marketing.1UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-KANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934For the Fiscal Year Ended December 31,
19972000Commission File No. 0-26770
NOVAVAX, INC.
(Exact(Exact name of registrant as specified in its charter)DELAWARE 22-2816046 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8320 GUILFORD ROAD, COLUMBIA, MARYLAND 21046 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
Delaware
(State or other jurisdiction of incorporation or organization)22-2816046
(I.R.S. Employer Identification No.) 8320 Guilford Road, Columbia, Maryland21046 (Address of principal executive offices) (Zip code) Registrant’s telephone number, including area code:(301) 854-3900
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered Common Stock ($.01 par value)American Stock Exchange Securities registered pursuant to Section 12(g) of
Each Class: Name of each exchange on which registered: COMMON STOCK ($.01 PAR VALUE) AMERICAN STOCK EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Nonethe Act:NONEIndicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
XNo-------- --------Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the
registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.------The aggregate market value of
9,501,99618,675,548 shares of theregistrant'sregistrant’s Common Stock, par value $.01 per share, held by non-affiliates of the registrant at March20, 1998,16, 2001, as computed by reference to the closing price of such stock, was approximately$42,758,982.$157,808,381.The number of shares of the
registrant'sregistrant’s Common Stock, par value $.01 per share, outstanding at March20, 199816, 2001 was12,060,44322,247,533 shares.DOCUMENTS INCORPORATED BY REFERENCE:Documents Incorporated By Reference
Portions of the
1998 Novavax, Inc.Registrant’s Proxy Statement to be filed not later than 120 days after December 31, 2000, in connection with the Registrant’s 2001 Annual Meeting of Stockholders, referred to herein as the “Proxy Statement,” are incorporated by reference into Part III of this Form 10-K. Certain exhibits filed with the Registrant’s prior registration statements and period reports under the Securities Exchange Act of 1934 are incorporated herein by reference into Part IV of this Report.72TABLE OF CONTENTSPART I
ITEMItem 1.
BUSINESSBusinessThe discussion of our business contained in this annual report on form 10-K may contain certain projections, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed below at “Risks and Uncertainties.” While this outlook represents management’s current judgment on the future direction of the business, such risks and uncertainties could cause actual results to differ materially from any future performance suggested below. We undertake no obligation to release publicly the results of any revisions to these forward-looking statements to reflect events or circumstances arising after the date of this annual report.
Overview
Novavax, Inc.
("Novavax"(“Novavax”, “we”, “our”, or the"Company"“Company”) is a specialty biopharmaceuticaldrug deliverycompany engaged in the research, development and commercialization of proprietary products focused on women’s health and infectious diseases. We were incorporated in Delaware in 1987. Our principal executive offices are located at 8320 Guilford Road, Columbia, Maryland 21046.Through a series of strategic initiatives, Novavax has evolved from a technology-based biotechnology company into a fully integrated pharmaceutical company. These strategic initiatives have included the:
• Acquisition of a profitable women’s healthcare pharmaceutical company; • Acquisition of a fully staffed vaccine manufacturing and development operation; • Expansion of our women’s healthcare product lines through product purchases and co-promotion agreements; • Completion of a pivotal Phase III clinical trial for our estrogen replacement product, ESTRASORB™. These initiatives were funded through two private placements of our common stock in 1999 and 2000 and the issuance of a convertible note in 2000.
Recent Developments
Fielding Pharmaceutical Company Acquisition
In December 2000, we acquired the privately owned Fielding Pharmaceutical Company (“Fielding”), based in St. Louis, Missouri, which sells, markets and distributes a proprietary line of pharmaceutical products focused on women’s health. Under the terms of the acquisition agreement, we acquired 100% of the outstanding shares of Fielding for $31.5 million, consisting of $13 million in cash and 2,312,501 shares of Novavax common stock, valued at $18.5 million. An additional $5 million in either Novavax common stock or cash will be paid to former Fielding shareholders in March 2002.
Fielding was established in 1959 and markets women’s healthcare products nationally to obstetricians and gynecologists through its sales force of over 60 personnel. Fielding’s products included Nestabs®, a complete line of pre-natal vitamins; Gynodiol®, an oral form of estrogen replacement therapy, as well as several other over-the-counter (“OTC”) women’s healthcare products. We intend to use Fielding to sell, market and distribute additional future products. Fielding fills, packages and warehouses all of its own products, which are purchased from contract manufacturers.
Biomedical Services Laboratory Acquisition
In August 1999, we acquired substantially all of the assets of the Biomedical Services Laboratory (“BSD”) division of DynCorp of Reston, Virginia. The total consideration and direct costs for the acquisition were $860,000. The research and development activities of BSD are conducted in an approximately 12,000 square foot facility located in Rockville, Maryland. BSD is engaged in contract research, development and pilot manufacturing of human vaccines for government laboratories, principally National Institutes of Health (“NIH”), and other vaccine companies.
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King Pharmaceuticals, Inc. Transactions
In December 2000, King Pharmaceuticals, Inc., (“King”) agreed to make a $25 million convertible note investment in Novavax. The note is convertible into Novavax Common Stock at $10.00 per share. The note carries a 4% coupon payable semi-annually in cash and stock. As part of the transaction, we received $20 million in December 2000 and will receive an additional $5 million when we file a New Drug Application (“NDA”) for our topical transdermal estrogen replacement therapy, ESTRASORB™, expected to be filed in the first half of 2001. We used a portion of the funds to complete our acquisition of Fielding and will use the balance for general operating purposes. In January 2001, we also signed a co-promotion agreement with King for ESTRASORB™, in the United States. In addition, we will combine U.S. sales efforts with King to begin co-promoting one of King’s products already on the market, Nordette®, a birth control pill. In another agreement, we also acquired AVC™ Cream and Suppositories from King in January 2001, for $3.3 million, which has been marketed by King for the treatment of vaginal bacterial infections.
Our Products and Product Candidates
The tables below provides a summary of our products and product development candidates which are discussed in further detail herein:
Women’s Health Products
Product Indications Status Nestabs® Prescription Pre-Natal Vitamins Marketed Gynodiol® Oral Estrogen Replacement Therapy Marketed Vitelle® OTC Women’s Health Products Marketed AVC™Vaginal Bacterial Infection Marketed Nordette® (co-promote) Birth Control Pill Marketed ESTRASORB™Transdermal Lotion for Estrogen replacement Phase III ANDROSORB™Transdermal Lotion for Testosterone replacement Phase I/II ANDRO-JECTTMInjectable Testosterone Therapy Preclinical Infectious Disease Vaccines
Product Collaboraton/Partner Status Human Papillomavirus (“HPV16”) VLP (mono) NIH/King Phase II Hepatitis E Vaccine NIH Phase I Dengue Type 4 NIH IND Malaria MSP-1 NIH/SAIC Preclinical Influenza Vaccine King Preclinical HPV16 (chimeric) NIH/King Preclinical Product Development Programs
Our product development efforts are focused on the research and development of proprietary
topicaldrug delivery andoral drug deliveryvaccine technologies and the applications of those technologies.The Company'sOur technology platforms involve the use of proprietary, microscopic, organized,lipidnon-phospholipid structures as vehicles for the delivery of a wide variety of drugs and other therapeutic products, including certain hormones, anti-bacterial and anti-viral products and vaccine adjuvants.The Company recently formed two operating divisions, NOVAVAX PHARMACEUTICAL DIVISION (the "PHARMACEUTICAL DIVISION")These technology platforms support three product development programs: hormone replacement therapies, third party drug delivery andNOVAVAX BIOLOGICS DIVISION (the "BIOLOGICS DIVISION"). This reorganizationvaccine adjuvant applications. In addition, BSD isintended to streamline operationsengaged in contract research andgive each business division dedicated resources, stronger focus,development andtighter management. The PHARMACEUTICAL DIVISION utilizes a rangePhase I and Phase II vaccine manufacturing ofmicroencapsulation technologies to develop novel biopharmaceuticals, often reformulating existing, approved drugs for topical delivery in cosmetic-like cream formulations. Its strong technology provides a basis for development of novel products while utilizing resources with little short term opportunity for immediate revenue. The BIOLOGICS DIVISION is a revenue center focused onhuman vaccinesadjuvants and anti-infectives. It has business objectives focused on generating contract revenues and providing researchfor thePHARMACEUTICALS DIVISION.Company’s own use, for government laboratories and for other vaccine companies.3
Hormone Replacement Therapies. The
BIOLOGICS DIVISION has historically entered into contractual arrangements which usually provide upfront and milestone payments as compensation during development contracts. These contracts may also provide for potential license and royalty fees. Currently the BIOLOGICS DIVISION is working under contract on several governmental and private sector programs in the fields of vaccines and biological defense systems. These contracts include development of an adjuvant for an immunotherapeutic against the human papilloma virus for a British vaccine company and a subcontractor agreement with University of Michigan who is supplying anti-infective defense systems against biological warfare agents for the U.S. military. They are anticipated to generate approximately $.5 million in revenue in 1998 with potential revenue opportunities beyond 1998. The Company has threeCompany’s hormone replacement therapy program includes its two leadpharmaceuticalproduct candidates: ESTRASORB,atopical estrogen cream, and ANDROSORB, a topical testosteronecreamcream. ESTRASORB, a topical lotion for estrogen replacement therapy is the company’s lead product candidate, andHelicore, an oral, non-antibiotic, anti-bacterial preparation foremploys Novavax’s proprietary micellar nanoparticle (“MNP”) technology. ESTRASORB’s MNP formulation is designed to deliver 17ß estradiol, a naturally occurring hormone, through thetreatment of Helicobacter pylori infection. These products areskin, when applied topically invarious phases of clinical development.lotion form. The Company has completedanimalvarious preclinical and human safety studies for both ESTRASORB andANDROSORBANDROSORB. The Company completed a multi-center Phase III study of ESTRASORB, during the first quarter of 2001. The study was designed to measure ESTRASORB’s ability to deliver estradiol through the skin, when applied as a topical lotion. The randomized, double-blind, placebo controlled trial enrolled a total of 200 women either on placebo or ESTRASORB who underwent a 13 week course of treatment. The study results indicate that there is a statistically significant difference between ESTRASORB and placebo treatment with respect to the trial’s primary clinical endpoint, a reduction in the number of hot flushes. We intend to file an NDA for ESTRASORB in the first half of 2001. The Company hasother clinical studies underway. Currently, several formulationsalso completed Phase I safety study in men ofHelicore areANDROSORB; Phase II trials inanimal and human safety studies. Althoughtestosterone deficient women were completed in the fourth quarter of 2000. In addition, the Companybeganis undergoing preclinical development ofits pharmaceutical product candidates later than,ANDRO-JECT, a depot delivery of testosterone for testosterone deficient men. The Investigational New Drug application (“IND”) for ANDRO-JECT is expected to be filed in the first half of 2001.Third Party Drug Delivery and Vaccine Adjuvant Applications.Formulations of the Company’s lipid technologies are expected to have broad application as
byproductsvehicles for the encapsulation and delivery of drugs developed by other companies. Moreover, the Company believes that certain of its organized lipid structures may provide effective and safe adjuvant carrier systems for a variety of vaccines. The Company plans to leverage these technologies by licensing its drug delivery, encapsulation and adjuvant technologies to third parties for specific therapeutic indications.Vaccine Development. BSD is involved in three areas of vaccine development: virology, tissue culture and molecular virology. BSD’s experimental virology research and development may lead to live virus vaccine production in the embryonated hens’ eggs and in designated tissue culture systems. Tissue culture involves the growth, maintenance and characterization of cell systems as potential substrates for virus growth and vaccine production as well as cell systems for safety testing, plaque-purification and virus titers. BSD’s work in molecular virology involves recombinant DNA cloning of viral and human genes, protein expression of these genes in prokaryotic and eukaryotic systems including baculoviruses, protein purification of the recombinant protein products, and biophysical characterization of recombinant proteins leading to vaccine and related product development.
Anti-Microbial Agents. The Company is also applying its
primary emphasis is nowlipid technologies to develop anti-microbial agents that are capable of acting onthese pharmaceuticalviruses, bacteria, spores and sperm. Potential product candidates include Helicore®, an oral anti-bacterial preparation for thefollowing reasons: - Much larger potential markets - Measurementstreatment ofclinical efficacy are more easily defined - The Company's belief that resources should be focused on few initiatives that may offer the best potential return on investment. Consistent with prudent use of the Company's limited cash resources, the clinical development programs for oral active vaccine immunization programs, ECOVAX 0157JHelicobacter pylori(“H. Pylori”) infection, andShigella flexneri 2a, were suspended late in 1996 in favor of the development of its three lead pharmaceuticaltwo anti-microbial agents targeting biological threat agents such as Bacillus anthracis and influenza A, respectively, as well as a spermicide productcandidates. The Company submitted dose ranging clinical study plans for both ESTRASORB and Helicore to the FDA in 1997. The Company has the potential, dependent on future capital, to develop other human pharmaceutical products utilizing its proprietary drug delivery platform technologies. It has several such products in various stages of pre-clinical development. Novavax, Inc. was incorporated in Delaware in 1987. On December 12, 1995, the Company's former parent, IGI, Inc. ("IGI") distributed its majority interest in Novavax to the IGI stockholders (the "Distribution"). Until then, Novavax had been the human pharmaceuticals subsidiary of IGI. The Company's principal executive offices are located at 8320 Guilford Road, Columbia, Maryland, 21046. THE NOVAVAX TECHNOLOGY PLATFORMScandidate.Product Technology Platforms
Novavax has developed proprietary topical, oral and
oralinjectable drug delivery technologies using microscopic, organized, non-phospholipid structures, including Novasome® non-phospholipid vesicles (“Novasomes”), MNP’s and non-antibiotic, anti-microbial lipidstructures (collectively, the "Novavax Technologies"). To date, theemulsions. The Companyhas utilized its technologies in the development of Novasome(R) lipid vesicles and micellar nanoparticles, which are sub-micron size lipid structures that also possess encapsulation capabilities. Thesebelieves these structures mayhelp withbe useful for targeted delivery and controlledrelease. Therelease of certain drugs, along with inactivation of bacteria, enveloped viruses, spores and sperm. Moreover, the Company believes that certain of itstechnologiesorganized lipid structures mayallowprovide effective and safe adjuvant carrier systems for amore cost-effective delivery of a widevariety ofdrugs andvaccines.Although other
therapeutics than phospholipid liposomes and other delivery vehicles. Itscompanies have developed liposome technologies,may be preferred over other transdermal delivery systems because of the reduction in side effects, primarily skin irritation. Additionally, future applications may show advantages over injectable delivery technologies which are invasive, inconvenient and sometimes painful. Mostmost commercial liposomes are composed of delicate phospholipids. Due to their inherent lack of stability and carrying capacity,limitations,only a limited number of drugs may be used with these phospholipid liposomes. While capable of encapsulating certain (principallywater soluble)water-soluble) drugs, phospholipid liposomes have a number of other significant disadvantages including their expense and the4
need to use potentially hazardous organic solvents in their manufacture. In addition, the standard, multi-step phospholipid manufacturing processyieldsis relativelysmall quantitiesexpensive.The Company believes its non-phospholipid technologies may allow for a more cost-effective delivery of
liposomes. 83a wider variety of drugs and other therapeutics than commercially available phospholipid liposomes and other delivery vehicles. Its technologies may also be preferred over other available transdermal delivery systems because its technologies may reduce side effects such as skin irritation. Future applications may show advantages over injectable delivery technologies, which are invasive, inconvenient and sometimes painful. In addition, the Company’s anti-microbial lipid emulsions may avoid the problem of pathogen mutation and resistance because of their non-antibiotic method of action.Novasome
lipid vesicles Novasome lipid vesiclesNon-Phospholipid Vesicles. Novasomes are proprietaryorganized, lipidstructures in which drugs or other materialsmaycan be encapsulated for delivery into the body topically or orally.Novasome lipid vesiclesNovasomes are made using theCompany'sCompany’s patented manufacturingprocessprocesses from a variety of readily available chemicals called amphiphiles, which include fatty alcohols and acids, ethoxylated fatty alcohols and acids, glycol esters of fatty acids, glycerol fatty acid mono and diesters, ethoxylated glycerol fatty acid esters, glyceryl ethers, fatty acid diethanolamides and dimethyl amides, fatty acyl sarcosinates, alkyds andalkyds as well asphospholipids.The Company
entered intoplans to commercialize its Novasome technology in part through products it develops itself and in part through third party drug delivery application licenses. The Company believes that certain of its organized lipid structures may provide effective and safe adjuvant carrier systems for alicensing agreement with IGI, the Company's former parent, in December 1995 entitling IGI to the exclusive use of the Novavax Technologies in certain fields. Currently, IGI uses Novasome lipid vesicles in a widevariety ofcosmetic applications, including products sold by Estee Laudervaccines. In addition, the Company has developed structures for delivery of biologically active molecules like antisense, genes andRevlon. The Company retains rights to Novasome lipid vesicle technologies for use in human pharmaceuticals except for topical dermatological products for localized usage at the delivery zone.proteins.Micellar
Nanoparticles Micellar nanoparticles ("MNPs")Nanoparticle Emulsion. MNPs are proprietary, submicron-sized, water miscible,lipidnon-phospholipid structures that have different structural characteristics and are generally smaller than Novasomelipidnon-phospholipid vesicles.MNPs,MNP’s, like Novasomelipidnon-phospholipid vesicles, are derived fromamphiphileamphiphilic molecules.Novavax scientists have demonstrated
the abilitythat MNP’s are able to incorporate alcohol soluble drugs,andpesticides, vaccine adjuvants, proteins, whole viruses, flavors, fragrances andcolors into MNPs. MNPscolors. MNP’s also have the ability to entrap ethanol or methanol soluble drugs, and to deliver certain of these drugs transdermally through intact skin. The MNP formulations used by Novavax for the transdermal delivery of drugs have cosmetic propertieslikesimilar to creams and lotions.There may be inherent advantagesThese transdermal formulations have the advantage over injectable delivery systemswhich areof being less invasiveandand/or inconvenient andoverthe may also cause less skin irritation than patch transdermal delivery systems. MNP’s are the fundamental technology platform for Novavax’s hormone replacement therapies.Vaccine Research and Development
BSD is engaged in contract research, development and pilot manufacturing of human vaccines for the Company’s own use and for government laboratories and other vaccine companies. The Director of our vaccine programs is Louis Potash, Ph.D., one of the original scientists to work on both the Salk-type inactivated polio vaccines and inactivated whole influenza virus vaccines during the 1950s. This acquisition significantly expanded Novavax’s internal vaccine developmental capabilities and allows the Company to combine its adjuvant technology with BSD’s 35 years of experience in developing and manufacturing vaccines.
BSD’s facility is a vaccine research and development laboratory producing Phase I and II clinical materials in accordance with the FDA’s current Good Manufacturing Practice (“cGMP”) regulations. The facility develops and produces live virus suspensions and vaccines and recombinant proteins from baculovirus infected insect cells and E. coli for government, industrial pharmaceutical, biotech and academic clients at lab bench and pilot production scales. Services include experimental vaccine development,in vivoandin vitrovaccine safety testing, large-scale virus seed pool production in tissue culture and embryonated hens’ eggs, the production and testing of tissue culture systems, and final container filling in ampules, in cryules and in aluminum-crimped cap vials. Additionally,
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repository management including specimen receipt, storage, tracking, and shipment for thousands of biological samples is available.BSD is one of the few locations in the world that produces experimental live viral vaccines for Phase I and II clinical trials. Our professional expertise lies in live virus suspensions (both attenuated and wild type), recombinant live virus suspensions, inactivated virus suspensions, recombinant baculovirus expression, recombinant virus-like particles (“VLP”s), recombinant protein purification, and cancer immunotherapeutics. VLP’s are non-infectious, self-assembled macro-molecules comprised of viral capsid proteins that elicit neutralizing antibodies and cellular immune response. Novavax has developed several VLP’s using its proprietary design and manufacturing processes.
Some of our recent achievements in the vaccine field include:
• More than 200 final virus vaccines for clinical studies with no untoward effects, including those for influenza, parainfluenza, rotaviruses and vaccinia recombinants • The development of several Phase I therapeutic cancer vaccines • The development of VLP’s subunit vaccines for human caliciviruses, rotaviruses, human papillomavirus, hepatitis and others Virology Laboratory
The virology laboratory, has produced and safety tested experimental live virus vaccines and suspensions propagated in tissue cultures and in embryonated hens’ eggs for the NIH, commercial, and academic clients since 1964. The laboratory, currently staffed by a senior staff scientist/co-Principal investigator and five research technicians, has produced and safety tested over 200 live virus vaccines and suspensions. These vaccines have consisted of wild type parent strains as well as attenuated and/or mutant strains of viruses such as rotaviruses (human, human X bovine, human X rhesus, and human x human reassortants), influenza viruses (human H3N2, H1N1, H2N2 and B; avian and avian X human reassortants), respiratory syncytial viruses (subgroups A and B), parainfluenza viruses (human types 1, 2 and 3; bovine type 3), dengue, cytomegalovirus, and vaccinia virus recombinants. Release/ Manufacturing Protocols, written in a format suitable for submission to the FDA as part of IND applications, are submitted to the Regulatory Affairs Branch of the sponsoring organization. The majority of the virus suspensions and vaccines produced have received FDA approval for use in Phase I and II clinical studies. The rotaviruses have been administered orally, whereas the respiratory viruses (influenza, parainfluenza and respiratory syncytial viruses) have been administered intranasally in newborns as well as in geriatric populations and in-between age groups. Other viruses studied include herpes, hepatitis A, hepatitis B, Coxsackie, polioviruses and bovin virus diarrhea virus (“BVD”).
The virology laboratory possesses its proprietary characterized and patented African Green monkey kidney cell line used for the production of experimental live virus fluids and vaccines as well as for virus isolation from human specimens such as nasal swabs, throat washes and feces. This serially passaged monkey kidney cell line has a Master Drug File with the FDA, as does the proprietary characterized Merieux line of Vero cells. In addition, BSD has stocks of other similarly characterized cell lines suitable for virus vaccine production such as FRhL-2 and CV-1 cells as well as many other cell lines suitable for research and development efforts and for diagnostic purposes. BSD has the capability for final container filling in ampules, in cryules, in screw cap vials, and in aluminum crimped-cap vials in its newly renovated and validated filling room.
