NOVAVAX INC - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934


For Quarter Ended		Commission File No.
September 30, 2002		0-26770

NOVAVAX, INC.

(Exact name of registrant as specified in its charter)


Delaware		22-2816046

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


8320 Guilford Road, Columbia, MD		21046

(Address of principal executive offices)		(Zip code)

(301) 854-3900

(Registrant’s telephone number, including area code)

Indicate 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	X		No

The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Common Shares Outstanding at November 13, 2002: 24,654,359

NOVAVAX, INC.

Form 10-Q
For the Quarter Ended September 30, 2002

Table of Contents


Part I. Financial Information			Page No.
Item 1	Financial Statements
	Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001			3
	Consolidated Statements of Operations for the three month and nine month periods
		ended September 30, 2002 and 2001		4
	Consolidated Statements of Cash Flows for the nine months
		ended September 30, 2002 and 2001		5
	Notes to Consolidated Financial Statements			6
Item 2	Management’s Discussion and Analysis of Financial
		Condition and Results of Operations		9
Item 3	Quantitative and Qualitative Disclosure about Market Risk		15
Item 4	Controls and Procedures		15
Part II. Other Information
Item 1	Legal Proceedings			*
Item 2	Changes in Securities			*
Item 3	Defaults upon Senior Securities			*
Item 4	Submission of Matters to a Vote of Security Holders			*
Item 5	Other Information			16
Item 6	Exhibits and Reports on Form 8-K		17
Signature			18
Certifications			19

*No information provided due to inapplicability of item.

Part I . Financial Information

Item 1. Financial Statements

NOVAVAX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)


					September 30,			December 31,
					2002			2001

ASSETS					(unaudited)
Current assets:
	Cash and cash equivalents				$	7,630		$	20,045
	Accounts receivable, net					1,514			3,878
	Inventory					930			537
	Prepaid expenses and other current assets					1,915			567

			Total current assets			11,989			25,027
Property and equipment, net						12,968			4,326
Goodwill and other intangible assets, net						37,271			37,762

			Total assets		$	62,228		$	67,115

LIABILITIES and STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable				$	2,584		$	1,410
	Accrued expenses					3,822			4,337
	Deferred revenue – current					350			1,250

				Total current liabilities		6,756			6,997

Convertible notes						40,000			30,000
Deferred revenue – non current						2,437			2,625
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; 25,212,110 issued and 24,654,358
		outstanding at September 30, 2002 and 23,871,794 issued
		and 23,294,633 outstanding at December 31, 2001				252			239
	Additional paid-in capital					102,217			97,861
	Notes receivable from shareholders					(1,519	)		—
	Accumulated deficit					(82,382	)		(64,830	)
	Treasury stock, 557,752 and 577,161 shares, cost basis, at
		September 30, 2002 and December 31, 2001, respectively				(5,533	)		(5,777	)

				Total stockholders’ equity		13,035			27,493

				Total liabilities and stockholders’ equity	$	62,228		$	67,115

The accompanying notes are an integral part of the consolidated financial statements.

NOVAVAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except share data)
(unaudited)


				Three months ended						Nine months ended
				September 30,						September 30,
				2002			2001			2002			2001

Revenues
	Product sales			$	1,781		$	3,792		$	10,775		$	12,325
	Contract research & development				549			433			1,443			2,311
	Milestone & licensing fees				137			813			1,088			3,313

		Total revenues			2,467			5,038			13,306			17,949

Operating costs and expense:
	Cost of products sold				762			822			2,828			2,926
	Research and development				3,702			1,757			9,848			8,186
	Selling and marketing				2,713			2,828			10,637			5,782
	General and administrative				1,629			2,003			6,659			7,262

			Total operating costs and expenses		8,806			7,410			29,972			24,156

Loss from operations					(6,339	)		(2,372	)		(16,666	)		(6,207	)

Interest expense, net					375			141			886			346

Net loss				$	(6,714	)	$	(2,513	)	$	(17,552	)	$	(6,553	)

Basic and diluted net loss per share				$	(.27	)	$	(.11	)	$	(.72	)	$	(.29	)

Weighted average shares used in computing net loss per share					24,653,759			22,906,055			24,359,013			22,472,799

The accompanying notes are an integral part of the consolidated financial statements.

NOVAVAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)


				Nine months ended
				September 30,
				2002			2001

Operating Activities:
	Net loss			$	(17,552	)	$	(6,553	)
	Adjustments to reconcile net loss to net cash used by
		operating activities:
		Depreciation and amortization			857			2,578
		Changes in operating assets and liabilities:
			Accounts receivable		2,364			(2,058	)
			Inventory		(393	)		(198	)
			Prepaid expenses and other assets		(1,348	)		(47	)
			Accounts payable and accrued expenses		417			(456	)
			Deferred revenue		(1,087	)		4,585

	Net cash used in operating activities				(16,742	)		(2,149	)

Investing Activities:
		Acquisition of product line			—			(3,332	)
		Capital expenditures			(8,766	)		(812	)

	Net cash used in investing activities				(8,766	)		(4,144	)

Financing Activities:
		Proceeds from the issuance of convertible notes			10,000			10,000
		Proceeds from the exercise of stock options and warrants			3,093			4,725

	Net cash provided by financing activities				13,093			14,725

Net change in cash and cash equivalents					(12,415	)		8,432
Cash and cash equivalents at beginning of period					20,045			14,864

Cash and cash equivalents at end of period				$	7,630		$	23,296

The accompanying notes are an integral part of the consolidated financial statements.

NOVAVAX, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

Novavax, Inc., a Delaware corporation (“Novavax” or the “Company”), is a specialty biopharmaceutical company engaged in the research, development and commercialization of proprietary products focused on women’s health and infectious diseases. The Company sells, markets, and distributes a line of prescription pharmaceuticals and prenatal vitamins. The Company’s principal technology platform involves the use of patented oil and water emulsions which are used as vehicles for the delivery of a wide variety of drugs and other therapeutic products. These include certain hormones, anti-bacterial, and anti-viral products and vaccine adjuvants, which are substances added to vaccines to enhance their effectiveness. In September 2002, Novavax refiled a New Drug Application with the Food and Drug Administration for ESTRASORB™, a transdermal lotion for estrogen replacement therapy. Novavax has several other product candidates in pre-clinical and human clinical trials, including ANDROSORB®, a transdermal lotion for testosterone replacement therapy in women which began Phase I/II clinical trials in the first quarter of 2002. In addition, Novavax conducts research and development on preventative and therapeutic vaccines for a variety of infectious diseases, including human papillomavirus.

The consolidated financial statements of Novavax for the three and nine month periods ended September 30, 2002 and 2001 are unaudited. These financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature. These interim results are not necessarily indicative of the results to be expected for the year ending December 31, 2002.

Certain information in footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted pursuant to SEC rules and regulations, although the Company believes the disclosures are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. Actual results could differ from those estimates.

NOVAVAX, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Inventories

Inventories consist of raw materials and finished goods and are priced at the lower of cost or market, using the first-in-first-out method.

Revenue Recognition

The Company recognizes revenue in accordance with the provisions of Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, whereby revenue is not recognized until it is realized or realizable and earned. Revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable and collectibility is reasonably assured. Up-front payments and licensing fees are deferred and recognized as earned over the life of the related agreement. Milestone payments are recognized as revenue upon achievement of contract-specified events and when there are no remaining performance obligations. 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 that have reached their expiration date. Revenues from the sale of scientific prototype vaccines and adjuvants are recorded as the products are shipped.

Revenues earned under research contracts are recognized on the percentage of completion method as described in Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. The extent of progress toward completion is measured on the cost-to-cost method. When the current estimates of total contract revenue and contract cost indicate a loss, a provision for the entire loss on the contract is made.

Net Loss per Share

Basic loss per share is computed by dividing the net loss available to common shareholders (the numerator) by the weighted average number of common shares outstanding (the denominator), during the period. Shares issued during the period and shares reacquired during the period are weighted for the portion of the period that they were outstanding. The computation of diluted loss per share is similar to the computation of basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. Potentially dilutive 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.

NOVAVAX, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Goodwill and Intangible Assets

Under Statement of Financial Accounting Standards (“SFAS”) 142, goodwill impairment is deemed to exist if the net book value of a “reporting unit” (i.e., the level with the consolidated business at which goodwill impairment is measuring) exceeds its estimated fair value. This methodology differs from the Company’s previous policy, as permitted under accounting standards existing at that time, of using discounted and undiscounted future cash flows as a basis to determine if goodwill is recoverable. There was no impact on the carrying value of the Company’s goodwill and intangible assets upon adoption of SFAS 142. The Company does not have any intangible assets, other than goodwill, that are subject to the non-amortization provisions of SFAS 142.

