Vaxart, Inc.: Form 10-Q for the period ended Sep 30, 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 (teslexivir), 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; and
• the expected post-Merger share ownership split between Vaxart and Aviragen stockholders and anticipated timing of the closing of the Merger.

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 Company’s obtaining the requisite stockholder approval and other conditions to the Merger being satisfied; and other cautionary statements contained elsewhere in this Quarterly Report on Form 10-Q and in the Company’s Annual Report on Form 10-K for the year ended June 30, 2017, as filed with the U.S. Securities and Exchange Commission on September 1, 2017.

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 months ended September 30, 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: BTA074 (teslexivir), an antiviral treatment for condyloma caused by human papillomavirus types 6 & 11; vapendavir, a capsid inhibitor for the prevention or treatment of rhinovirus (“RV”) upper respiratory infections; and BTA585 (enzaplatovir), a fusion protein inhibitor in development for the treatment of respiratory syncytial virus infections.

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.

On October 30, 2017, the Company announced that it had entered into the Merger Agreement pursuant to which Vaxart., a privately-held clinical-stage company focused on developing oral recombinant vaccines from its proprietary delivery platform, would become a wholly-owned subsidiary of the Company. This transaction marks the culmination of the Company’s Strategic Review process which was initiated in April. The Merger will result in a combined company focused on developing orally-delivered vaccines and therapeutics to address a variety of viral infections.

The exchange ratio in the merger agreement was determined by Vaxart assigning $60,000,000 in value to Aviragen for its financial and clinical assets, and $90,000,000 in value for its own assets. On a pro forma basis after giving effect to the number of shares of Aviragen common stock that will be issued to Vaxart security holders in the Merger and assuming no adjustments for cash balances as provided for in the Merger Agreement, current Vaxart security holders will own approximately 60% of the combined company and current Aviragen security holders will own approximately 40% of the combined company. The transaction has been approved by the boards of directors of both companies. The Merger is expected to close in the first quarter of 2018, subject to the approval of the stockholders of each company as well as other customary conditions.

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 2017 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 September 30, 2017 and September 30, 2016

Summary. For the three months ended September 30, 2017, we reported a net loss of $5.3 million, as compared to a net loss of $10.0 million in the same period of the prior fiscal year. Basic and diluted net loss per share was $0.14 for the three month period ended September 30, 2017, as compared to a basic and diluted net loss per share of $0.26 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 remained the same at $0.1 million for the three month periods ended September 30, 2017 and 2016. The following table summarizes the key components of our revenue for the three months ended September 30, 2017 and 2016:

(in millions)

Research and Development Expense. Research and development expense decreased to $2.8 million for the three months ended September 30, 2017 from $7.6 million for the same period in 2016. The following table summarizes the components of our research and development expense for the three months ended September 30, 2017 and 2016.

(in millions)

15

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 in the end of the prior fiscal year. Salaries, benefits and share-based compensation expenses decrease due to a reduction in headcount during the fourth quarter of fiscal 2017.

General and Administrative Expense. General and administrative expense increased to $2.3 million for the three months ended September 30, 2017 from $2.2 million for the same period in 2016. The following table summarizes the components of our general and administrative expense for the three months ended September 30, 2017 and 2016.

(in millions)

Foreign Exchange Loss (Gain), net. The impact of foreign exchange changed from a gain of $0.1 million in the three months ended September 30, 2016 to no gain or loss for the three months ended September 30, 2017. The negative impact on foreign exchange on our 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 three months ended September 30, 2017, cash and cash equivalents increased by $1.9 million. This increase was primarily the result of the maturities of our short-term investments.

Net cash used by operating activities was $4.5 million for the three months ended September 30, 2017, which reflected our net loss during the period of $5.3 million, a net decrease in operating liabilities of $0.9 million, partially offset by net non-cash adjustments of $0.8 million and a net decrease in operating assets of $0.9 million. Non-cash adjustments consist of $0.4 million in non-cash interest expense and $0.5 million in share-based compensation expense, partially offset by $0.1 million in non-cash royalty income.