Molecular Virology Laboratory
The molecular virology laboratory, under the direction of Dr. Robin Robinson, is staffed by three senior scientists, and four research technicians. The scope of the laboratory expertise ranges from molecular DNA cloning to protein production and purification from prokaryotic and eukaryotic expression systems to biophysical characterization of protein molecules. These expression systems include numerous plasmids in E. coli, baculovirus in insect cells, and semliki forest virus, adenovirus, and other virus expression in mammalian cells including primate and human cells. Proprietary insect lines for production of clinical materials have been developed and validated.
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Cloning genes of interest is performed in BSD’s plasmid and viral vectors, which
often cause skin irritation. NOVAVAX PRODUCT CANDIDATES Topical Drug Deliveryare designed for maximal protein expression and to facilitate protein purification and formulation. Cell fermentation in BSD’s proprietary cell lines ranges from 50 milliliter shaker flasks to 30 liter bioreactors. Protein purification utilizes conventional, expanded bed adsorption, and affinity–TAG chromatographic techniques using FPLC and HPLC systems. Development and production VLPs from multiple virus systems are available for single and chimeric-particles. Available analytical methods for protein characterization include gel electrophoresis, immunodetection by Western blotting and quantitative ELISA, glycosylation analyses by DIG-labeling glycan binding assays, immunoelectro-focusing, quantitative HPLC methods, peptide mapping, automated amino acid sequencing and composition determination, and mass spectroscopy. Other capabilities include virus removal from hybridoma and ascites fluids. These services represent a comprehensive program to deliver genes from the lab bench to vectors compatible for commercial production to express high levels of recombinant proteins as secreted and/or intracellular molecules, and to purify these proteins to homogeneity by technology easily transferred to large-scale commercial production.Novavax Product Candidates
Hormone Replacement Therapy
The Company is using its
micellar nanoparticleMNP technology in the development of ESTRASORB, a cream designed for the delivery of 17b estradiol(estrogen)(estrogen hormone) through the skin. Estrogen replacement therapy is currently used worldwide by menopausal and post-menopausal women to prevent osteoporosis, cardiovascular disease and other menopausal symptoms(e.g. "hot flashes"(such as “hot flushes”). The hormone replacement market in the US is approximately $1.7 billion. This market is believed to represent only 15-20% of the estimated 60.3 million women over 40 years of age in the US who could potentially benefit from hormone replacement therapy.Current estrogen replacement products include oral tablets
or,and, more recently, transdermal patches. Oral estrogen tablets, however, have been associated with side effects primarily resulting fromfluctuatingblood hormonelevels.level fluctuations. Because of these side effects, transdermal patches for estrogen replacement were developed. While these patches help reduce blood hormone fluctuations, they may cause skin irritation and patient inconvenience associated with wearing and changing an external patch.The Company believes that ESTRASORB may offer several advantages over existing therapies used for estrogen replacement. ESTRASORB
is a cream thatmay be applied to the skin much like atopical cosmetic-like cream.typical cosmetic lotion. The Company believes ESTRASORB will be able to deliver a continuous amount of estrogen to the patient without the fluctuations in blood hormone levels associated with oral tablets. In addition, ESTRASORB does not contain materials that may cause the skin irritation associated with transdermal patches.In 1995, the Company completed preclinical testing of ESTRASORB in a primate model. Results of this study demonstrated that ESTRASORB can be utilized to deliver estradiol through intact skin with maintenance of therapeutic serum estradiol levels for six days after a single topical application. Based on these results, the Company initiated a Phase I human clinical trial of ESTRASORB involving 10 symptomatic menopausal women. In this study, each woman received a single topical application of ESTRASORB. This study was completed in the fourth quarter of 1996 with no significant adverse experiences noted.The Company has completed
two additional humanfive clinical studies with ESTRASORB. The firstis a multiple-dose, dose ranging, pharmacokinetic study begun inthree studies demonstrated transdermal delivery of thesecond quarter of 1997. The second is a multiple-dose, pharmacokinetic, placebo controlled study was started in third quarter of 1997. These studies demonstrateddrug and no skin irritationand delivery of therapeutic levels of the drug. In September, 1996, the Company completed the animal testing of ANDROSORB (testosterone) in its MNP transdermal drug delivery platform. In these tests, peak blood levels of testosterone were approximately three times higher than testosterone dissolved in ethanol. After a single topical cream application, peak serum levels of testosterone were as high as 35 nanograms per milliliter and persisted in the therapeutic range for 48 hours. The Company completed the human safety studies and submitted the results to the FDA in the third quarter of 1997.was noted. Amultiple-dose, pharmacokinetic humanPhase II, randomized, double blind, placebo-controlled, dose-ranging studybegan in the third quarter of 1997 andwas completed in the first quarter of1998.1999. This studydemonstrated noinvolved a 35 day dosing protocol and included 120 patients at six clinical sites located in the United States. This study indicated that ESTRASORB, administered daily to menopausal women, significantly reduced the number of hot flushes per day and significantly increased their trough serum estradiol levels.During the first quarter of 2001, Novavax completed a multi-center Phase III study of ESTRASORB in symptomatic menopausal women. The study involved 200 subjects in 20 centers nationwide. The study was designed to measure ESTRASORB’s ability to deliver 17b estradiol through the skin,
irritationwhen applied as a topical lotion. The study results indicate that there is a statistically significant difference between ESTRASORB anddeliveryplacebo treatment with respect to the trial’s primary clinical endpoint, a reduction in the number oftherapeutic levelshot flushes.The positive reactions of the
drug.women in the Phase II study coupled with the Company’s positive Phase III clinical results indicate that estrogen replacement therapy is an excellent initial target for the Company’s topical drug delivery system. As the Company begins the final stages of clinical development with ESTRASORB and files for an NDA, the Company will continue to investigate its topical delivery system to other products.Testosterone replacement therapy is currently used by males who are testosterone deficient as a result of either primary or secondary hypogonadism.
TestosteroneIt is believed that testosterone in males is required to maintain sexual function and libido, maintain lean body mass, increase hemoglobin synthesis and maintain bone density. There are estimated7
to be one million testosterone deficient men in the US. It is further estimated that only 100,000 to 150,000 men are currently being treated for testosterone deficiency. These numbers are expected to grow with the aging of the population and the increasing awareness of the benefits of hormone replacement therapy.Current testosterone replacement therapy products include deep intramuscular injections or transdermal patches. The injections require frequent visits to a physician and may be associated with pain at the injection site and abscess. The transdermal patches may cause skin irritation and patient inconvenience associated with wearing and changing
two to threeexternalpatches per day.patches.The Company believes that ANDROSORB (its testosterone hormone replacement therapy product) may offer several advantages over current testosterone replacement therapies. ANDROSORB is a lotion that may be applied to the
skin. This would eliminateskin, thus eliminating the need for intramuscular injections. In addition, ANDROSORB does not contain materials that may cause the skin irritation associated with transdermal patches.94 All clinical trials to date, for both ESTRASORB and ANDROSORB, have been conducted with product formulations that have been refrigerated.The Companyis currently developingcompleted human safety studies of ANDROSORB involving 10 subjects andevaluating several other formulations, alongsubmitted the results to the FDA in the third quarter of 1997. A multiple-dose, pharmacokinetic study involving 9 subjects was completed in the fourth quarter of 1997, and a dose-ranging pharmacokinetic study involving 8 subjects was completed in the second quarter of 1998. The Company completed Phase I testing of ANDROSORB in 1999, withpackaging alternatives,results thatwillindicated ANDROSORB did notbe refrigerated and willcause skin irritation in the patients tested. These studies havea two year shelf life. Clinical trials to determine that therapeutic blood levelsalso all demonstrated delivery of the drugare delivered with these formulations are expected to be completed by the end of the third quartersuccessfully results in1998. These formulations are believed to have commercial and patient compliance advantages over refrigerated product formulations.elevated blood hormone levels. The Companyanticipates most future clinical trials to be with formulations that require no refrigeration. The Company has developed several other applicationscompleted a Phase II dose ranging study in testosterone deficient women in the fourth quarter ofits MNP transdermal2000.ANDRO-JECT is a new oil-free, cholesterol-free depot drug delivery
technology platform. These product applications aresystem for testosterone, which is invarious stagespreclinical development. ANDRO-JECT is delivered subcutaneously with a small 25 gauge needle. In animal studies therapeutic levels ofpre-clinical testing. The Company believes its MNP and other technologies are suitabletestosterone were maintained for two weeks after one subcutaneous injection. We expect to file an IND for ANDRO-JECT in thedeliveryfirst half ofethanol soluble drugs. Helicore Microbicidal Preparations2001.Microbicides
The Company has developed proprietary lipid
structure formulationsstructures that it is using in the development of a non-antibiotic, anti-bacterial preparation, Helicore, for the treatment ofHelicobacterH. pylori("H. pylori")infection in humans.H. pyloriwas recognized in 1994 by the National Institutes of Health as a causative agent of peptic ulcer disease, antral gastritis and certain types of gastric cancer.It is estimated that 30-80 million adults in the U.S. are infected with H. pylori. Each year the treatment of complications of H. pylori infections (i.e., peptic ulcer disease) in the U. S. alone costs in excess of five billion dollars.Current therapies for the treatment ofH. pyloriinclude the use of antibiotics alone or antibiotics in combination with drugs that inhibit acid production in the stomach. Problems associated with such therapies include, but are not limited to, cost, toxicity, failure to sufficiently eradicate all the bacteria, and acquired resistance to the antibiotic.TheIn 1995, the Company beganin 1995to test formulations of Helicore in both animal studies and Phase I human safety studies. Results from clinical studies completed in 1996 were submitted to the FDA.A multiple-dose, dose ranging study began in the second quarter of 1997Novavax is not currentlybeing completed. Additional pre-clinicalconducting preclinical or clinical studies on Helicore.The Company has also developed BCTP, a lipid emulsion that acts on various
formulationsmicrobials, including enveloped viruses, as well as spores and bacteria. The product has also demonstrated spermicidal action. The Company believes that the emulsion acts on the target by first fusing or merging with the lipid envelope or outer membrane of the target. The Company believes that BCTP has many potential applications. Preclinical studies indicate that viruses and spores vulnerable to BCTP include influenza A and bacillus anthracis, but it may also be appropriate for herpes, measles, mumps, rubella and many other microbes and pathogens. While influenza vaccines arestill in process.relatively effective at preventing the flu, BCTP unlike vaccines, does not appear to promote mutation and resistance. Other advantages of BCTP appear to include a low toxicity profile, inexpensive scale-up and manufacturing costs, and a rapid and broad spectrum of killing.Vaccine Adjuvants
Adjuvants are substances that make vaccines more effective. The Company believes that
certain ofitsorganized lipid structures (e.g.Novasome lipidvesicles)vesicles may provide effective and safe adjuvant carrier systems for a variety ofvaccines. The Company believes that Novasome lipid vesicles may be used as vaccine adjuvants and protective carriersvaccines in a variety of circumstances, including: (i) encapsulation and protectionof delicate antigenic materialsfrom destruction by thebody'sbody’s normal enzymaticprocesses;processes of delicate antigenic materials; (ii) encapsulation of toxic materials, such as endotoxins and other potent toxins, for gradualreleases,release, thereby providing protection of the body from the toxin while generating an immune8
response to the toxic antigen; and (iii) presentation of small peptide antigens or proteins to elicitaboth heightened antibody and cellular immuneresponse. Additionally,responses.Vaccine Projects
The Company’s BSD operation currently has two products in clinical trials with collaborators at NIH. The first, an HPV-16 VLP vaccine is in Phase II clinical trials and is intended to prevent HPV-16 infection. The second product, a Hepatitis E vaccine, will be tested in a Phase II trial in Nepal.
In October 2000, BSD became a part of a team assembled by Science Applications International Corporation (“SAIC”) for a contract awarded to SAIC for “Malaria Vaccine Production and Support Services”, funded by the
CompanyNational Institute of Allergy and Infectious Diseases (“NIAID”) of the NIH. Under the terms of the agreement, we will work closely with SAIC to evaluate the process of developing malaria protein vaccine candidates using multiple expression systems, as well as bacterial and viral vectors. We will also be responsible for process development and GMP manufacturing and testing of the vaccine candidates. The seven-year subcontract commenced on or about January 1, 2001 and is estimated to be valued at $10.5 million.In October 2000, we extended our initial 1999 contract with the NCI, to manufacture recombinant monomeric and chimeric VLP’s against HPV. The novel recombinant VLP’s are non-infectious vaccine candidates designed to either treat or prevent HPV infections that cause genital warts and cervical cancer. The current contract value is approximately $2.0 million. The HPV vaccines were developed by research and development teams lead by Robin Robinson, Ph.D., Associate Director of BSD and Douglas Lowy, M.D. of the Laboratory of Cellular Oncology at NCI. Dr. Robinson will serve as Principal Investigator on this new HPV vaccine project. In January 2001, we also granted King an exclusive license to use our proprietary cell line to develop and potentially commercialize recombinant HPV vaccines. Novavax and King are currently working together on manufacturing HPV-16 VLP vaccines for an NCI Phase II study, expected to commence during the second half of 2001 in Costa Rica.
The BSD operations also has
developed structuresa contract with NIH fordelivery of biologically active molecules like anti-sense, genes and proteins. The Company has several research contracts in place to provide vaccine products, services and adjuvant technologies. These contracts include developmentthe “Operation of anadjuvant for an immunotherapeutic against human PapillomaExperimental Virusfor a British vaccine companyVaccine Production Facility” through November 2002. Current efforts are stressing dengue anda subcontract agreement with University of Michigan who is supplying anti-infective defense systems against biological warfare agents for the U.S. military. They are anticipated to generate approximately $.5 million in revenue in 1998 with potential revenue opportunities beyond 1998. MANUFACTURINGparainfluenza virus reassortant vaccines.Manufacturing
The development and manufacture of the
Company'sCompany’s products are subject to good laboratory practices("GLP"(“GLP”) andgood manufacturing practices ("GMP")cGMP requirements prescribed by the FDA and to other standards prescribed by the appropriate regulatory agency in the country of use. The Company has the ability to produce quantities of Novasome lipid vesiclessufficient to support its current needs. The Company also has the ability to produce quantities of Novasome lipid vesiclesand MNPs sufficient to support its needs for early-stage clinical trials. It does not presently haveFDA certifiedFDA-certified facilities capable of producing the larger quantities of pharmaceutical products required for larger scale clinical trials or commercial production. The Company will need to rely on collaborators, licensees or contract manufacturers or acquire such manufacturing facilities for later stage clinical trials and commercial production of its own pharmaceuticals. Novavax has entered into a supply agreement with PCI, Inc., a division of Cardinal Health, Inc., to produce ESTRASORB. This GMP facility, located in Philadelphia, Pennsylvania, has the capacity to meet Novavax’s current and future production requirements for ESTRASORB. Additionally, Novavax has entered into an agreement with Parkedale, Inc. a subsidiary of King Pharmaceuticals, Inc., whereby Novavax can use manufacturing facilities at Parkedale to manufacture vaccines for Phase III clinical trials. There can be no assurance that the Company will be able to obtain such facilities or manufacture such products in a timely fashion at acceptable quality and prices, that it or its suppliers will be able to comply with GLP or GMP, as applicable, or that it or its suppliers will be able to manufacture an adequate supply of product.MARKETINGMarketing
The Company plans to market its
pharmaceuticalscurrent healthcare products and pharmaceutical products for which it obtains regulatory approvals in the future either through its recently acquired marketing and distribution operations in St. Louis, Missouri, joint ventures or corporate partnering arrangements. The Company expects that such arrangements could include technology licenses, research funding, milestone payments, collaborative product development, royalties and equity investments in Novavax.ImplementationWe expect the level ofthisadvertising and promotional spending to support9
these products to be in line with industry standards. The success of our strategy will depend on many factors including general market conditions, marketplace acceptance of themarket potential of itsproducts,and technologies, the success in developing relationships with distributors or marketing partners for the Company's products and thefinancial resources available to us and theCompany. 105 COMPETITIONinfluence of competition.Competition
All of the markets in which Novavax competes are intensely competitive. The pre-natal vitamin market is very fragmented with many competitors. A number of
largecompaniessuch as Novartis, Procter & Gamble, American Home Products, Parke-Davis,that are larger than us, and have greater resources than we do, compete in the market, including, Warner-Chillcot, Solvay Pharmaceuticals,SmithKline Beecham, Abbott Laboratories, Ortho Pharmaceuticals andMead Johnson,Laboratories, produceandsell estrogen preparations for clinical indications identical to those the Company proposes to target. SmithKline Beecham currently markets a transdermal testosterone patchmany generic andNovartis markets an estrogen transdermal patch.controlled brand manufacturers. The competition to develop FDA approvedhormone replacement therapiesprenatal vitamins is intense and no assurance can be given thatthe Company'sour product candidates will continue to bedeveloped intocommercially successful products.Many large companies, such as
Merck, Merck-Astra, Glaxo-Wellcome, Procter & Gamble, SmithKline Beecham, OraVaxAmerican Home Products (“AHP”), Apothecon, Watson Pharmaceutical, Solvay Pharmaceuticals, andothers, area number of generic manufacturers currentlyevaluating various treatment programsproduce and sell estrogen products forpeptic ulcer diseaseclinical indications identical to those the Company seeks for its lead product. In addition, the Wyeth-Ayerst division of AHP commits significant resources in the sales and marketing of its products to maintain its market leadership position. In thetreatment of H. pylori. Mosttransdermal segment of thetherapies under investigation today involvemarket, Novartis markets acombination oftransdermal estrogen patch and Watson currently markets acurrently used ulcer treatment medication (e.g., Prilosec(R), Zantac(R) or Tagamet(R),) in association with an antibiotic (e.g., amoxicillin, Flagyl(R) or Biaxin(R)). The market for the development of treatment programs for peptic ulcer disease and H. pylori infection is competitive and no assurance can be given that the Company's H. pylori product candidates will be developed into commercially successful products.transdermal testosterone patch.A number of other companies including Merck, Glaxo-SmithKline, Novartis, Pharmacia, and AHP have been working on vaccines and vaccine adjuvants for use
inas humanvaccines. These include, but are not limited to, Chiron, Ribi Immunochem Research, Cambridge Biotech, Iscotec, Proteus International and Biomira.drug products. The competition to develop FDA-approved human vaccines and vaccine adjuvants is intense and no assurance can be given thatthe Company'sour vaccine and vaccine adjuvant product candidates will be developed into commercially successful products.Primary competitors in the development of lipid structure and vesicle encapsulation technologies are
The Liposome Company, Sequus Pharmaceuticals, Nexstar PharmaceuticalsElan, Alza, Gilead andL'Oreal,L’Oreal, as well as other pharmaceutical, vaccine and chemical companies.The Company believesWe believe that, except forL'Oreal,L’Oreal, these companies have focused their development efforts on pharmaceutical carrier systems for the treatment of infections and certain cancers. Tothe Company'sour knowledge,The Liposome Company, SequusElan, Alza andNexstarGilead all base their lipid vesicle technologies on phospholipids.Most of
the Company'sour competitors are larger thanthe Companywe are and have substantially greater financial, marketing and technical resources. In addition, many of these competitors have substantially greater experience thanthe Companywe have in developing, testing and obtaining FDA and other approvals of pharmaceuticals. Furthermore,if the Company commenceswhen we commence commercial sales of pharmaceuticals,itwe will also be competing with respect to manufacturing efficiency and marketing capabilities, areas in whichit haswe have limited or no experience. If any of the competitors develop new encapsulation technologies that are superior tothe Company'sour Novasome and MNP technologies,theour abilityof the Companyto expand into the pharmaceutical and vaccine adjuvant markets will be materially and adversely affected.Competition among products will be based, among other things, on product efficacy, safety, reliability, availability, price and patent position. An important factor will be the timing of market introduction of
the Company's or competitors'our competitors’ products. Accordingly, the relative speed with whichthe Companywe can develop products, complete the clinical trials, and approval processes and supply commercial quantities of the products to the market, is expected to be an important competitive factor.The Company'sOur competitive position will also depend uponitsour ability to attract and retain qualified personnel, to obtain patent protection or otherwise develop proprietary products or processes and to secure sufficient capital resources for the often substantial period between technological conception and commercial sales.RESEARCH AND DEVELOPMENT The Company'sResearch and Development
Our research is focused principally on the development and commercialization of formulations for topical drug delivery and therapeutic products, including
antibacterialanti-bacterial and anti-viral products and adjuvants for vaccines.The Company intendsWe intend to usethird-partythird party funding when available, through collaborations, joint ventures or strategic alliances with othercompanies, particularly potential distributors of the Company's products.companies. Because of the substantial funds required for clinical trials,the Company willwe may have to obtain additional financing foritsour future human clinical trials. No assurance can be given that such financing will be available on terms attractive tothe Company,us, if at all.The Company bases itsWe base our development decisions on
developmentcosts and potential return on investment, regulatory considerations, and the interest, sponsorship and availability of funding from third parties. As of December 31,1997, the Company's2000, our research and10
development staff numbered831 individuals. In addition to its internal research and development efforts,the Company encourageswe encourage the development of product candidates in areas related toitsour present lines by working with universities and government agencies.Novavax'sOur research and development expenditures approximated$2,874,000, $3,716,000$9.4 million, $3.4 million and$3,708,000 and$3.4 million in the years ended December 31,1997, 19962000, 1999 and1995,1998, respectively.PATENTS AND PROPRIETARY INFORMATION The Company, throughPatents and Proprietary Information
Through a wholly-owned subsidiary,
holds 46we hold 50 U.S. patents and53have approximately 125 foreign patents and patent applications coveringitsour technologies (which include a wide variety of component materials, its continuous flow vesicle production process and itsNovamix(R)Novamix® production equipment).The Company believesWe believe that these patents are important for the protection ofitsour technology as well as certain of the development processes that underlie that technology. In addition,8three U.S.patent applications and 53 foreignpatent applications are pending covering the composition, manufacture and use of its organized lipid structures and related technologies.The Company expectsWe expect to engage in collaborations, sponsored research agreements and preclinical testing agreements in connection with
itsour future pharmaceutical products and vaccine adjuvants, as well116as clinical testing agreements with academic and research institutions and U.S. government agencies, such as the NIH, to take advantage of the technical expertise and staff of these institutions and to gain access to clinical evaluation models, patients and related technologies. Consistent with pharmaceutical industry and academic standards, and the rules and regulations promulgated under the federal Technology Transfer Act of 1986, these agreements may provide that developments and results will be freely published, that information or materials supplied bythe Companyus will not be treated as confidential and thatthe Companywe will be required to negotiate a license to any such developments and results in order to commercializeproducts incorporating them.products. There can be no assurance thatthe Companywe will be able to successfully obtain any such license at a reasonable cost or that such developments and results will not be made available to our competitorsof the Companyon an exclusive or nonexclusive basis.GOVERNMENT REGULATION The Company'sGovernment Regulation
Our research and development activities are subject to regulation for safety, efficacy and quality by numerous governmental authorities in the United States and other countries. The development, manufacturing and marketing of human pharmaceuticals are subject to regulation in the United States for safety and efficacy by the FDA in accordance with the Food, Drug and Cosmetic Act.
In the United States, human pharmaceuticals are subject to rigorous FDA regulation including preclinical and clinical testing. The process of completing clinical trials and obtaining FDA approvals for a new drug is likely to take a number of years, requires the expenditure of substantial resources and is often subject to unanticipated delays. There can be no assurance that any product will receive such approval on a timely basis, if at all.
The steps required before new products for use in humans may be marketed in the United States include (i) preclinical tests, (ii) submission to the FDA of an
application for an Investigational New Drug application (IND),IND, which must be approved before human clinical trials commence, (iii) adequate and well-controlled human clinical trials to establish the safety and efficacy of the product, (iv) submission ofa New Drug Application ("NDA")an NDA for a new drug or a Product License Application("PLA"(“PLA”) for a new biologic to the FDA and (v) FDA approval of the NDA or PLA prior to any commercial sale or shipment of the product.Preclinical tests include laboratory evaluation of product formulation, as well as animal studies (if an appropriate animal model is available) to assess the potential safety and efficacy of the product. Formulations must be manufactured according to GMP and preclinical safety tests must be conducted by laboratories that comply with FDA regulations regarding GLP. The results of the preclinical tests, are submitted to the FDA as part of an IND and are reviewed by the FDA prior to the commencement of human clinical trials. There can be no assurance that submission of an IND will result in FDA authorization to commence clinical trials. Clinical trials involve the administration of the investigational new drug to healthy volunteers and to patients under the supervision of a qualified principal investigator and are typically conducted in three sequential phases, although the phases may overlap.
The CompanyWe or the FDA may suspend clinical trials at any time if the participants are being exposed to an unacceptable health risk. The FDA may deny an NDA or PLA if applicable regulatory criteria are not satisfied, require additional testing or information, or require post marketing testing and surveillance to monitor the safety ofthe Company'sour products.11
In addition to obtaining FDA approval for each PLA, an Establishment License Application
("ELA"(“ELA”) must be filed and approved by the FDA for the manufacturing facilities of a biologic product before commercial marketing of the biologic product is permitted. The regulatory process may take many years and requires the expenditure of substantial resources.In addition to regulations enforced by the FDA,
the Companywe are alsoissubject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other present and potential future federal, state or local regulations.The Company'sOur research and development involves the controlled use of hazardous materials, chemicals and viruses. Althoughthe Company believeswe believe thatitsour safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident,the Companywe could be held liable for any damages that result, and any such liability could exceedthe resources of the Company.our resources.In both domestic and foreign markets,
theour abilityof the Companyto commercializeitsour product candidates will depend, in part, on the availability of reimbursement from third-party payers, such as government health administration authorities, private health insurers and other organizations. If adequate coverage and reimbursement levels are not provided by government, and third-party payers for uses ofthe Company'sour therapeutic products, the market acceptance of these products would be adversely affected.There have been a number of federal and state proposals during the last few years to subject the pricing of pharmaceuticals to government control and to make other changes to the medical care system of the United States. It is uncertain what legislative proposals will be adopted or what actions federal, state or private payers for medical goods and services may take in response to any medical reform proposals or legislation.
The CompanyWe cannot predict the effect medical reforms may have onitsour business, and no assurance can be given that any such reforms will not have a material adverseeffect on the Company. 127 EMPLOYEESeffect.Employees
The Company had
15127 full-time employees as of December 31,1997,2000, of whom831 are in research and development. Of those 31, 6 are PhD’s and 1 is an M.D. The Company has no collective bargaining agreement with its employees and believes that its employee relations are good.ITEMRisks and Uncertainties
The following is a summary description of some of the many risks we face in our business. You should carefully review these risks in evaluating our business, including the business of our subsidiaries. You should also consider the other information described in this report.
We have a history of losses and our future profitability is uncertain
Our expenses have exceeded our revenues since our formation in 1987, and our accumulated deficit at December 31, 2000 was $55.1 million. Our revenues for the last three years were $681,000 in 1998, $1.2 million in 1999 and $2.5 million in 2000. The Fielding acquisition will generate revenue from commercial sales of products but we cannot be certain that these revenues will be sufficient to offset our expenses in the future. We have received a very limited amount of product-related revenue from research contracts, licenses and agreements to provide vaccine products, services and adjuvant technologies. We cannot be certain that we will be successful in entering into strategic alliances or collaborative arrangements with other companies that will result in other significant revenues to offset our expenses. Our net losses for the last three years were $4.8 million in 1998, $4.5 million in 1999 and $12.2 million in 2000. Our losses have resulted from research and development expenses, clinical trials, protection of our patents and other intellectual property and other general operating expenses. We expect that our annual losses will continue in the near term as we conduct additional clinical trials and seek regulatory approval for advanced stage product candidates. Therefore, we expect our cumulative operating loss to increase until such time, if ever, as product sales, licensing fees and royalty payments generate sufficient revenue to fund our continuing operations. We cannot predict when, if ever, we might achieve profitability and cannot be certain that we will be able to sustain profitability, if achieved.
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We have not completed the development of any product and our ability to do so is uncertain
All of our potential products are still in various stages of pre-clinical research or clinical trials. Significant further research and development, pre-clinical and clinical testing, regulatory approval and additional financing are all necessary before the commercial sales of any of our products.
We are not certain whether we will be able to complete the development of and sell any of our products. The development of pharmaceutical products based on new technologies is subject to a variety of inherent risks of failure. These risks include the following:
• Our potential products may be found to be unsafe, to have harmful side effects on humans, to be ineffective or may otherwise fail to meet regulatory standards or receive necessary regulatory approvals. • Our potential products may be too difficult or costly to manufacture on a large scale, to develop into commercially viable products or to market. • Our potential products may not be accepted by the medical community. • Other companies may market superior or equivalent products. • Other parties may claim proprietary rights to our product technology that prevent us from marketing our products. • We may be unable to raise enough money to finance our continued product development. We have recently completed a Phase III clinical trial for our estrogen replacement therapy product, ESTRASORB and expect to file an NDA in the first half of 2001. Our products are in various phases of testing and we cannot guarantee that these products will successfully pass such testing phases, and if so, will result in commercially successful products. Clinical trial results are frequently susceptible to varying interpretations by scientists, medical personnel, regulatory personnel, statisticians and others which may delay, limit or prevent further clinical development or regulatory approvals of a product candidate. Also, the length of time that it takes for us to complete clinical trials and obtain regulatory approval for product marketing can vary by product and by the indicated use of a product. We are unable to predict the length of time before we complete the necessary clinical trials and obtain regulatory approval.
We may not succeed in obtaining the FDA approval necessary to sell our products
The development, manufacture and marketing of our pharmaceutical products are subject to government regulation in the United States and other countries. In the United States and most foreign countries, we must complete rigorous preclinical testing and extensive human clinical approval to market the product. One of our product candidates, ANDROSORB, is now in Phase I human clinical studies. ESTRASORB recently completed Phase III clinical trials for estrogen replacement therapy. Our other product candidates are in pre-clinical laboratory or animal studies. Before applying for FDA approval to market any particular product candidate, we must conduct larger-scale Phase II and III human clinical trials that demonstrate the safety and efficacy of our products to the satisfaction of the FDA or other regulatory authorities. These processes are expensive and can take many years to complete. We may not be able to demonstrate the safety and efficacy of our products to the satisfaction of the FDA or other regulatory authorities. Novavax may also be required to demonstrate that its proposed product represents an improved form of treatment over existing therapies and we may be unable to do so without conducting further clinical studies, if at all.
We may fail to obtain regulatory approval for our products on a timely basis, if at all. Delays in obtaining regulatory approval can be extremely costly in terms of lost sales opportunities and increased clinical trial costs. The speed with which we complete our clinical trials and our applications for marketing approval will depend on several factors, including the following:
• The rate of patient enrollment, which is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the study and the nature of the protocol; 13
• Institutional review board approval of the protocol and the informed consent form; • Prior regulatory agency review and approval; • Analysis of data obtained from pre-clinical and clinical activities which are susceptible to varying interpretations, which interpretations could delay, limit or prevent regulatory approval; • Changes in the policies of regulatory authorities for drug approval during the period of product development; and • The availability of skilled and experienced staff to conduct and monitor clinical studies and to prepare the appropriate regulatory applications. We have limited experience in conducting and managing the pre-clinical and clinical trials necessary to obtain regulatory marketing approvals. We may not be able to obtain the approvals necessary to conduct clinical studies. Also, the results of our clinical trials may not be consistent with the results obtained in pre-clinical studies or the results obtained in later phases of clinical trials may not be consistent with those obtained in earlier phases. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after experiencing promising results in early animal and human testing. If regulatory approval of a drug is granted, such approval is likely to limit the indicated uses for which it may be marketed. Furthermore, even if a product of ours gains regulatory approval, the product and the manufacturer of the product will be subject to continuing regulatory review. We may be restricted or prohibited from marketing or manufacturing a product, even after obtaining product approval, if previously unknown problems with the product or its manufacture are subsequently discovered.
We may need substantial additional capital to grow and operate our business and we are uncertain about obtaining future financing
We estimate that our existing cash resources will be sufficient to finance our operations at current and projected levels of development and general corporate activity for the next 12 to 18 months. Thereafter, we will require substantial additional funds to continue our research and development, commence future pre-clinical and clinical trials, seek regulatory approvals, establish commercial-scale manufacturing capabilities and market our products. We will seek to obtain additional funds through public or private equity or debt financings, collaborative arrangements with pharmaceutical companies and other sources. We cannot be certain that adequate additional funding or bank financing will be available to us on acceptable terms, if at all. If we cannot raise the additional funds and we need to continue our current and anticipated operations, we may be required to delay significantly, reduce the scope of or eliminate one or more of our research or development programs. If that is the case we will seek other alternatives to avoid insolvency, including arrangements with collaborative partners or others that may require Novavax to relinquish rights to certain of its technologies, product candidates or products.
Our success depends on our ability to maintain the proprietary nature of our technology
Our success will, in large part, depend on our ability to maintain the proprietary nature of our technology and other trade secrets. To do so, we must prosecute and maintain existing patents, obtain new patents and pursue trade secret protection. We also must operate without infringing the proprietary rights of third parties or letting third parties infringe our rights. Novavax has 50 United States patents and approximately 125 foreign patents covering its technologies, including its Novamix™ production equipment. However, patent issues relating to pharmaceuticals involve complex legal, scientific and factual questions. To date, no consistent policy has emerged regarding the breadth of biotechnology patent claims that are granted by the United States Patent and Trademark Office or enforced by the federal court. Therefore, we do not know whether our applications will result in the issuance of patents, or that any patents issued to Novavax will provide us with any competitive advantage. We also cannot be sure that Novavax will develop additional proprietary products that are patentable. Furthermore, there is a risk that others will independently develop or duplicate similar technology or products or circumvent the patents issued to Novavax.
There is a risk that third parties may challenge our existing patents or may claim that we are infringing their patents or proprietary rights. We could incur substantial costs in defending patent infringement suites or in filing
14
suits against others to have their patents declared invalid or claim infringement. It is also possible that we may be required to obtain licenses from third parties to avoid infringing third-party patents or other proprietary rights. We cannot be sure that such third-party licenses would be available to us on acceptable terms, if at all. If we are unable to obtain required third-party licenses, we may be delayed in or prohibited from developing, manufacturing or selling products requiring such licenses.Some of our know-how and technology is not patentable. To protect our proprietary rights in unpatentable intellectual property and trade secrets, we require employees, consultants, advisors and collaborators to enter into confidentiality agreements. These agreements may not provide meaningful protection for Novavax’s trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure.
Other organizations have greater resources to develop, manufacture and market competitive products
We compete with numerous other companies worldwide that have developed or are developing novel drug delivery and encapsulation technologies. These competitors include both large and small pharmaceutical companies, biotechnology firms, universities and other research institutions. Novavax may not succeed in developing technologies and products that are more effective than those being developed by our competitors. Novavax’s technologies and products may be rendered obsolete or noncompetitive as a result of products introduced by competitors. Most of our competitors have substantially greater financial and technical resources, production capabilities and experience of our competitors may enable them to develop, manufacture and market their products more successfully and at a lower cost than Novavax. In addition, many of Novavax’s competitors have significantly greater experience than Novavax in conducting preclinical testing and clinical trials of human pharmaceuticals and obtaining regulatory approvals to market such products. Accordingly, Novavax’s competitors may succeed in obtaining FDA approval for products more rapidly than Novavax which may give them an advantage over Novavax in achieving market acceptance of their products.
We need marketing and manufacturing partners to commercialize our products
We do not have any significant manufacturing capability and our drug development capability is limited in large part by our finances. Although we have the ability to produce the limited quantities of products needed to support our current research and development program and clinical trials, we will need more production capacity for larger, later-stage clinical studies and commercial sales. Therefore, our ability to successfully develop and commercialize our products depends, in large part, on our success in entering into strategic alliances or licensing arrangements with collaborative partners, primarily pharmaceutical companies. We expect that these partners will assume various responsibilities for product commercialization including conducting clinical trials, submitting applications for regulatory approval and manufacturing product supplies. However, we may not be able to negotiate collaborative arrangements on acceptable terms, if at all. Even if such collaborations are established, they may not be scientifically or commercially successful. There is a risk that our collaborative partners may fail to perform their obligations to develop and manufacture our products in which case our business may be adversely affected. We also face the risk that our collaborative partners may develop competing technologies for treating the diseases and conditions targeted by our products, either on their own or in collaboration with others.
In certain circumstances, it may be advantageous for us to retain manufacturing rights for some of the products that we license to collaborative partners. However, we cannot be sure that we will be able to retain such rights on acceptable terms, if at all, or that we will have the ability to produce the quantities of product required under the terms of such arrangements. Our reliance on collaborative arrangements for product development and commercialization may result in lower revenues from royalties and other payments than we could have generated had we commercialized and marketed products ourselves.
If we manufacture our own products, we will need to acquire additional manufacturing facilities and to improve our manufacturing technology. Establishing additional manufacturing facilities will require us to spend substantial funds, hire and retain a significant number of additional personnel and comply with extensive regulations applicable to such facilities here and abroad, including the current good laboratory practices and good manufacturing practices required by the FDA. If we elect to or need to manufacture our own products, we risk the possibility that we may not be able to do so in a timely fashion at acceptable quality and prices or in compliance with good laboratory
15
practices and good manufacturing practices. If we are not able to enter into commercial manufacturing agreements or successfully develop our own commercial manufacturing capacity, sales of our products will be delayed or reduced.We are in the process of validating our manufacturing methods for ESTRASORB, which is required under FDA guidelines. We have entered into a supply agreement using one third-party contract manufacturer for our clinical and manufacturing needs. We intend to qualify at least one additional FDA approved manufacturing facility after receiving FDA approval. However, if we are unable to produce ESTRASORB in our current facility, Novavax would not have immediate access to this product. Under such circumstances Novavax would be required to reestablish its validation process at a different third-party contract manufacturer. This would delay the commercialization of ESTRASORB.
The Fielding acquisition may not result in a smooth integration of our future products into Fielding’s current sales and distribution channels
We cannot be certain whether the acquisition of Fielding will result in a successful integration of our future products into Fielding’s sales and distribution channels. Among the reasons we have acquired Fielding are its experienced sales representatives and seasoned management team, its existing product revenues and operating income, which will provide Fielding with the financial resources to fund the development of additional proprietary products, and the synergies which should be created by the merger. In the event that we are unable to integrate successfully, our results of operations and financial condition would be materially adversely affected and we would continue to have limited revenues and large operating losses. In addition, our inability to integrate successfully would increase our dependence on other third party collaborations.
Our bylaws contain anti-takeover provisions that may deter an acquisition of Novavax, a change of management or other events that might benefit stockholders
Our Amended and Restated Certificate of Incorporation requires that any action required or permitted to be taken by stockholders of Novavax must be effected at a duly called annual or special meeting of stockholders and may not be effected by any consent in writing, and will require reasonable advance notice by a stockholder of a proposal or director nomination which such stockholder desires to present at any annual or special meeting of stockholders. Special meetings of stockholders may be called only the Chief Executive Officer or, if none, the President of Novavax or the Board of Directors. The Restated Certificate of Incorporation also provided for a classified Board of Directors and members of the Board of Directors may be removed only for cause upon the affirmative vote of holders of a least two-thirds of the shares of capital stock of Novavax entitled to vote. The Board of Directors also has the authority, without further action by the stockholders, to fix the rights and preferences of, and issue shares of, preferred stock.
These provisions and other provisions of our Restated Certificate of Incorporation and By-Laws may deter hostile takeovers or delay or prevent changes in control or management of Novavax, including transactions in which stockholders might otherwise receive a premium for their shares over then current market prices. In addition, these provisions may limit the ability of stockholders to approve transactions that they believe to be beneficial.
Item 2.
PROPERTIESPropertiesThe Company leases approximately 12,000 square feet of administrative offices and laboratory space for its corporate headquarters, and
PHARMACEUTICAL DIVISION, locatedpharmaceutical product storage at 8320 Guilford Road, Columbia, Maryland. The Company leases a second facility of approximately 6,000 square feet of space located in Rockville, Maryland. This facility contains the Company’s certified animal facility and laboratories for its drug research and biologics development, which includes the vaccine adjuvant product and services group. A third facility leases approximately 12,000 square feet of space which is also located in Rockville, Maryland. This facility is for contract vaccine research, development and manufacturing of Phase I and II products. The Company’s Fielding subsidiary leases a facility in Maryland Heights, Missouri. This facility is approximately 12,000 square feet and is used for administrative offices, manufacturing and warehousing.16
The Company believes its facilities are adequate to produce quantities of Novasome lipid vesicles, micellar nanoparticles, vaccines and
MNPs sufficientadjuvants to supportits needs for early-stagePhase I and Phase II clinical trials. It does not presently have FDA certified facilities capable of producing the larger quantities of pharmaceutical products required forlarger scale clinical trials orcommercial production. The Companywill need to relypresently relies on collaborators, licensees or contract manufacturersor acquire such manufacturing facilitiesforlater stagePhase III clinicaltrialstrial materials and commercial production of its own pharmaceuticals.Item 3. Legal Proceedings
The
Company's BIOLOGICS DIVISION also leases 2,363 square feetCompany is not a party to any legal proceedings.Item 4. Submission of
space located in Rockville, Maryland. This space contains the Company's certified animal facility and laboratories for its biologics development which includes the vaccine and vaccine adjuvant product and services group. ITEM 3. LEGAL PROCEEDINGS Not Applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSMatters to a Vote of Security HoldersNo matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31,
1997. EXECUTIVE OFFICERS OF THE REGISTRANT2000.Executive Officers Of The
Company'sRegistrantThe Company’s executive officers hold office until the first meeting of the Board of Directors following the annual meeting of stockholders and until their successors are duly chosen and qualified, or until they resign or are removed from office in accordance with the
Company'sCompany’s By-laws.PRINCIPAL OCCUPATION AND OTHER BUSINESS NAME AGE EXPERIENCE DURING PAST FIVE YEARS - ------------------------------------------------------------------------------- RICHARD F. MARADIE 50 Chief Executive Officer of Novavax since March, 1997. Co-Founder, Director, President and Chief Executive Officer of Protyde Pharmaceuticals, Inc. from 1994The following table provides certain information with respect to
1997. Director, Executive Vice President and Chief Operating Officer of Platelet Research Products, Inc. from 1991 to 1994. Director, President and Chief Executive Officer of VimRx Pharmaceuticals, Inc. from 1988 to 1991. Executive Vice President and Chief Operating Officer of Creative Biomolecules, Inc. from 1987 to 1988. Senior Director Cetus Corporation and General Manager and Chairman oftheBoard of Managers for Cetus/BenVenue Oncology Therapeutics from 1983 to 1987. Director of Oncology Marketing and Sales of Adria Laboratories, Inc. from 1974 to 1983. D. CRAIG WRIGHT, M.D. 47 Vice President, Research and Development and Operations of Novavax since 1993. Founder and Senior Director of Medical Research of Univax Biologics, Inc., a biopharmaceutical company, from 1988 to 1992. BRENDA L. FUGAGLI 41 Vice President, Chief Financial Officer and Treasurer of Novavax since July, 1997. President, Chief Operating Officer, Carestream a division of FoxMeyer Corporation, 1995. Senior Vice President of Marketing FoxMeyer Drug Company 1992 to 1995. Vice President and Controller FoxMeyer Corporation from 1989 to 1992. 138 PRINCIPAL OCCUPATION AND OTHER BUSINESS EXPERIENCE NAME AGE DURING PAST FIVE YEARS - -------------------------------------------------------------------------------- THOMAS G. TACHOVSKY, PH.D. 51 Vice President, Business Development since February, 1998. General Partner and Founder, Matco & Associates, a consulting firm, 1991 to 1998. Executive Vice President R&D, Director and Founder, Protyde Pharmaceuticals, Inc., 1995 to 1997. Vice President Business Development, Cytogen Corporation, 1989 to 1991. RICHARD J. HARWOOD, PH.D. 54 Vice President, Pharmaceutical Product Development since March, 1998. Consultant K. W. Tunnell Company, Inc., 1995 to 1998. Vice President, Research and Development, Private Formulations, Inc., 1993 to 1995. Technical Planning Director, Worldwide Strategic Product Planning, Bristol-Myers Squibb, 1986 to 1993. Department Director, Product Development, Rorer Group, Inc., 1982 to 1986. Research Fellow, Merck and Co., Inc., 1970 to 1982.Company’s executive officers.
Principal Occupation and Other Business Name Age Experience During the Past Five Years John A. Spears 51 President, Chief Executive Officer and Director since May 1999. President and Chief Executive Officer of Vion Pharmaceuticals, Inc. from 1995 to May 1999. President and Chief Executive Officer of MelaRx Pharmaceuticals, Inc. from 1993 to 1995. Senior Vice President of Immunex Corp from 1989 to 1993. Denis M. O’Donnell, M.D. 47 Chairman of the Board of Directors of Novavax, Inc. since May, 2000. Vice Chairman of the Board of Directors of Novavax, Inc. from June, 1999 to May 2000. General Partner at Seaside Partners, LP, a private equity limited partnership, since 1997. Senior Advisor to Novavax from 1997 to 1998. President of Novavax from 1995 to 1997. Vice President, Business Development of Novavax from 1992 to 1995. Vice President of IGI, Inc. from 1991 to 1995. Director of the Clinical Research Center of MTRA, Inc., a provider of contract pharmaceutical research, from 1986 to 1991. D. Craig Wright, M.D. 50 Chief Scientific Officer of Novavax since 1993. Founder and Senior Director of Medical Research of Univax Biologics, Inc., a biopharmaceutical company, from 1988 to 1992. 17
Principal Occupation and Other Business Name Age Experience During the Past Five Years James R. Mirto 58 Senior Vice President and Chief Operating Officer since May 2000. Vice President, New Product Development and Licensing of Ligand Pharmaceuticals from August 1993 to February 2000. Vice President of Sales and Marketing at Adria Laboratories, from April 1990 to November 1992. Dennis W. Genge 48 Vice President and Treasurer, Chief Financial Officer since October 2000. Vice President Controller of Pyxis Corporation from April 1999 to September 2000. Executive Director of Accounting and Finance and Controller of Ligand Pharmaceuticals, Inc. from July 1991 to March 1999. 18
PART II
ITEMItem 5.
MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERSMarket For Registrant’s Common Equity and Related Stockholder MattersThe
Company'sCompany’s Common Stock was held by952approximately 813 stockholders of record as of March20, 1998.9, 2001. The Company has never paid cash dividends on its Common Stock. The Company currently anticipates that it will retain all of its earnings for use in the development of its business and does not anticipate paying any cash dividends in the foreseeable future.The
principal market for the Company'sCompany’s Common Stock ($.01 par value) is traded on the American Stock Exchange under the symbol"NOX"“NOX”. The following tableshowssets forth, for therange ofperiods presented, the high and lowclosingsales prices for the Company’s Common Stock.
Quarter Ended: High Low December 31, 2000 $ 9.48 $ 6.75 September 30, 2000 9.19 6.13 June 30, 2000 8.63 4.50 March 31, 2000 12.38 4.75 December 31, 1999 $ 6.19 $ 3.63 September 30, 1999 4.50 3.13 June 30, 1999 4.19 3.06 March 31, 1999 4.00 1.88 Recent Sales of Unregistered Securities
In December 2000, Novavax acquired privately owned Fielding Pharmaceutical Company. Under the terms of the
Company's common stock on the American Stock Exchange for the periods indicated. HIGH LOW - ---------------------------------------------------- 1997 First quarter $4 3/4 $3 1/4 Second quarter 4 7/16 2 5/8 Third quarter 6 4 Fourth quarter 5 3/4 4 1/8 1996 First quarter $6 5/8 $3 3/8 Second quarter 8 1/4 5 1/4 Third quarter 7 1/8 3 1/8 Fourth quarter 4 5/8 2 7/8 RECENT SALES OF UNREGISTERED SECURITIES On October 30, 1996,acquisition agreement, Novavaxreceived $1,655,877, net of all transaction costs, from the sale of 505,000 common shares that were privately placed with accredited institutional investors by Vector Securities International, Inc. On February 10, 1997, Novavax signed a definitive agreement to privately place 1,200,000 common shares with Anaconda Opportunity Fund, L.P., an accredited institutional investor, at an aggregate price of $5,100,000. Effective on or about the closing dates the 1,705,000 common shares were registered and freely tradable. On January 23, 1998, the Company entered into Subscription Agreements to effectuate the private placement of 6,500 shares of Series A Custom Convertible Preferred Stock, $.01 par value per share (the "Series A Preferred Stock"). The closing occurred on January 28, 1998 (the "Issuance Date") at an aggregate purchase price of $6,500,000. The Company received the proceeds therefor and paid Diaz & Altschul, LLC a fee of $425,233 in consideration for its services as placement agent. The Series A Preferred stock is convertible into shares of Common Stock at a conversion price equal to (i) during a period of 90 days following the Issuance Date,acquired 100% of theaverageoutstanding shares ofthe two lowest consecutive trade pricesFielding for $31.5 million, consisting ofthe Common Stock as reported on the American Stock Exchange$13 million in cash and 2,312,501 shares of Novavax common stock, valued at $18.5 million. An additional $5 million in either Novavax common stock or cash will be paid to former Fielding shareholders in March 2002.Item 6. Selected Consolidated Financial Data
For the years ended December 31, 1996 1997 1998 1999 2000 (amounts in thousands, except share and per share information) Statement of Operations Data:Revenues $ 56 $ 520 $ 681 $ 1,181 $ 2,475 Loss from operations (5,534 ) (4,791 ) (5,152 ) (4,566 ) (12,742 ) Net loss (5,495 ) (4,547 ) (4,817 ) (4,506 ) (12,191 ) Loss applicable to common stockholders (5,495 ) (4,547 ) (7,045 ) (4,506 ) (12,191 ) Per share information: (basic and diluted) Loss applicable to common stockholders $ (0.54 ) $ (0.39 ) $ (0.57 ) $ (0.31 ) $ (0.64 ) Weighted average number of shares outstanding 10,132,896 11,667,428 12,428,246 14,511,081 19,015,719
As of December 31, 1996 1997 1998 1999 2000 Balance Sheet Data:Total current assets $ 3,221 $ 4,303 $ 1,207 $ 1,143 $ 17,036 Working capital 2,640 4,014 349 (480 ) 12,331 Total assets 5,722 6,823 3,819 4,463 56,529 Stockholders’ equity 5,117 6,522 2,961 2,840 31,824 19
Summarized Quarterly Financial Information for the
25 trading days immediately preceeding the conversion date (the "Two Day Average Trading Price") or (ii) during the period on and after the date which is 91 days after the Issuance date, 94% of the Two Day Average Trading Price (the "Conversion Price"). From the Issuance Date, there is ceiling price of $6.33 and within the first 180 days after the Issuance Date, the Conversion Price has applicable floor prices based on conversion dates. The floor prices range from $5.67 to $4.32. The maximum number of shares as measured by the conversion terms most beneficial to the holders of the Series A Preferred Stock at the time of closing will result in a deemed dividend in the amount of $455,048 which has been recorded to Accumulated Deficit and Additional Paid In Capital during the three months ended March 31, 1998. 149 ITEM 6. SELECTED FINANCIAL DATA
For the years ended December 31, ------------------------------------------------------------------------------------ 1993 1994 1995 1996 1997 - ---------------------------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA: Revenues:Research revenues (1) $ 380,700 $ 475,000 $ -- $ -- $ -- Sales -- -- -- 55,553 519,714 Royalties from former parent (2) 198,546 209,877 268,002 -- -- Total Revenues 579,246 684,877 268,002 55,553 519,714 Costs and expenses: Selling and marketing 278,836 323,640 398,776 -- -- General and administrative (3) 1,976,356 2,162,431 2,905,873 1,874,418 2,437,166 Research and development 2,701,038 2,860,048 3,708,005 3,715,545 2,874,129 Interest expense to former parent (4) 413,049 1,028,794 1,749,706 -- -- Interest income -- -- -- (137,539) (244,964) Income tax expense -- -- -- 98,094 -- Net loss (4,790,033) (5,690,036) (8,494,358) (5,494,985) (4,546,617) Net loss per share (basic and diluted)(5) n/a n/a $ (0.85) $ (0.54) $ (0.39) Weighted average number of common shares outstanding n/a n/a 9,937,936 10,132,896 11,667,428 BALANCE SHEET DATA: Total current assets $ 268,050 $ 501,845 $ 4,761,199 $ 3,220,772 $ 4,303,044 Working capital 202,914 306,159 4,330,412 2,639,505 4,014,406 Total assets 2,819,631 3,132,688 7,529,544 5,721,952 6,823,271 Capital lease obligations -- -- -- 34,351 23,607 Stockholders' (deficit) equity (1,070,994) (2,202,868) 7,098,757 5,117,078 6,521,770(1) Includes payments for licensing agreements and technology application review. (2) Includes royalties for product sales in IGI's animal health products, cosmetic and consumer products businesses through the date of the Distribution. (3) Includes administrative expenses incurred by IGI allocated to Novavax through the date of the Distribution. (4) Interest expense is solely attributable to debt incurred by Novavax to fund its operations through the date of the Distribution. (5) On December 12, 1995, IGI distributed to the holders of record of IGI's common stock , at the close of business on the Record Date, November 28, 1995, one share of the Company's common stock for every one share of IGI common stock outstanding. Pro forma net loss per common share for the yearYears ended December 31,1995 is based upon weighted average shares outstanding2000 and 1999:
Quarter Ended March 31 June 30 September 30 December 31 (in thousands except per share data) 2000 Revenues $ 710 $ 588 $ 370 $ 807 Research and development costs 1,524 2,113 2,924 2,797 General and administrative expenses 641 1,302 822 3,094 Net loss (1,350 ) (2,641 ) (3,213 ) (4,987 ) Net loss per share $ (0.08 ) $ (0.14 ) $ (0.17 ) $ (0.25 ) 1999 Revenues $ 76 $ 252 $ 143 $ 710 Research and development costs 497 627 1,119 1,111 General and administrative expenses 468 531 807 587 Net loss (881 ) (884 ) (1,769 ) (972 ) Net loss per share $ (0.07 ) $ (0.06 ) $ (0.12 ) $ (0.07 ) Item 7. Management’s Discussion and Analysis of
9,937,936. See footnote 5Financial Condition and Results of OperationsThis annual report may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed at “Risks and Uncertainties.” This outlook represents our current judgment on the
Financial Statements. 1510 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements under Item 1 and Item 7 contained herein or as may otherwise be incorporated by reference herein constitute "forward-looking statements" within the meaningfuture direction ofthe Private Securities Litigation Reform Act of 1995.our business. Forward-looking statements include, but are not limitedto:to, statements regarding future product development and related clinical trials and statements regarding future research and development. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the following: general economic and business conditions; competition; technological advances; ability to obtain rights to technology; ability to obtain and enforce patents; ability to commercialize and manufacture products; results of preclinical studies; results of research and development activities; business abilities and judgment of personnel; availability of qualified personnel; changes in, or failure to comply with, governmental regulations; ability to obtain adequate financing in the future; and other factors referenced herein.All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. Accordingly, pastPast results and trends should not be used by investors to anticipate future results or trends. We undertake no obligation to release publicly the results of any revisions to these forward-looking statements to reflect events or circumstances arising after the date of this annual reportOverview
The Company has incurred net losses since its inception from the development of its technologies for human pharmaceuticals, vaccines and vaccine adjuvants. As of December 31, 2000 our accumulated deficit was $55.1 million. We expect the losses to continue in the near-term, as we conduct additional human clinical trials and seek regulatory approval for our product candidates. We also expect to continue to incur operating losses over the time period required to develop our products, or until such time as revenues, to offset the losses, are sufficient to fund our continuing operations.
In August 1999, the Company acquired substantially all of the assets (excluding cash and accounts receivable) of the Biomedical Services Laboratory (“BSD”) division of DynCorp of Reston, Virginia. The total consideration and direct costs for the acquisition were $860,000. The research and development activities of BSD are conducted in an approximately 12,000 square foot facility located in Rockville, Maryland. BSD is engaged in contract research, development and pilot manufacturing of human vaccines for government laboratories and other vaccine companies. The acquisition has been accounted for under the purchase method of accounting for business combinations.
In December 2000, Novavax acquired privately owned Fielding Pharmaceutical Company (“Fielding”), based in St. Louis, Missouri, which sells, markets and distributes a proprietary line of pharmaceutical products focused on
20
women’s health. Fielding fills, packages and warehouses all of its own products, which are purchased from contract manufacturers. Novavax will operate Fielding as a wholly owned subsidiary. Under the terms of the acquisition agreement, Novavax acquired 100% of the outstanding shares of Fielding for $31.5 million, consisting of $13 million in cash and 2,312,501 shares of Novavax common stock, valued at $18.5 million. An additional $5 million in either Novavax common stock or cash will be paid to former Fielding shareholders in March 2002. The acquisition has been accounted for in the accompanying financial statements under the purchase method of accounting for business combinations.In December 2000, King Pharmaceuticals, Inc., (“King”) agreed to make a $25 million convertible note investment in Novavax. The note is convertible into Novavax Common Stock at $10.00 per share which was an 18% premium to a 20 day trading average prior to the closing. The note carries a 4% coupon payable semi-annually in cash and stock. As part of the transaction, Novavax received $20 million in December 2000 and will receive an additional $5 million when Novavax files a New Drug Application (“NDA”) for its topical transdermal estrogen replacement therapy, ESTRASORB™, expected to be filed in the first half of 2001. Novavax used a portion of the funds to complete its acquisition of Fielding and will use the balance for general operating purposes. In January 2001, we also signed a co-promotion agreement with King for ESTRASORB™, in the United States. In addition, we will combine U.S. sales efforts with King to begin co-promoting one of King’s products already on the market, Nordette®, a birth control pill. We also acquired AVC™ Cream and Suppositories from King in January 2001, for $3.3 million, which had previously been marketed by King for the treatment of vaginal bacterial infections.
The following is a discussion of the historical consolidated financial condition and results of operations of Novavax and its subsidiaries. The discussion should be read in conjunction with the consolidated financial statements and notes thereto set forth in Item 8 to this Report.
OnYear Ended December
12, 1995, the Company's former parent, IGI, Inc.31, 2000 (“2000”),distributed its majority interest in Novavax to the IGI stockholders (the "Distribution"). Prior to the Distribution, IGI owned 93.2% of the outstanding shares of the Company, all of which were distributed to IGI stockholders. Certain periods covered by the discussion below occurred when the Company was a subsidiary of IGI and may not be indicative of current or future performance. RESULTS OF OPERATIONS The Company has incurred net losses since its inception from the development of its technologies for human pharmaceuticals, vaccines and vaccine adjuvants. Novavax expects the losses to continue and to most likely increase in the near-term,asit conducts additional human clinical trials and seeks regulatory approval for its product candidates. The Company also expects to continue to incur substantial operating losses over the extensive time period required to develop the Company's products , or until such time as revenues, to offset the losses, are sufficient to fund its continuing operations. Until the second quarter of 1996, the Company had recorded revenues from two sources: (i) research revenues from industry partners in consideration of either exclusive licenses or technology application reviews and (ii) royalty revenues that were attributable to product sales by IGI. Revenues from the sale of scientific prototype vaccines and adjuvants have been recorded in the second, third and fourth quarters of 1996 and in each quarter of 1997. 1997 COMPARED TO 1996 Thecompared with Year Ended December 31, 1999 (“1999”)Our net loss
of $4,546,617forthe year ended December 31, 19972000 was$948,368$12.2 million or17%, lower than the net loss of $5,494,985 for the year ended December 31, 1996. The 1997 net loss includes non-cash compensation expense of $577,643$(0.64) per share, compared to$1,506,790 included in the 1996 net loss. This compensation expense relates to the amortization$4.5 million or $(0.31) per share for 1999, which is an increase ofbelow-market priced stock options and warrants issued at the time of the Distribution. Other 1997 non-cash charges include $253,591 of depreciation and patent amortization expense. Non-cash charges in 1996 included $334,564 for the disposal of property and equipment and $328,225 of depreciation and patent amortization expense.$7.7 million or $(0.33) per share. Revenues of$519,714$2.5 million were recognized during19972000, compared to$55,533 during 1996.$1.2 million in 1999. Revenues in 2000 included $750,000 from a license agreement entered into in October 1999 with Parkedale Pharmaceuticals, Inc., a wholly-owned subsidiary of King. The license agreement included a non-refundable license payment of $1.0 million. We recognized $250,000 under this agreement in 1999. In addition revenues of $1.4 million and $370,000 were recognized in 2000 and 1999, respectively, under contracts with the National Institutes of Health (“NIH”) and other government agencies.General and administrative expenses were $5.9 million for 2000, compared to $2.4 million incurred in 1999, which is an increase of $3.5 million or 145%. The increase was due primarily to
two contracts related to vaccine products, servicescosts incurred for financing andadjuvant technologies. Selling, generalacquisition activities andadministrative expenses include all costs associated with the marketing of the Company's technology to potential industry partners and those activities associated with identifying additional sources of capital. It also includes costs associated with management and administrative activities. Selling, general and administrative expenses were approximately $2,437,166 and $1,874,418 for the years ended December 31, 1997 and 1996, respectively. The increase of $562,748 was attributable to increased costs associated with securing strategic alliances and potential sources of financing as well as the increased staffing and infrastructure growth includingthe hiring ofa new Chief Financial Officeradditional senior management andChief Executive Officer. Research and development expenses include scientific staffing, supplies and other costs relatedpersonnel tothe ongoing development of the Novavax technologies as well as the development of the Company's three lead product candidates.support our growth. Research and development expenses wereapproximately $2,874,129$9.4 million and$3,715,545$3.4 million forthe years ended 1611 December 31, 19972000 and1996,1999, respectively.Although such expenses have decreased by $841,416, this change is primarily caused by the net decreaseThis $6.0 million, or 176% increase inthe amortization of below-market priced stock options issued at the time of the Distribution of $933,742 and the non-recurring charge of $334,564 for the disposal of assets in 1996. Researchresearch and development expensesbefore these items were $2,407,258 and $1,908,370 for 1997 and 1996. After considering the impact of these aforementioned non-cash expenses, research and development costs increased by $498,888. The increase wasis primarily due tothe number of product candidates incosts associated with our clinical trials and manufacturing process validation activities related to our ESTRASORB product, which completed Phase III clinical trials. Additional increases in 2000 are due to thegrowtheffect ofthe underlying researcha full year of expenses incurred by BSD. Novavax expects costs related to its NDA submission, manufacturing process validation anddevelopment infrastructure including facility expansion. InterestBSD programs to continue to increase during 2001.Net interest income was
approximately $244,964 and $137,539 for the years ended December 31, 1997 and 1996, respectively.$551,000 in 2000 compared to $60,000 in 1999. The increase innetthe interest incomewas a direct result of an increase in therelates to higher average cash balanceson hand throughout the year. 1996 COMPARED TO 1995 Thefrom financing activities during 2000 compared to 1999.Year Ended December 31, 1999 (“1999”), as compared with Year Ended December 31, 1998 (“1998”)
Our net loss
of $5,494,985available to common stockholders forthe year ended December 31, 19961999 was$2,999,373,$4.5 million or35%, lower than the net loss of $8,494,358 for the year ended December 31, 1995. The 1996 net loss includes $1,506,790,$(0.31) per share, compared to$101,183 included$7.0 million or $(0.57) per share for 1998, which was a decrease of $2.5 million, or $(0.26) per share. In 1998, charges for a dividend, a deemed dividend and offering costs, together totaling $2.2 million, relating to mandatory — redeemable convertible preferred stock resulted in the1995 netincreased lossof non-cash compensation expense. Other non-cashin 1998 when compared to 1999. There were no similar chargesinclude $334,564forthe disposal of property and equipment and $328,225 of depreciation and patent amortization expense. Non-cash charges of $272,886 for depreciation and patent amortization have been included in the 1995 expense.1999.21
Revenues of
$55,533$1.2 million wererecognized during the year ended December 31, 1996received in 1999, compared to $.7 million in 1998. The $500,000 increase relates to payments under license and research contracts fromthe sale of scientific prototype vaccines and adjuvants. Novavax earned royalties from IGI of 10% of licensed product sales, or $268,002,BSD which was acquired inthe year ended December 31, 1995. Total operating expenses were $5,589,963 in 1996, decreasing $1,422,691, or 20%, from the $7,012,654 incurred in 1995. Reduced cash resources causedAugust 1999. In October 1999, the Companyto reduce spending and achieve other efficiencies includingalso entered into arefocuslicensing agreement with Parkedale Pharmaceuticals, Inc. a wholly owned subsidiary ofits efforts on the developmentKing. The license agreement included a non-refundable license payment ofits three lead product candidates$1.0 million. We recognized $250,000 under this agreement inconnection with FDA human clinical trials. Total selling, general1999.General and administrative expenses were
$1,874,418$2.4 million for both 1999 and$3,304,649 for the years ended December 31, 1996 and 1995, respectively. Costs associated with the Distribution are included in the 1995 expenses. Nonrecurring charges of $230,474 were incurred through June 30, 1996 for transitional services provided by IGI. The agreement providing these services terminated on June 30, 1996 and no additional charges have been recorded. Certain costs included in the 1995 expenses were estimates allocated from IGI, based on Novavax being a separate public company, and may not compare with the actual costs Novavax incurred in 1996. These estimated costs were $850,000 for the year ended December 31, 1995.1998. Research and development expenses were$3,715,545$3.4 million for both 1999 and$3,708,0051998. Increases in research costs for theyears ended December 31, 1996newly acquired BSD operation and1995, respectively. The 1996 expenses include non-cash chargespersonnel in 1999 were offset by reductions in the number of$1,410,648, compared to $101,183products in1995,clinical development programs. As expected costs related tothe amortization of below-market priced stock options issued at the time of the Distribution,our clinical trials, manufacturing process validation andnon-cash charges of $334,564 for the disposal of property and equipment related to the closing of one of the Novavax subsidiaries' laboratory.BSD programs increased during 2000.Net interest income
of $137,539wasrecorded$60,000 in 1999 compared to $335,000 in 1998. The decrease in the interest income relates to lower average cash balances duringthe twelve months ended December 31, 1996,1999 comparedwith net interest expense of $1,749,706 for the same period ended December 31, 1995, that was chargedtoNovavax by IGI for borrowings1998.Liquidity and
notes due to IGI through the date of the Distribution to fund operating losses, capital equipment purchases and patent costs. In connection with the filing of the Company's 1995 tax return during 1996, it was determined that the Company had an Alternative Minimum Tax liability resulting from the cash received from IGI in return for the license. Net income tax expense of $98,094 for 1996 is attributable to the Alternative Minimum Tax calculation. LIQUIDITY AND CAPITAL RESOURCES Novavax'sCapital ResourcesOur capital requirements depend on numerous factors, including but not limited to the progress of
itsour research and development programs, the progress of preclinical and clinical testing, the time and costs involved in obtaining regulatory approvals, the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, competing technological and market developments, and changes inNovavax'sour development of commercialization activities and arrangements.During 1996, the Company moved three product candidates intoWe currently have two products in clinicaltrials in less than one year. This rapid development prompted the need for expansion in late 1996. On October 31, 1996, the Company completed the relocation of its administrative offices and pharmaceutical laboratories to a leased facility in Columbia, Maryland.trials. Future activitiesto establishincluding clinical development, the establishment of commercial-scale manufacturing capabilities and the development of sales and marketing programs are subject tothe Company'sour ability to raise funds through equity financing, or collaborative arrangements withcorporateindustry partners.Novavax's future growth will depend on its ability to commercialize its Novavax technologies for human pharmaceutical applications. Net cash used in 1997 for operating activities was $4,244,733. From the date of the Distribution, Novavax has conducted its operations with approximately $5,000,000 paid by IGI under the IGI License Agreement along with net proceeds from several financing transactions completed and described herein. Additionally the Company has received sources of cash from the sale of scientific prototype vaccines and adjuvants and from the exercise of stock options. On October 30, 1996, Novavax received $1,655,877, net of all transaction costs, from the sale of 505,000 common shares that were privately placed with accredited institutional investors by Vector Securities International, Inc. 1712 On February 10, 1997, Novavax signed a definitive agreement to privately place 1,200,000 common shares with Anaconda Opportunity Fund, L.P., an accredited institutional investor, at an aggregate price of $5,100,000. As part of the transaction, Novavax also granted warrants to purchase an additional 600,000 shares at a price of $6.00 per share and 600,000 shares at a price of $8.00 per share. The warrants have a three-year term. The transaction was closed March 14, 1997 with net proceeds of $5,002,718. OnIn January
23,1998, the Company entered into Subscription Agreementswith each of four purchasersto effectuate the private placement of 6,500shareshares of Series A Custom Convertible Preferred Stock,$.01$1,000 par valueper share(the"Series A Preferred Stock"“Preferred Stock”). The closing occurred on January 28, 1998 (the"Issuance Date"“Issuance Date”) at an aggregate purchase price of$6,500,000. The Company received$6.5 million.Prior to the
proceeds therefor and paid Diaz & Altschul, LLC a feesubsequent repurchase of$425,233 in consideration for its services as placement agent. The Series Aall the outstanding Preferred Stock,is convertible$1.5 million of the original issue had been converted into 1,043,956 shares of Common Stock,at a conversion price equalpursuant to(i) during a period of 90 days followingtheIssuance Date, 100%terms and conditions of theaveragePreferred Stock. In October 1998, we entered into agreements to repurchase the remaining Preferred Stock. We repurchased the remaining outstanding $5.0 million of Preferred Stock plus accrued dividends at the annual rate of five percent. The terms of thetwo lowest consecutive trade pricesPreferred Stock also required us to pay the holders of the Preferred Stock $225,000 in dividends. This amount was paid in cash of $179,000 and through the issuance of 32,492 shares of the Company’s Common Stock. The Company incurred transaction fees associated with the placement, conversion and repurchase of the Preferred Stock of $502,000 which are included in the accompanying financial statements as accretion of Preferred Stock.In April 1999, we entered into Stock and Warrant Purchase Agreements for the private placement of 1,651,100 shares of our Common Stock to accredited investors (the “Private Placement”). One of the principals of one of the investors is also a director of the Company. The issuance price of the Common Stock
as reported on the American Stock Exchangewas $2.50 per share. Each share was sold together with a non-transferable warrant for the25 trading days immediately precedingpurchase of .25 additional shares at an exercise price of $3.75. The warrants have a three-year term. Net proceeds from theconversion datePrivate Placement were approximately $4.0 million. Placement agents fees of $215,000 were paid in cash and shares of common stock. Non-transferable warrants for the purchase of 143,000 shares of our Common Stock, with an exercise price of $3.00 per share and a three-year term, were also issued to the placement agents.In January 2000, we closed a private placement of 2,813,850 shares of our Common Stock to accredited investors (the
"Two Day Average Trading Price"“2000 Private Placement”)or (ii). The issuance price of the Common Stock was $4.00 per share. Each share was sold together with a non-transferable warrant for the purchase of .25 additional shares at an exercise price of $6.75. The warrants have a three-year term. Placement agent fees were approximately $675,000, which was paid in cash. Additionally, non-transferable warrants for the purchase of 281,385 shares of the Company’s Common Stock, with an exercise price of $6.75 per share and a three-year term, were issued to the placement agent. Net proceeds to the Company from the 2000 Private Placement were approximately $10.5 million.22
In December 2000, we acquired Fielding and also received $20 million from a convertible note from King. For details on these transactions, refer to our discussion in the Overview section above.
The Company used approximately $9.4 million during the
periodyear ended December 31, 2000 to fund the activities of its research and development programs and costs associated with obtaining regulatory approvals, clinical testing and manufacturing process validation. Cash balances available to the Company, including the financings described above, funded these expenditures.Cash and cash equivalents on December 31, 2000, totaled $14.9 million, compared to $732,000 at December 31, 1999. The $14.1 million increase was attributable to the financing activities and
after the date which is 91 days after the Issuance Date, 94% of the Two Day Average Trading Price (the "Conversion Price"). From the Issuance Date, there is a ceiling price of $6.33 and within the first 180 days after the Issuance Date, the Conversion Price has applicable floor prices, ranging from $5.67 to $4.32,Fielding acquisition previously discussed. We estimate that based onconversion dates. The maximum numberhistorical levels ofshares as measured by the conversion terms most beneficialspending and revenues, giving effect to theholders of the Series A Preferred Stock at the time of closing results in a deemed dividend in the amount of $455,048 which will be recorded in the first quarter of 1998. As of December 31, 1997, Novavax estimates that the money received from the mostrecentsale of the privately placed Preferred Stock,Fielding acquisition noted above, anditswithout giving effect to any future financing, existing cash resources will be sufficient to financeitsour operationsat current and projected levels of development activityfor approximately 12 to 18to 24months.On December 31, 1997, the Company had $3,847,072 in cash, cash equivalents and marketable securities on hand.Past spending levels are not necessarily indicative of future spending. Future expenditures for product development,especially relatingincluding these related to outside testing and human clinical trials, are discretionary and accordingly, can be adjusted to available cash. As we continue to progress in our clinical development activities and commercial scale-up of product manufacturing, we anticipate future increases in spending associated with these activities. Moreover,the Company willwe may seek to establishone or moreadditional collaborations with industry partners, to defray the costs of clinical trials and other related activities.NovavaxWe will alsoseek to obtainconsider sources of additional funds through public or private equity or debtfinancings,financing, collaborative arrangements with pharmaceutical companies, government agency contracts or from other sources. There can be no assurance that additional funding or bank financing will be available at all or on acceptable terms to permit successful commercialization ofNovavax'sall our technologies and products. If adequate funds are not available,Novavaxwe may be required to significantly delay, reduce the scope of or eliminate one or more of its research or development programs, or seek alternative measures including arrangements with collaborative partners or others that may requireNovavaxus to relinquish rights to certain of its technologies, product candidates or products.ITEMItem 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKSQuantitative and Qualitative Disclosures about Market RisksNot applicable.
ITEMItem 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAFinancial Statements and Supplementary DataThe financial statements and notes thereto listed in the accompanying index to financial statements (Item 14) are filed as part of this Annual Report and are incorporated herein by this reference.
ITEMItem 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREChanges in and Disagreements With Accountants on Accounting and Financial DisclosureNone.
181323
PART III
ITEMItem 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTDirectors and Executive Officers of the RegistrantThe information required by this item is contained in part under the caption
"Executive“Executive Officers of theRegistrant"Registrant” in Part I hereof, and the remainder is contained in theCompany'sCompany’s Proxy Statement for theCompany'sCompany’s Annual Meeting of Stockholders to be held on May14, 19989, 2001 (the"1998“2001 ProxyStatement"Statement”) under the captions"Proposal“Proposal 1--— Election ofDirectors"Directors” and"Beneficial“Beneficial Ownership of CommonStock"Stock” and is incorporated herein by this reference. The Company expects to file the19982001 Proxy Statement within 120 days after the close of the fiscal year ended December 31,1997. Officers are elected on an annual basis and serve at the discretion of the Board of Directors. ITEM2000.Item 11.
EXECUTIVE COMPENSATIONExecutive CompensationThe information required by this item is contained in the
Company's 1998Company’s 2001 Proxy Statement under the captions"Executive Compensation"“Executive Compensation” and"Director Compensation"“Director Compensation” and is incorporated herein bythisreference.ITEMItem 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTSecurity Ownership of Certain Beneficial Owners and ManagementThe information required by this item is contained in the
Company's 1998Company’s 2001 Proxy Statement under the caption"Beneficial“Beneficial Ownership of CommonStock"Stock” and is incorporated herein bythisreference.ITEMItem 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSCertain Relationships and Related TransactionsThe information required by this item is contained in the
Company's 1998Company’s 2001 Proxy Statement under the caption"Certain“Certain Relationships and RelatedTransactions"Transactions” and is incorporated herein bythisreference.24
PART IV
ITEMItem 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORMExhibits, Financial Statement Schedules, and Reports on Form 8-K(a)(1) Financial Statements: Report of Independent Accountants Consolidated Balance Sheets as of December 31, 1997 and 1996
(a)(1) Financial Statements: Reports of Independent Accountants; Consolidated Balance Sheets as of December 31, 2000 and 1999; Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998; Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998; Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2000, 1999 and 1998; Notes to Consolidated Financial Statements. (a)(2) Financial Statement Schedules: Schedules are either not applicable or not required because the information required is contained in the financial statements or notes thereto. Condensed financial information of the Company is omitted since there are no substantial amounts of restricted net assets applicable to the Company’s consolidated subsidiaries. (a)(3) Exhibits Required to be Filed by Item 601 of Regulation S-K: Exhibits marked with a single asterisk are filed herewith, and exhibits marked with a double plus sign reference management contracts, compensatory plans or arrangements, filed in response to Item 14 (a)(3) of the instructions to Form 10-K. The other exhibits listed have previously been filed with the Commission and are incorporated herein by reference. 3.1 Amended and Restated Certificate of Incorporation of the Company [Incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996, File No. 0-26770, filed March 21, 1997 (the “1996 Form 10-K”).] 3.2 Amended and Restated By-laws of The Company [Incorporated by reference to Exhibit 3.2 to the 1996 Form 10-K.] 3.3 Certificate of Designations of Series A Custom Convertible Preferred Stock dated January 28, 1998. [Incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-3, File No. 333-46409, filed February 17, 1998.] *3.4 Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Company, dated December 18, 2000. 4. Specimen stock certificate for shares of Common Stock, par value $.01 per share. [Incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 10, File No. 0-26770, filed September 14, 1995 (the “Form 10”).] 10.1 License Agreement between IGEN, Inc. and Micro-Pak, Inc. [Incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 0-26770, filed April 1, 1996, (the “1995 Form 10-K”).] ††10.2 1995 Stock Option Plan. [Incorporated by reference to Exhibit 10.4 to the Form 10.] ††10.3 First Amendment to The Company 1995 Stock Option Plan approved by the stockholders of the Company on May 14, 1998, and by the Board of Directors on March 16, 1998. [Incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998, File No. 0-26770, filed April 15, 1999. (the “1998 Form 10-K”).] *††10.4 Second Amendment to The Company 1995 Stock Option Plan approved by the stockholders of the Company on May 9, 2000, and by the Board of Directors on March 7, 2000. ††10.5 Director Stock Option Plan. [Incorporated by reference to Exhibit 10.5 to the Form 10.] 10.6 Agreement of Lease by and between the Company and Rivers Center Associates Limited Partnership, dated September 25, 1996. [Incorporated by reference to Exhibit 10.7 to the 1996 Form 10-K.] ††10.7 Employment Agreement dated March 31, 1998, by and between the Company and D. Craig Wright [Incorporated by reference to Exhibit 10.14 to the1998 Form 10-K.] 25
††10.8 Employment Agreement dated May 13, 1999, by and between the Company and John A. Spears. [Incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999, File No. 0-26770, filed March 9, 2000. (the “1999 Form 10-K”).] 10.9 Form of Stock and Warrant Purchase Agreement dated April 14, 1999, by and between the Company and the purchasers named therein. [Incorporated by reference to Exhibit 10.16 to the 1998 Form 10-K] 10.11 License Agreement by and between the Company and Parkedale Pharmaceuticals, Inc. dated October 21, 1999. [Incorporated by reference to Exhibit 10.13 to the 1999 Form 10-K.] 10.12 Form of Stock and Warrant Purchase Agreement dated January 28, 2000, by and between the Company and the purchasers named therein. [Incorporated by reference to Exhibit 10.15 to the 1999 Form 10-K.] 10.13 Agreement and Plan of Merger dated October 4, 2000 between the Company and the parties identified therein. [Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed October 19, 2000.] 10.14 Note Purchase Agreement dated as of December 19, 2000 between the Company and King Pharmaceuticals, Inc. [Incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K, filed January 2, 2001.] 10.15 Investor Rights Agreement dated December 19, 2000 between the Company and King Pharmaceuticals, Inc. [Incorporated by reference to Exhibit 99.4 to the Company’s Current Report on Form 8-K, filed January 2, 2001.] 10.16 Agreement for Purchase and Sale of Assets Relating to AVC™Product Line dated as of January 8, 2001, by and between the Company and King Pharmaceuticals, Inc. [Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed January 19, 2001.] 10.17 Copromotion Agreement dated as of January 8, 2001, between the Company and King Pharmaceuticals, Inc. [Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed January 19, 2001.] 10.18 Exclusive License and Distribution Agreement dated as of January 8, 2001, between the Company and King Pharmaceuticals, Inc. [Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed January 19, 2001.] 16. Letter regarding change in certifying accountant. [Incorporated by reference to Exhibit 16 to the Company’s Current Report on Form 8-K, filed July 25, 2000.] *21 List of Subsidiaries. *23.1 Consent of Ernst & Young LLP, Independent Accountants. *23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants. 27 Financial Data Schedule 26
(b) Reports on Form 8-K: The Company filed a current report on Form 8-K on October 19, 2000 to report under Item 2 its agreement to acquire Fielding Pharmaceutical Company, Inc. In addition, the Company filed an amendment to the Form 8-K on December 18, 2000 to include under Item 7 the following financial information: (a) Audited Combined Financial Statements of Fielding Pharmaceutical Company and MB Packaging, Inc.: (1) Report of Independent Accountants dated October 20, 2000. (2) Combined Balance Sheets as of December 31, 1999 and 1998. (3) Combined Income Statements for the years ended December 31, 1999 and 1998. (4) Combined Statements of Changes in Stockholders’ Equity for the two years ended December 31, 1999. (5) Combined Statements of Cash Flows for the years ended December 31, 1999 and 1998. (6) Notes to the Combined Financial Statements (b) Unaudited Interim Combined Financial Statements of Fielding Pharmaceutical Company and MB Packaging, Inc.: (1) Unaudited Combined Balance Sheets as of September 30, 2000 and December 31, 1999. (2) Unaudited Combined Income Statements for the nine-month periods ended September 30, 2000 and 1999. (3) Unaudited Combined Statements of Cash Flows for the nine-month periods ended September 30, 2000 and 1999. (4) Notes to the Combined Financial Statements (c) Unaudited Pro Forma Consolidated Financial Information of The Company and Fielding Pharmaceutical Company: (1) Unaudited Pro Forma Consolidated Statement of Operations for the year ended December 31, 1999 (2) Unaudited Pro Forma Consolidated Statement of Operations for the nine-month period ended September 30, 1999. (3) Unaudited Pro Forma Consolidated Balance Sheet as of September 30, 2000. (4) Notes to the Unaudited Pro Forma Financial Statements. The Company filed a second amendment to the October 19, 2000 Form 8-K on December 21, 2000 to include under Item 2 a statement that the Fielding Pharmaceutical acquisition was completed on December 19, 2000 and under Item 99 a Press Release relating to the completion of the Fielding Pharmaceutical acquisition. 27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 29, 2001
NOVAVAX, INC.
By: /s/ JOHN A. SPEARS
John A. Spears, President
and Chief Executive OfficerPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacity and on the date indicated.
Name Title Date /s/ JOHN A. SPEARS
John A. SpearsPresident and Chief Executive
Officer and DirectorMarch 29, 2001 /s/ DENNIS W. GENGE
Dennis W. GengeVice President and Chief Financial Officer (Principal Financial and Accounting Officer) March 29, 2001 /s/ GARY C. EVANS
Gary C. EvansDirector March 29, 2001 /s/ MITCHELL J. KELLY
Mitchell J. KellyDirector March 29, 2001 /s/ J. MICHAEL LAZARUS, M.D.
J. Michael Lazarus, M.D.Director March 29, 2001 /s/ JOHN O. MARSH, JR.
John O. Marsh, Jr.Director March 29, 2001 /s/ MICHAEL A. MCMANUS
Michael A. McManusDirector March 29, 2001 /s/ DENIS M. O’DONNELL, M.D.
Denis M. O’Donnell, M.D.Director March 29, 2001 /s/ RONALD H. WALKER
Ronald H. WalkerDirector March 29, 2001 /s/ WILLIAM E. GEORGES
William E. GeorgesDirector March 29, 2001 28
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31,
1997,1996,2000 and1995 Consolidated Statements of Cash Flows for the years ended December 31, 1997,1996, and 1995 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997,1996, and 1995 Notes to Consolidated Financial Statements (2) Financial Statement Schedules: Schedules are either not applicable or not required because the information required is contained in the financial statements or notes thereto. Condensed financial information of the Registrant is omitted since there are no substantial amounts of restricted net assets applicable to the Company's consolidated subsidiaries. (3) Exhibits Required to be Filed by Item 601 of Regulation S-K. Exhibits marked with a single asterisk are filed herewith, and exhibits marked with a double asterisk reference management contract, compensatory plan or arrangement, filed in response to Item 14 (a)(3) of the instructions to Form 10-K. The other exhibits listed have previously been filed with the Commission and are incorporated herein by reference. 3.1 Amended and Restated Certificate of Incorporation of Novavax, Inc. [Incorporated by reference to Exhibit 3.1 to the Company's Annual Report Form 10-K for the fiscal year end December 31, 1996, File No. 0-26770, filed March 21, 1997 (the "1996 Form 10-K")] 3.2 Amended and Restated By-laws of Novavax, Inc. [Incorporated by reference to Exhibit 3.2 to the 1996 Form 10-K.] 3.3 Certificate of Designations of Series A Custom Convertible Preferred Stock dated January 28, 1998 by and between the Company and each of the four purchasers, Delta Opportunity Fund, Ltd., Olympus Securities, Ltd., Nelson Partners, OTATO Limited Partnership. [Incorporated by reference to Exhibits 4.2 1914 to the Company's Registration Statement on Form S-3, File No. 333-46409, filed February 17, 1998. ] 4 Specimen stock certificate for shares of Common Stock par value $.01 per share. [Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form 10, File No. 0-26770, filed September 14, 1995 (the "Form 10").] 10.1 Tax Matters Agreement between Novavax and IGI. [Incorporated by reference to Exhibit 10.1 to the Form 10.] 10.2 Transition Services Agreement between Novavax and IGI. [Incorporated by reference to Exhibit 10.2 to the Form 10.] 10.3 License Agreement between IGEN, Inc. and Micro-Pak, Inc.[Incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 0-26770, filed April 1, 1996, (the "1995 Form 10-K").] **10.4 1995 Stock Option Plan. [Incorporated by reference to Exhibit 10.4 to the Form 10.] **10.5 1995 Director Stock Option Plan. [Incorporated by reference to Exhibit 10.5 to the Form 10.] 10.6 Stock Purchase Agreement dated October 9, 1996 by and between the Company and the purchasers named therein. [Incorporated by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-3, File No. 333-14305, filed October 17, 1996.] 10.7 Agreement of Lease by and between the Company and Rivers Center Associates Limited Partnership, dated September 25, 1996. [Incorporated by reference to Exhibit 10.7 to the 1996 Form 10-K.] 10.8 Stock and Warrant Purchase Agreement dated February 10, 1997 by and between the Company and Anaconda Opportunity Fund, L.P. [Incorporated by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-3, File No. 333-22685, filed March 4, 1997(the "Anaconda S-3").] 10.9 Form of Warrant issued by the Company to Anaconda Opportunity Fund, L.P. [Incorporated by reference to Exhibit 4.5 to the Anaconda S-3.] **10.10 Employment Agreement dated May 15, 1997, by and between the Company * and Richard F. Maradie. **10.11 Employment Agreement dated July 24, 1997, by and between the Company * and Brenda L. Fugagli. **10.12 Letter Agreement dated February 19, 1998, by and between the Company * and Richard J. Harwood. **10.13 Letter Agreement dated February 19, 1998, by and between the Company * and Thomas G. Tachovsky. 10.14 Form of Subscription Agreement dated January 23, 1998 by and between the Company and each of the four purchasers, Delta Opportunity Fund, Ltd., Olympus Securities, Ltd., Nelson Partners, OTATO Limited Partnership. [Incorporated by reference to Exhibits 4.5 to the Company's Registration Statement on Form S-3, File No. 333-46409, filed February 17, 1998.] 21 List of Subsidiaries [Incorporated by reference to Exhibit 21 to the 1995 Form 10-K.] *23 Consent of Coopers & Lybrand L.L.P. *27 Financial Data Schedule (B) Reports on Form 8-K: None. 2015 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS DESCRIPTION Report of Independent Accountants 20 Consolidated Statements of Operations for each of the three years in the period ended December 31, 1997 21 Consolidated Balance Sheets as of December 31, 1997 and 1996 22 Consolidated Statements of Changes in Stockholders' Equity for each of the three years in the period ended December 31, 1997 23 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1997 24 Notes to Consolidated Financial Statements 25 21161999Contents
Reports of Independent Accountants F-2 Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 2000 and 1999 F-4 Consolidated Statements of Operations for each of the three years in the period ended December 31, 2000 F-5 Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended December 31, 2000 F-6 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2000 F-7 Notes to the Consolidated Financial Statements F-8 F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To theBoard of Directors
and Stockholders ofNovavax, Inc.:We have audited the accompanying consolidated balance
sheetssheet of Novavax, Inc.and Subsidiariesas of December 31,1997 and 1996,2000 and the related consolidated statements of operations,stockholders'stockholders’ equity and cash flows foreach ofthethree years in the period ended December 31, 1997.year then ended. These consolidated financial statements are the responsibility of theCompany'sCompany’s management. Our responsibility is to express an opinion on these financial statements based on ouraudits.audit.We conducted our
auditsaudit in accordance with auditing standards generally acceptedauditing standards.in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that ouraudits provideaudit provides a reasonable basis for our opinion.In our opinion, the 2000 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Novavax, Inc.
and Subsidiaries as ofat December 31,19972000 and1996,the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States./s/ Ernst and Young LLP
McLean, Virginia
March 2, 2001F-2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Novavax, Inc.
In our opinion, the accompanying consolidated balance sheet and related consolidated statements of operations, of cash flows and of stockholders’ equity, present fairly, in all material respects, the consolidated financial position of Novavax, Inc. and subsidiaries at December 31, 1999, and the consolidated results of their operations and their cash flows for each of the
threetwo years in the period ended December 31,19971999, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accountingprinciples. COOPERS & LYBRAND L.L.P.principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. We have not audited the consolidated financial statements of Novavax, Inc. for any period subsequent to December 31, 1999./s/ PRICEWATERHOUSECOOPERS LLP
McLean, Virginia
March 13, 1998 2217February 26, 2000F-3
NOVAVAX, INC.
AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in thousands)
December 31, 2000 1999 ASSETSCurrent assets: Cash and cash equivalents $ 14,864 $ 732 Accounts receivable net of allowance for doubtful accts of $50,000 and $0 at December 31, 2000 and 1999 954 341 Inventory 461 — Prepaid expenses and other current assets 757 70 Total current assets 17,036 1,143 Property and equipment, net 1,927 1,053 Goodwill and other intangible assets, net 37,566 2,267 Total assets $ 56,529 $ 4,463 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 1,401 $ 481 Accrued expenses 3,200 281 Deferred revenue 104 750 Debt obligations — 111 Total current liabilities 4,705 1,623 Convertible note 20,000 — Commitments and contingencies Stockholders’ equity: Preferred stock, $.01 par value, 2,000,000 shares authorized; no shares issued and outstanding — — Common stock, $.01 par value, 50,000,000 shares authorized; 22,586,304 issued and 22,104,087 outstanding at December 31, 2000, and 15,173,688 issued and 15,167,166 outstanding at December 31, 1999 226 152 Additional paid-in capital 91,611 45,622 Accumulated deficit (55,085 ) (42,894 ) Deferred compensation on stock options granted — (5 ) Treasury stock, 482,217 shares and 6,522 shares, cost basis, at December 31, 2000 and 1999, respectively (4,928 ) (35 ) Total stockholders’ equity 31,824 2,840 Total liabilities and stockholders’ equity $ 56,529 $ 4,463 See accompanying notes.
F-4
NOVAVAX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, ------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------------------------------Revenues: Contract Revenue $ 519,714 $ 55,533 $ -- Royalties from former parent -- -- 268,002 ----------- ----------- ----------- Total Revenues 519,714 55,533 268,002 Operating expenses: Selling and marketing -- -- 398,776 General and administrative 2,437,166 1,874,418 2,905,873 Research and development 2,874,129 3,715,545 3,708,005 ----------- ----------- ----------- Total operating expenses 5,311,295 5,589,963 7,012,654 Loss from operations (4,791,581) (5,534,430) (6,744,652) Interest expense to former parent -- -- (1,749,706) Interest income, net 244,964 137,539 -- ----------- ----------- ----------- Loss before income taxes (4,546,617) (5,396,891) (8,494,358) Income tax expense -- (98,094) -- ----------- ----------- ----------- Net loss $(4,546,617) $(5,494,985) $(8,494,358) =========== =========== =========== Net loss per share (basic and diluted) $ (0.39) (0.54) (0.85) =========== =========== =========== Weighted average number of common shares outstanding 11,667,428 10,132,896 9,937,936 =========== =========== ===========The(in thousands, except share and per share information)
For the years ended December 31, 2000 1999 1998 Revenues $ 2,475 $ 1,181 $ 681 Operating expenses: General and administrative 5,859 2,393 2,472 Research and development 9,358 3,354 3,361 Total operating expenses 15,217 5,747 5,833 Loss from operations (12,742 ) (4,566 ) (5,152 ) Interest income, net 551 60 335 Net loss (12,191 ) (4,506 ) (4,817 ) Dividends on preferred stock — — (1,808 ) Accretion of offering cost — — (420 ) Loss applicable to common stockholders $ (12,191 ) $ (4,506 ) $ (7,045 ) (Basic and diluted) Loss per share applicable to common stockholders $ (0.64 ) $ (0.31 ) $ (0.57 ) Weighted average number of common shares outstanding (basic and diluted) 19,015,719 14,511,081 12,428,246 See accompanying
notes are an integral part of the consolidated financial statements. 2318notes.F-5
NOVAVAX, INC.
AND SUBSIDIARIESCONSOLIDATEDBALANCE SHEETS
As of December 31, ---------------------------- 1997 1996 - ------------------------------------------------------------------------------------------ASSETS Current Assets: Cash and cash equivalents $ 3,847,107 $ 2,481,258 Marketable securities -- 500,820 Accounts receivable 217,150 -- Receivable from former parent 32,835 -- Prepaid expenses and other current assets 205,952 238,694 ------------ ------------ Total current assets 4,303,044 3,220,772 ------------ ------------ Property and equipment-- cost 1,428,638 1,383,123 Accumulated depreciation (539,463) (405,212) ------------ ------------ Property and equipment -- net 889,175 977,911 Patent costs, net of accumulated amortization of $549,397 and $430,057 in 1997 and 1996, respectively 1,573,454 1,494,880 Other assets 57,598 28,389 ------------ ------------ Total assets $ 6,823,271 $ 5,721,952 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Capital lease obligations $ 10,744 $ 10,744 Accounts payable 237,884 367,754 Accrued payroll 40,010 196,593 Payable to former parent -- 6,176 ------------ ------------ Total current liabilities 288,638 581,267 Capital lease obligations, less current maturities 12,863 23,607 ------------ ------------ Stockholders' Equity: Preferred stock, $.01 par value, 2,000,000 shares authorized -- -- Common stock, $.01 par value, 30,000,000 shares authorized, 12,031,757 issued and 12,012,013 outstanding at December 31, 1997 and 10,660,710 shares issued and outstanding at December 31, 1996 120,318 106,607 Additional paid-in capital 38,020,621 32,409,899 Accumulated deficit (31,342,780) (26,796,164) Deferred compensation on stock options granted (25,620) (603,264) ------------ ------------ Treasury stock, 19,744 shares, cost basis (250,769) -- Total stockholders' equity 6,521,770 5,117,078 ------------ ------------ Total liabilities and stockholders' equity $ 6,823,271 $ 5,721,952 ============ ============TheSTATEMENTS OF STOCKHOLDERS’ EQUITY(in thousands, except share information)
Deferred Compensation Common Stock Additional On Stock Total Paid-in Accumulated Options Treasury Stockholders’ Shares Dollars Capital Deficit Granted Stock Equity Balance, December 31, 199712,031,757 $ 120 $ 37,853 $ (31,343 ) $ 25 $ (83 ) $ 6,522 Company contribution to employee 401(k) 42 1 (12 ) — — 33 22 Amortization of deferred compensation — — — — 10 — 10 Private sale of preferred stock, net — — 1,583 — — — 1,583 Conversion of preferred stock 1,043,956 11 1,475 — — — 1,486 Dividend on preferred stock 32,944 — — (225 ) — — (225 ) Deemed dividend on preferred stock — — — (1,583 ) — — (1,583 ) Accretion of offering costs — — — (420 ) — — (420 ) Private sale of common stock, net — — — — — 50 50 Exercise of stock options 144,419 1 332 — — — 333 Net loss — — — (4,817 ) — — (4,817 ) Balance, December 31, 199813,253,118 133 41,231 (38,388 ) (15 ) — 2,961 Amortization of deferred compensation — — — — 10 — 10 Private sale of common stock 1,651,100 17 4,111 — — — 4,128 Offering costs 42,933 — (173 ) — — — (173 ) Stock issued as compensation — — (43 ) — — 158 115 Exercise of stock options 226,537 2 496 — — (193 ) 305 Net loss — — — (4,506 ) — — 4,506 Balance, December 31, 199915,173,688 152 45,622 (42,894 ) (5 ) (35 ) 2,840 Amortization of deferred compensation — — — — 5 — 5 Private sale of common stock, net 2,813,850 28 10,470 — — — 10,498 Stock issued for acquisition 2,312,501 23 18,477 — — — 18,500 Acquisition obligation — — 5,000 — — — 5,000 Exercise of stock options and warrants 2,286,265 23 12,042 — — (4,893 ) 7,172 Net loss — — — (12,191 ) — — (12,191 ) Balance, December 31, 200022,586,304 $ 226 $ 91,611 $ (55,085 ) $ — $ (4,928 ) $ 31,824 See accompanying
notes are an integral part of the consolidated financial statements. 2419notes.F-6
NOVAVAX, INC.
AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, ----------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------------------------- Cash flows from operating activities:Net Loss $(4,546,617) $(5,494,985) $(8,494,358) Reconciliation of net loss to net cash used by operating activities: Non-cash restructuring and recapitalization -- -- 1,513,253 Reimbursement to former parent -- -- (250,000) Non-cash compensation expense 577,644 1,506,790 101,183 Depreciation and amortization 253,591 328,225 272,886 Disposal of property and equipment -- 334,564 -- Issuance of stock to 401k plan 9,729 -- -- Changes in operating assets and liabilities Accounts receivable (217,150) -- 475,000 Prepaid expenses and other assets 3,534 (185,074) (58,993) Payable to/receivable from former parent (39,011) 60,930 (54,754) Accounts payable and accrued expenses (286,453) 133,560 235,101 ----------- ----------- ----------- Net cash used by operating activities (4,244,733) (3,315,990) (6,260,682) Cash flows from investing activities: Proceeds from the sale of marketable securities 500,820 (500,820) -- Capital expenditures (45,515) (98,363) (45,562) Deferred patent costs (197,914) (244,321) (367,418) ----------- ----------- ----------- Net cash used by investing activities 257,391 (843,504) (412,980) Cashflows from financing activities: Payable to former parent -- -- 2,081,776 Notes payable to former parent -- -- 4,172,401 License agreement with former parent -- -- 5,000,000 Payment of capital leases (10,744) -- -- Proceeds from the private placement of Common Stock, net 5,002,718 1,655,877 -- Proceeds from the exercise of options 361,217 350,639 37,500 ----------- ----------- ----------- Net cash provided by financing activities 5,353,191 2,006,516 11,291,677 ----------- ----------- ----------- Net change in cash and cash equivalents 1,365,849 (2,152,978) 4,618,015 Cash and cash equivalents at beginning of the period 2,481,258 4,634,236 16,221 ----------- ----------- ----------- Cash and cash equivalents at end of the period $ 3,847,107 $ 2,481,258 $ 4,634,236 =========== =========== ===========The(in thousands)
For the years ended December 31, 2000 1999 1998 Operating ActivitiesNet loss $ (12,191 ) $ (4,506 ) $ (4,817 ) Reconciliation of net loss to net cash used by operating activities: Gain on sale of asset — (23 ) — Non-cash compensation expense 5 10 10 Amortization 362 199 129 Depreciation 232 183 152 Issuance of stock to 401(k) plan and as compensation — 115 22 Changes in operating assets and liabilities: Accounts receivable 220 (203 ) 112 Inventory (211 ) — — Prepaid expenses and other assets (555 ) (45 ) 224 Accounts payable and accrued expenses 2,740 (180 ) 544 Deferred revenue (646 ) 750 — Net cash used by operating activities (10,044 ) (3,700 ) (3,624 ) Investing activitiesAcquisition of a business, net of cash acquired (12,466 ) (592 ) — Capital expenditures (831 ) (48 ) (231 ) Deferred patent costs (86 ) (171 ) (146 ) Proceeds from sale of asset — 25 — Net cash used in investing activities (13,383 ) (786 ) (377 ) Financing activitiesProceeds from issuance of convertible note 20,000 — — Payment of capital lease obligations (111 ) (73 ) (38 ) Issuance of preferred stock — — 5,998 Dividend on preferred stock — — (179 ) Repurchase of preferred stock — — (4,979 ) Proceeds from private placements of common stock 10,498 3,955 50 Proceeds from the exercise of stock options and warrants 7,172 305 333 Net cash provided by financing activities 37,559 4,187 1,185 Net change in cash and cash equivalents 14,132 (299 ) (2,816 ) Cash and cash equivalents at beginning of year 732 1,031 3,847 Cash and cash equivalents at end of year $ 14,864 $ 732 $ 1,031 See accompanying
notes are an integral part of the consolidated financial statements. 2520notes.F-7
NOVAVAX, INC.
AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the years ended December 31, 1997, 1996 and 1995
Additional Note Payable Combined Common Stock Paid-in to Former Equity Shares Dollars Capital Parent Capital Deficit - ----------------------------------------------------------------------------------------------------------------------------------Balance, January 1, 1995 14,973 $12,851,599 $ 4,974,000 $(20,028,467) Proceeds from payable to former parent 7,221,646 Proceeds from note payable to former parent 4,172,401 Restructuring and recapitalization 9,872,963 $ 98,879 $23,162,374 (17,024,000) (4,974,000) License agreement with former parent 5,000,000 Options granted as compensation 1,988,748 Amortization of deferred compensation Exercise of stock options 50,000 500 37,000 Net loss (8,494,358) ---------- --------- ----------- -------- ---------- ------------ Balance, December 31, 1995 9,937,936 99,379 30,188,122 -- -- (21,301,179) Options and warrants granted as compensation 222,489 Amortization of deferred compensation Private sale of common stock, net 505,000 5,050 1,650,827 Exercise of stock options 217,774 2,178 348,461 Net loss (5,494,985) ---------- --------- ----------- -------- ---------- ------------ Balance, December 31, 1996 10,660,710 106,607 32,409,899 (26,796,164) Options granted as compensation Company contribution to Employee 401k plan 771 8 2,491 Amortization of deferred compensation Private sale of common stock, net 1,200,000 12,000 4,990,718 Exercise of stock options 170,276 1,703 617,513 Net loss (4,546,617) ---------- --------- ----------- -------- ---------- ------------ Balance, December 31, 1997 12,031,757 $120,318 $38,020,621 $ -- $ -- $(31,342,780) ========== ========= =========== ======== ========== ============
Deferred Total Compensation Stockholders' on Stock Treasury Stock Equity Options Granted Shares Dollars (Deficit) - -----------------------------------------------------------------------------------------------------------------Balance, January 1, 1995 $(2,202,868) Proceeds from payable to former parent 7,221,646 Proceeds from note payable to former parent 4,172,401 Restructuring and recapitalization 1,263,253 License agreement with former parent 5,000,000 Options granted as compensation $(1,988,748) -- Amortization of deferred compensation 101,183 101,183 Exercise of stock options 37,500 Net loss (8,494,358) ----------- ------ --------- --------- Balance, December 31, 1995 (1,887,565) -- -- 7,098,757 Options and warrants granted as compensation (222,489) -- Amortization of deferred compensation 1,506,790 1,506,790 Private sale of common stock, net 1,655,877 Exercise of stock options 350,639 Net loss (5,494,985) ----------- ------ --------- --------- Balance, December 31, 1996 (603,264) -- 5,117,078 Options granted as compensation Company contribution to Employee 401k plan 1,330 $ 7,230 9,729 Amortization of deferred compensation 577,644 577,644 Private sale of common stock, net 5,002,718 Exercise of stock options (21,074) (257,999) 361,217 Net loss (4,546,616) ----------- ------ --------- --------- Balance, December 31, 1997 $ (25,620) (19,744) $(250,769) $6,521,770 =========== ====== ========= =========The accompanying notes are an integral part of the consolidated financial statements. 2621 NOVAVAX, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2000, 1999 and 19981.
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION DESCRIPTION OF BUSINESSDescription of BusinessNovavax, Inc., a Delaware corporation
("Novavax"(“Novavax” orthe "Company"“the Company”),was incorporated in 1987, and is a specialty biopharmaceutical companyfocusing onengaged in the research, development anddevelopmentcommercialization of proprietarytopicalproducts focused on women’s health andoral drug delivery technologiesinfectious diseases. The Company sells, markets, andapplicationsdistributes a line ofthose technologies.ethical pharmaceuticals and pre-natal vitamins. TheCompany'sCompany’s principal technologyplatforms involveplatform involves the use of proprietary, microscopic, organized,lipidnon-phospholipid structuresmade into microscopic vesiclesas vehicles for the delivery of a wide variety of drugs and other therapeuticproducts, includingproducts. These include certain hormones,antibacterialanti-bacterial, and anti-viral products and vaccine adjuvants.The Company currentlyNovavax hasthree leadseveral product candidates invarious stages of development and animalpre-clinical and humantrials. These include, ESTRASORB(TM)clinical trials, including ESTRASORB™, atopicaltransdermal lotion for estrogencream, ANDROSORB(TM),replacement therapy which recently completed Phase III testing. In addition, Novavax conducts research and development on preventative and therapeutic vaccines for atopical testosterone cream, and Helicore(TM), an oral anti-bacterial preparation for the treatmentvariety ofHelicobacter pylori infection.infectious diseases, including human papillomavirus (HPV).The
regulatory process is lengthy, requiring substantial funds, andproducts currently under development or in clinical trials by the Companycannot predict whenwill require significant additional research and development efforts, including extensive pre-clinical and clinical testing and regulatory approval,of any product or a licenseprior tosell any product might occur. In addition, therecommercial use. There can be noassurancesassurance that the Company’s research and development efforts will be successful and that any of the Company’s potential products will prove to be safe and effective in clinical trial. Even if developed, these products may not receive regulatory approval or be successfully introduced and marketed at prices that would permit the Companywill have sufficient funds necessary or that the additional funds will be available at all or on acceptable terms.to operate profitably. The Company also recognizes that the commercial launch of any product is subject to certain risks including but not limited to manufacturing scale-up and market acceptance.BASIS OF PRESENTATIONNo assurance can be given that the Company can generate sufficient product revenue to become profitable or generate positive cash flow from operations at all or on a sustained basis.2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Novavax
(formerly Molecular Packaging Systems,and its wholly owned subsidiaries Fielding Pharmaceuticals, Inc.),its wholly-owned subsidiariesMicro-Pak, Inc.("Micro-Pak") and, Micro Vesicular Systems, Inc.("MVS"),and Lipovax, Inc.("Lipovax", formerly known as Novavax, Inc.).All significant intercompany accounts and transactions have been eliminated in consolidation.The financial statements for the period January 1, 1995 through December 12, 1995 have been prepared for the aforementioned companies on a combined basis from books and records maintained by IGI, Inc. ("IGI"). These combined financial statements reflect the financial position and resultsUse of
operations of the combined companies at their historical bases, including allocations of certain costs by IGI. The accounts and transactions between the companies have been eliminated. The financial statements may not be indicative of the results that would have been attained had the entities operated together independently of IGI. 2. DISTRIBUTION On December 12, 1995 (the "Distribution Date"), IGI distributed to the holders of record of IGI's common stock, at the close of business on the Record Date, November 28, 1995, one share of the Company's common stock for every one share of IGI common stock outstanding (the "Distribution"). The Distribution resulted in 93.2% of the outstanding shares of the Company's common stock being distributed to holders of IGI common stock on a proportionate basis after taking into account the Restructuring and Recapitalization described in Note 3. As a result of the Distribution, the Company is no longer a subsidiary of IGI but an independent publicly-owned company whose shares are traded on the American Stock Exchange under the trading symbol NOX. 3. RESTRUCTURING AND RECAPITALIZATION Prior to the Distribution, IGI consolidated its animal health products and cosmetics and consumer products businesses (the "Core Businesses") within itself and its subsidiaries. Concurrently it consolidated the biotechnology business (the "Biotechnology Business") within Novavax and its subsidiaries (the "Restructuring"). At the time of the Restructuring, IGI owned, through its wholly-owned subsidiary, IGEN, Inc. ("IGEN"), the following percentages of the voting power of the subsidiaries conducting the Biotechnology Business: 84.7% of the voting power of Novavax, the sole stockholder of both Micro-Pak and MVS, and 90.3% of the voting power of Lipovax. The Biotechnology Business resided, and continues to reside, within Novavax, Micro-Pak, MVS and Lipovax. Prior to the Restructuring, the current and former employees of Novavax and Lipovax held approximately 15.3% and 9.7% of the voting power of Novavax and Lipovax, respectively. On September 20, 1995, Novavax, Lipovax and Novavax Acquisition Subsidiary, Inc., a wholly-owned subsidiary of Novavax created for purposes of the Restructuring ("Acquisition Corporation"), entered into a merger agreement (the "Merger Agreement"). The Merger Agreement, which was approved by Lipovax stockholders on October 12, 1995, provided, among other things, for a reverse triangular merger (the "Merger") in which Acquisition Corporation merged with and into Lipovax and Lipovax became a wholly-owned subsidiary of Novavax. As consideration for the Merger, Novavax issued an aggregate of 21,698 shares, of which 90.3% were issued to IGEN and the remaining 9.7% to the minority stockholders of Lipovax. The issuance of shares to the minority stockholders of Lipovax resulted in a charge to the statement of operations of $866,966 to reflect the purchase of in process research and development. After the Merger, IGEN owned 85.5% of the outstanding shares of Novavax, and the remaining 14.5% were held by the minority stockholders of Novavax (8.8%) and by the former minority stockholders of Lipovax (5.7%). As part of the Restructuring, Novavax issued to IGEN 41,569 shares of Novavax Common Stock in exchange for the transfer by 2722 IGEN to Novavax of all of IGEN's rights to the payment of $17,024,000 aggregate indebtedness owed to ImmunoGenetics, Inc., a wholly-owned subsidiary of IGEN (and the primary operating entity of the Core Businesses ("ImmunoGenetics")), by MVS ($9,996,504) and Lipovax ($7,027,496) (collectively, "Novavax Sub Debt"). The Novavax Sub Debt resulted from loans made by ImmunoGenetics to MVS and Lipovax during the period from 1991 to the Distribution Date. The number of shares of Novavax Common Stock issued in exchange for the Novavax Sub Debt was based on the value of $409.54 per share of Novavax Common Stock. In connection with the Restructuring, Novavax converted $17,024,000 of these loans for 41,569 shares of Novavax stock. In addition to the Restructuring, Novavax recapitalized its capital stock (the "Recapitalization"). Immediately prior to the Recapitalization, Novavax's issued and outstanding capital stock consisted of approximately 75,240 shares of Class A Common Stock and 3,000 shares of Class B Common Stock. As a result of the Recapitalization, each share of Class A and Class B Common Stock was converted into approximately 126.37944 shares of Novavax Common Stock. After the Restructuring and Recapitalization, there were 9,887,936 shares of Novavax Common Stock outstanding. To complete the separation of the Core Businesses from the Biotechnology Business, on December 12, 1995, IGEN distributed all of the shares of Novavax Common Stock held by IGEN (approximately 93.2% of the voting securities of Novavax) to IGI in a transaction intended to qualify as a tax-free distribution under section 355 of the Code. IGI received a private letter ruling from the Internal Revenue Service ("IRS") that the Distribution would not be taxable to IGI or its shareholders. 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES Cash equivalents are considered to be short-term highly liquid investments with original maturities of 90 days or less. Marketable securities consist of investments in fixed income securities with original maturities of greater than three months and less than one year. Marketable securities are stated at cost which approximates market. Interest income is accrued as earned. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation of furniture, fixtures and equipment is provided under the straight-line method over the estimated useful lives, generally five years. Amortization of leasehold improvements is provided over the estimated useful lives of the improvements or the term of the lease, which ever is shorter. Furniture and equipment held under capital leases are amortized under the straight-line method over the shorter of the lease term or the estimated useful life of the asset. Repair and maintenance costs are charged to operations as incurred while major improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation thereon are removed from the accounts and any gains or losses are included in operations. PATENT COST Costs associated with obtaining patents, principally legal costs and filing fees, are being amortized on a straight line basis over the remaining economic lives of the respective patents. The Company periodically evaluates the carrying amount of these assets based on current licensing and future commercialization efforts and if warranted, impairment would be recognized. Accumulated amortization of patent costs was $549,397 and $430,057 at December 31, 1997 and 1996, respectively. REVENUE RECOGNITION Revenues from the sale of scientific prototype vaccines and adjuvants are recorded as the products are produced and shipped. Revenues earned under research contracts are recognized when the related contract provisions are met. NET LOSS PER SHARE In 1997, the Company adopted SFAS No. 128, Earnings per Share. Basic earnings per share is computed by dividing the net loss available to common shareholders by the weighted average number of common share outstanding during the period. Diluted earnings per share is computed by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding after giving effect to all dilutive potential common shares that were outstanding during the period. Potential common shares are not included in the computation of dilutive earning per share if they are antidilutive. Net loss per share as reported was not adjusted for potential common shares as they are antidilutive. Earnings per share for all other periods presented conform to SFAS No. 128. Pro forma net loss per share for the year ended December 31, 1995 is based upon weighted average shares outstanding of 9,937,936 representing primarily shares issued in connection with the Recapitalization. These shares have been treated as outstanding as if the transaction had occurred on January 1, 1995. INCOME TAXES The Company's income taxes are determined in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 109 which requires the asset and liability method of accounting for income taxes. Under the asset and liability method deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to 2823 differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The effect on deferred taxes of changes in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded based on management's determination of the ultimate realizability of future deferred tax assets. Novavax was included in IGI's consolidated federal income tax return through the effective date of the Distribution. Provisions for income taxes were calculated on a separate return basis and were determined in accordance with the provisions of SFAS No. 109. USE OF ESTIMATESEstimatesThe preparation of financial statements in conformity with generally accepted accounting principles 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 revenues and expenses during the reporting period.
Significant estimates include valuation of patent costs and benefits for income taxes and related valuation allowances.Actual results could differ from those estimates.NEW ACCOUNTING STANDARDSCash and Cash Equivalents
The Company considers all highly-liquid investments with insignificant interest rate risk and original maturities of three months or less from the date of purchase to be cash equivalents. The carrying amounts of cash and cash equivalents approximate their fair values.
Concentration of Credit Risk
Financial instruments, which possibly expose the Company to concentration of credit risk, consist primarily of cash and cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents in bank accounts and with high credit quality financial institutions, which, at times, may exceed
F-8
NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)December 31, 2000, 1999 and 19982. Summary of Significant Accounting Policies — (Continued)Concentration of Credit Risk (Continued)federally insured limits. The Company has not experienced any losses on such accounts. Accounts receivable consist principally of amounts due from credit worthy wholesale drug distributors, the Federal Government and other large institutions.
The company monitors the balances of individual accounts to assess any collectibility issues. The Company has not experienced significant credit losses on customer accounts. As of December 31, 1999, three customers accounted for 74% of accounts receivable.
Inventories
Inventories consist of raw materials and are priced at the lower of cost or market, using the first-in-first-out method (FIFO).
Property and Equipment
Property and equipment are recorded at cost. Depreciation of furniture, fixtures and equipment is provided under the straight-line method over the estimated useful lives, generally 3 to 7 years. Amortization of leasehold improvements is provided over the estimated useful lives of the improvements or the term of the lease, which ever is shorter.
Patent Cost
Costs associated with obtaining patents, principally legal costs and filing fees, are being amortized on a straight-line basis over the remaining estimated economic lives of the respective patents.
Goodwill and Intangible Assets
Goodwill and intangible assets principally result from business acquisitions. Assets acquired and liabilities assumed are recorded at their fair values; the excess of the purchase price over the net assets acquired is recorded as goodwill. Goodwill and intangible assets are amortized on a straight-line basis over their estimated useful lives, ranging from 5 to 15 years.
Impairment of Long-Lived Assets
The Company periodically evaluates the recoverability of the carrying value of its long-lived assets. The Company considers historical performance and anticipated future results in its evaluation of potential impairment. Accordingly, when indicators of impairment are present, the Company evaluates the carrying value of these assets in reaction to the operating performance of the business and future discounted and undiscounted cash flows expected to result from the use of these assets.
Impairment losses are recognized when the sum of expected future cash flows are less than the assets’ carrying value. No such impairment losses have been recognized to date.
Revenue Recognition
Revenues from product sales are recognized upon shipment, net of allowances for returns, rebates and chargebacks. The Company is obligated to accept from customers the return of pharmaceuticals which have reached their expiration date.
F-9
NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)December 31, 2000, 1999 and 19982. Summary of Significant Accounting Policies — (Continued)Revenue Recognition (Continued)Revenues from the sale of scientific prototype vaccines and adjuvants are recorded as the products are produced and shipped. Revenues earned under research contracts are recognized when the related contract services are performed.
Net Loss per Share
Basic earnings per share is computed by dividing the net loss available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted loss per share is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding after giving effect to all dilutive potential common shares that were outstanding during the period.
Potential common shares are not included in the computation of dilutive earnings per share if they are antidilutive. Net loss per share as reported was not adjusted for potential common shares, as they are antidilutive.
Stock-Based Compensation
The Company measures compensation expense for its employee stock-based compensation using the intrinsic value method. Under the intrinsic value method of accounting for stock-based compensation, when the exercise price of options granted to employees is less than the estimated fair value of the underlying stock on the date of grant, deferred compensation is recognized and is amortized to compensation expense over the applicable vesting period.
Research and Development Costs
Research and development costs are expensed as incurred.
Income Taxes
The Company’s income taxes are accounted for using the liability method. Under the liability method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities.
The effect on deferred taxes of changes in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded based on management’s determination of the ultimate realizability of future deferred tax assets. The Company has provided a full valuation allowance against its net deferred tax assets as of December 31, 2000 and 1999.
Comprehensive Loss
Under Financial Accounting Standards
Board has issued two new standards which become effective for reporting periods beginning after December 15, 1997. SFASNo. 130Reporting(“SFAS 130”), “Reporting Comprehensive Income,requires additional disclosures with respect” the Company is required to display comprehensive loss and its components as part of the consolidated financial statements. Comprehensive loss is comprised of the net loss and other comprehensive income (loss), which includes certain changes inassets and liabilitiesequity thatpreviously were not required to be reported as results of operations for the period. The Company will begin making the additional disclosures required by SFAS No. 130 in the first quarter of 1998. SFAS no. 131, Disclosures about Segments of an Enterprise and Related Information, requires financial and descriptive information with respect to "operating segments" of an entity based on the way management makes internal operating decisions. The Company will begin making the disclosures required by SFAS No. 131 with financial statements for the period ending December 31, 1998. 5. TRANSACTIONS WITH FORMER PARENT CHARGES Through the Distribution Date, IGI charged Novavax for expenses incurred on its behalf, including executive, legal, accounting, data processing, consulting, cash management, human resources and employee benefits. These costs were allocated on a variety of methods, including: - - Specific identification based on estimates of time and services provided - - Relative identification allocated based on Novavax's relationship to the entire pool of beneficiaries The allocation methods, while reasonable under the then current circumstances, may not represent the cost of similar activities on a separate entity basis. For the period January 1, 1995 through December 31, 1995 such costs have been included in general and administrative expenses ($850,000), and interest expense ($1,749,706). These amounts have been accumulated on Novavax's accompanying Balance Sheet as payable to parent through the Distribution Date, at which time such amounts were reversed to the Deficit since these charges will not be repaid. BORROWING ARRANGEMENTS On the Distribution Date, Novavax had a note payable to IGI under which borrowings bore interest at IGI's borrowing rate. The note was converted into shares of Novavax common stock based on an appraisal of Novavax common stock. The outstanding loan balance of $17,024,000 was converted into 5,253,494 shares of Novavax common stock after the Restructuring and Recapitalization. Such amount was included in the Distribution and, accordingly, has been included in stockholders' equity in the accompanying balance sheets. In accordance with the plan of Distribution, $250,000, representing loans made by IGI to Novavax in excess of $17,024,000, was deducted from IGI's $5,000,000 payment due under the License Agreement. Novavax has no outside borrowing arrangements. TRANSITION SERVICES Under a Transition Services Agreement, established at the time of the Distribution, IGI continued to provide certain administrative services to Novavax, including services relating to human resources, purchasing and accounting, data processing and payroll servicesare excluded from theday of the Distribution until June 30, 1996. Novavax paid IGI a feenet loss. Comprehensive loss forall services provided by IGI employees, based on IGI's cost. The agreement was terminated on June 30, 1996. Costs of $230,474 were incurred for the six month period ended June 30, 1996. For the period December 13, 1995 through December 31, 1995, $35,000 of such costs were incurred. These charges have been offset in part by receivables due from IGI and recorded as a payable to former parent on the December 31, 1995 balance sheet. At December 31, 1996the Company wasowed $32,285 from IGI primarily related to patent costs. ROYALTY REVENUES Novavax earned royalties from IGI at 10% ofthesales of the licensed products. The agreements were terminated in connection with the Distribution and execution of the License Agreement. In connection with the Distribution, IGI paid Novavax $5,000,000 in returnsame as net loss fora fully paid-up, ten-year license (the "License Agreement") entitling it to the exclusive use of the Novavax Technologies in the fields of (i) animal pharmaceuticals, biologicals and other animal health products; (ii) foods, food applications, nutrients and flavorings; (iii) cosmetics, consumer products and dermatological over-the-counter and 2924 prescription products (excluding certain topically delivered hormones); (iv) fragrances; and (v) chemicals, including herbicides, insecticides, pesticides, paints and coatings, photographic chemicals and other specialty chemicals; and the processes for making the same. IGI has the option, exercisable within the last year of the ten-year term, to extend the License Agreement for an additional ten-year period for $1,000,000. Novavax will retain the right to use its Novavax Technologies for all other applications, including human vaccines and pharmaceuticals. Novavax has presented the payment under the License Agreement as a capital contribution in its financial statements to reflect the intercompany nature and substance of the transaction. The form was structured as a prepaid license agreement to address various considerations of the Distribution including tax and financing considerations. For tax purposes, the transaction was treated as income for the period ended December 31, 1995. IGI has no further obligations or intentions to fund Novavax. 6. SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for:
1997 1996 1995 - --------------------------------------------------Taxes $ -- $100,000 $-- Interest -- 10,955 --Forthe years ended December 31,1997, 19962000, 1999 and1995,1998.F-10
NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)December 31, 2000, 1999 and 19982. Summary of Significant Accounting Policies — (Continued)Recent Accounting Standards
In June 1998, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Implementation of SFAS 133 is required as of the beginning of fiscal year 2001 and will not have a material effect on the Company’s financial position or results of operation.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (“SAB 101”), “Revenue Recognition in Financial Statement.” SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. The adoption of SAB 101 did not have a material effect on the financial position or results of operations of the Company.
In March 2000, the FASB issued Interpretation No. 44 (“FIN 44”) “Accounting for Certain Transactions Involving Stock Compensation,” which addresses certain accounting issues which arose under the previously established accounting principles relating to stock-based compensation. The adoption of this interpretation did not have a material effect on the Company’s financial position or results of operations.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
3. Acquisitions
Fielding Pharmaceutical Company
In December 2000, Novavax acquired privately owned Fielding Pharmaceutical Company (“Fielding”), based in St. Louis, Missouri, which sells, markets and distributes a proprietary line of pharmaceutical products focused on women’s health. Novavax will operate Fielding as a wholly owned subsidiary. Under the terms of the acquisition agreement, Novavax acquired 100% of the outstanding shares of Fielding. The purchase method of accounting was used to account for the transaction.
The total purchase price of $38.7 million consisted of $18.5 million in Novavax common stock (2,312,501 shares), $13 million in cash, $5 million payable in cash or common stock to the former owners of Fielding (due March 2002), $1.1 million in assumed liabilities and $1.1 million in transaction costs.
The aggregate consideration of $38.7 million was allocated to cash ($1.7 million), accounts receivable and inventory ($1.2 million), property and equipment ($300,000) and goodwill ($35.5 million).
The operating results of Fielding have been included in the consolidated statement of operations from the acquisition date. The following summary represents pro forma results of operations as if the acquisition had occurred at the beginning of 1998. These pro forma results have been prepared for comparative purposes only
F-11
NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)December 31, 2000, 1999 and 19983. Acquisitions — (Continued)Fielding Pharmaceutical Company — (Continued)and do not purport to be indicative of the results of operations that would have actually resulted had the combination been in effect and are not intended to be indicative of future results.
Year ended December 31, 2000 1999 1998 (amounts in thousands, except per share information) Revenue $ 12,843 $ 12,750 $ 5,767 Net loss (13,602 ) (3,824 ) (9,408 ) Loss per share applicable to common stockholders (.64 ) (.23 ) (.64 ) Biomedical Services Laboratory
On August 10, 1999, the Company
hadacquired substantially all of thefollowing non-cash financingassets (excluding cash andinvesting activities:
1997 1996 1995 - ------------------------------------------------------------------------Reversal against deficit of payable to former parent $ -- $ -- $7,221,646 Options granted as compensation -- -- $1,988,748 Capital lease obligation for the purchase of furniture and equipment $36,285 $ 36,285 $ --7. PROPERTY AND EQUIPMENTaccounts receivable) of the Biomedical Services Laboratory (“BSD”) division of DynCorp of Reston, Virginia. In addition, DynCorp entered into a five-year non-competition agreement. The research and development activities of BSD are conducted in a leased 12,000 square foot facility located in Rockville, Maryland. BSD is engaged in contract research, development and pilot manufacturing of human vaccines for government laboratories and other vaccine companies.The purchase method of accounting was used to account for the transaction. The total purchase price of $860,000 consisted of $740,000 in cash, $60,000 in assumed liabilities and $60,000 in transaction costs.
The aggregate consideration of $860,000 was allocated to property and equipment ($170,000) and goodwill and other intangible assets ($690,000).
Property and equipment
statedconsists primarily of laboratory equipment that the Company believes will continue to be used in the operations of BSD. Other intangible assets included patents, workforce, favorable lease and approved FDA facility. Goodwill and other intangible assets are being amortized over their useful lives of five years.The operating results of BSD have been included in the consolidated statement of operations from the acquisition date. The following summary represents pro forma results of operations as if the acquisition had occurred at
cost,the beginning of 1998. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that would have actually resulted had the combination been in effect and are not intended to be indicative of future results.
Year ended December 31, 1999 1998 (in thousands, except per share information) Revenue $ 3,597 $ 3,037 Net loss $ (4,484 ) $ (4,798 ) Loss per share applicable to common stockholders $ (.31 ) $ (.57 ) F-12
NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)December 31, 2000, 1999 and 19984. Supplemental Financial Data
Property and Equipment
Property and equipment is comprised of the
following:
1997 1996 - -------------------------------------------------------------Leasehold improvements $ 327,682 $ 321,506 Machinery and equipment 1,021,135 993,202 Equipment under capital leases 36,285 36,285 Furniture and fixtures 43,536 32,130 ---------- ---------- 1,428,638 1,383,123 Less accumulated depreciation (539,463) (405,212) ---------- ---------- $ 889,175 $ 977,911 ========== ==========During 1996, the disposal of property and equipment having a net book value of $334,564 was recorded relating to the closing of one of the Novavax subsidiaries' laboratory.following at December 31:
2000 1999 (in thousands) Machinery and equipment $ 2,226 $ 1,433 Leasehold improvements 703 428 Furniture and fixtures 101 63 3,030 1,924 Less accumulated depreciation (1,103 ) (871 ) $ 1,927 $ 1,053 Depreciation expense
of $134,251, $221,237was $232,000, $183,000 and$189,085 and was recorded in$152,000 for the years ended December 31,19972000, 1999 and1996, 1995,1998, respectively.8. STOCK OPTIONS AND WARRANTS 1995 STOCK OPTION PLAN Various directors, officersGoodwill and
employees of IGI including those employed by Novavax have been awarded stock options under various IGI stock option plans at 100%Intangible AssetsGoodwill and intangible assets consist of the
fair market valuefollowing at December 31:
2000 1999 (in thousands) Goodwill — Biomedical Services Acquisition $ 542 $ 542 Non-Compete — Biomedical Services Acquisition 148 148 Goodwill — Fielding Acquisition 35,590 — Patents 2,525 2,454 38,805 3,144 Accumulated Amortization (1,239 ) (877 ) $ 37,566 $ 2,267 Accrued Expenses
Accrued expenses consist of
IGI'sthe following at December 31:
2000 1999 (in thousands) Accrued clinical trial expenses $ 900 $ 90 Accrued acquisition costs 897 — Accrued compensation 759 126 Accrued operating expenses 618 65 Accrued interest 26 — $ 3,200 $ 281 5. Convertible note
On December 19, 2000 Novavax entered into a Note Purchase Agreement with King Pharmaceuticals, Inc. (“King”) whereby it agreed to issue to King a 4% senior convertible promissory note in the aggregate amount of $25.0 million. On that same date, Novavax entered into a 4% senior convertible promissory note with King for $20.0 million in principal due December 19, 2007 with interest payable in semi-annual
F-13
NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)December 31, 2000, 1999 and 19985. Convertible note — (Continued)installments on June 30 and December 31 commencing on June 30, 2001. Up to 50% of the interest due may be paid in common stock of the Company. A second promissory note of $5.0 million is due to be executed when the Company files a New Drug Application for its ESTRASORB product which is expected to occur during 2001.
The first note is convertible into common stock at $10.00 per share or 2,000,000 shares. The note has a mandatory conversion from January 2002 through December 31, 2004 if the
date of grant. In connection with the Distribution, the Board of Directors of Novavax authorized the grant of Novavax options to all holders of options to purchase IGI Common Stock as of the Distribution Date ("Spin-off Options"). The Spin-off Options were granted to such holders on substantially similar terms to the corresponding options to purchase IGI Common Stock. The number of sharesclosing price of Novavax common stockunderexceeds 180% of theoptions as comparedconversion price for 60 trading days. The note can be redeemed by the Company at 102%, 101% and 100% of face value during the years ended December 31, 2005, 2006 and 2007, respectively.6. Equity
In January 2000, the Company closed a private placement of 2,813,850 shares of its Common Stock to
their IGI counterparts reflectsaccredited investors (the “2000 Private Placement”). The issuance price of thedistribution ratioCommon Stock was $4.00 per share. Each share was sold together with a non-transferable warrant for the purchase of .25 additional shares at an exercise price of $6.75. The warrants have a three-year term. Gross proceeds from the 2000 Private Placement were $11,255,400. Placement agent fees were approximately $675,000, which was paid in cash. Additionally, non-transferable warrants for the purchase of 281,385 shares of the Company’s Common Stock, with an exercise price of $6.75 per share and a three-year term, were issued to the placement agent. Other costs connected with the 2000 Private Placement, including legal, stock exchange listing and registration fees, were approximately $80,000. Net proceeds to the Company from the 2000 Private Placement were approximately $10.5 million.In April 1999, the Company entered into Stock and Warrant Purchase Agreements for the private placement of 1,651,000 shares of its Common Stock to accredited investors (the “Private Placement”). One of the principals of one of the investors is also a director of the Company. The issuance price of the Common Stock was $2.50 per share. Each share was sold together with a non-transferable warrant for the purchase of
Novavax common.25 additional shares at an exercise price of $3.75. The warrants have a three-year term. Placement agents’ fees were approximately $215,000, which was paid with cash of $107,000 and 42,933 shares of the Company’s Common Stock, which were issued together with non-transferable warrants for the purchase of 10,733 shares of the Company’s Common Stock at an exercise price of $3.75. These warrants have a three-year term. Additionally, non-transferable warrants for the purchase of 143,000 shares of the Company’s Common Stock, with an exercise price of $3.00 per share and a three-year term, were issued to the placement agents. Other costs connected with the Private Placement, including legal, stock exchange listing and registration fees, were approximately $67,000. Net proceeds to the Company from the Private Placement were approximately $4.1 million.In 1998, the Company closed on a private placement of 6,500 shares of Series A Custom Convertible Preferred Stock, $1,000 par value per share (the “Preferred Stock”), at an aggregate purchase price of $6.5 million. During 1998, $1,522,000 of the original shares were converted into 1,043,956 shares of Common Stock, pursuant to the terms and conditions of the Preferred Stock. In October 1998, the Company repurchased the outstanding Preferred Stock for
one shareapproximately $4.9 million. The Company incurred placement agent and other transaction fees relating to the placement, conversion and repurchase ofIGIthe Preferred Stock of $502,000, which are included in the accompanying financial statements as preferred stock offering costs. Per the terms of the Preferred Stock, the Company was required to pay the holders of the Preferred Stock dividends of $225,000. This amount was paid in cash and shares of common stock.Exercise prices of the options were based on the relative market capitalization of IGIF-14
NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)December 31, 2000, 1999 andNovavax on the 20 trading days immediately following the Distribution Date to restore holders of each option to the economic position prior to the Distribution Date. As of the Distribution Date, 2,034,015 Spin-off19986. Equity — (Continued)The 1998 preferred stock transactions are summarized as follows:
(in thousands) Private sale of preferred stock, net $ 4,415 Deemed dividend of preferred stock 1,583 Conversion or preferred stock (1,439 ) Accretion of offering costs 420 Repurchase of preferred stock (4,979 ) $ — 7. Stock Options
to purchase shares of Novavax common stock were granted to holders of options to purchase IGI common stock at $3.69 per share.and Warrants1995 Stock Option Plan
Under the Novavax 1995 Stock Option Plan (the
"Plan"“Plan”), options may be granted to officers, employees and consultants or advisors to Novavax and any present or future subsidiary to purchase a maximum of4,000,0006,000,000 shares of Novavax commonstock (including the Spin-off Options).stock. Incentive options, having a maximum term of ten years, can be granted at no less than 100% of the fair market value ofNovavax'sNovavax’s stock at the time of grant and are generally exercisable in cumulative increments over several years from the date of grant. Both incentive and non-statutory stock options may be granted under the1995 plan.Plan. There is no minimum exercise price for non-statutory stock options.The Board of Directors of Novavax granted, as of the Distribution Date, options to purchase 600,000 shares of Novavax common stock to various employees at an exercise price of $.01 per share. Concurrently, the Board granted options to purchase 415,000 shares of Novavax common stock at $3.24 per share to Novavax employees, the estimated fair market value. 890,000 of these options first become exercisable on the six month anniversary of the Distribution Date as to 50% of the shares covered thereby and as to an additional 25% of the shares on each of the first and second anniversaries of the Distribution Date. 125,000 of these options first become exercisable in increments of 3025 25% of the shares on each of the first through fourth anniversaries of the Distribution Date. These options become immediately exercisable in the event of the acquisition of Novavax, including a merger in which Novavax is not the surviving entity, the sale of all or substantially all of the assets of Novavax or the acquisition of a majority of the equity securities of Novavax. The options also become immediately exercisable in the event the optionee is terminated without cause. As of the Distribution Date, 28,871 substitute options were issued in exchange for options to purchase Lipovax, which existed prior to the Distribution Date. 1995 DIRECTOR STOCK OPTION PLANThe 1995 Director Stock Option Plan (the
"Director Plan"“Director Plan”) provides for the issuance of up to 500,000 shares of NovavaxCommon Stock. 110,000, 80,000 and 120,000 options were granted under this plan in 1997, 1996 and 1995, respectively. In addition, each Eligible Director then serving as a director on the last business day of 1998 will be granted a non-qualified option to purchase 10,000 shares ofCommon Stock. The exercise price per share is the fair market value on the date of grant. Options granted toEligible Directorseligible directors are exercisable in full beginning six months after the date of grant and terminate ten years after the date of grant.Such options cease to be exercisable at the earlier of their expiration or three years after an
Eligible Directoreligible director ceases to be a director for any reason. In the event that anEligible Directoreligible director ceases to be a director on account of his death, his outstanding options (whether exercisable or not on the date of death) may be exercised within three years after such date (subject to the condition that no such option may be exercised after the expiration of ten years from its date of grant).F-15
NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)December 31, 2000, 1999 and 19987. Stock Options and Warrants — (Continued)Activity under the 1995 Stock Option Plan and 1995 Director Stock Option Plan was:
1995 1995 Stock Director Stock Option Plan Option Plan - ----------------------------------------------------------------------------Balance January 1, 1995 22,749 Granted at average price of $2.97 per share 3,077,886 120,000 Exercised at average price of $.75 per share (50,000) Expired or canceled at average price of $3.66 per share (2,000) ---------- --------- December 31, 1995 3,048,635 120,000 Granted at average price of $4.96 per share 660,000 80,000 Exercised at average price of $1.61 per share (215,274) Expired or canceled at average price of $3.84 per share (20,500) ---------- --------- December 31, 1996 3,472,861 200,000 Granted at average price of $4.18 per share 300,000 110,000 Exercised at average price of $2.86 per share (190,693) Expired or canceled at average price of $3.58 per share (378,610) ---------- --------- December 31, 1997 3,203,558 310,000 ---------- --------- Price Range $.01 to 7.00 $3.24 to 5.81 ------------ ------------- Weighted average $3.35 $4.01 Exercisable 2,603,925 240,000 Available for grant December 31, 1996 259,365 300,000 December 31, 1997 361,549 190,000 ---------- ---------
1995 Stock 1995 Director Option Plan Stock Option Plan Balance, December 31, 19973,203,558 310,000 Granted at weighted average price of $4.03 per share 501,000 140,000 Exercised at weighted average price of $2.06 per share (124,419 ) — Expired or canceled at weighted average price of $3.74 per share (465,892 ) (10,000 ) Balance, December 31, 19983,114,247 440,000 Granted at weighted average price of $3.80 per share 1,078,500 — Exercised at weighted average price of $2.20 per share (226,537 ) — Expired or canceled at weighted average price of $4.28 per share (577,757 ) — Balance, December 31, 19993,388,453 440,000 Granted at weighted average price of $7.50 per share 1,019,500 60,000 Exercised at weighted average price of $3.79 per share (485,728 ) (80,000 ) Expired or canceled at weighted average price of $3.75 per share (28,040 ) — Balance, December 31, 20003,894,185 420,000 Price range $ 0.01 to 10.63 $ 1.94 to 5.81 Weighted average exercise price $ 3.87 $ 3.24 Exercisable 2,278,428 420,000 Available for grant: December 31, 2000 810,664 — Information with respect to stock options outstanding at December 31,
19972000 is as follows:
Weighted Number Average Weighted of Remaining Average Options Contractual Exercise Price Range Outstanding Life Price - -------------------------------------------------------------- Options issued at below Market Value$0.01 523,383 7.7 $0.01 - -------------------------------------------------------------- Options issued at Market Value $1.21 to 2.50 20,622 7.9 $1.21 $2.51 to 3.50 1,193,788 6.0 $3.06 $3.51 to 4.50 947,800 7.0 $3.90 $4.51 to 7.00 827,965 7.4 $5.54 --------- --- ----- 2,990,175 6.7 $4.00 --------- --- -----3126 In connection with its stock option plans,
Number of Weighted Average Weighted Options Remaining Average Outstanding Contractual Life Exercise Price Options issued at below market value: $0.01 402,430 5.0 $ 0.01 Options issued at market value: $1.21 to 3.50 747,971 5.5 $ 3.07 $3.51 to 4.50 1,428,284 6.8 $ 3.79 $4.51 to 6.50 1,008,500 7.0 $ 5.70 $6.51 to 10.63 727,000 9.2 $ 8.32 4,314,185 6.8 $ 4.52 Novavax makes no charges to operations in connection with employee stock options granted at the fair market value at the date of grant. With respect to options which were granted below fair market value at the date of grant, the Company records compensation expense for the difference between the fair market value at the date of grant and the exercise price, as the options become exercisable.
$471,924, $1,410,648$5,000, $10,000, and$101,183$9,000 related to such options has been included as compensation expense in1997, 19962000, 1999 and1995,1998, respectively.The Company has adopted the disclosure - only provisions of Statement of Financial Accounting Standards No. 123 ("SFAS 123") as they pertain to financial statement recognition of compensation expense attributable to option grants. As such, no compensation cost has been recognized on the Company's option plans. If the Company had elected to recognize the compensation cost for the 1995 Stock Option Plan and the 1995 Director Stock Option Plan consistent with SFAS 123, the Company'sPro forma information regarding net loss and loss per share
onis required by SFAS No. 123, Accounting for Stock-Based Compensation, and has been determined as if Novavax had accounted for its employee and director stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model.F-16
NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)December 31, 2000, 1999 and 19987. Stock Options and Warrants — (Continued)The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because Novavax employee and director stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
For purposes of pro forma
basis would be:
1997 1996 1995 - --------------------------------------------------------------------------------Net loss As reported $(4,546,617) $(5,494,985) $ (8,494,358) Pro forma $(5,113,882) $(6,354,089) $(10,110,754) Basic earnings per share (in dollars) As reported $ (.39) $ (.54) $ (.85) Pro forma $ (.44) $ (.63) $ (1.02) Risk-free interest rates 5.2%-7.2% 5.97% 5.97% Expected life in years Employees 6.0 6.0 6.0 Directors 3.0 3.0 3.0 Dividend Yield 0.0% 0.0% 0.0% Volatility Options issued by Novavax after November 28, 1995 47% 75% 75% Options issued by Novavax prior November 28, 1995 -- 50% 50% Weighted average remaining contractual life in years 6.9 5.7 5.7 Weighted average fair value at date of grant (in dollars) $3.41 $3.11 $3.11NON-EMPLOYEE OPTIONSdisclosures below, the estimated fair value of the options is amortized to expense over the option’s vesting period. Novavax’s pro forma information follows:
Year ended December 31, 2000 1999 1998 (in thousands) Net loss applicable to common stockholders: As reported (in thousands) $ (12,191 ) $ (4,506 ) $ (7,045 ) Pro forma (in thousands) $ (14,609 ) $ (6,430 ) $ (7,983 ) Basic and diluted loss per share: As reported $ (.64 ) $ (.31 ) $ (.57 ) Pro forma $ (.77 ) $ (.44 ) $ (.64 ) Risk-free interest rates 6.0 % 5.8 % 6.0 % Expected life in years: Employees 6.0 6.0 6.0 Directors 3.0 3.0 3.0 Dividend yield 0.0 % 0.0 % 0.0 % Volatility 80 % 69 % 105 % Weighted average remaining contractual life in years 6.8 6.8 6.7 Weighted average fair value at date of grant $ 5.87 $ 3.56 $ 1.21 The Company has entered into agreements to receive advisory and consulting services from several individuals, four of whom serve on the Novavax Scientific Advisory Board. Non-qualified stock options have been granted to these individuals under the 1995 Stock Option Plan.
Using the Black-Scholes option pricing model, a charge of $39,685 and $30,107 related to these options has been recorded in 1997 and 1996 respectively. COMMON STOCK WARRANTSCommon Stock Warrants
In connection with the October 1996 private stock sale, the Company provided the underwriter warrants for the purchase of 50,000 shares of common
stock, par value $.01 per share.stock. The warrants are fully exercisable at $3.75 per share and expireonin October30,2001. After giving effect to the anti-dilution provision, the warrants were revised to allow for the purchase of 54,924 shares at $3.54 per share. In November 1996, in consideration for services performed by a consultant, the Company also issued warrants for 50,000 shares of commonstock, par value $.01 per share.stock. The warrants are exercisable at $5.00 per share andare fully vestedexpire in November 2001. In March 1997, Novavax privately placed 1,200,000 shares of common stock. As part of the transaction, Novavax also granted warrants to purchase an additional 600,000 shares at a price of $6.00 per share and 600,000 shares at a price of $8.00 per share. After giving effect to the anti-dilution provision, the warrants were revised to allow for the purchase of 659,090 shares at $5.46 per share and 659,090 shares at $7.28 per share. The warrants had a three-year term and were exercised in March 2000 for cash of $3.6 million and a “cashless” exercise of 465,410 shares of common stock which were placed into treasury shares. In April 1999, Novavax privately placed 1,651,100 shares of common stock. As part of the transaction, Novavax also granted warrants to purchase 412,775 additional shares at an exercise price of $3.75. The placement agent for this transaction was givenF-17
NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)December 31,1997.2000, 1999 and 19987. Stock Options and Warrants — (Continued)warrants to purchase 10,733 additional shares at $3.75 and 143,000 additional shares at $3.00. These warrants have a three-year term and expire
on November 18, 2001.in April 2002. As of December 31,1997, no2000, 136,204 of these warrants had been exercised.UsingAfter giving effect to theBlack-Scholesanti-dilutive provisions of these warrants, the warrants outstanding were revised to allow for the purchase of 394,410 shares at $3.54 per share and 59,772 shares at $2.84 per share. In connection with the 2000 Private Placement the Company granted warrants to purchase an additional 703,462 shares at an exercise price of $6.75. In addition, warrants of 251,385 shares were issued to the placement agent at an exercise price of $6.75 per share. The warrants have a three year term. As of December 31, 2000, 35,127 of these warrants have been exercised.Information with respect to warrants to purchase the Company’s common stock at December 31, 2000 is as follows:
Number of Warrants Exercise Expiration Outstanding Price Date 54,924 $ 3.54 October 2001 50,000 $ 5.00 November 2001 394,410 $ 3.54 April 2002 59,772 $ 2.84 April 2002 919,720 $ 6.75 January 2003 1,478,826 8. Employee Benefits
The Company has a defined contribution 401(k) retirement plan (the Plan), pursuant to which employees who have completed ninety days of employment with the Company as of specified dates may elect to contribute to the Plan, in whole percentages, up to 15% of their compensation and a maximum contribution of $10,500, $10,500 and 10,000 in 2000, 1999 and 1998, respectively.
The Company matches 25% of the first 5% of compensation contributed by the participant and $4.00 per week of employment during the year. At the option
pricing model, a chargeof the Company matching contributions to the Plan can be made in the form of the Company’s common stock. All contributions to the Plan are immediately vested. The Company has recorded charges to expenses related tothese warrantsthe Plan of$66,035,approximately $28,000, $16,000 and$66,035 has been recorded$23,000 in19972000, 1999 and1996 to the Statement of Operations.1998, respectively.F-18
NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)December 31, 2000, 1999 and 19989.
INCOME TAXESIncome TaxesDeferred tax assets (liabilities) included in the balance sheets consist of the following:
1997 1996 - --------------------------------------------------------------Net operating losses $ 4,888,610 3,516,909 Research tax credits 820,641 721,333 Disqualifying stock options 716,428 523,746 Deferred patent costs (607,668) (515,675) Alternative-minimum tax credit 93,674 93,674 Other, net 17,985 10,927 ------------ ---------- 5,929,670 4,350,914 Less valuation allowance (5,929,670) (4,350,914) ------------ ---------- Deferred taxes, net $ -- $ -- ============ ==========
2000 1999 (in thousands) Net operating losses $ 12,513 $ 8,420 Research tax credits 1,229 1,024 Disqualifying stock options 673 671 Alternative-minimum tax credit 94 94 Equipment and furniture 44 51 Intangibles from acquisition 12 15 Deferred patent costs (602 ) (626 ) Accrued vacation pay 28 28 Deferred revenues 40 290 Allowance for Doubtful Accounts 19 — 14,050 9,967 Less valuation allowance $ (14,050 ) $ (9,967 ) Deferred tax assets, net — — The differences between the U.S. federal statutory tax rate and the Company’s effective tax rate are as follows:
2000 1999 Statutory federal tax rate (34)% (34)% State income taxes, net of federal benefit (5)% (4)% Disqualifying stock options 0% 3% Research and development credit (2)% (8)% Alternative-minimum credit 0% (1)% Other 1% (1)% Change in valuation allowance 40% 45% — — Realization of net deferred tax assets at the balance sheet dates is dependent on the
company'sCompany’s ability to generate future taxable income, which is uncertain. Accordingly, a full valuation allowance was recorded against these assets as of December 31,19972000 and1996. In connection with1999.Novavax has recorded no net benefit for income taxes in 2000, 1999 and 1998 in the
filing of the Company's 1995 tax return during 1996, it was determined that the Company had an Alternative Minimum Tax liability resulting from the cash received from IGI in return for the license. The 1996 income tax expense is fully attributableaccompanying financial statements due to theAlternative Minimum Tax calculation. 3227uncertainty regarding ultimate realization of certain net operating losses and other tax credit carryforwards.Federal net operating losses and tax credits available to
Novavax andthe Company are as follows:- ------------------------------------------------------------------------------- Net operating losses expiring through the year 2012 $12,089,502 Research tax credits expiring through the year 2012 820,641 Alternative-minimum tax credit (no expiration) 93,674
2000 (in thousands) Federal net operating losses expiring through the year 2020 $ 32,400 State net operating losses expiring through the year 2015 37,142 Research tax credits expiring through the year 2020 1,229 Alternative-minimum tax credit (no expiration) 94 F-19
NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)December 31, 2000, 1999 and 199810.
COMMITMENTS AND CONTINGENCIESCommitments and ContingenciesNovavax leases laboratory and office space, machinery and equipment under capital and
noncancelablenon-cancelable operating lease agreements expiring at various dates through 2006. Future minimum rental commitments undernoncancelablenon-cancelable leases as of December 31,19972000 are as follows:
OPERATING LEASES CAPITAL LEASES - -----------------------------------------------------------------------------1998 $ 201,709 $14,822 1999 176,921 12,062 2000 151,014 -- 2001 145,725 -- 2002 149,489 -- Thereafter 610,450 -- ---------- ------- Total Lease Payments $1,435,308 $26,884 ========== Less: amount representing interest 3,277 ----- Present value of net minimum lease payments $23,607 =======
Operating Year Leases (in thousands) 2001 $ 781 2002 598 2003 509 2004 370 2005 377 Thereafter 165 $ 2,800 Aggregate rental expenses approximated
$279,398, $183,327, $260,041,$411,000, $299,000, and $219,000 in1997,19962000, 1999 and19951998, respectively.In
October 1996,connection with theCompany entered into a 10-year operatinglease for office and laboratoryfacilities. In connection with this lease agreement, Novavaxfacilities, the Company is required to maintain a"Net“Net AssetValue"Value” of$2,000,000.$2.0 million. The term"Net“Net AssetValue"Value” is defined as the difference between the total assets and the total liabilities. If the Net Asset Value falls below$2,000,000,$2.0 million, the Company is required to provide other reasonable financial assurances to theLandlordlandlord within five days of theLandlordslandlord’s request.The financial assurances may be, but without limitation to,11. Subsequent Event
In January 2001, the
following:Company signed abondco-promotion agreement with King for theLandlord's benefit, an increasedistribution of one of the Company’s products in thedeposit, or a letter of credit, as reasonably believed necessary by the Landlord or its lenders. Also in October 1996,United States. Additionally, the Companyentered into a 2-year operating lease for approximately 2,363 square feetand King will combine U.S. sales efforts to begin co-promoting one oflaboratory space. This shared space housesKing’s products that is already on theCompany's certified animal facility and laboratories for its biologics development which includes the vaccine adjuvant program. Both leases include various renewal options, purchase options, and escalation clauses. 11. SIGNIFICANT CUSTOMERS Novavax's revenue includes amounts earned from arrangements with various industry partners. In the year ended December 31, 1997, two different customers each represented in excess of 10% of revenues. 12. SUBSEQUENT EVENTS On January 23, 1998, the Company entered into Subscription Agreements to effectuate the private placement of 6,500 share of Series A Custom Convertible Preferred Stock, $.01 par value per share (the "Series A Preferred Stock"). The closing occurred on January 28, 1998 (the "Issuance Date") at an aggregate purchase price of $6,500,000.market. The Companyreceived the proceeds therefor andalso paidDiaz & Altschul, LLC a fee of $425,233 in consideration for its services as placement agent. The Series A Preferred Stock is convertible into shares of Common Stock at a conversion price equal to (i) during a period of 90 days following the Issuance Date, 100% of the average of the two lowest consecutive trade prices of the Common Stock as reported on the American Stock ExchangeKing $3.3 million for the25 trading days immediately preceding the conversion date (the "Two Day Average Trading Price") or (ii) during the period on and after the date which is 91 days after the Issuance Date, 94% of the Two Day Average Trading Price (the "Conversion Price"). From the Issuance Date, there is ceiling price of $6.33 and within the first 180 days after the Issuance Date, the Conversion Price has applicable floor prices based on conversion dates. The floor prices range from $5.67rights to$4.32. The maximum number of shares as measured by the conversion terms most beneficial to the holders of the Series A Preferred Stock at the time of closing will result inadeemed dividend in the amount of $455,048 whichproduct that King has beenrecorded to Accumulated Deficit and Additional Paid in Capital during the three months ended March 31, 1998. 3328 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NOVAVAX, INC. Date: March 27, 1998 By: /s/ Richard F. Maradie ------------------------ Richard F. Maradie Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacity and on the date indicated. NAME TITLE DATE - ------------------------------------------------------------------------------- /s/ Richard F. Maradie Chief Executive Officer March 27, 1998 - ---------------------- Richard F. Maradie /s/ Brenda L. Fugagli Vice President, March 27, 1998 - --------------------- Principal Financial and Brenda L. Fugagli Accounting Officer /s/ Wayne A. Downing Director March 27, 1998 - -------------------- Wayne A. Downing /s/ Mitchell J. Kelly Director March 27, 1998 - --------------------- Mitchell J. Kelly /s/ J. Michael Lazarus Director March 27, 1998 - ---------------------- J. Michael Lazarus /s/ John O. Marsh, Jr. Director March 27, 1998 - ---------------------- John O. Marsh, Jr. /s/ Ronald A. Schiavone Director March 27, 1998 - ----------------------- Ronald A. Schiavone /s/ Ronald H. Walker Director March 27, 1998 - -------------------- Ronald H. Walker 3429 EXHIBIT INDEX Exhibit - ---------------------------------- 3.1 * 3.2 * 3.3 * 4 * 10.1 * 10.2 * 10.3 * 10.4 * 10.5 * 10.6 * 10.7 * 10.9 * 10.10 10.11 10.12 10.13 10.14 * 21 * 23 27 * These exhibits are incorporated by reference 35
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