclose material developments related to previously disclosed information. We qualify all of the information presented in this Form 10-Q, and particularly our forward-looking statements, by these cautionary statements.

Aviragen is a registered trademark of Aviragen Therapeutics Inc., Relenza ® is a registered trademark of GlaxoSmithKline plc, and Inavir ® is a registered trademark of Daiichi Sankyo Company, Ltd.

References to “we,” “us,” and “our” refer to Aviragen Therapeutics, Inc. and its subsidiaries.

The following is a discussion and analysis of the major factors contributing to our results of operations for the three and nine months ended March 31, 2017, and our financial condition at that date, and should be read in conjunction with the financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Company Overview

We are focused on the discovery and development of direct-acting antivirals to treat infections that have limited therapeutic options and affect a significant number of patients globally. The Company has three Phase 2 clinical stage compounds: vapendavir, a capsid inhibitor for the prevention or treatment of rhinovirus (RV) upper respiratory infections; BTA585 (enzaplatovir), a fusion protein inhibitor in development for the treatment of respiratory syncytial virus infections; and BTA074, an antiviral treatment for condyloma caused by human papillomavirus types 6 & 11. We also have preclinical RSV non-fusion inhibitor program that we believe complements our F-protein inhibitor BTA585.

Although several of our influenza product candidates have been successfully developed and commercialized to date by other larger pharmaceutical companies under license, collaboration or commercialization agreements with us, we have not independently developed or received regulatory approval for any product candidate, and we do not currently have any sales, marketing or commercial capabilities. Therefore, it is possible that we may not derive any significant product revenues from any product candidates that we are developing now, or may develop in the future. We expect to incur losses for the foreseeable future as we intend to support the clinical and preclinical development of our product candidates.

In April 2017, we announced that we plan to explore a wide range of strategic alternatives that include a business combination or strategic merger, in-licensing clinical stage programs, an acquisition, or other transaction that would complement our current pipeline and could maximize both near and long-term value for our shareholders. We have retained Stifel, Nicolaus & Company, Incorporated to serve as our financial advisor in the process. During the strategic alternatives process, we plan to continue to finance our operations with its existing cash. The Company’s ability to continue to support its operations is dependent, in the near-term, upon managing its cash resources (including royalty revenue received under existing licenses) as we continue with our ongoing clinical development activities. We do not have a defined timeline for the exploration of strategic alternatives and we can provide no assurance that the process will result in any strategic alternative being announced or consummated. We do not intend to discuss or disclose further developments during this process unless and until our Board of Directors has approved a specific action or otherwise determined that further disclosure is appropriate.

Recent Clinical Highlights and Updates

Strategic Review Process. The Company is actively engaged, with the assistance of its financial advisor, Stifel, Nicolaus & Company, Incorporated, in evaluating a wide range of strategic alternatives that include a business combination or strategic merger, in-licensing clinical stage programs, an acquisition, or other transaction that would complement the Company's pipeline.

BTA074. The Phase 2 trial of BTA074, a topical antiviral treatment for condyloma caused by human papillomavirus (HPV), is ongoing with completion of enrollment in the 210 patient trial anticipated in the second half of 2017. Top-line safety and efficacy data are expected in the first half of 2018.

Vapendavir. On February 13, 2017 the Company announced top-line data from its Phase 2b SPIRITUS trial, a multi-center, randomized, double-blind, placebo controlled, dose-ranging study of vapendavir in moderate to severe asthmatics with a rhinovirus (RV) infection. Vapendavir did not demonstrate a statistically significant reduction in the primary endpoint, asthma control questionnaire-6 (ACQ-6) at day 14 compared to placebo; however, Vapendavir did demonstrate an antiviral effect and clinical benefit in subjects dosed within 24 hours of symptom onset, consistent with that observed in earlier clinical trials with the drug. The Company is working with several key opinion leaders in evaluating a potential clinical development path for the drug based on the consistent antiviral effect observed in all of its Phase 2 clinical studies, and its favorable safety profile.

RSV Programs. On February 1, 2017 the Company announced top-line data from its double-blind, placebo-controlled Phase 2a study of BTA585 in adults challenged intranasally with respiratory syncytial virus (RSV). The data indicate there was not a significant reduction in the primary endpoint, which was viral load. The overall safety profile of BTA585 was favorable and consistent across treatment groups. The Company continues to progress non-clinical activities in support of its response to the U.S. Food and Drug Administration regarding the clinical hold on BTA585 for the treatment of respiratory syncytial virus (RSV) infections. In addition the Company is making progress in identifying several compounds for its non-nucleoside inhibitor program in the same indication.

Overhead Expense. The Company has reduced its headcount by approximately 25% and has taken several additional steps to preserve cash during the strategic review process.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s Discussion and Analysis of Results of Operations discusses our financial results, which (except to the extent described in the Notes thereto) have been presented in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

We base our estimates and judgments on historical experience, current economic and industry conditions, and various other factors that we believe to be reasonable under the circumstances. This forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe there have been no changes to our critical accounting policies that require significant judgment and estimates as discussed in detail in our 2016 annual 10-K filing:

• Use of estimates
• Revenue recognition
• Accrued expenses
• Share-based compensation

For a description of recent accounting policies and the impact on our financial statements, refer to Note 2 in the condensed consolidated financial statements.

Results of Operations for the Three months ended March 31, 2017 and March 31, 2016

Summary. For the three months ended March 31, 2017, we reported a net loss of $4.4 million, as compared to a net loss of $5.2 million in the same period of the prior fiscal year. Basic and diluted net loss per share was $0.11 for the three month period ended March 31, 2017, as compared to a basic and diluted net loss per share of $0.14 in the same period of 2016. The following commentary provides details underlying changes from last year in the major line items of our statement of operations:

Revenue. Revenue decreased to $4.9 million for the three month period ended March 31, 2017 from $5.3 million in the same period in 2016 mainly due to a $0.6 million decrease in Relenza® royalties which was partially offset by a $0.2 million increase in Inavir® royalties. Of the total $3.8 million Inavir royalties earned for the three months ended March 31, 2017, $0.8 million are related to the sale of certain royalty rights to HealthCare Royalty Partners III, L.P. (HCRP) in April 2016 and will be passed through to HCRP. These are accounted for as non-cash royalty revenue in the condensed consolidated statement of operations. The following table summarizes the key components of our revenue for the three months ended March 31, 2017 and 2016:

(in millions)

Research and Development Expense. Research and development expense decreased to $6.8 million for the three months ended March 31, 2017 from $8.5 million for the same period in 2016. The following table summarizes the components of our research and development expense for the three months ended March 31, 2017 and 2016.

(in millions)

Direct preclinical, clinical and product development expense decreased largely due to reduced clinical trial activity and manufacturing costs, as two of our three Phase 2 clinical trials came to a close, and reductions in overhead during the period.

General and Administrative Expense. General and administrative expense decreased to $1.8 million for the three months ended March 31, 2017 from $2.3 million for the same period in 2016. The following table summarizes the components of our general and administrative expense for the three months ended March 31, 2017 and 2016.

(in millions)

18

Foreign Exchange Loss (Gain), net. The impact of foreign exchange changed from a gain of $0.3 million in March 31, 2016 to a loss of $0.1 million for three months ended March 31, 2017. The negative impact on foreign exchange on our condensed consolidated statement of operations was due to fluctuations in foreign currency exchange rates versus the U.S. dollar, largely related to the British Pound and Australian dollar. The vast majority of our cash holdings are held in the U.S. dollar. We re-measure all of our foreign assets and liabilities at the period-end exchange rate and the net effect of these translation adjustments is shown as a foreign currency loss or gain.

Results of Operations for the Nine months ended March 31, 2017 and March 31, 2016

Summary. For the nine months ended March 31, 2017, we reported a net loss of $23.5 million, as compared to a net loss of $18.4 million in the same period of the prior fiscal year. Basic and diluted net loss per share was $0.61 for the nine month period ended March 31, 2017, as compared to a basic and diluted net loss per share of $0.48 in the same period of 2016. The following commentary provides details underlying changes from last year in the major line items of our statement of operations:

Revenue. Revenue was $8.8 million for both the nine month periods ended March 31, 2017 and 2016. Relenza® royalty revenue for the nine months ended March 31, 2017 decreased while Inavir® revenue increased compared to the same period in 2016. Of the total $6.1 million Inavir royalties earned for the nine months ended March 31, 2017, $3.0 million are related to the sale of certain royalty rights to HCRP in April 2016 and will be passed through to HCRP. These are accounted for as non-cash royalty revenue in the condensed consolidated statement of operations. The following table summarizes the key components of our revenue for the nine months ended March 31, 2017 and 2016.

(in millions)

Research and Development Expense. Research and development expense increased to $24.6 million for the nine months ended March 31, 2017 from $20.4 million for the same period in 2016. The following table summarizes the components of our research and development expense for the nine months ended March 31, 2017 and 2016.