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 changes in operating assets and liabilities primarily reflects a $0.9 million decrease in accounts payable and accrued expense due to reduced clinical trial activity, offset by a $0.4 million decrease in prepaid expenses, also due to reduced clinical trial activity and a $0.5 million decrease in receivables, which is largely related to royalty income.

Net cash provided by investing activities during the three months ended September 30, 2017 consisted of the maturity of $13.4 million of investments, partially offset by the purchase of $7.0 million of investments.

At September 30, 2017, our cash, cash equivalents and investments totaled $34.1 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 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 $34.1 million as of September 30, 2017, along with the anticipated proceeds from existing royalty-bearing licenses will enable us to operate for a period of at least 12 months from the date of this report.

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.

On October 30, 2017, the Company announced that it had entered into the Merger Agreement pursuant to which Vaxart, a privately-held clinical-stage company focused on developing oral recombinant vaccines from its proprietary delivery platform, would become a wholly-owned subsidiary of the Company. This transaction marks the culmination of the Company’s Strategic Review process which was initiated in April. The Merger will result in a combined company focused on developing orally-delivered vaccines and therapeutics to address a variety of viral infections.

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, 2017.

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, 2017.

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 September 30, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Risks Related to Investment in our Business

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, 2017. 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.

Risks Related to Our Pending Merger

Because the lack of a public market for Vaxart shares makes it difficult to evaluate the fairness of the Merger, the stockholders of Vaxart may receive consideration in the Merger that is less than the fair market value of the Vaxart shares and/or we may pay more than the fair market value of the Vaxart shares.

The outstanding capital stock of Vaxart is privately held and is not traded in any public market. The lack of a public market makes it extremely difficult to determine the fair market value of Vaxart. Because the percentage of our equity to be issued to Vaxart securityholders was determined based on our negotiations with Vaxart, it is possible that the value of our common stock to be issued to Vaxart securityholders will be less than the fair market value of Vaxart, or we may pay more than the aggregate fair market value for Vaxart.

There is no assurance that the proposed Merger between us and Vaxart will be completed in a timely manner or at all. If the Merger with Vaxart is not consummated, our business could suffer materially and our stock price could decline.

The consummation of the proposed Merger between us and Vaxart is subject to a number of closing conditions, including the approval by our stockholders of the issuance of our shares in the Merger and other customary closing conditions. If the conditions are not satisfied or waived, the Merger will not occur or will be delayed.

If the proposed Merger between us and Vaxart is not consummated, we may be subject to a number of material risks, and our business and stock price could be adversely affected, as follows:

• we have incurred and expect to continue to incur significant expenses related to the proposed Merger with Vaxart even if the Merger is not consummated;
• we could be obligated to pay Vaxart up to a $1.95 million termination fee under certain circumstances pursuant to the Merger Agreement;
• the market price of our common stock may decline to the extent that the current market price reflects a market assumption that the proposed Merger will be completed; and
• we may not be able to pursue an alternate merger transaction if the proposed Merger with Vaxart is not completed.

The market price of our common stock following the Merger may decline as a result of the Merger.

The market price of our common stock may decline as a result of the Merger for a number of reasons including if:

• investors react negatively to the prospects of the combined organization’s business and prospects from the Merger;
• the effect of the Merger on the combined organization’s business and prospects is not consistent with the expectations of financial or industry analysts; or
• the combined organization does not achieve the perceived benefits of the Merger as rapidly or to the extent anticipated by financial or industry analysts.

During the pendency of the Merger, we may not be able to enter into a business combination with another party at a favorable price because of restrictions in the Merger Agreement, which could adversely affect our business.

Covenants in the Merger Agreement impede the ability of Aviragen to make acquisitions, subject to certain exceptions relating to fiduciaries duties, or complete other transactions that are not in the ordinary course of business, pending completion of the Merger. As a result, if the Merger is not completed, we may be at a disadvantage to our competitors during that period. In addition, while the Merger Agreement is in effect, each party is generally prohibited from soliciting, initiating, encouraging or entering into certain extraordinary transactions, such as a merger, sale of assets or other business combination outside the ordinary course of business, with any third party, subject to, in the case of Aviragen, certain exceptions. These restrictions apply even if such transactions could be favorable to our stockholders.

Certain provisions of the Merger Agreement may discourage third parties from submitting competing proposals, including proposals that may be superior to the arrangements contemplated by the Merger Agreement.

The terms of the Merger Agreement prohibit each of Aviragen and Vaxart from soliciting competing proposals or cooperating with persons making unsolicited acquisition proposals, except in the case of Aviragen if Aviragen’s board of directors determines in good faith, after consultation with our outside financial advisors and outside legal counsel, that an unsolicited alternative competing proposal is or is reasonably likely to result in a superior competing proposal and that failure to enter into discussions with the proponent of the proposal is reasonably likely to be inconsistent with the board’s fiduciary duties. In addition, even if our board of directors desires to terminate the Merger Agreement to accept a superior competing proposal, the Merger Agreement requires that we must first hold a meeting of our stockholders before we can terminate the Merger Agreement. If we or Vaxart terminate the Merger Agreement under certain circumstances, including terminating because of a decision of our board of directors to recommend a superior proposal, we would be required to pay a termination fee of $1.95 million to Vaxart. This termination fee and the other requirements of the Merger Agreement described above may discourage third parties from submitting competing proposals to us or our stockholders, and may cause our board of directors to be less inclined to recommend an alternative proposal.

Some Aviragen executive officers and directors have interests in the Merger that are different from yours and that may influence them to support or approve the Merger without regard to your interests.

Certain officers and directors of Aviragen participate in arrangements that provide them with interests in the Merger that are different from yours, including, among others, the continued service as an officer or director of the combined organization and continued indemnification, severance payments upon termination of employment and acceleration of stock options.

Failure to obtain stockholder approval for the proposed reverse stock split may result in our stock being delisted from the NASDAQ Capital Market.

We are required pursuant to the terms of the Merger Agreement to submit to our stockholders a proposal to approve an amendment to our certificate of incorporation to authorize our board of directors to effect a reverse stock split of all outstanding shares of our common stock. If our proposal for implementing a reverse stock split is not approved by our stockholders, we will likely not be able to regain compliance with the minimum bid price requirement of the NASDAQ Stock Market LLC (“Nasdaq”) and as a consequence, Nasdaq will provide us written notification that our common stock will be delisted. Upon receipt of such delisting letter, we may appeal the determination to the Hearings Panel (the “Panel”). At the hearing, we will be required to provide a plan to regain compliance. If the Panel decides to continue with delisting of the Company, the Panel’s decision may be appealed to the Nasdaq Listing and Hearing Review Council but such appeal will not stay the delisting process. There can be no assurance that, if the Company does appeal any delisting determination, any such appeal would be successful.

The issuance of shares of our common stock to Vaxart stockholders in the pending Merger will dilute substantially the voting power of our current stockholders.

If the pending Merger is completed, each outstanding share of Vaxart common stock will be converted into the right to receive a number of shares of our common stock equal to the exchange ratio determined pursuant to the Merger Agreement. Immediately following the Merger, our equityholders are expected to own approximately 40% of the outstanding capital stock of the combined company on a fully diluted basis, and the Vaxart equityholders are expected to own approximately 60% of the outstanding capital stock of the combined company on a fully diluted basis. Accordingly, the issuance of shares of our common stock to Vaxart stockholders in the merger will reduce significantly the relative voting power of each share of our common stock held by our current equityholders. Consequently, our equityholders as a group will have significantly less influence over the management and policies of the combined company after the Merger than prior to the Merger.

The pendency of the Merger could have an adverse effect on the trading price of our common stock and our business, financial condition, results of operations or business prospects.

While there have been no significant adverse effects to date, the pendency of the Merger could disrupt our businesses in the following ways, including:

• the attention of our management may be directed toward completion of the Merger and related matters and may be diverted from the day-to-day business operations; and
• third parties may seek to terminate or renegotiate their relationships with us as a result of the Merger, whether pursuant to the terms of their existing agreements with us or otherwise.

Should they occur, any of these matters could adversely affect the trading price of our common stock or harm our financial condition, results of operations or business prospects.