NOTE

Summary of Significant Accounting Policies

Basis of Presentation

– The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Basis of Consolidation

– The consolidated financial statements include the financial statements of Vaxart, Inc. and its subsidiaries. All significant transactions and balances between Vaxart, Inc. and its subsidiaries have been eliminated in consolidation.

Use of Estimates

– The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities in the financial statements and accompanying notes. Actual results and outcomes could differ from these estimates and assumptions.

Foreign Currencies

– Foreign exchange gains and losses for assets and liabilities of the Company’s non-U.S. subsidiaries for which the functional currency is the U.S. dollar are recorded in foreign exchange gain or loss, net within other income and (expenses) in the Company’s consolidated statements of operations and comprehensive loss. The Company has

subsidiaries for which the local currency is the functional currency.

Cash and Cash Equivalents

– The Company considers all highly liquid debt investments with an original maturity of

three

months or less when purchased to be cash equivalents. Cash equivalents, which

may

consist of amounts invested in money market funds, corporate bonds and commercial paper, are stated at fair value.

Concentration of Credit Risk

– Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash, cash equivalents, short-term investments and accounts receivable. The Company places its cash, cash equivalents and short-term investments at financial institutions that management believes are of high credit quality. The Company is exposed to credit risk in the event of default by the financial institutions holding the cash and cash equivalents to the extent such amounts are in excess of the federally insured limits. The Company has

not

experienced any losses on its deposits since inception.

The primary focus of the Company’s investment strategy is to preserve capital and meet liquidity requirements. The Company’s investment policy addresses the level of credit exposure by limiting the concentration in any

one

corporate issuer or sector and establishing a minimum allowable credit rating. The Company generally requires

collateral from its customers.

Accounts Receivable

– Accounts receivable arise from the Company’s royalty revenue receivable for sales, net of estimated returns, of Inavir and Relenza, and from its contracts with customers and with the Department of Health and Human Services, Office of Biomedical Advanced Research and Development Authority (“HHS BARDA”) (see Note

), and are reported at amounts expected to be collected in future periods. An allowance for uncollectible accounts will be recorded based on a combination of historical experience, aging analysis, and information on specific accounts, with related amounts recorded as a reserve against revenue recognized. Account balances will be written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company has provided

allowance for uncollectible accounts as of

December 31, 2019

and

2018

Property and Equipment

– Property and equipment is carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets. Depreciation begins at the time the asset is placed in service. Maintenance and repairs are charged to operations as incurred. Upon sale or retirement of assets, the cost and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss is reflected in other income and (expenses) in the period realized.

The useful lives of the property and equipment are as follows:

Laboratory equipment (in years)			5
Office and computer equipment (in years)			3
Leasehold improvements			Shorter of remaining lease term or estimated useful life

Intangible Assets

– Intangible assets comprise developed technology, intellectual property and, until it was considered fully impaired (see Note

), in-process research and development. Intangible assets are carried at cost less accumulated amortization. Amortization is computed using the straight-line method over useful lives ranging from

1.3

11.75

years for developed technology and

years for intellectual property. In-process research and development is considered to be indefinite-lived and is

not

amortized, but is subject to impairment testing. The Company assessed its in-process research and development as fully impaired in the year ended

December 31, 2018 (

see Note

Impairment of Long-Lived Assets

– The Company reviews its long-lived assets, including property and equipment and intangible assets with finite lives, for impairment whenever events or changes in circumstances indicate the carrying amount of these assets

may

not

be recoverable. Recoverability of these assets is measured by comparison of the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate over its remaining life. When indications of impairment are present and the estimated undiscounted future cash flows from the use of these assets is less than the assets’ carrying value, the related assets will be written down to fair value. The Company assessed leasehold improvements and furniture at its leased offices in Alpharetta, Georgia as impaired in the year ended

December 31, 2018 (

see Notes

and

). The Company also assessed its manufacturing equipment and its right-of-use asset and leasehold improvements at its manufacturing premises as impaired in the year ended

December 31, 2019 (

see Note

Accrued Clinical and Manufacturing Expenses

– The Company accrues for estimated costs of research and development activities conducted by

third

-party service providers, which include the conduct of preclinical studies and clinical trials, and contract manufacturing activities. The Company records the estimated costs of research and development activities based upon the estimated amount of services provided and includes the costs incurred but

not

yet invoiced within other accrued liabilities in the balance sheets and within research and development expense in the consolidated statements of operations and comprehensive loss. These costs can be a significant component of the Company’s research and development expenses.

The Company estimates the amount of services provided through discussions with internal personnel and external service providers as to the progress or stage of completion of the services and the agreed-upon fee to be paid for such services. The Company makes significant judgments and estimates in determining the accrued balance in each reporting period. As actual costs become known, it adjusts its accrued estimates. Although the Company does

not

expect its estimates to be materially different from amounts actually incurred, its understanding of the status and timing of services performed, the number of subjects enrolled, and the rate of enrollment

may

vary from its estimates and could result in the Company reporting amounts that are too high or too low in any particular period. The Company’s accrued expenses are dependent, in part, upon the receipt of timely and accurate reporting from contract research organizations and other

third

-party service providers. To date, the Company has

not

experienced any material differences between accrued costs and actual costs incurred.

Leases

– Effective

January 1, 2019,

the Company records operating leases as right-of-use assets and operating lease liabilities in its consolidated balance sheets for all operating leases with terms exceeding

one

year. Right-of-use assets represent the right to use an underlying asset for the lease term, including extension options considered reasonably certain to be exercised, and operating lease liabilities to make lease payments. Right-of-use assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term. To the extent that lease agreements do

not

provide an implicit rate, the Company uses its incremental borrowing rate based on information available at the lease commencement date to determine the present value of lease payments. The expense for operating lease payments is recognized on a straight-line basis over the lease term and is included in operating expenses in the Company’s consolidated statement of operations and comprehensive loss. The Company has elected to

not

separate lease and non-lease components of facilities leases, whereas non-lease components of equipment leases are accounted for separately from lease components.

Convertible Preferred Stock Warrant Liability

– The Company has issued certain convertible preferred stock warrants. These warrants were recorded within other accrued liabilities in the consolidated balance sheets at fair value due to down-round protection features contained in the convertible preferred stock into which the warrants were exercisable. At the end of each reporting period, changes in fair value of the warrants since the prior period were recorded as a component of (loss) gain on revaluation of financial instruments, net within other income and (expenses) in the consolidated statements of operations and comprehensive loss. In the event that the terms of the warrant change such that liability accounting is

longer required, the fair value on the date of such change is released to equity.

Revenue Recognition

– The Company recognizes revenue when it transfers control of promised goods or services to its customers, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. To determine revenue recognition, the Company performs the following

five

steps:

(i)

identification of the promised goods or services in the contract;

(ii)

determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract;

(iii)

measurement of the transaction price, including the constraint on variable consideration;

(iv)

allocation of the transaction price to the performance obligations based on estimated selling prices; and

(v)

recognition of revenue when (or as) the Company satisfies each performance obligation. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account.

Revenue from royalties earned as a percentage of sales, including milestone payments based on achieving a specified level of sales, where a license is deemed to be the predominant item to which the royalties relate, is recognized as revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied), as required under the sales- and usage-based royalty exception.

Revenue from contracts with customers is recognized ratably, based on costs incurred, as the Company provides promised services to its customers in amounts that reflect the consideration that the Company expects to receive for those services.

The Company performed research and development work under its cost-plus-fixed-fee contract with HHS BARDA. The Company recognizes revenue under research contracts only when a contract has been executed and the contract price is fixed or determinable. Revenue from the HHS BARDA contract is recognized in the period during which the related costs are incurred and the related services are rendered, provided that the applicable conditions under the contract have been met. Costs of contract revenue are recorded as a component of operating expenses in the consolidated statements of operations and comprehensive loss.

Under the cost reimbursable contract with HHS BARDA, the Company is reimbursed for allowable costs, and recognizes revenue as allowable costs are incurred and the fixed fee is earned. Reimbursable costs under the contract primarily include direct labor, subcontract costs, materials, equipment, travel, and approved overhead and indirect costs. Fixed fees under cost reimbursable contracts are earned in proportion to the allowable costs incurred in performance of the work relative to total estimated contract costs, with such costs incurred representing a reasonable measurement of the proportional performance of the work completed. Under the HHS BARDA contract, certain activities must be pre-approved in order for their costs to be deemed allowable direct costs. The HHS BARDA contract provides the U.S. government the ability to terminate the contract for convenience or to terminate for default if the Company fails to meet its obligations as set forth in the statement of work.

Payments to the Company under cost reimbursable contracts, such as this contract, are provisional payments subject to adjustment upon annual audit by the government. Management believes that revenue for periods

not

yet audited has been recorded in amounts that are expected to be realized upon final audit and settlement. When the final determination of the allowable costs for any year has been made, revenue and billings

may

be adjusted accordingly in the period that the adjustment is known.

Research and Development Costs

– Research and development costs are expensed as incurred. Research and development costs consist primarily of salaries and benefits, stock-based compensation, consultant fees,

third

-party costs for conducting clinical trials and the manufacture of clinical trial materials, certain facility costs and other costs associated with clinical trials. Payments made to other entities are under agreements that are generally cancelable by the Company. Advance payments for research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the related services are performed.

Stock-Based Compensation

– The Company measures the fair value of all stock-based awards, including stock options, to employees and, since

April 1, 2018,

to nonemployees, on the grant date and records the fair value of these awards, net of estimated forfeitures, to compensation expense over the service period. Prior to

April 1, 2018,

the fair value of awards to nonemployees was measured on the date of performance at the fair value of the consideration received or the fair value of the equity instruments issued, whichever was more reliably measured. The fair value of options is estimated using the Black-Scholes valuation model. The expected term of each option is estimated by taking the arithmetic average of its original contractual term and its average vesting term.

Net Income (Loss) Per Share Attributable to Common Stockholders

– Basic net income (loss) per share is computed by dividing net income (loss), as adjusted for dividends on the Series B and Series C convertible preferred stock in the period, by the weighted average number of common shares outstanding during the period, without consideration of potential common shares.

Diluted net income (loss) per common share is computed giving effect to all potential dilutive common shares, comprising common stock issuable upon exercise of stock options and warrants. The Company uses the treasury-stock method to compute diluted income (loss) per share with respect to its stock options and warrants. For purposes of this calculation, options and warrants to purchase common stock are considered to be potential common shares and are only included in the calculation of diluted net income per share when their effect is dilutive. In the event of a net loss, the effects of all potentially dilutive shares are excluded from the diluted net loss per share calculation as their inclusion would be antidilutive.

Recently Adopted Accounting Pronouncements

February

2016,

the FASB issued ASU

2016

Leases (Topic

842

)

, which replaced most current lease guidance when it became effective. This standard update was designed to increase transparency and improve comparability by requiring entities to recognize assets and liabilities on the balance sheet for all leases, with certain exceptions. The new standard states that a lessee will recognize a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the statements of operations. The Company adopted the new guidance effective

January

2019,

using the modified retrospective method, and used the effective date method of adoption, as permitted by ASU

2018

11,

Leases (Topic

842

): Targeted Improvements

, which the FASB issued in

July 2018,

clarified by ASU

2019

01,

Leases (Topic

842

): Codification Improvements

, which the FASB issued in

March 2019,

which reduces the disclosure requirements on transition. The Company has elected the short-term lease recognition exemption for all classes of assets, which means that it will

not

recognize right-of-use assets or lease liabilities for leases with a duration of

one

year or less. Further, the Company has elected to use all of the practical expedients available on transition, whereby it has

not

reassessed under the new standard its prior conclusions about lease identification, lease classification and initial direct costs.

The adoption of this standard had a material effect on the Company’s consolidated balance sheets, the most significant effects being the recognition of new right-of-use assets and lease liabilities. The Company recognized lease liabilities of

$1,229,000,

$783,000

of which was current, and right-of-use assets of

$953,000

based on the present value of the remaining minimum rental payments for existing operating leases, derecognized liabilities related to deferred rent and lease loss accrual of

$249,000,

$111,000

of which was current, and recognized an increase of

$27,000

to accumulated deficit on adoption of the new accounting standard.

The increase in accumulated deficit arose because the right-of-use asset impairment charge that would have been recorded in the

three

months ended

December 31, 2018,

under Topic

842

exceeded the lease loss accrual, net of accretion, that was recorded. This impact aside, the adoption had

effect on the Company’s consolidated statements of operations or cash flows, other than on related disclosures.

Recent Accounting Pronouncements

The Company has reviewed all newly-issued accounting pronouncements and concluded that they either are

not

applicable to the Company’s operations or

material effect is expected on its consolidated financial statements as a result of future adoption.