As of September 30, 2002 and December 31, 2001, the Company’s intangible assets and related accumulated amortization consisted of the following (in thousands):


	As of September 30, 2002							As of December 31, 2001

			Accumulated							Accumulated
	Gross		Amortization			Net		Gross		Amortization			Net

Non-compete agreements	$	148	$	(94	)	$	54	$	148	$	(72	)	$	76
Product licenses		3,332		(833	)		2,499		3,332		(476	)		2,856
Patents		2,525		(1,228	)		1,297		2,525		(1,115	)		1,410

Total	$	6,005	$	(2,155	)	$	3,850	$	6,005	$	(1,663	)	$	4,342

The Company recorded amortization expense for the items above of $164,000 and $492,000 during the three and nine months ended September 30, 2002, respectively compared to $164,000 and $492,000 on a pro forma basis during the three and nine months ended September 30, 2001, respectively. Based on the current amount of intangible assets subject to amortization, the estimated amortization expense for each of the succeeding 5 years will be approximately $650,000. As acquisitions and dispositions occur in the future, these amounts may vary.

The 2001 results on a historical basis do not reflect the provisions of SFAS 142. Had the Company adopted SFAS 142 on January 1, 2001, the historical net loss would have been changed to the adjusted amounts indicated below for the three and nine months ended September 30, 2001 (in thousands):


	Three months ended						Nine months ended

				Basic and diluted						Basic and diluted
	Net loss			net loss per share			Net loss			net loss per share

As reported – historical basis	$	(2,513	)	$	(0.11	)	$	(6,553	)	$	(0.29	)
Add: Goodwill Amortization		536			0.02			1,777			0.08

Adjusted	$	(1,977	)	$	(0.09	)	$	(4,776	)	$	(0.21	)

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following discussion may contain statements that are not purely historical. Certain statements contained herein or as may otherwise be incorporated by reference herein constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include but are not limited to statements regarding product sales, future product development and related clinical trials and statements regarding future research and development, including Food and Drug Administration approval. 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; unexpected changes in technologies and technological advances; ability to obtain rights to technology; ability to obtain and enforce patents; ability to commercialize and manufacture products; ability to establish and maintain commercial-scale manufacturing capabilities; ability to enter into future collaboration with industry partners; results of clinical studies; progress 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 contained 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, except as specifically required by law. Accordingly, past results and trends should not be used to anticipate future results or trends.

Overview

Novavax is a fully-integrated specialty pharmaceutical company focused on the research, development and commercialization of products utilizing our proprietary drug delivery and vaccine technologies for large and growing markets, concentrating on the areas of women’s health and infectious diseases.

Our drug delivery technologies involve the use of our patented oil and water emulsions which we believe can be used as vehicles for the transdermal and injectable delivery of a wide variety of drugs and other therapeutic products, including hormones, anti-bacterial and anti-viral products and vaccine adjuvants, which are substances added to vaccines to enhance their effectiveness. We believe that our technologies represent the first time that alcohol soluble hormones, such as estrogen and testosterone, have been encapsulated and delivered through the skin in a lotion formulation. ESTRASORB™, our initial product candidate utilizing these technologies, is an estradiol topical emulsion in a lotion-like formulation being developed for the short term use in the reduction of vasomotor systems, such as hot flushes, in menopausal women. In addition to ESTRASORB, we have several other drugs that utilize this technology: ANDROSORB®, a transdermal testosterone lotion that is in Phase I/II clinical trials; ANDRO-JECT™, a long-acting subcutaneous injectable formulation of testosterone that is in preclinical development; and a transdermal progestin lotion that is also in preclinical development. We also conduct research and development on preventative and therapeutic vaccines for a variety of infectious diseases.

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION

We believe ESTRASORB will be competitively positioned to address the estimated $1.8 billion estrogen replacement therapy market in the United States. In our Phase II and III clinical trials, women using ESTRASORB experienced a statistically significant reduction in the number of hot flashes, the primary endpoint of our study, with many women reporting a total elimination of hot flashes while using the product.

A New Drug Application (“NDA”) for ESTRASORB was submitted to the U.S. Food and Drug Administration (“FDA”) in June 2001 and was accepted for filing in August 2001. In April 2002, we were informed by the Food and Drug Administration that the agency had completed their review of the New Drug Application for ESTRASORB. At that time, the agency did not raise any issues regarding the efficacy or safety of ESTRASORB, but did request additional information with respect to the Chemistry, Manufacturing and Control (“CMC”) section of the filing. We determined that the most advantageous approach to resolving the outstanding CMC questions was to voluntarily withdraw the New Drug Application and resubmit it once all of the responses to the CMC questions have been prepared. On September 9, 2002 we re-submitted the New Drug Application, which was accepted for filing by the FDA on November 8, 2002.

Critical Accounting Policies and Changes to Accounting Policies

We have identified below some of our more significant accounting policies and changes to accounting policies. For further discussion of our accounting policies see Footnote 2 “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements.