NOVAVAX INC - 10-Q Quarterly Report

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

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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)

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


		Page No.

Part I. Financial Information

Item 1	Financial Statements

	Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002		3

	Consolidated Statements of Operations for the three month and nine month periods
	ended September 30, 2003 and 2002		4

	Consolidated Statements of Cash Flows for the nine months
	ended September 30, 2003 and 2002		5

	Notes to Consolidated Financial Statements		6

Item 2	Management’s Discussion and Analysis of Financial
	Condition and Results of Operations		11

Item 3	Quantitative and Qualitative Disclosure about Market Risk		16

Item 4	Controls and Procedures		16

Part II. Other Information

Item 1	Legal Proceedings		17

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		*

Item 6	Exhibits and Reports on Form 8-K		18

Signature			19

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


				September 30,			December 31,
				2003			2002

				(unaudited)
ASSETS
Current assets:
	Cash and cash equivalents			$	6,045		$	3,005
	Accounts receivable, net				2,860			1,882
	Inventory				731			633
	Prepaid expenses and other current assets				611			722

		Total current assets			10,247			6,242
Property and equipment, net					14,275			13,655
Goodwill, net					33,141			33,141
Other intangible assets, net					3,474			3,966
Other long-term assets					426			501

		Total assets		$	61,563		$	57,505

LIABILITIES and STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable			$	2,201		$	2,534
	Accrued expenses				2,572			2,844
	Deferred revenue — current				250			275
	Current portion of capital lease obligations				226			211

			Total current liabilities		5,249			5,864

Convertible notes					40,000			40,000
Deferred revenue — non-current					2,187			2,375
Long-term debt, capital lease obligations and other					1,296			1,193
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; 30,392,360 shares issued and 30,142,300 outstanding at September 30, 2003; and 25,222,110 issued and 24,664,358 outstanding at December 31, 2002				304			252
	Additional paid-in capital				120,457			102,361
	Notes receivable from directors				(1,480	)		(1,480	)
	Accumulated deficit				(101,717	)		(87,527	)
	Treasury stock, 250,060 and 557,752 shares, cost basis, at September 30, 2003 and December 31, 2002, respectively				(4,733	)		(5,533	)

			Total stockholders’ equity		12,831			8,073

			Total liabilities and stockholders’ equity	$	61,563		$	57,505

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,

				2003			2002			2003			2002

							(restated)						(restated)
Revenues
	Product sales			$	3,647		$	1,781		$	6,508		$	10,775
	Contract research and development				560			410			1,017			643
	Milestone and licensing fees				62			137			212			1,088

		Total revenues			4,269			2,328			7,737			12,506

Operating costs and expenses:
	Cost of sales				761			762			1,384			2,828
	Research and development				2,554			3,702			7,713			9,848
	Selling and marketing				2,003			2,713			6,073			10,637
	General and administrative				1,911			1,629			5,561			6,659

			Total operating costs and expenses		7,229			8,806			20,731			29,972

Loss from operations					(2,960	)		(6,478	)		(12,994	)		(17,466	)

Interest expense, net					(401	)		(375	)		(1,196	)		(886	)

Net loss				$	(3,361	)	$	(6,853	)	$	(14,190	)	$	(18,352	)

Basic and diluted net loss per share				$	(.11	)	$	(.28	)	$	(.49	)	$	(.75	)

Basic and diluted weighted average number of common outstanding					30,134,586			24,653,759			29,045,982			24,359,013

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,

		2003			2002

					(restated)
Operating Activities:
	Net loss	$	(14,190	)	$	(18,352	)
Reconciliation of net loss to net cash used by operating activities:
	Amortization		492			492
	Depreciation		382			365
	Provision for bad debt		65			11
	Deferred rent expense		54			—
Changes in operating assets and liabilities:
	Accounts receivable		(1,043	)		3,153
	Inventory		(98	)		(393	)
	Prepaid expenses and other assets		111			(1,348	)
	Accounts payable and accrued expenses		195			417
	Deferred revenue		(213	)		(1,087	)

Net cash used by operating activities			(14,245	)		(16,742	)

Investing Activities:
	Capital expenditures		(1,002	)		(8,766	)

Net cash used by investing activities			(1,002	)		(8,766	)

Financing Activities:
	Proceeds from the issuance of convertible notes		—			10,000
	Net proceeds from equipment loans		217			—
	Deferred financing costs		75			—
	Payment of capital lease obligations		(153	)		—
	Proceeds from private placements of common stock		16,625			—
	Proceeds from the exercise of stock options and warrants		1,523			3,093

Net cash provided by financing activities			18,287			13,093

Net change in cash and cash equivalents			3,040			(12,415	)
Cash and cash equivalents at beginning of period			3,005			20,045

Cash and cash equivalents at end of period		$	6,045		$	7,630

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

Novavax, Inc., a Delaware corporation (“Novavax” or “the Company”), was incorporated in 1987, and is a specialty pharmaceutical 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. The Company’s principal technology platform involves the use of patented oil and water emulsions that we believe can be used as vehicles for the topical delivery of a wide variety of drugs and other therapeutic products, including hormones. Other drug delivery technologies, such as our Novasome® and Sterisome® technologies, are being utilized to develop other products. Novasomes are used as adjuvants to enhance vaccine effectiveness. Sterisomes are being used for, among other things, subcutaneous injections that can deliver long-lasting drug effects. In addition, Novavax conducts research and development on preventative and therapeutic vaccines and proteins for a variety of infectious diseases and immunotherapies.

The consolidated financial statements of Novavax for the three and nine month periods ended September 30, 2003 and 2002 are unaudited. These financial statements reflect all adjustments that, 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, 2003.

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. The Company suggests that you read these consolidated financial statements 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, 2002.

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

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.

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

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. Revenues from product sales are recognized upon shipment, net of allowances for returns, rebates and charge backs. The Company is obligated to accept from customers the return of pharmaceuticals that have reached their expiration date. A large part of our product sales are to distributors who resell the products to their customers. We provide rebates to members of certain buying groups who purchase from our distributors, to distributors that sell to their customers at prices determined under a contract between the customer and us, or to state agencies that administer various programs such as the federal Medicaid and Medicare programs. Rebate amounts are usually based upon the volume of purchases or by reference to a specific price for a product. We estimate the amount of the rebate that will be paid, and record the liability as a reduction of revenue when we record our sale of the products. Settlement of the rebate generally occurs from 3 to 12 months after sale. We regularly analyze the historical rebate trends and make adjustments to recorded reserves for changes in trends and terms of rebate programs.

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 earned under research contracts are generally recognized ratably over the term of the agreement or as milestones are achieved. 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. Revenues from contracts with acceptance terms are recognized when the customer has received and approved the services. During the fourth quarter of 2002, we reassessed the remaining costs, progress and milestones outstanding on four contracts. Based on this assessment we determined that estimated costs to complete those contracts had been underestimated throughout the year. We then reevaluated the estimated costs to complete on all contracts. The effect of this reevaluation was a reduction to revenue for the three-month period ended September 30, 2002 from $2.5 million to $2.3 million and for the nine month period ended September 30, 2002 from $13.3 million to $12.5 million. Additionally, the net loss and net loss per share increased from $6.7 million to $6.9 million and from $0.27 to $0.28 for the three month period ended September 30, 2002, and from $17.6 million to $18.4 million and from $0.72 to $0.75 for the nine month period ended September 30, 2002.

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.

Goodwill principally results from business acquisitions. Assets acquired and liabilities assumed are recorded at their fair values; the excess of the purchase price over the aggregate fair value of identifiable net assets acquired is recorded as goodwill. Other intangible assets are a result of product acquisitions, non-compete arrangements, and internally discovered patents. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to impairment tests annually, or more frequently, should indicators of impairment arise. The Company utilizes a discounted cash flow analysis that includes profitability information, estimated future operating results, trends and other information in assessing whether the value of indefinite-lived intangible assets can be recovered. Under SFAS No. 142, goodwill impairment is deemed to exist if the carrying value of a reporting unit exceeds its estimated fair value. Other intangible assets are amortized on a straight-line basis over their estimated useful lives, ranging from 5 to 15 years. Amortization expense was $164,000 and $492,000, respectively, for both the three months ending September 30, 2003 and 2002, and the nine months ending September 30, 2003 and 2002.

As of September 30, 2003 and December 31, 2002, goodwill and other intangible assets and related accumulated amortization consisted of the following (in thousands):


		September 30, 2003							December 31, 2002

				Accumulated							Accumulated
		Gross		Amortization			Net		Gross		Amortization			Net

Goodwill, net
Goodwill-Fielding acquisition		$	35,590	$	(2,449	)	$	33,141	$	35,590	$	(2,449	)	$	33,141

Other intangible assets, net
Non-compete-Biomedical Services acquisition		$	148	$	(123	)	$	25	$	148	$	(101	)	$	47
AVC-Product acquisition			3,332		(1,309	)		2,023		3,332		(952	)		2,380
Patents			2,525		(1,099	)		1,426		2,525		(986	)		539

	Total other intangible assets, net	$	6,005	$	(2,531	)	$	3,474	$	6,005	$	(2,039	)	$	3,966


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)


	As of

	September 30, 2003		December 31, 2002

	(amounts in thousands)
Raw materials	$	442	$	479
Finished goods		289		154

	$	731	$	633


For Quarter Ended September 30, 2003		Commission File No. 0-26770


þ Yes		o No


þ Yes		o No