(in millions)

Direct preclinical, clinical and product development expense increased largely due to clinical and manufacturing costs associated with the Phase 2a challenge trial for BTA585, the Phase 2b SPIRITUS clinical trial for vapendavir, and clinical and chemistry expenses for BTA074 for the Phase 2 clinical trial that was initiated in February 2016.

General and Administrative Expense. General and administrative expense was $6.0 million for the nine months ended March 31, 2017 compared to $6.7 million for the same period in 2016. The following table summarizes the components of our general and administrative expense for the nine months ended March 31, 2017 and 2016.

(in millions)

Salaries, benefits and share-based compensation decreased primarily due to a reduction in administrative personnel. Professional and legal fees expenses increased due to timing of fees incurred compared to the same period in the prior year.

Foreign Exchange Loss (Gain), net. The impact of foreign exchange changed from a loss of $0.2 million in March 31, 2016 to a loss of $0.1 million for the nine months ended March 31, 2017. The positive impact on foreign exchange on our condensed consolidated statement of operations was due to fluctuations in foreign currency exchange rates versus the U.S. dollar, largely related to the British Pound and Australian Dollar. The vast majority of our cash holdings are held in the U.S. dollar. We re-measure all of our foreign assets and liabilities at the period-end exchange rate and the net effect of these translation adjustments is shown as a foreign currency loss or gain.

LIQUIDITY AND CAPITAL RESOURCES

For the nine months ended March 31, 2017, cash and cash equivalents decreased by $37.9 million. This decrease was primarily the result of our operating activities and purchases of short-term investments.

Net cash used by operating activities was $31.2 million for the nine months ended March 31, 2017, which reflected our net loss during the period of $23.5 million, net non-cash adjustments of $0.2 million, a net increase in operating assets of $4.7 million and a net decrease in operating liabilities of $2.8 million. Non-cash adjustments consist of $3.0 million in non-cash royalty income, offset by $1.4 million in non-cash interest expense and $1.4 million in share-based compensation expense.

Our net loss resulted largely from our funding of research and development activities including conducting clinical and preclinical studies, manufacturing and formulation of our product candidates, as well as ongoing general and administrative expenses. The net change in operating assets reflects a $0.5 million decrease in prepaid expenses and $5.2 million increase in trade accounts receivable, which is largely related to royalty income, and a $2.8 million decrease in accounts payable and accrued expenses.

Net cash used in investing activities during the nine months ended March 31, 2017 consisted of the purchase of $26.8 million of investments, partially offset by the maturity of $20.3 million of investments.

At March 31, 2017, our cash, cash equivalents and investments totaled $37.6 million. Our cash and cash equivalents are currently held in the form of short-term deposits with large U.S. banks. Our short-term investments consist primarily of certificates of deposit and highly-rated corporate securities.

Based on our current strategy and operating plan, and considering the potential costs associated with advancing the preclinical and clinical development of our product candidates, we believe that our existing cash, cash equivalents and investments of approximately $37.6 million and our accounts receivable as of March 31, 2017, which includes $3.0 million in Relenza royalties and $2.8 million in Inavir royalties that will be retained by the Company, will enable us to operate for a period of at least 12 months.

We have an ATM facility in place, which may allow us to quickly access the equity capital markets if we think it is prudent to do so and if market conditions allow. However, we currently do not have any commitments for future funding, nor do we anticipate that we will generate significant revenue, aside from revenue from existing royalty-bearing arrangements.

In April 2017, we announced that we plan to explore a wide range of strategic alternatives that include a business combination or strategic merger, in-licensing clinical stage programs, an acquisition, or other transaction that would complement our current pipeline and could maximize both near and long-term value for our shareholders. We have retained Stifel, Nicolaus & Company, Incorporated to serve as our financial advisor in the process. During the strategic alternatives process, we plan to continue to finance our operations with its existing cash. The Company’s ability to continue to support its operations is dependent, in the near-term, upon managing its cash resources (including royalty revenue received under existing licenses) as we continue with our ongoing clinical development activities. We do not have a defined timeline for the exploration of strategic alternatives and we can provide no assurance that the process will result in any strategic alternative being announced or consummated. We do not intend to discuss or disclose further developments during this process unless and until our Board of Directors has approved a specific action or otherwise determined that further disclosure is appropriate.

Contractual and Commercial Commitments

There have been no material changes from the information included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2016.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, as defined in Item 303(a)(4) (ii) of Regulation S-K under the Securities Exchange Act of 1934, as amended.

There has been no material change in our assessment of sensitivity to market risk since our presentation set forth in Item 7A “Quantitative and Qualitative Disclosures about Market Risk” in the our Annual Report on Form 10-K for the fiscal year ended June 30, 2016.

Evaluation of Disclosure Controls and Procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated 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, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Controls over Financial Reporting

There has been no change in our internal control over financial reporting during the quarter ended March 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Any investment in our business involves a high degree of risk. Before making an investment decision, you should carefully consider the information we include in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and accompanying notes, and the additional information in the other reports we file with the Securities and Exchange Commission along with the risks described in our Annual Report on Form 10-K for the fiscal year ended June 30, 2016. These risks may result in material harm to our business and our financial condition and results of operations. In this event, the market price of our common stock may decline and you could lose part or all of your investment. We have described below those risks that reflect substantive changes from, or additions to, the risks described in our Annual Report on Form 10‑K for the fiscal year ended June 30, 2016.

Our exploration of strategic alternatives process may not be successful.

In April 2017, we engaged Stifel, Nicolaus and Company, Incorporated (“Stifel”) as our advisor to assist with the exploration of strategic alternatives. Stifel is providing a range of advisory services aimed to enhance stockholder value. The alternatives to be considered may include, but are not limited to, the potential for a business combination or strategic merger, in-licensing clinical stage programs, an acquisition or other strategic transactions. We have and expect to continue to devote substantial time and resources to exploring strategic alternatives; however, there can be no assurance that such activities will result in any agreements or transactions that will enhance stockholder value. In addition, potential strategic transactions that require stockholder approval may not be approved by our stockholders. Further, any strategic transaction that is completed ultimately may not deliver the anticipated benefits or enhance stockholder value.

Furthermore, we may acquire additional businesses, products or product candidates that complement or augment our existing business. Integrating any newly acquired business, product or product candidate could be expensive and time-consuming. We may not be able to integrate any acquired business, product or product candidate successfully. Our future financial performance will depend, in part, on our ability to manage any future growth effectively and our ability to integrate any acquired businesses.

If no transactions with respect to potential business alternatives are identified and completed, our board of directors may decide to pursue a dissolution and liquidation of our company. If our board of directors were to approve and recommend, and our stockholders were to approve, a dissolution and liquidation of our company, we would be required under Delaware corporate law to pay our outstanding obligations, as well as to make reasonable provision for contingent and unknown obligations, prior to making any distributions in liquidation to our stockholders. As a result of this requirement, a portion of our assets may need to be reserved pending the resolution of such obligations. In addition, we may be subject to litigation or other claims related to a dissolution and liquidation of our company. If a dissolution and liquidation were pursued, our board of directors, in consultation with its advisors, would need to evaluate these matters and make a determination about a reasonable amount to reserve. Accordingly, holders of our common stock may be delayed in receiving any payout or may lose their entire investment in the event of a bankruptcy, liquidation, dissolution or winding up of our company.

We are substantially dependent on our remaining employees to facilitate the consummation of a strategic transaction.

Our ability to successfully complete a strategic transaction depends in large part on our ability to retain certain of our remaining personnel. Despite our efforts to retain these employees, one or more may terminate their employment with us on short notice. The loss of the services of any of these employees could potentially harm our ability to evaluate and pursue strategic alternatives, as well as fulfill our reporting obligations as a public company.

Our certificate of incorporation, our bylaws, and the laws of Delaware contain provisions that could discourage, delay or prevent a change in our control or in our management.

Certain provisions of our restated certificate of incorporation, our bylaws and the laws of Delaware, the state in which we are incorporated, may discourage, delay or prevent a change in control of us or a change in our directors or management that stockholders may consider favorable. These provisions:

• allow the authorized number of directors to be changed only by resolution of our Board of Directors;
• removal of Directors from office at any time, but only by the affirmative vote of the holders of at least seventy-five (75%) of the voting power of all of the then-outstanding shares of capital stock of the corporation entitled to vote generally in the election of Directors;
• authorize our Board of Directors to issue without stockholder approval, up to 5,000,000 shares of preferred stock, the rights of which will be determined at the discretion of the Board of Directors that, if issued, could operate as a “poison pill” to dilute the stock ownership of a potential hostile acquirer to prevent an acquisition that is not approved by our Board of Directors;
• establish advance notice requirements for stockholder nominations to our Board of Directors or for stockholder proposals that can be acted on at stockholder meetings;
• limit who may call stockholder meetings; and
• contain a fair price provision.

In addition, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may, unless certain criteria are met, prohibit large stockholders, in particular those owning 15% or more of the voting rights of our common stock, from merging or combining with us for a prescribed period of time. These provisions could discourage proxy contests and make it more difficult for you and other stockholders to remove and elect directors and take other corporate actions. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock.