e10vk
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2006
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to .
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Commission File
No. 0-26770
NOVAVAX, INC.
(Exact name of Registrant as
specified in its charter)
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Delaware
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22-2816046
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(State or other jurisdiction
of
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(I.R.S. Employer
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incorporation or
organization)
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Identification No.)
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9920 Belward Campus
Drive,
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20850
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Rockville, Maryland
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(Zip Code)
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(Address of principal executive
offices)
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Registrants telephone number, including area code:
(240) 268-2000
Securities registered pursuant to Section 12(b) of the
Act:
NONE
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, Par Value $0.01 per share
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or 15(d) of the
Act. Yes o No þ
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 þ No o
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 Registrants 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. o
Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large Accelerated
Filer o Accelerated
Filer þ Non-Accelerated
filer o
Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of June 30, 2006, the aggregate market value of the
voting and non-voting common equity held by non-affiliates of
the Registrant based on the closing sale price of such stock as
reported by the NASDAQ National Market on such date was
$242,418,088. For purposes of this calculation, shares of common
stock held by directors, officers and stockholders whose
ownership exceeds ten percent of the common stock outstanding at
June 30, 2006 were excluded. Exclusion of such shares held
by any person should not be construed to indicate that the
person possesses the power, direct or indirect, to direct or
cause the direction of the management or policies of the
Registrant, or that the person is controlled by or under common
control with the Registrant.
As of February 28, 2007, there were 61,845,090 shares
of the Registrants Common Stock, par value $.01 per
share, outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Registrants Definitive Proxy Statement to
be filed no later than 120 days after the fiscal year ended
December 31, 2006 in connection with the Registrants
2007 Annual Meeting of Stockholders are incorporated by
reference into Part III of this
Form 10-K.
Table of
Contents
When used in this Annual Report on
Form 10-K,
except where the context otherwise requires, the terms
we, us, our,
Novavax and the Company refer to
Novavax, Inc.
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Table of
Contents
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Index To The Consolidated Financial Statements
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Page No.
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F-2
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Consolidated Financial Statements:
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F-5
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F-6
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F-7
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F-8
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F-9
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PART I
This Annual Report on
Form 10-K
contains forward-looking statements, within the meaning of the
Private Securities Litigation Reform Act that involve risks and
uncertainties. In some cases, forward-looking statements are
identified by words such as believe,
anticipate, intend, plan,
will, may and similar expressions. You
should not place undue reliance on these forward-looking
statements, which speak only as of the date of this report. All
of these forward-looking statements are based on information
available to us at this time, and we assume no obligation to
update any of these statements. Actual results could differ from
those projected in these forward-looking statements as a result
of many factors, including those identified in the section
titled Risk Factors, Managements
Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere. We urge you to review and
consider the various disclosures made by us in this report, and
those detailed from time to time in our filings with the
Securities and Exchange Commission, that attempt to advise you
of the risks and factors that may affect our future results.
Overview
Novavax, Inc., a Delaware corporation (Novavax or
the Company) was incorporated in 1987, and is a
biopharmaceutical company focused on creating differentiated,
value-added vaccines that improve upon current preventive
options for a range of infectious diseases. These vaccines
leverage the Companys virus-like particle
(VLP) platform technology,
Novasome®
adjuvants and unique production technology. The Company also has
a drug delivery platform based on micellar nanoparticles
(MNPs), proprietary oil and water nanoemulsions used
for the topical delivery of drugs. The MNP technology was the
basis for Novavaxs first Food and Drug
Administration approved estrogen replacement
product,
ESTRASORB®.
In 2005, Novavax completed its transition from a specialty
pharmaceutical company that sold and marketed womens
health products to an innovative, biopharmaceutical company
focused on vaccines.
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In October 2005, the Company entered into a License and Supply
Agreement for ESTRASORB with Esprit Pharma, Inc.
(Esprit). Under this agreement, the Company
continues to manufacture ESTRASORB, and Esprit has an exclusive
license to sell ESTRASORB in North America.
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In April 2006, the Company entered into a License and
Development Agreement and a Supply Agreement with Esprit to
co-develop, supply and commercialize the Companys
MNP-based testosterone product candidate for the treatment of
female hypoactive sexual desire disorder. Esprit was granted
exclusive rights to market this product in North America.
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The Company is now firmly focused on its VLP vaccine technology
platform. VLPs imitate the three-dimensional structures of
viruses but are composed of recombinant proteins believed to be
incapable of causing infection and disease. The Company is
initially focused on the influenza virus but is committed to
expanding its product pipeline to numerous other infectious
diseases.
Novavax has developed vaccines that target the H5N1, H9N2 and
other subtypes of avian influenza with pandemic potential as
well as vaccines that protect against seasonal influenza. In
2006, Novavax generated robust pre-clinical data that
demonstrates its pandemic influenza vaccine can generate a
protective immune response in relevant animal models, including
the ferret. Data also show that a single VLP vaccine can provide
cross-protection against a broad variety of influenza virus
subtypes. The Company has begun toxicology studies required
prior to the initiation of human clinical trials with its
pandemic influenza vaccine and anticipates that human clinical
trials could begin by mid-2007. The Company plans to conduct
additional pre-clinical studies for its seasonal influenza VLP
vaccine during 2007 with the goal of advancing to the clinic in
the first half of 2008.
In addition, the Company has developed a unique production
process for making its VLP-based vaccines using portable,
disposable manufacturing technology that permits the development
of the vaccine to be readily positioned where and when it is
needed. This proprietary production technology uses insect cells
rather than chicken eggs or mammalian cells, which can reduce
lead time from many months to a matter of weeks. Because the
equipment is
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both portable and disposable, it can be deployed quickly where
needed and is capable of rapid
scale-up to
meet demand.
In summary, Novavax has a unique blend of capabilities including
formulation and vaccine technologies, development
infrastructure, including clinical; portable, disposable and
scalable manufacturing; and commercial production facilities.
Our strategy is to license our differentiated vaccine candidates
at various stages of development to realize their value. The
portfolio of our technologies and capabilities is summarized in
the following table.
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Technology/Capability
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Description
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Product/Examples
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Recombinant vaccines
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Virus-like particle vaccines
produced in cultured insect cells
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Pandemic avian
influenza & seasonal human influenza, HIV/AIDS, SARS
and other infectious diseases
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Novasomes®
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Non-phospholipid vesicles that can
be used as adjuvants to enhance vaccine effectiveness; also
serve as a vehicle for topical or oral drug delivery of certain
molecules
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Adjuvants for influenza and HIV-1
and other vaccines
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Micellar Nanoparticles
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Oil and water nanoemulsion that
allows topical systemic delivery of certain molecules
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ESTRASORB®
and
ANDROSORBtm
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Recombinant tolerogens
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Tolerization for prevention of
inflammation leading to stroke and other diseases
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E-Selectin tolerogen
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Facilities
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Manufacturing using current Good
Manufacturing Practices (cGMP)
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Clinical manufacturing for
biologics, and clinical and commercial manufacturing for
pharmaceuticals
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Over the past twelve months, we have taken steps to strengthen
our balance sheet and significantly improve our capital
resources. In the first half of 2006, we completed two equity
transactions through the sale of our common stock, with gross
proceeds totaling $58.0 million. Also during the first half
of 2006, holders of $7 million principal amount of our
4.75% senior convertible notes due July 19, 2009
exercised their optional right to convert their notes plus
accrued interest into 1,294,564 shares of Novavax common
stock, at the per share conversion price of $5.46. The licensing
arrangement with Esprit for ESTRASORB added an additional
$2.5 million of cash in October 2006. We believe the cash
raised from these transactions provides us a strong foundation
from which to execute our strategic plan. (see Item 7.
Management Discussion and Analysis of Financial Condition and
Results of Operations, Summary of Significant
Transactions for further details).
Our
Strategy
The key elements of our business strategy are as follows:
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Leveraging our technological leadership in influenza
vaccines.
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Our recombinant VLP technology is well suited to create a
differentiated vaccine against pandemic and seasonal influenza.
This technology addresses several of the technical and
logistical issues associated with a potential pandemic. It
allows rapid creation of new vaccines that have high fidelity to
emerging strains of influenza and the manufacturing process can
be rapidly commissioned and scaled up. In addition, the
technology provides the potential to differentiate a seasonal
flu vaccine.
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Maximizing the commercial impact of ESTRASORB and continuing
to expand our drug delivery and formulation technologies.
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After licensing the North American marketing rights for
ESTRASORB and ANDROSORB to Esprit, we are looking to license the
rights to market this product in other territories. In addition,
we continue our efforts to improve the packaging of ESTRASORB to
improve our margins on the product.
Our proven MNP technology has resulted in several product
candidates that can be licensed to pharmaceutical companies. We
have been able to demonstrate the benefits of our formulation
for several compounds and are actively seeking to license these
product candidates.
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Leveraging our formulation science to develop adjuvants for
better vaccines.
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Adjuvants improve immunogenicity of vaccines and they are
becoming central for competitive advantage of new vaccines. Our
inherent strengths in formulations are well suited to develop
new adjuvants, such as Novasomes, that can lead to
best-in-class
vaccines. These adjuvants can also be products in themselves and
can be licensed to other companies to be used with their
antigens.
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Developing new technologies, evaluating strategic alliances
and acquisitions and fortifying our intellectual property.
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We continue to improve upon our current portfolio of
technologies in formulations and vaccines. We believe these
improvements will result in new intellectual property, making us
more competitive.
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Leveraging collaborations and partnerships to advance
products and technologies.
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We are engaged in seeking collaborations and partnerships to
develop and commercialize our products. These include
partnerships with governmental and academic organizations as
well as other industry partners.
Research
and Development Activities
Biologics
We develop and produce biopharmaceutical proteins for use as
vaccines against pandemic and seasonal influenza and other
infectious diseases, and as tolerogens to prevent inflammatory
responses in the initiation and progression of stroke and other
illnesses. Our lead vaccine technology platform is based on
virus-like particles (VLPs), which are
self-assembling protein structures that resemble viruses. These
are non-infectious particles that for many viral diseases have
been shown in animal and human studies to make effective
vaccines. VLPs closely mimic natural virus particles with
repeating protein structures that can elicit broad and strong
antibody and cellular immune responses, but lack the genetic
material required for replication. We have several ongoing
development programs involving VLP vaccines that address urgent
medical needs, including pandemic and seasonal influenza,
HIV-1/AIDS and other infectious diseases. We collaborate with
governmental, commercial and leading academic institutions in
development, safety testing and clinical trials.
Influenza VLP Vaccine. According to the Center
for Disease Control, every year between 5% and 20% of the
U.S. population is infected by the influenza virus. While
the severity of illness varies, influenza causes an estimated
36,000 deaths in the U.S. and 500,000 worldwide annually. These
seasonal outbreaks have in recent years been caused by subtypes
of influenza virus designated as H3N2 and H1N1. More recently,
unexpected subtypes of avian origin have resulted in severe
morbidity and mortality in a limited number of people. Highly
pathogenic H5N1 influenza viruses are now widespread in poultry
in Asia and have spread to some European countries, where they
have been linked to human infection. Genetic reassortment
between avian and human influenza subtypes, or genetic
mutations, may lead to the emergence of a virus capable of
causing worldwide illness, a pandemic.
All currently available influenza vaccines are produced by
growing virus in chicken eggs, from which the virus is extracted
and further processed. This 50- year-old production method
requires six to nine month lead times and significant investment
in fixed production facilities, which, once commissioned, cannot
have their capacity easily increased. The vaccine shortage
during the 2004 flu season highlighted the limitations of
current production methods and the need for increased vaccine
manufacturing capacity. It also heightened concerns regarding
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manufacturers capacity to respond to a pandemic, when the
number of vaccine doses required will be higher than the number
required for seasonal flu vaccines and lead times will be even
shorter.
Novavax is applying its expertise in producing VLPs to develop
vaccines for both seasonal and pandemic strains of influenza. We
produce VLPs using a baculovirus expression system in insect
cells with disposable, low-cost equipment that can be readily
dispersed both nationally and internationally. By not requiring
a fixed plant, production capacity can be increased quickly to
whatever extent is required. Lead times for production are
expected to be measured in weeks, not months.
Proof-of-concept
of the VLP approach in influenza has been obtained in various
pre-clinical studies. In a recent study, co-expression of three
genes (hemagglutinin, neuraminidase and matrix derived from the
H9N2 influenza in insect cells) resulted in the self-assembly of
influenza H9N2 VLPs. The H9N2 VLPs elicited protective immune
responses in mice and ferrets. In view of these encouraging
preclinical data, we have accelerated and prioritized the
development of our VLP influenza vaccines. We have completed
comprehensive pre-clinical studies in 2006 with the objective of
initiating human clinical studies with influenza VLP vaccines in
2007.
HIV-1/AIDS VLP Vaccine. The human toll of AIDS
is staggering and now kills more people worldwide than any other
infectious disease. Nearly 40 million people are infected
with HIV-1, including four to six million people who were newly
infected in 2005, according to the World Health Organization
(WHO). Under a five-year National Institutes of
Health (NIH) grant, which was awarded in 2003, we
are working in collaboration with leading scientists from the
University of Alabama Birmingham, Emory University
and Harvard Medical School in the development of a
second-generation AIDS vaccine. In January 2007, the Company
announced that it has significantly enhanced both the quality
and purity of its VLP vaccine for HIV/AIDS. This second
generation AIDS vaccine is based on the HIV-1 viral
envelope with a natural three-dimensional structure to trigger a
protective immune response. Preclinical studies are under way
using the improved HIV-1 vaccine, and planning has begun to
advance this new vaccine to human clinical trials in
collaboration with the U.S. government. Early versions of
Novavaxs VLP vaccine were successful in triggering immune
responses in preclinical studies. Novavax scientists and its
collaborators discovered a way to optimize the expression of the
HIV-1 envelope, which is a principle target for immunity in
humans.
SARS VLP Vaccine. In 2005, the NIH awarded us
a $1.1 million, three-year grant to develop a vaccine to
prevent Severe Acute Respiratory Syndrome (SARS).
SARS is a severe form of pneumonia, accompanied by a fever and
caused by a coronavirus. WHO has reported over 8,000 SARS cases
with nearly 800 deaths since the first case of SARS was reported
in February 2003. Our SARS VLP vaccine is also based on the
production of coronavirus-like VLPs in insect cells.
Hepatitis E Vaccine. Hepatitis E is the most
prevalent form of acute hepatitis in the developing world.
Hepatitis E is transmitted through contaminated water and is
indistinguishable from the disease caused by the Hepatitis A
virus. The disease is rarely fatal, although the risk of death
and the intensity of the illness increase with age, with
pregnant women being at a particularly high risk.
In collaboration with the National Institute of Allergy and
Infectious Disease, Walter Reed Army Institute for Research, and
GlaxoSmithKline Pharmaceuticals, we have developed vaccines to
prevent hepatitis caused by the Hepatitis E Virus. The
recombinant Hepatitis E vaccine produced by us is in clinical
trials conducted by GlaxoSmithKline. As reported in the New
England Journal of Medicine (March 1, 2007), this
recombinant Hepatitis E vaccine was evaluated for safety and
efficacy in a phase II, randomized, double-blind,
placebo-controlled trial in 2,000 healthy adults susceptible to
Hepatitis E virus infection and found to be effective in the
prevention of Hepatitis E. GlaxoSmithKline has commercial rights
and we will share royalties with the NIH, if marketed.
E-Selectin
Tolerogen. In collaboration with the National
Institute of Neurological Disorders and Stroke we have been
developing
E-selectin-based
molecularly-derived products for the prevention of strokes. In
September 2002, a published report in the professional journal
Stroke provided experimental evidence on prevention of stroke in
stroke-prone rats. These results provided supportive evidence
that
E-selectin
tolerization may help in the prevention of strokes and other
illness where inflammatory and immune responses are involved in
the initiation and progression of disease. We were awarded a
government contract for the pre-clinical development and
manufacture of
E-selectin
for Phase I clinical trials to be run by the National
Institute of Neurological Disease and Stroke and the NIH.
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Novasome Adjuvant Program. Adjuvants are
agents that enhance the immune response generated by antigens.
As a consequence, smaller amounts of antigen can elicit the
desired immune response, referred to as an antigen sparing
effect. In addition, adjuvants may elicit responses from
multiple components of the immune system leading to an improved
level of immunity and protection. Novasomes, our proprietary
adjuvants, are currently being evaluated in both the influenza
and the HIV-1/AIDS VLP vaccine programs. Preclinical data have
demonstrated an encouraging degree of improvement in immune
responses with a variety of antigens. If warranted by future
studies, Novasomes will be included in human studies of our VLP
vaccines.
Formulation
Science
The formulations group is committed to the creation and
development of innovative and effective technologies for
enhancing the performance of Active Pharmaceutical Ingredients
(APIs) that are approved by the Food and Drug
Administration (FDA). Use of APIs simplifies
clinical testing and FDA approval because of the safety and
efficacy records of the APIs. The key drivers for these research
programs are those therapeutic segments and clinical conditions
that cannot be satisfied by the conventional dosage forms.
We have two drug delivery platform technologies:
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Micellar Nanoparticles: This is a
nanotechnology-based, lotion-like formulation that has achieved
a significant break through in transdermal therapeutics. Upon
topical application, an MNP formulation deposits the API in both
a readily available solution form as well as in a long-acting
particulate depot form onto the skin. The inactive ingredients
used in the formulation not only help in forming an occlusive
barrier that acts as a pseudo-patch, but also drives the drug
into the systemic circulation. Unlike conventional passive
transdermal delivery systems such as patches, gels, and creams
with chemical permeation enhancers, the MNPs have been shown to
accommodate and deliver a wide spectrum of drugs having diverse
lipophilicities (i.e., affinities for a hydrophobic or oil
phase), molecular weights, melting points, and dosages.
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Novasomes: These are
non-phospholipid-based, proprietary vesicular structures that
can be either used for delivery of drugs or as vaccine
adjuvants. Typically, Novasomes can be utilized for
encapsulation of both hydrophilic and lipophilic drugs. The
formulation design enhances deposition and retention of the
active ingredients within the superficial skin layers
(epidermis) but limits their passage into the systemic
circulation. Novasomes, when formulated as vaccine adjuvants for
co-administration with a vaccine preparation, have demonstrated
a significantly improved immunogenicity profile.
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The focus of our drug delivery product development is
transdermal delivery both from a traditional and a
non-traditional perspective. Traditionally, this route of
administration is known to offer therapeutic benefits like
avoiding hepatic first pass metabolism, overcoming stability and
toxicity issues related to oral administration, and has been
viewed as a non-invasive pathway to achieve drug transport into
the systemic circulation through topical application. It is
generally accepted that the best drug candidates for transdermal
delivery are non-ionic, lipophilic and potent and have a low
molecular weight and a low melting point. Our first set of
product candidates falls in this category, which includes
testosterone, nicotine, fentanyl, clonidine, loratadine and
oxybutynin.
ESTRASORB, our first internally developed product, is a topical
estradiol replacement lotion that helps validate the MNP-based
transdermal technology. ESTRASORB is the first topical emulsion
for estrogen therapy approved by the FDA for the treatment of
moderate to severe vasomotor symptoms (hot flashes) associated
with menopause. This product is unique in that it is the first
commercial nanoparticle-based transdermal pharmaceutical
product. ESTRASORB has undergone the complete product
development-to-commercialization
cycle. In October 2005, the Company licensed the marketing
rights for ESTRASORB to Esprit. This licensing agreement has
provided a cash consideration of $12.5 million within the
first year as well as sales-based milestone payments and a
double digit royalty on all sales. We retained rights to
manufacture the product for Esprit at set prices and retained
marketing rights for all territories outside of North America.
However, the cost at which we manufacture ESTRASORB currently
exceeds the fixed price at which we sell the product to Esprit.
Our MNP testosterone product candidate for the treatment of
female hypoactive sexual disorder is the second product in our
pipeline. In April 2006, we entered into a second License and
Supply Agreement with Esprit to
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co-develop,
supply and commercialize this MNP testosterone product
candidate. Under the terms of the License Agreement, Esprit was
granted exclusive rights to this MNP testosterone product
candidate in North America. We will receive a royalty on all net
sales of the product as well as milestone payments on specific
pre-determined clinical and regulatory milestones. Esprit will
be responsible for all development costs and will lead all
clinical programs. Under the term of the Supply Agreement, we
will be responsible for manufacturing the product.
The MNP platform addresses several issues related to product
development:
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Ability to formulate APIs with a wider range of chemical
characteristics compared to traditional transdermal drug
delivery technologies.
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Rapid and reliable product development, optimization, and
screening.
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More simple, quick, and cost-effective regulatory approval than
the approval process for a New Chemical Entity.
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Research
and Development Funding
Total externally contracted research and development costs were
$1.9 million in 2006, $1.8 million in 2005 and
$1.7 million in 2004. Total internally-sponsored research
and development costs were $9.8 million in 2006,
$3.3 million in 2005 and $5.6 million in 2004. Our
manufacturing
start-up
costs related to preparing our manufacturing facility for
commercial production of ESTRASORB were included in research and
development until April 2004, at which time the manufacturing
costs have been included in cost of sales and inventory. Total
manufacturing
start-up
costs related to ESTRASORB included in research and development
were $1.7 million in 2004. Further development costs of
$0.2 million for ESTRASORB were included in 2005 internally
sponsored research and development costs.
Competition
Technologies
The biopharmaceutical industry is intensely competitive and is
characterized by rapid technological progress. We compete in two
primary technology areas vaccines and transdermal
pharmaceutical delivery.
We compete in a competitive and capital intensive vaccine arena.
Our technology is based upon utilizing the baculovirus
expression system in insect cells to make VLPs. We believe this
system offers many advantages when compared to other
technologies and is uniquely suited for developing pandemic and
seasonal influenza vaccines as well as other infectious
diseases. The table below provides a list of key competitors and
corresponding influenza vaccine technologies.
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Company
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Competing Technology Description
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Sanofi Pasteur, Inc.
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Inactivated sub-unit
egg based
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Medimmune Vaccines, Inc.
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Nasal, live attenuated
cell based
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GlaxoSmithKline Biologicals
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Inactivated egg based
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Novartis, Inc.
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Inactivated sub-unit
egg based
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Merck & Co., Inc.
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Novel vaccines
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The transdermal drug delivery arena is highly competitive with a
broad array of passive and active transdermal drug delivery
technologies. Our technologies include MNPs and Novasomes. The
MNP technology which is the basis for our FDA- approved product
ESTRASORB competes with a number of companies and technologies.
The following table highlights several competitors and their
corresponding technologies.
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Company
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Competing Technology Description
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Noven Pharmaceuticals
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Passive transdermal patches
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Antares Pharma, Inc.
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Passive topical gels
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Acrux Limited
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Passive metered dose transdermal
spray
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Solvay Group
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Passive topical gels
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Alza Corporation
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Active transdermal
micro projection enhanced permeation, electro transport
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Transpharma Medical Ltd.
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Active transdermal
radio-frequency enhanced permeation
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Altea Therapeutics Corporation
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Active transdermal
thermally enhanced permeation
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Hormone
Therapy Products
Through ESTRASORB and our MNP testosterone product candidate, we
continue to compete with specialty biopharmaceutical firms and
large pharmaceutical companies in the U. S., Europe and
elsewhere that are engaged in the discovery, development and
marketing of hormone therapies, and other products that do or
could compete with our currently marketed product and product
candidates. These companies, as well as academic institutions,
governmental agencies and private research organizations, also
compete with us in recruiting and retaining highly qualified
scientific personnel and consultants.
In 2005, we licensed ESTRASORB to Esprit. The estrogen therapy
market is highly competitive, well-established and includes many
products marketed by major pharmaceutical companies. The oral
segment, which accounts for over 75% of the estrogen therapy
market, is dominated by Wyeths
Premarin®,
an oral estrogen tablet. Wyeth commits significant resources to
promoting its portfolio of estrogen products and has a dominant
presence with healthcare professionals that utilize oral
estrogen therapy products. Further, we compete with Wyeth and
numerous other companies marketing oral products, including
manufacturers of generic 17 -estradiol. Gynodiol, our marketed
oral estrogen therapy product also competes in the crowded,
competitive oral estrogen therapy market. Transdermal estrogen
therapy products (patches) currently account for approximately
15% of the estrogen therapy market. Patch products are well
accepted and many, such as Vivelle
DOT®,
have been marketed for several years. Solvay Pharmaceuticals, a
large international pharmaceutical company, recently introduced
an ethanol-based gel product, Estrogel that is directly
competing with ESTRASORB. In addition to the currently approved
and marketed products, several estrogen therapy products are in
development.
New
Products
In general, competition among pharmaceutical products is based
in part on product efficacy, safety, reliability, availability,
price and patent position. An important factor is the relative
timing of the market introduction of our products and our
competitors products. Accordingly, the speed with which we
can develop products, complete the clinical trials and approval
processes and supply commercial quantities of the products to
the market is an important competitive factor. Our competitive
position also depends upon our ability to attract and retain
qualified personnel, obtain patent protection or otherwise
develop proprietary products or processes, and secure sufficient
capital resources for the often substantial period between
technological conception and commercial sale.
Patents
and Proprietary Rights
We generally seek patent protection for our technology and
product candidates in the U.S. and abroad. We have submitted
patent applications that are pending in the U.S. and other
countries. The patent position of biotechnology
7
firms generally is highly uncertain and involves complex legal
and factual questions. Our success will depend, in part, on
whether we can:
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Obtain patents to protect our own technologies and products;
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Obtain licenses to use the technologies of third parties, which
may be protected by patents;
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Protect our trade secrets and know-how; and
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Operate without infringing the intellectual property and
proprietary rights of others.
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Patent rights; licenses. Our licensors and we
have patents and continue to seek patent protection for
technologies that relate to our product candidates, as well as
technologies that may prove useful for future product
candidates. We currently have over 50 U.S. patents and
corresponding foreign patents and patent applications relating
to vaccines, biologics, and drug delivery systems and
applications for various biological and chemical uses.
We have U.S. patent applications pending in both the
U.S. and worldwide covering the composition, manufacture
and use of our organized lipid structures and related
technologies. A current U.S. patent issued in 1997 covers
our MNP technology and methods of their production. In addition,
the Company continues to build upon its technology portfolio and
file appropriate intellectual property disclosures and patent
applications.
Consistent with statutory guidelines issued under the Federal
Technology Transfer Act of 1986 designed to encourage the
dissemination of science and technology innovation and provide
sharing of technology that has commercial potential, our
collaborative research efforts with the U.S. government and
with other private entities receiving federal funding provide
that developments and results must be freely published, that
information or materials supplied by us will not be treated as
confidential and that we will be required to negotiate a license
to any such developments and results in order to commercialize
products. There can be no assurance that we 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 competitors on an exclusive or nonexclusive basis.
Trade Secrets. To a more limited extent, we
rely on trade secret protection and confidentiality agreements
to protect our interests. It is our policy to require employees,
consultants, contractors, manufacturers, collaborators, and
other advisors to execute confidentiality agreements upon the
commencement of employment, consulting or collaborative
relationships with us. We also require signed confidentiality
agreements from any entity that is to receive confidential
information. With respect to employees, consultants and
contractors, the agreements generally provide that all
inventions made by the individual while rendering services to us
shall be assigned to us as our property.
Government
Regulations
The development, production and marketing of pharmaceutical and
biological products developed by Novavax or our collaborators is
subject to regulation for safety, efficacy and quality by
numerous governmental authorities in the U.S. and other
countries. In the U. S., the development, manufacturing and
marketing of human pharmaceuticals and vaccines are subject to
extensive regulation under the federal Food, Drug, and Cosmetic
Act, and biological products are subject to regulation both
under provisions of that Act and under the Public Health Service
Act. The FDA assesses the safety and efficacy of products and
regulates, among other things, the testing, manufacture,
labeling, storage, record keeping, and advertising and
promotion. The process of obtaining FDA approval for a new
product is costly and time-consuming.
Before applying for FDA approval to market any new drug product
candidates, we must first submit an Investigational New Drug
application (an IND) that explains to the FDA the
results of pre-clinical testing conducted in laboratory animals
and what we propose to do for human testing. At this stage, the
FDA decides whether it is reasonably safe to move forward with
testing the drug on humans. We must then conduct Phase I
studies and larger-scale Phase II and III human clinical
trials that demonstrate the safety and efficacy of our products
to the satisfaction of the FDA. Once these trials are complete,
a New Drug Application (an NDA) can be filed with
the FDA requesting approval of the drug marketing.
8
Vaccine clinical development follows the same general pathway as
for drugs and other biologics. A sponsor who wishes to begin
clinical trials with a vaccine must submit an IND describing the
vaccine, its method of manufacture and quality control tests for
release. Pre-marketing (pre-licensure) vaccine clinical trials
are typically done in three phases. Initial human studies,
referred to as Phase I, are safety and immunogenicity
studies performed in a small number of closely monitored
subjects. Phase II studies are dose-ranging studies and may
enroll hundreds or thousands of subjects. Finally,
Phase III trials typically enroll thousands of individuals
and provide the critical documentation of effectiveness and
important additional safety data required for licensing.
If successful, the completion of all three phases of clinical
development can be followed by the submission of a Biologics
License Application (a BLA). Also during this stage,
the proposed manufacturing facility undergoes a pre-approval
inspection during which production of the vaccine as it is in
progress is examined in detail. Vaccine approval also requires
the provision of adequate product labeling to allow health care
providers to understand the vaccines proper use, including
its potential benefits and risks, to communicate with patients
and parents, and to safely deliver the vaccine to the public.
Until a vaccine is given to the general population, all
potential adverse events cannot be anticipated. Thus, many
vaccines undergo Phase IV studies after a BLA has been
approved and the vaccine is licensed and on the market.
In addition to obtaining FDA approval for each product, each
domestic manufacturing establishment must be registered with the
FDA, is subject to FDA inspection and must comply with current
Good Manufacturing Practices (cGMP) regulations. To
supply products for use either in the U.S. or outside the
U.S., including clinical trials, U.S. and non
U.S. manufacturing establishments, including third-party
facilities, must comply with cGMP regulations and are subject to
periodic inspection by the corresponding regulatory agencies in
their home country under reciprocal agreements with the FDA
and/or by
the FDA.
Preclinical studies may take several years to complete and there
is no guarantee that the FDA will permit an IND based on those
studies to become effective and the product to advance to
clinical testing. Clinical trials may take several years to
complete. After the completion of the required phases of
clinical trials, if the data indicate that the drug or biologic
product is safe and effective, a BLA or NDA (depending on
whether the product is a biologic or pharmaceutical product) is
filed with the FDA to approve the marketing and commercial
shipment of the drug. This process takes substantial time and
effort and the FDA may not accept the BLA or NDA for filing,
and, even if filed, the FDA might not grant approval. FDA
approval of a BLA or NDA may take up to two years and may take
longer if substantial questions about the filing arise. The FDA
may require post-marketing testing and surveillance to monitor
the safety of the applicable products.
In addition to regulatory approvals that must be obtained in the
U.S. an investigational product is also subject to
regulatory approval in other countries in which it is intended
to be marketed. No such product can be marketed in a country
until the regulatory authorities of that country have approved
an appropriate license application. FDA approval does not assure
approval by other regulatory authorities. In addition, in many
countries, the government is involved in the pricing of the
product. In such cases, the pricing review period often begins
after market approval is granted.
We are also subject 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 federal, state or local
regulations. These and other laws govern our use, handling and
disposal of various biological and chemical substances used in,
and wastes generated by, our operations. Our research and
development involves the controlled use of hazardous materials,
chemicals and viruses. Although we believe that our 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, we could be held liable for any damages that
result, and any such liability could exceed our resources.
Additionally, for formulations containing controlled substances,
we are subject to Drug Enforcement Act (DEA)
regulations.
There have been a number of federal and state proposals during
the last few years to subject the pricing of pharmaceutical and
biological products to government control and to make other
changes to the medical care system of the U.S. It is
uncertain what legislative proposals will be adopted or what
actions federal, state or private payors for medical goods and
services may take in response to any medical reform proposals or
legislation. We
9
cannot predict the effect medical or health care reforms may
have on our business, and no assurance can be given that any
such reforms will not have a material adverse effect.
Manufacturing
We have a 24,000 square foot manufacturing facility
situated within a Cardinal Health, Inc. facility in
Philadelphia, Pennsylvania. It is staffed by our employees and
operates under our quality system. ESTRASORB, our first
FDA-approved commercial product, is being manufactured at this
facility. There have been no adverse 483 observations from
FDA inspections associated with the production of ESTRASORB.
For our vaccine business, we have a research and development
facility in Rockville, Maryland and have established
laboratories and staff to support the non-GMP production and
process development of more advanced manufacturing processes and
product characterization method for our vaccine candidates. We
have completed renovations of cGMP suites at this facility which
will incorporate disposable cell culture equipment obtained from
Wave Biotech to support the manufacturing requirements for early
stage clinical trial materials for our pandemic and seasonal
influenza vaccine candidates and other biologic products.
We intend to continue expanding our own product development and
manufacturing capability while utilizing third-party contractors
where we lack sufficient internal capability. Any plans to
expand our internal manufacturing capabilities at our Rockville,
Maryland facilities, including the facilities necessary to
manufacture, test and package an adequate supply of finished
products in order to meet our long term clinical needs, will
require significant resources and will be subject to ongoing
government approval and oversight.
We have the quality infrastructure to support release testing
and stability evaluation of cGMP materials. We also have the
regulatory support to ensure compliance with FDA and other
regulatory authorities.
Sources
of Supply
Most of the raw materials and other supplies required in our
business are generally available from various suppliers in
quantities adequate to meet our needs. In some cases, we
currently have only one supplier for certain of our
manufacturing components. We have plans in place to develop
multiple suppliers for all critical supplies before the time we
would put any of our product candidates into commercial
production.
Marketing
and Sales
We continue to explore opportunities for corporate alliances and
partners to help develop and ultimately commercialize and market
our product candidates. Our strategy is to enter into
collaborative arrangements with pharmaceutical and other
companies for some or all aspects of product development,
manufacturing, marketing and sales of our products that will
require broad marketing capabilities and overseas marketing.
These collaborators are generally expected to be responsible for
funding or reimbursing all or a portion of the development
costs, including the costs of later stage clinical testing
necessary to obtain regulatory clearances and for commercial
scale manufacturing, in exchange for rights to market specific
products in particular geographic territories.
Employees
As of February 28, 2007, we had 56 full-time employees
and 4 part-time employees for a total of 60, 15 of whom
hold M.D. or Ph.D. degrees and 7 of whom hold other advanced
degrees. Of our total workforce, 48 are engaged primarily in
research, development and manufacturing activities and 12 are
engaged primarily in business development, finance and
accounting and administrative functions. None of our employees
are represented by a labor union or covered by a collective
bargaining agreement, and we consider our employee relations to
be good.
Availability
of Information
Novavax was incorporated in 1987 under the laws of the State of
Delaware. Our principal executive offices are located at 9920
Belward Campus Drive, Rockville, Maryland, 20850. Our telephone
number is
(240) 268-2000
and our Internet address is www.novavax.com. The contents
of our website are not part of this Annual Report on
Form 10-K.
10
We make available, free of charge and through our website, our
Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K,
and any amendments to any such reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended, as soon as reasonably
practicable after filed with or furnished to the Securities and
Exchange Commission.
You should carefully consider the following risk factors in
evaluating our business. There are a number of risk factors that
could cause our actual results to differ materially from those
that are indicated by forward-looking statements. Some of the
risks described relate principally to our business and the
industry in which we operate. Others relate principally to the
securities market and ownership of our common stock. The risks
and uncertainties described below are not the only ones facing
us. Additional risks and uncertainties that we are unaware of,
or that we currently deem immaterial, also may become important
factors that affect us. If any of the following risks occur, our
business, financial condition or results of operations could be
materially and adversely affected. You should also consider the
other information included in this Annual Report on
Form 10-K
for the fiscal year ended December 31, 2006.
RISKS
RELATED TO OUR BUSINESS
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, 2006 was
$165.0 million. Our net revenues for the last three fiscal
years were $4.7 million in 2006, $7.4 million in 2005
and $8.3 million in 2004. We have received a 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 fiscal years were $23.1 million in 2006,
$11.2 million in 2005 and $25.9 million in 2004.
Our historical losses have resulted from research and
development expenses for our vaccine and drug delivery product
candidates and sales and marketing expenses for ESTRASORB,
protection of our intellectual property and other general
operating expenses. Our losses increased due to the launch of
ESTRASORB as we expanded our manufacturing capacity and sales
and marketing capabilities. More recently, our losses have
increased, and will continue to increase, as a result of higher
research and development efforts to support the development of
our pandemic and seasonal influenza vaccines.
We expect to continue to incur significant operating expenses
and anticipate that our expenses and losses will increase in the
foreseeable future as we seek to:
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initiate Phase I/II clinical trials for our pandemic and
seasonal flu vaccines;
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initiate additional preclinical studies for other product
candidates using our VLP vaccine technology platform;
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expand our manufacturing capacity, which will require that we
build-out a portion of our research and development space as a
Food and Drug Administration, or FDA, compliant and validated
product manufacturing facility;
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relocate some of our business operations to a newly leased
facility;
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maintain, expand and protect our intellectual property portfolio;
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hire additional clinical, quality control, scientific and
management personnel; and
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add operations, financial, accounting, facilities engineering
and information systems personnel, consistent with expanding our
operations.
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As a result, we expect our cumulative operating loss to increase
until such time, if ever, product sales, licensing fees,
royalties, milestones, contract research and other sources
generate sufficient revenue to fund our continuing
11
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.
We
have repositioned ourselves from a specialty pharmaceutical
company and face all the risks inherent in the implementation of
a new business strategy.
In conjunction with the sale of our prenatal and related product
lines coupled with the grant of an exclusive North American
license to Esprit Pharma, Inc. to our lead product ESTRASORB
during the second half of 2005, we have changed the focus of the
Company from the development and commercialization of specialty
pharmaceutical products to the research and development of new
products using our proprietary drug delivery and biological
platforms. We cannot predict whether we will be successful in
implementing our new business strategy.
We intend to focus our research and development activities on
areas in which we have particular strengths and on technologies
that appear promising. These technologies often are on the
cutting edge of modern science. As a result, the outcome of any
research or development program is highly uncertain. Only a
small fraction of these programs ultimately result in commercial
products or even product candidates and a number of events could
delay our development efforts and negatively impact our ability
to obtain regulatory approval for, and to market and sell, a
product candidate. Product candidates that initially appear
promising often fail to yield successful products. In many
cases, preclinical or clinical studies will show that a product
candidate is not efficacious or that it raises safety concerns
or has other side effects that outweigh their intended benefit.
Success in preclinical or early clinical trials may not
translate into success in large-scale clinical trials. Further,
success in clinical trials will likely lead to increased
investment, adversely affecting short-term profitability, to
bring such products to market. Even after a product is approved
and launched, general usage or post-marketing studies may
identify safety or other previously unknown problems with the
product, which may result in regulatory approvals being
suspended, limited to narrow indications or revoked, or which
may otherwise prevent successful commercialization.
We
have limited financial resources and we are not certain that we
will be able to maintain our operations or to fund the
development of future products.
We do not expect to generate revenues from product sales,
licensing fees, royalties, milestones, contract research or
other sources in an amount sufficient to fund our operations,
and we will therefore use our cash resources and expect to
require additional funds to maintain our operations, continue
our research and development programs, commence future
preclinical studies and clinical trials, seek regulatory
approvals and manufacture and market our products. We will seek
such additional funds through public or private equity or debt
financings, collaborative arrangements and other sources. We
cannot be certain that adequate additional funding will be
available to us on acceptable terms, if at all. If we cannot
raise the additional funds required for our anticipated
operations, we may be required to delay significantly, reduce
the scope of or eliminate one or more of our research or
development programs, downsize our general and administrative
infrastructure, or seek alternative measures to avoid
insolvency, including arrangements with collaborative partners
or others that may require us to relinquish rights to certain of
our technologies, product candidates or products. If we raise
additional funds through future offerings of shares of our
common stock or other securities, such offerings would cause
dilution of existing stockholders percentage ownership in
the Company. These future offerings also could have a material
and adverse effect on the price of common stock.
Many
of our competitors have significantly greater resources and
experience, which may negatively impact our commercial
opportunities and those of our current and future
licensees.
The biotechnology and pharmaceutical industries are subject to
intense competition and rapid and significant technological
change. We have many potential competitors, including major drug
and chemical companies, specialized biotechnology firms,
academic institutions, government agencies and private and
public research institutions. Many of our competitors have
significantly greater financial and technical resources,
experience and expertise in:
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research and development;
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preclinical testing;
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designing and implementing clinical trials;
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regulatory processes and approvals;
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production and manufacturing; and
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sales and marketing of approved products.
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Principal competitive factors in our industry include:
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the quality and breadth of an organizations technology;
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management of the organization and the execution of the
organizations strategy;
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the skill of an organizations employees and its ability to
recruit and retain skilled employees;
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an organizations intellectual property portfolio;
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the range of capabilities, from target identification and
validation to drug discovery and development to manufacturing
and marketing; and
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the availability of substantial capital resources to fund
discovery, development and commercialization activities.
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Large and established companies such as Merck & Co.,
Inc., GlaxoSmithKline PLC, Novartis, Inc., Sanofi and Medimmune
Inc., among others, compete in the vaccine market. In
particular, these companies have greater experience and
expertise in securing government contracts and grants to support
their research and development efforts, conducting testing and
clinical trials, obtaining regulatory approvals to market
products, and manufacturing such products on a broad scale.
Smaller or early-stage companies and research institutions may
also prove to be significant competitors, particularly through
collaborative arrangements with large and established
pharmaceutical or other companies. As these companies develop
their technologies, they may develop proprietary positions,
which may prevent or limit our product commercialization
efforts. We will also face competition from these parties in
recruiting and retaining qualified scientific and management
personnel, establishing clinical trial sites and patient
registration for clinical trials, and in acquiring and
in-licensing technologies and products complementary to our
programs or potentially advantageous to our business. If any of
our competitors succeeds in obtaining approval from the FDA or
other regulatory authorities for their products sooner than we
do or for products that are more effective or less costly than
ours, our commercial opportunity could be significantly reduced.
In order to effectively compete, we will have to make
substantial investments in manufacturing and sales and marketing
or partner with one or more established companies. There is no
assurance that we will be successful in gaining significant
market share for any product or product candidate. Our
technologies and products also may be rendered obsolete or
noncompetitive as a result of products introduced by our
competitors to the marketplace more rapidly and at a lower cost.
We may
have product liability exposure.
The administration of drugs to humans, whether in clinical
trials or after marketing clearances are obtained, can result in
product liability claims. We maintain product liability
insurance coverage in the total amount of $10 million for
claims arising from the use of our currently marketed products
and products in clinical trials prior to FDA approval. Coverage
is becoming increasingly expensive, however, and we may not be
able to maintain insurance at a reasonable cost. There can be no
assurance that we will be able to maintain our existing
insurance coverage or obtain coverage for the use of our other
products in the future. This insurance coverage and our
resources may not be sufficient to satisfy liabilities resulting
from product liability claims. A successful claim may prevent us
from obtaining adequate product liability insurance in the
future on commercially desirable items, if at all. Even if a
claim is not successful, defending such a claim would be
time-consuming and expensive, may damage our reputation in the
marketplace, and would likely divert managements attention.
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If we
lose or are unable to attract key management or other personnel,
we may experience delays in product development.
We depend on our senior executive officers as well as key
scientific and other personnel. The loss of these individuals
could harm our business and significantly delay or prevent the
achievement of research, development or business objectives. We
have not purchased key-man life insurance on any of our
executive officers or key personnel, and therefore may not have
adequate funds to find acceptable replacements for them.
Competition for qualified employees is intense among
pharmaceutical and biotechnology companies, and the loss of
qualified employees, or an inability to attract, retain and
motivate additional highly skilled employees required for the
expansion of our activities, could hinder our ability to
complete human studies successfully and develop marketable
products.
We also rely from
time-to-time
on outside advisors who assist us in formulating our research
and development and clinical strategy. We may not be able to
attract and retain these individuals on acceptable terms, which
could have a material adverse effect on our business, financial
condition and results of operations.
We
have experienced significant management turnover.
Our current President and Chief Executive Officer, Rahul
Singhvi, assumed this responsibility in August 2005. Most of our
executive officers have joined us since that time. This lack of
management continuity, and the resulting lack of long-term
history with our Company, could result in operational and
administrative inefficiencies and added costs. If we were to
experience additional turnover at the executive level, these
risks would be exacerbated.
Our
substantial indebtedness could adversely affect our cash flow
and prevent us from fulfilling our obligations.
As of December 31, 2006, we had $23.2 million of
outstanding indebtedness. Our substantial amount of outstanding
indebtedness could have significant consequences. For example,
it:
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could increase our vulnerability to general adverse economic and
industry conditions;
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requires us to dedicate a substantial portion of our cash flow
from operations to service payments on our indebtedness,
reducing the availability of our cash flow to fund future
capital expenditures, working capital, execution of our growth
strategy, research and development costs and other general
corporate requirements;
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could result in the acceleration of the maturity of our other
financial obligations if a default under the terms of existing
obligations were to occur;
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could limit our flexibility in planning for, or reacting to,
changes in our business and the industry, which may place us at
a competitive disadvantage compared with competitors that have
less indebtedness; and
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could limit our ability to obtain additional funds, even when
necessary to maintain adequate liquidity.
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We may incur additional indebtedness for various reasons, which
would increase the risks associated with our substantial
leverage.
The
conversion of our outstanding convertible debt, and the issuance
of shares of our common stock upon conversion or exercise of
preferred stock
and/or
warrants or in future offerings would cause dilution of existing
security holders interests in the Company and may cause
the price of our common stock to go down.
As of December 31, 2006, we had outstanding convertible
notes in the aggregate principal amount of $22 million that
as of such date were convertible into an aggregate of
4,029,304 shares of our common stock. The issuance of
shares of our common stock upon conversion of such notes, as
well as in connection with future capital raising activities,
would cause immediate and potentially substantial equity
dilution for existing stockholders and the price of our common
stock could be subject to significant downward pressure.
14
We
have made loans to certain of our directors, which could have a
negative impact on our stock price.
On March 21, 2002, pursuant to the Novavax, Inc. 1995 Stock
Option Plan, the Company approved the payment of the exercise
price of options by two of its directors through the delivery of
full-recourse, interest-bearing promissory notes in the
aggregate amount of $1,480,000. The borrowings accrue interest
at 5.07% per annum and are secured by an aggregate of
261,667 shares of common stock owned by the directors. The
notes were payable upon the earlier to occur of the following:
(i) the date on which the director ceases for any reason to
be a director of the Company (ii) in whole, or in part, to
the extent of net proceeds, upon the date on which the director
sells all or any portion of the pledged shares or
(iii) payable in full on March 21, 2007.
In May 2006, one of these directors resigned from the
Companys Board of Directors. Following his resignation the
Company approved an extension of the former directors
$448,000 note. The note continues to accrue interest at
5.07% per annum and is secured by 95,000 shares of
common stock owned by the former director and is payable on
December 31, 2007, or earlier to the extent of the net
proceeds from any sale of the pledged shares.
The terms and interest rate remain unchanged for the promissory
note for the active director and is due to be repaid in full on
March 21, 2007.
Due to heightened sensitivity in the current environment
surrounding related-party transactions, these transactions could
be viewed negatively in the market and our stock price could be
negatively affected. Our corporate governance policies have been
revised and our 2005 Stock Incentive Plan prohibits any loans or
guarantees to directors, officers or employees.
PRODUCT
DEVELOPMENT RISKS
Because
our product development efforts depend on new and rapidly
evolving technologies, we cannot be certain that our efforts
will be successful.
Our work depends on new, rapidly evolving technologies and on
the marketability and profitability of innovative products.
Commercialization involves risks of failure inherent in the
development of products based on innovative technologies and the
risks associated with drug development generally. These risks
include the possibility that:
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these technologies or any or all of the products based on these
technologies will be ineffective or unsafe, or otherwise fail to
receive necessary regulatory clearances;
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the products, if safe and effective, will be difficult to
manufacture on a large scale or uneconomical to market;
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proprietary rights of third parties will prevent us or our
collaborators from exploiting technologies or marketing
products; and
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third parties will market superior or equivalent products.
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We
have not completed the development of products other than
ESTRASORB and we may not succeed in obtaining the FDA approval
necessary to sell additional products.
The development, manufacture and marketing of our pharmaceutical
and biological products are subject to government regulation in
the U.S. and other countries. In the U.S. and most foreign
countries, we must complete rigorous preclinical testing and
extensive human clinical trials that demonstrate the safety and
efficacy of a product in order to apply for regulatory approval
to market the product. ESTRASORB is the only product developed
by the Company to have been approved for sale in the
U.S. Approval outside the U.S. may take longer or may
require additional clinical trials. We also have product
candidates in preclinical laboratory or animal studies.
The steps required by the FDA before our proposed
investigational products may be marketed in the
U.S. include:
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performance of preclinical (animal and laboratory) tests;
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submissions to the FDA or an Investigational New Drug
application (IND) which must become effective before
human clinical trials may commence;
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performance of adequate and well-controlled human clinical
trials to establish the safety and efficacy of the
investigational product in the intended target population;
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performance of a consistent and reproducible manufacturing
process intended for commercial use;
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submission to the FDA of a Biologics License Application
(BLA) or a New Drug Application
(NDA); and
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FDA approval of the BLA or NDA before any commercial sale or
shipment of the product.
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The processes are expensive and can take many years to complete,
and we may not be able to demonstrate the safety and efficacy of
our products to the satisfaction of such regulatory authorities.
Regulatory authorities may also require additional testing and
we may be required to demonstrate that our proposed products
represents an improved form of treatment over existing
therapies, which we may be unable to do so without conducting
further clinical studies. Moreover, if the FDA grants regulatory
approval of a product, the approval may be limited to specific
indications or limited with respect to its distribution.
Expanded or additional indications for approved drugs may not be
approved, which could limit our revenues. Foreign regulatory
authorities may apply similar limitations or may refuse to grant
any approval. Consequently, even if we believe that preclinical
and clinical data are sufficient to support regulatory approval
for our product candidates, the FDA and foreign regulatory
authorities may not ultimately grant approval for commercial
sale in any jurisdiction. If our drug candidates are not
approved, our ability to generate revenues may be limited and
our business will be adversely affected.
We
must identify products and product candidates for development
with our technologies and establish successful third-party
relationships.
Our long-term ability to generate product-related revenue
depends in part on our ability to identify products and product
candidates that may utilize our drug delivery and biological
technologies. If internal efforts do not generate sufficient
product candidates, we will need to identify third parties that
wish to license our technologies for development of their
products or product candidates. We may be unable to license our
technologies to third parties for a number of reasons, including:
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an inability to negotiate license terms that would allow us to
make an appropriate return from resulting products;
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an inability to identify suitable products or product candidates
within, or complementary to, our areas of expertise; or
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an unwillingness on the part of competitors to utilize the
technologies of a competing company.
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Our near and long-term viability will also depend in part on our
ability to successfully establish new strategic collaborations
with pharmaceutical and biotechnology companies and government
agencies. Establishing strategic collaborations and obtaining
government funding is difficult and time-consuming. Potential
collaborators may reject collaborations based upon their
assessment of our financial, regulatory or intellectual property
position; government agencies may reject contract or grant
applications based on their assessment of public need, the
public interest and our products ability to address these
areas. If we fail to establish a sufficient number of
collaborations or government relationships on acceptable terms,
we may not generate sufficient revenue.
Even if we successfully establish new collaborations or obtain
government funding, these relationships may never result in the
successful development or commercialization of any product
candidates or the generation of any sales or royalty revenue.
Reliance on such relationships also exposes us to a number of
risks. We may not have the ability to control the activities of
our partner and cannot assure you that they will fulfill their
obligations to us, including with respect to the license,
development and commercialization of products and product
candidates, in a timely manner or at all. We cannot assure you
that such partners will devote sufficient resources to our
products and product candidates or properly maintain or defend
our intellectual property rights; we also can give no assurances
that our partners will not utilize such rights in such a way as
to invite or cause litigation. Any failure on the part of
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our partners to perform or satisfy their obligations to us could
lead to delays in the development or commercialization of
products and product candidates, and affect our ability to
realize product revenues. Disagreements, including disputes over
the ownership of technology developed with such collaborators,
could result in litigation, which would be time-consuming and
expensive, and may delay or terminate research and development
efforts, regulatory approvals, and commercialization activities.
If we or our partners fail to maintain our existing agreements
or in the event we fail to establish agreements as necessary, we
could be required to undertake research, development,
manufacturing and commercialization activities solely at our own
expense. These activities would significantly increase our
capital requirements and, given our current limited sales,
marketing and distribution capabilities, significantly delay the
commercialization of products and product candidates.
Even
though we have received governmental support in the past, we may
not continue to receive support at the same level or at
all.
The U.S. government, through its various agencies, has
provided grants to fund certain research and development
efforts. There can be no assurances that the Company will
continue to receive the same level of funding from the
U.S. government, if at all.
If we
or our collaborators are unable to manufacture our products in
sufficient quantities or are unable to obtain regulatory
approvals for a manufacturing facility for our products, we may
experience delays, and be unable to meet demand, and may lose
potential revenues.
Completion of our clinical trials and commercialization of our
product candidates require access to, or development of,
facilities to manufacture a sufficient supply of our product
candidates. We have limited experience manufacturing any of our
product candidates in the volumes that will be necessary to
support large-scale clinical trials or commercial sales. Efforts
to establish capabilities, if pursued, may not meet initial
expectations as to scheduling, reproducibility, yield, purity,
cost, potency or quality.
If we or our collaborators are unable to manufacture our product
candidates in clinical quantities or, when necessary, commercial
quantities, then we will need to rely on third parties to
manufacture compounds for clinical and commercial purposes.
These third-party manufacturers must receive FDA approval before
they can produce clinical material or commercial products. Our
products may be in competition with other products for access to
these facilities and may be subject to delays in manufacture if
third parties give other products greater priority. In addition,
we may not be able to enter into any necessary third-party
manufacturing arrangements on acceptable terms, or on a timely
basis. There are very few contract manufacturers who currently
have the capability to produce our proposed product candidates,
and the inability of any of these contract manufacturers to
deliver our required quantities of product candidates on a
timely basis and at commercially reasonable prices would
negatively affect our operations.
Before we or our collaborators can begin commercial
manufacturing of any of our product candidates, we or our
collaborators must obtain regulatory approval of the
manufacturing facility and process. Manufacturing of our
proposed product candidates must comply with the FDAs
current Good Manufacturing Practices (cGMP)
requirements, and
non-U.S. regulatory
requirements. The cGMP requirements govern quality control and
documentation policies and procedures. In complying with cGMP
and
non-U.S. regulatory
requirements, we will be obligated to expend time, money and
effort in production, record keeping and quality control to
assure that the product meets applicable specifications and
other requirements. We or our collaborators must also pass a
pre-approval inspection before FDA approval. If we or our
collaborators fail to comply with these requirements, our
product candidates would not be approved. If we or our
collaborators fail to comply with these requirements after
approval, we would be subject to possible regulatory action and
may be limited in the jurisdictions in which we are permitted to
sell our products. The FDA and
non-U.S. regulatory
authorities also have the authority to perform unannounced
periodic inspections of our manufacturing facility to ensure
compliance with cGMP and non- U.S. regulatory requirements.
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We
rely on a limited number of suppliers for some of our
manufacturing materials. Any problems experienced by any of
these suppliers could negatively affect our
operations.
We rely on third-party suppliers and vendors for some of the
materials used in the manufacture of our product candidates. For
supply of early clinical trial materials, we rely on a limited
number of suppliers. Any significant problem experienced by one
of our suppliers could result in a delay or interruption in the
supply of materials to us until such supplier resolves the
problem or an alternative source of supply is located. We have
limited experience with alternative sources of raw materials.
Any delay or interruption would negatively affect our operations.
We
have limited marketing capabilities, and if we are unable to
enter into collaborations with marketing partners or develop our
own sales and marketing capability, we may not be successful in
commercializing any approved products.
We currently have limited sales, marketing and distribution
capabilities. As a result, we will depend on collaborations with
third parties that have established distribution systems and
sales forces. To the extent that we enter into co-promotion or
other licensing arrangements, our revenues will depend upon the
efforts of third parties, over which we may have little or no
control. If we are unable to reach and maintain agreements with
one or more pharmaceutical companies or collaborators, we may be
required to market our products directly. Developing a marketing
and sale force is expensive and time consuming and could delay a
product launch. We cannot be certain that we will be able to
attract and retain qualified sales personnel or otherwise
develop this capability.
If
reforms in the health care industry make reimbursement for our
potential products less likely, the market for our potential
products will be reduced, and we will lose potential sources of
revenue.
Our successes may depend, in part, on the extent to which
reimbursement for the costs of therapeutic products and related
treatments will be available from third-party payers such as
government health administration authorities, private health
insurers, managed care programs, and other organizations. Over
the past decade, the cost of health care has risen
significantly, and there have been numerous proposals by
legislators, regulators, and third-party health care payors to
curb these costs. Some of these proposals have involved
limitations on the amount of reimbursement for certain products.
Similar federal or state health care legislation may be adopted
in the future and any products that we or our collaborators seek
to commercialize may not be considered cost-effective. Adequate
third-party insurance coverage may not be available for us to
establish and maintain price levels that are sufficient for
realization of an appropriate return on our investment in
product development. Moreover, the existence or threat of cost
control measures could cause our corporate collaborators to be
less willing or able to pursue research and development programs
related to our product candidates.
RISKS
FROM COLLABORATION RELATIONSHIPS AND STRATEGIC
ACQUISITIONS
The
return on our investment in ESTRASORB depends in large part on
the success of our relationship with Esprit Pharma, Inc. and our
ability to manufacture the product.
In October 2005, we entered into a License Agreement and a
Supply Agreement with Esprit Pharma Inc., (Esprit)
for ESTRASORB. Under the License agreement, we granted Esprit
exclusive rights to market ESTRASORB in North America.
While our License Agreement with Esprit gives us some limited
protections with respect to that companys ESTRASORB
marketing and sales efforts and, we believe, creates incentives
for Esprit consistent with our own, we cannot control the amount
and timing of the marketing efforts that Esprit devotes to
ESTRASORB or make any assurances that Esprits promotion
and marketing of ESTRASORB in North America will be successful.
We do not have a history of working together with Esprit and
cannot predict the success of the collaboration, nor can we give
any assurances that Esprit will not reduce or curtail its
efforts to market ESTRASORB because of factors affecting its
business or operations beyond our control. Loss of Esprit as a
partner in the commercialization of ESTRASORB, any dispute over
the terms of our decisions regarding the License and Supply
Agreements, or other adverse developments in our relationship
with Esprit may harm our business and might accelerate our need
for additional capital. We also can give no assurances that
Esprit will be more successful than us in gaining market
acceptance of ESTRASORB. Prescription trends for ESTRASORB have
not met our expectations to date and Esprit will face
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similar obstacles to gaining market share of the estrogen
therapy market, including competition from large and established
companies with similar estrogen therapy products.
Numerous companies worldwide currently produce and sell estrogen
products for clinical indications identical to those for
ESTRASORB. Currently, the oral and patch product segment account
for approximately 75% and 15% of the market, respectively,
according to 2004 Verispan data. Wyeth commits significant
resources to the sale and marketing of its product,
Premarin®,
in order to maintain its market leadership position. Several
other companies compete in the estrogen category including
Berlex Laboratories, Inc., Novartis Pharma AG and Solvay
Pharmaceuticals. In particular, Solvay has introduced an
alcohol-based gel product, Estrogel, which is directly
competitive with ESTRASORB. These and other products sold by our
competitors have all achieved a degree of market penetration
superior to ESTRASORB.
In addition, under the Supply Agreement, we are obligated to
supply Esprit with ESTRASORB through the manufacture of the
product at our manufacturing facility in Philadelphia,
Pennsylvania. We have only limited experience with the large
capacity manufacturing required for the commercial sale of a
product. Although we have validated our manufacturing methods
for the product with the FDA, we will remain subject to that
agencys rules and regulations regarding cGMP, which are
enforced by the FDA through its facilities inspection program.
Compliance with such rules and regulations requires us to spend
substantial funds and hire and retain qualified personnel. We
face the possibility that we may not be able to meet
Esprits supply requirements under the agreement in a
timely fashion at acceptable quality, quantity and prices or in
compliance with applicable regulations. If our facility fails to
comply with applicable regulations, we will be forced to utilize
a third party contractor to manufacture the product. We may not
be able to enter into alternative manufacturing arrangements at
commercially acceptable rates, if at all. Moreover, the
manufacturers we use may not provide sufficient quantities of
product to meet our specifications or our delivery, cost and
other requirements.
We
must utilize our manufacturing facility for products other than
ESTRASORB in order to avoid operating the facility at a
loss.
Currently we are manufacturing ESTRASORB at our facility in
Philadelphia, Pennsylvania at a loss and it is likely we will
continue to manufacture ESTRASORB at a loss until production
volumes increase or we enter into additional contract
manufacturing agreements with third parties to more fully
utilize our manufacturing facilitys capacity. The facility
is able to accommodate much greater production capacity than its
current schedule, which, if more fully utilized, would offset
the fixed costs related to the manufacturing process and
facility. In addition, we are negotiating revisions to our
agreements for packaging costs of ESTRASORB as well as our fixed
lease costs for the manufacturing facility. If these
negotiations result in higher packaging or lease costs for us,
it may have a material adverse impact on future financial
results.
Our
plan to use collaborations to leverage our capabilities and to
grow in part through the strategic acquisition of other
companies and technologies may not be successful if we are
unable to integrate our partners capabilities or the
acquired companies with our operations or if our partners
do not meet expectations.
As part of our strategy, we intend to continue to evaluate
strategic partnership opportunities and consider acquiring
complementary technologies and businesses. In order for our
future collaboration efforts to be successful, we must first
identify partners whose capabilities complement and integrate
well with ours. Technologies to which we gain access may prove
ineffective or unsafe. Our current agreements that grant us
access to such technologies may expire and may not be renewed.
Our partners may prove difficult to work with or less skilled
than we originally expected. In addition, any past collaborative
successes are no indication of potential future success. In
order to achieve the anticipated benefits of an acquisition, we
must integrate the acquired companys business, technology
and employees in an efficient and effective manner. The
successful combination of companies in a rapidly changing
biotechnology industry may be more difficult to accomplish than
in other industries. The combination of two companies requires,
among other things, integration of the companies
respective technologies and research and development efforts. We
cannot assure you that this integration will be accomplished
smoothly or successfully. The difficulties of integration are
increased by the necessity of coordinating geographically
separated organizations and addressing possible differences in
corporate cultures and management philosophies. The integration
of certain
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operations will require the dedication of management resource
that may temporarily distract attention from the
day-to-day
operations of the combined companies. The business of the
combined companies may also be disrupted by employee retention
uncertainty and lack of focus during integration. The inability
of management to integrate successfully the operations of the
two companies, in particular, to integrate and retain key
scientific personnel, or the inability to integrate successfully
two technology platforms, could have a material adverse effect
on our business, results of operations and financial condition.
Our
collaboration agreements may prohibit us from conducting
research in areas that may compete with our collaboration
products, while our collaborators may not be limited to the same
extent. This could negatively affect our ability to develop
products and, ultimately, prevent us from achieving a continuing
source of revenues.
We anticipate that some of our corporate or academic
collaborators will be conducting multiple product development
efforts within each disease area that is the subject of its
collaboration with us. We generally have agreed not to conduct
independently, or with any third party, certain research that is
competitive with the research conducted under our
collaborations. Therefore, our collaborations may have the
effect of limiting the areas of research that we may pursue,
either alone or with others. Some of our collaborators, however,
may develop, either alone or with others, products in related
fields that are competitive with the products or potential
products that are the subject of their collaborations with us.
In addition, competing products, either developed by the
collaborators or to which the collaborators have rights, may
result in their withdrawing support for our product candidates.
Generally under our academic collaborations, we retain the right
to exclusively license any technologies developed using funding
we provided. If we elect to not license a particular technology,
the academic collaborator is typically free to use the
technology for any purpose, including the development and
commercialization of products that might compete with our
products.
Because
we depend on third parties to conduct some of our laboratory
testing and human studies, we may encounter delays in or lose
some control over our efforts to develop products.
We are dependent on third-party research organizations to
conduct some of our laboratory testing and human studies. If we
are unable to obtain any necessary testing services on
acceptable terms, we may not complete our product development
efforts in a timely manner. If we rely on third parties for
laboratory testing and human studies, we may lose some control
over these activities and become too dependent upon these
parties. These third parties may not complete testing activities
on schedule or when we request. We may not be able to secure and
maintain suitable research organizations to conduct our
laboratory testing and human studies.
REGULATORY
RISKS
We may
fail to obtain regulatory approval for our products on a timely
basis or comply with our continuing regulatory obligations after
approval is obtained.
Delays in obtaining regulatory approval can be extremely costly
in terms of lost sales opportunities and increased 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:
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the rate of patient enrollment and retention, 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;
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Institutional Review Board approval of the protocol and the
informed consent form;
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prior regulatory agency review and approval;
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our ability to manufacture or obtain sufficient quantities of
materials for use in clinical trials;
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negative test results or side effects experienced by trial
participants;
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analysis of data obtained from preclinical and clinical
activities, which are susceptible to varying interpretations and
which interpretations could delay, limit or prevent regulatory
approval;
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changes in the policies of regulatory authorities for drug or
vaccine approval during the period of product
development; and
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the availability of skilled and experienced staff to conduct and
monitor clinical studies and to prepare the appropriate
regulatory applications.
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We have limited experience in conducting and managing the
preclinical studies and clinical trials necessary to obtain
regulatory marketing approvals. We may not be able to obtain the
approvals necessary to conduct clinical trials. We also face the
risk that the results of our clinical trials may be inconsistent
with the results obtained in preclinical studies or that the
results obtained in later phases of clinical trials may be
inconsistent with those obtained in earlier phases. A number of
companies in the specialty biopharmaceutical and product
development industry have suffered significant setbacks in
advanced clinical trials, even after experiencing promising
results in early animal and human testing.
Furthermore, even if a product gains regulatory approval, such
approval is likely to limit the indicated uses for which it may
be marketed and the product and the manufacturer of the product
will be subject to continuing regulatory review, including
adverse event reporting requirements and the FDAs general
prohibition against promoting products for unapproved uses.
Failure to comply with any post-approval requirements can, among
other things, result in warning letters, product seizures,
recalls, fines, injunctions, suspensions or revocations of
marketing licenses, operating restrictions and criminal
prosecutions. Any of these enforcement actions, any
unanticipated changes in existing regulatory requirements or the
adoption of new requirements, or any safety issues that arise
with any approved products, could adversely affect our ability
to market products and generate revenues and thus adversely
affect our ability to continue our business.
We also 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 and we cannot assure you
that newly discovered or developed safety issues will not arise
following any regulatory approval. With the use of any drug by a
wide patient population, serious adverse events may occur from
time to time that initially do not appear to relate to the drug
itself, and only if the specific event occurs with some
regularity over a period of time does the drug become suspect as
having a casual relationship to the adverse event. Any safety
issues could cause us to suspend or cease marketing of our
approved products, possibly subject us to substantial
liabilities, and adversely affect our ability to generate
revenues and our financial condition.
Because
we are subject to environmental, health and safety laws, we may
be unable to conduct our business in the most advantageous
manner.
We are subject to various laws and regulations relating to safe
working conditions, laboratory and manufacturing practices, the
experimental use of animals, emissions and wastewater
discharges, and the use and disposal of hazardous or potentially
hazardous substances used in connection with our research,
including infectious disease agents. We also cannot accurately
predict the extent of regulations that might result from any
future legislative or administrative action. Any of these laws
or regulations could cause us to incur additional expense or
restrict our operations.
We have facilities in Maryland and Pennsylvania that are subject
to various local, state and federal laws and regulations
relating to safe working conditions, laboratory and
manufacturing practices, the experimental use of animals and the
use and disposal of hazardous or potentially hazardous
substances, including chemicals, micro-organisms and various
hazardous compounds used in connection with our research and
development activities. In the U.S. these laws include the
Occupational Safety and Health Act, the Toxic Test Substances
Control Act and the Resource Conservation and Recovery Act. We
cannot eliminate the risk of accidental contamination or
discharge or injury from these materials. Federal, state, and
local laws and regulations govern the use, manufacture, storage,
handling and disposal of these materials. We could be subject to
civil damages in the event of an improper or unauthorized
release of, or exposure of individuals to, these hazardous
materials. In addition, claimants may sue us for injury or
contamination that results from our use or the use by third
parties of these materials, and our liability
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may exceed our total assets. Compliance with environmental laws
and regulations may be expensive, and current or future
environmental regulations may impair our research, development
or production efforts.
Although we have general liability insurance, these policies
contain exclusions from insurance against claims arising from
pollution from chemical or pollution from hazardous. Our
collaborators are working with these types of hazardous
materials in connection with our collaborations. In the event of
a lawsuit or investigation, we could be held responsible for any
injury we or our collaborators cause to persons or property by
exposure to, or release of, any hazardous materials. However, we
believe that we are currently in compliance with all applicable
environmental and occupational health and safety regulations.
INTELLECTUAL
PROPERTY RISKS
Our
success depends on our ability to maintain the proprietary
nature of our technology.
Our success in large part depends on our ability to maintain the
proprietary nature of our technology and other trade secrets,
including our proprietary drug delivery and biological
technologies. To do so, we must prosecute and maintain existing
patents, obtain new patents and pursue trade secret and other
intellectual property protection. We also must operate without
infringing the proprietary rights of third parties or letting
third parties infringe our rights. We currently have over 50
U.S. patents and corresponding foreign patents and patent
applications covering our technologies. 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 U.S. Patent and Trademark Office or enforced
by the federal courts. Therefore, we do not know whether our
patent applications will result in the issuance of patents, or
that any patents issued to us will provide us with any
competitive advantage. We also cannot be sure that we 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 us.
There is a risk that third parties may challenge our existing
patents or claim that we are infringing their patents or
proprietary rights. We could incur substantial costs in
defending patent infringement suits or in filing 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.
Although our patents include claims covering various features of
our products and product candidates, including composition,
methods of manufacture and use, our patents do not provide us
with complete protection against the development of competing
products. 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 our trade secrets, know-how or other proprietary
information in the event of any unauthorized use or disclosure.
If we
infringe or are alleged to infringe intellectual property rights
of third parties, it will adversely affect our business,
financial condition and results of operations.
Our research, development and commercialization activities,
including any product candidates or products resulting from
these activities, may infringe or be claimed to infringe patents
owned by third parties and to which we do not hold licenses or
other rights. There may rights we are not aware of, including
applications that have been filed but not published that, when
issued, could be asserted against us. These third parties could
bring claims against us and that would cause us to incur
substantial expenses and, if successful against us, could cause
us to pay substantial damages. Further, if a patent infringement
suit were brought against us, we could be forced to stop or
delay research, development, manufacturing or sales of the
product or biologic drug candidate that is the subject of the
suit.
As a result of patent infringement claims, or in order to avoid
potential claims, we may choose or be required to seek a license
from the third party. These licenses may not be available on
acceptable terms, or at all. Even if we are
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able to obtain a license, the license would likely obligate us
to pay license fees or royalties or both, and the rights granted
to us might be nonexclusive, which could result in our
competitors gaining access to the same intellectual property.
Ultimately, we could be prevented from commercializing a
product, or be forced to cease some aspect of our business
operations, if, as a result of actual or threatened patent
infringement claims, we are unable to enter into licenses on
acceptable terms. All of the issues described above could also
impact our collaborators, which would also impact the success of
the collaboration and therefore us.
There has been substantial litigation and other proceedings
regarding patent and other intellectual property rights in the
pharmaceutical and biotechnology industries. In addition to
infringement claims against us, we may become a party to other
patent litigation and other proceedings, including interference
proceedings declared by the U.S. Patent and Trademark
Office and opposition proceedings in the European Patent Office,
regarding intellectual property rights with respect to our
products and technology.
We may
become involved in lawsuits to protect or enforce our patents or
the patents of our collaborators or licensors, which could be
expensive and time consuming.
Competitors may infringe our patents or the patents of our
collaborators or licensors. As a result, we may be required to
file infringement claims to counter infringement for
unauthorized use. This can be expensive, particularly for a
company of our size, and time-consuming. In addition, in an
infringement proceeding, a court may decide that a patent of
ours is not valid or is unenforceable, or may refuse to stop the
other party from using the technology at issue on the grounds
that our patents do not cover its technology. An adverse
determination of any litigation or defense proceedings could put
one or more of our patents at risk of being invalidated or
interpreted narrowly and could put our patent applications at
the risk of not issuing.
Interference proceedings brought by the U.S. Patent and
Trademark Office may be necessary to determine the priority of
inventions with respect to our patent applications or those of
our collaborators or licensors. Litigation or interference
proceedings may fail and, even if successful, may result in
substantial costs and distraction to our management. We may not
be able, alone or with our collaborators and licensors, to
prevent misappropriation of our proprietary rights, particularly
in countries where the laws may not protect such rights as fully
as in the U.S.
Furthermore, because of the substantial amount of discovery
required in connection with intellectual property litigation,
there is a risk that some of our confidential information could
be compromised by disclosure during this type of litigation. In
addition, during the course of this kind of litigation, there
could be public announcements of the results of hearings,
motions or other interim proceedings or developments. If
investors perceive these results to be negative, the market
price for our common stock could be significantly harmed.
We may
need to license intellectual property from third parties and if
our right to use the intellectual property we license is
affected, our ability to develop and commercialize our product
candidates may be harmed.
We expect that we will need to license intellectual property
from third parties in the future and that these licenses will be
material to our business. We will not own the patents or patent
applications that underlie these licenses and we will not
control the enforcement of the patents. We will rely upon our
licensors to properly prosecute and file those patent
applications and prevent infringement of those patents.
While many of the licenses under which we have rights provide us
with exclusive rights in specified fields, the scope of our
rights under these and other licenses may be subject to dispute
by our licensors or third parties. In addition, our rights to
use these technologies and practice the inventions claimed in
the licensed patents and patent applications are subject to our
licensors abiding by the terms of those licenses and not
terminating them. Any of our licenses may be terminated by the
licensor if we are in breach of a term or condition of the
license agreement, or in certain other circumstances.
Our product candidates and potential product candidates will
require several components that may each be the subject of a
license agreement. The cumulative license fees and royalties for
these components may make the commercialization of these product
candidates uneconomical.
23
If
patent laws or the interpretation of patent laws change, our
competitors may be able to develop and commercialize our
discoveries.
Important legal issues remain to be resolved as to the extent
and scope of available patent protection for biotechnology
products and processes in the U.S. and other important markets
outside the U.S., such as Europe and Japan. Foreign markets may
not provide the same level of patent protection as provided
under the U.S. patent system. We expect that litigation or
administrative proceedings will likely be necessary to determine
the validity and scope of certain of our and others
proprietary rights. Any such litigation or proceeding may result
in a significant commitment of resources in the future and could
force us to do one or more of the following: cease selling or
using any of our products that incorporate the challenged
intellectual property, which would adversely affect our revenue;
obtain a license from the holder of the intellectual property
right alleged to have been infringed, which license may not be
available on reasonable terms, if at all; and redesign our
products to avoid infringing the intellectual property rights of
third parties, which may be time-consuming or impossible to do.
In addition, changes in, or different interpretations of, patent
laws in the U.S. and other countries may result in patent laws
that allow others to use our discoveries or develop and
commercialize our products. We cannot assure you that the
patents we obtain or the unpatented technology we hold will
afford us significant commercial protection.
RISKS
RELATED TO OUR COMMON STOCK AND ORGANIZATIONAL
STRUCTURE
Because
our stock price has been and will likely continue to be
volatile, the market price of our common stock may be lower or
more volatile than you expected.
Our stock price has been highly volatile. The stock market in
general and the market for biotechnology companies in particular
have experienced extreme volatility that has often been
unrelated to the operating performance of particular companies.
From January 1, 2006 through March 9, 2007, the
closing price of our common stock has been as low as
$2.77 per share and as high as $8.31 per share. The
market price of our common stock may be influenced by many
factors, including:
|
|
|
|
|
future announcements about our Company or our collaborators or
competitors, including the results of testing, technological
innovations or new commercial products;
|
|
|
|
negative regulatory actions with respect to ESTRASORB or our
product candidates or regulatory approvals with respect to our
competitors products;
|
|
|
|
depletion of our cash reserves
and/or the
approach of our convertible debt maturity date if additional
revenues are not generated or additional capital is not raised;
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|
|
changes in government regulations;
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|
developments in our relationships with our collaboration
partners;
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|
|
announcements relating to health care reform and reimbursement
levels for new drugs;
|
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|
|
announcement by us of significant acquisitions, strategic
partnerships, joint ventures or capital commitments;
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|
sales of substantial amounts of our stock by existing
stockholders (including stock by insiders or 5% stockholders);
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litigation;
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public concern as to the safety of our products;
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|
significant set-backs or concerns with the industry or the
market as a whole; and
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|
the other factors described in this Risk Factor
section.
|
The stock market has experienced extreme price and volume
fluctuation that have particularly affected the market price for
many emerging and biotechnology companies. These fluctuations
have often been unrelated to the operating performance of these
companies. These broad market fluctuations may cause the market
price of our common stock to be lower or more volatile than
expected.
24
We
have never paid dividends on our capital stock, and we do not
anticipate paying any such dividends in the foreseeable
future.
We have never paid cash dividends on our common stock. We
currently anticipate that we will retain all of our earnings for
use in the development of our business and do not anticipate
paying any cash dividends in the foreseeable future. As a
result, capital appreciation, if any, of our common stock would
be the only source of gain for stockholders until dividends are
paid if at all.
Provisions
of our Certificate of Incorporation and By-laws, Delaware law,
and our Shareholder Rights Plan could delay or prevent the
acquisition of the Company, even if such acquisition would be
beneficial to stockholders, and could impede changes in our
Board.
Our organizational documents could hamper a third partys
attempt to acquire, or discourage a third party from attempting
to acquire control of, the Company. We have also adopted a
shareholder rights plan, or poison pill, that
empowers our Board to delay or negotiate, and thereby possibly
thwart, any tender offer or takeover attempt the Board opposes.
Stockholders who wish to participate in these transactions may
not have the opportunity to do so. These provisions also could
limit the price investors are willing to pay in the future for
our securities and make it more difficult to change the
composition of our Board in any one year. These provisions
include the right of the Board to issue preferred stock with
rights senior to those of common stock without any further vote
or action by stockholders, the existence of a staggered Board
with three classes of directors serving staggered three-year
terms and advance notice requirements for stockholders to
nominate directors and make proposals.
The Company also is afforded the protections of Section 203
of the Delaware General Corporation Law, which will prevent us
from engaging in a business combination with a person who
acquires at least 15% of our common stock for a period of three
years from the date such person acquired such common stock,
unless advance board or stock holder approval was obtained.
Any delay or prevention of a change of control transaction or
changes in our Board of Director or management could deter
potential acquirers or prevent the completion of a transaction
in which our stockholders could receive a substantial premium
over the then current market price for their shares.
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|
Item 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
We have current operations in four leased facilities. In January
2007, we commenced a lease for approximately 51,200 square
feet in Rockville, Maryland, which is our new corporate
headquarters and will include administrative offices, vaccine
research and development along with future expansion activities.
We lease approximately 13,900 square feet at our other
facility in Rockville, Maryland for contract vaccine research,
development and manufacturing of early stage clinical supplies.
We lease approximately 32,900 square feet for
administrative office space and research and development
activities at our former corporate headquarters in Malvern,
Pennsylvania of which approximately 28,000 square feet is
being subleased. Our manufacturing facility for ESTRASORB and
other contract manufacturing is located in Philadelphia,
Pennsylvania, where we lease approximately 24,000 square
feet of manufacturing space. We believe that these facilities
are sufficient for our current needs. We have additional space
in our current facilities to accommodate our anticipated growth
over the next several years.
25
A summary of our current facilities is set forth below.
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Approximate
|
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Property Location
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Square Footage
|
|
|
Purpose
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|
Rockville, MD
|
|
|
51,200
|
|
|
Corporate headquarters and vaccine
research and development
|
Rockville, MD
|
|
|
13,900
|
|
|
Vaccine research and development
and early clinical phase manufacturing
|
Malvern, PA
|
|
|
32,900
|
|
|
Former corporate headquarters and
research and development
|
Philadelphia, PA
|
|
|
24,000
|
|
|
Manufacturing and packaging
facility for ESTRASORB
|
|
|
|
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Total square footage
|
|
|
122,000
|
|
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Malvern, PA sublease
|
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(28,000
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)
|
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|
|
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Net square footage
|
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94,000
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We had another approximately 2,800 square foot facility in
Pacific Grove, California for product research and development
activities which was closed in January 2007. The lease expired
on January 31, 2007.
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Item 3.
|
LEGAL
PROCEEDINGS
|
The Company is a defendant in a lawsuit filed in December 2003
by a former director alleging that the Company wrongfully
terminated the former directors stock options. In April
2006, a directed verdict in favor of the Company was issued and
the case was dismissed. The plaintiff has filed an appeal with
the court. Management believes the lawsuit is without merit and
the likelihood of an unfavorable outcome of such appeal is
minimal. Accordingly, no liability related to this contingency
is accrued in the consolidated financial statements as of
December 31, 2006.
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|
Item 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
No matters were submitted to a vote of our security holders
during the fourth quarter of the fiscal year ended
December 31, 2006.
PART II
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|
Item 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
|
Our common stock trades on the NASDAQ National Market System
under the symbol NVAX. The following table sets
forth the range of high and low closing sale prices for our
common stock as reported on The NASDAQ National Market for each
quarter in the two most recent years:
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Quarter Ended
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High
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|
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Low
|
|
|
March 31, 2006
|
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$
|
8.31
|
|
|
$
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3.88
|
|
June 30, 2006
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|
$
|
7.62
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|
|
$
|
4.19
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|
September 30, 2006
|
|
$
|
4.99
|
|
|
$
|
2.84
|
|
December 31, 2006
|
|
$
|
5.30
|
|
|
$
|
3.67
|
|
March 31, 2005
|
|
$
|
3.35
|
|
|
$
|
1.35
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|
June 30, 2005
|
|
$
|
1.64
|
|
|
$
|
1.13
|
|
September 30, 2005
|
|
$
|
2.56
|
|
|
$
|
0.70
|
|
December 31, 2005
|
|
$
|
6.01
|
|
|
$
|
1.67
|
|
26
On March 9, 2007, the last sale price reported on the
NASDAQ National Market for our common stock was $3.11. Our
common stock was held by approximately 12,000 stockholders of
record as of February 28, 2007, one of which is
Cede & Co., a nominee for Depository Trust Company (or
DTC). All of the shares of common stock held by
brokerage firms, banks and other financial institutions as
nominees for beneficial owners are deposited into participant
accounts at DTC, and are therefore considered to be held of
record by Cede & Co. as one stockholder. We have not
paid any cash dividends on our common stock since our inception.
We do not anticipate declaring or paying any cash dividends in
the foreseeable future.
Securities
Authorized for Issuance under our Equity Compensation
Plans
Information regarding our equity compensation plans, including
both stockholder approved plans and non-stockholder approved
plans, is included in Item 12. of this Annual Report on
Form 10-K.
Unregistered
Sales of Equity Securities; Use of Proceeds from Registered
Securities
During the year ended December 31, 2005, the Company issued
unregistered shares of its common stock to two individuals. In
August 2005, the Company issued 50,000 shares of restricted
common stock to its former Chairman of the Board, Denis M.
ODonnell, M.D., in connection with his separation
from the Company as an employee.
Also in August 2005, the Company issued 250,000 shares of
restricted common stock to Nelson M. Sims, the Companys
former President, Chief Executive Officer and director, in
connection with his separation from the Company. The Company
issued the shares pursuant to Section 4(2) of the
Securities Act of 1933 and received no cash consideration. In
accordance with his separation agreement, Mr. Sims agreed
to the cancellation of all then-outstanding options and other
rights to purchase shares of the Company. In exchange,
Mr. Sims received his salary through the date of
resignation and reimbursement of certain expenses. The Company
also agreed to pay him severance benefits, part of which
included the 250,000 shares of restricted common stock.
In July 2004, the Company issued 952,381 shares of common
stock at $5.25 per share, for gross proceeds of
$5.0 million to an accredited investor in reliance on
Regulation D promulgated under the Securities Act of 1933,
as amended. A resale registration statement was filed and
declared effective in August 2004.
Also in July 2004, the Company entered into definitive
agreements for the private placement of $35 million
aggregate principal amount of senior convertible notes to a
group of private investors. The notes carry a 4.75% coupon,
payable semi-annually, mature on July 19, 2009 and are
currently convertible into 4,029,304 shares of Novavax
common stock at $5.46 per share.
Issuer
Purchases of Equity Securities
During the fiscal year ended December 31, 2006, the Company
purchased 19,393 shares of Novavax common stock from
various participants 401(K) retirement plan at an average
price of $4.79 per share.
27
|
|
Item 6.
|
SELECTED
FINANCIAL DATA
|
The following table sets forth selected financial data for each
of the years in the five-year period ended December 31,
2006. The information below should be read in conjunction with
our financial statements and notes thereto and
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
the Annual Report on
Form 10-K.
These historical results are not necessarily indicative of
results that may be expected for future periods.
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|
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|
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|
|
|
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|
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|
|
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|
|
|
For the Years Ended December 31,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands, except per share data)
|
|
|
Statements of Operations
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
15,005
|
|
|
$
|
11,785
|
|
|
$
|
8,260
|
|
|
$
|
7,388
|
|
|
$
|
4,683
|
|
Loss from operations
|
|
|
(21,558
|
)
|
|
|
(16,054
|
)
|
|
|
(24,464
|
)
|
|
|
(9,171
|
)
|
|
|
(24,607
|
)
|
Net loss
|
|
|
(22,697
|
)
|
|
|
(17,273
|
)
|
|
|
(25,920
|
)
|
|
|
(11,174
|
)
|
|
|
(23,068
|
)
|
Basic and diluted net loss per
share
|
|
$
|
(0.93
|
)
|
|
$
|
(0.58
|
)
|
|
$
|
(0.70
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
(0.39
|
)
|
Shares used in computing basic and
diluted net loss per share
|
|
|
24,433,868
|
|
|
|
29,852,797
|
|
|
|
36,926,034
|
|
|
|
42,758,302
|
|
|
|
58,664,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and investments
|
|
$
|
3,005
|
|
|
$
|
27,633
|
|
|
$
|
17,876
|
|
|
$
|
31,893
|
|
|
$
|
73,595
|
|
Total current assets
|
|
|
6,242
|
|
|
|
32,062
|
|
|
|
23,937
|
|
|
|
37,611
|
|
|
|
77,342
|
|
Working capital
|
|
|
378
|
|
|
|
27,226
|
|
|
|
15,361
|
|
|
|
32,735
|
|
|
|
72,003
|
|
Total assets
|
|
|
57,505
|
|
|
|
84,159
|
|
|
|
77,993
|
|
|
|
84,382
|
|
|
|
121,877
|
|
Long term debt, less current
portion
|
|
|
41,103
|
|
|
|
41,100
|
|
|
|
35,970
|
|
|
|
29,678
|
|
|
|
22,458
|
|
Accumulated deficit
|
|
|
(87,527
|
)
|
|
|
(104,800
|
)
|
|
|
(130,720
|
)
|
|
|
(141,894
|
)
|
|
|
(164,962
|
)
|
Total stockholders equity
|
|
|
8,073
|
|
|
|
35,944
|
|
|
|
33,281
|
|
|
|
49,652
|
|
|
|
94,001
|
|
|
|
Item 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
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, royalties, milestone
payments and other information related to license agreements and
collaboration arrangements, governmental grant applications,
future licensing of our products, future product development and
related clinical trials, manufacturing capabilities and 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 those
expressed or implied by such forward-looking statements.
Such factors include, among other things, the following: general
economic and business conditions; competition; ability to enter
into future collaborations; collaborators may delay or terminate
their relationship with us; our ability to obtain government
funding; unexpected changes in technologies and technological
advances; our ability to obtain rights to technology; ability to
obtain and enforce patents; ability to commercialize and
manufacture products; our ability to maintain commercial-scale
manufacturing capabilities; results of clinical studies;
progress of research and development activities; business
abilities and judgment of personnel; our ability to be able to
attract and retain qualified personnel; changes in, or failure
to comply with, governmental regulations; changes in
intellectual property laws, health care legislation or other
federal and state laws to which the Company is subject; or
substantial indebtedness; the rate at which we utilize capital;
our ability to obtain adequate financing in
28
the future through product licensing, co-promotional
arrangements, public or private equity financing or otherwise;
and other factors referenced herein.
All forward-looking statements contained in this annual report
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, Inc., a Delaware corporation (Novavax or
the Company), was incorporated in 1987, and is a
biopharmaceutical company focused on creating differentiated,
value-added vaccines that leverage the Companys
proprietary virus-like particle (VLP) technology as
well as its proprietary
Novasomes®
adjuvants. VLPs imitate the three-dimensional structures of
viruses but are composed of recombinant proteins and therefore,
are believed incapable of causing infection and disease. Our
proprietary production technology uses insect cells rather than
chicken eggs or mammalian cells. The Companys product
targets include vaccines against the H5N1, H9N2 and other
subtypes of avian influenza with pandemic potential and against
human seasonal influenza as well as other infectious diseases.
The Company also has a drug delivery platform based on its
micellar nonparticle (MNP) technology, proprietary
oil and water nano emulsions used for the topical delivery of
drugs. The MNP technology was the basis for the development of
the Companys first Food and Drug
Administration approved estrogen replacement
product,
ESTRASORB®.
During 2005, Novavax transitioned from a specialty
pharmaceutical company, which included the sale and marketing of
products serving the womens health space, to an
innovative, biopharmaceutical company.
|
|
|
|
|
In October 2005, the Company entered into a License and Supply
Agreement for ESTRASORB with Esprit Pharma, Inc.
(Esprit). Under these agreements, the Company
continues to manufacture ESTRASORB and Esprit has an exclusive
license to sell ESTRASORB in North America.
|
|
|
|
In April 2006, the Company entered into a License and
Development Agreement and a Supply Agreement with Esprit to
co-develop, supply and commercialize the Companys
MNP-based testosterone product candidate for the treatment of
female hypoactive sexual desire disorder. Esprit was granted
exclusive rights to market the product in North America.
|
The Company has a unique blend of capabilities consisting of
formulation technologies, vaccine technologies and drug
development infrastructure, including clinical and commercial
production facilities. We are leveraging our capabilities to
develop differentiated, value-added vaccine products and
licensing them at various stages of development to realize their
value.
Summary
of Significant Transactions
License
and Development Agreement and Supply Agreement with Espirit
Pharma, Inc.
In October 2005, we entered into License and Supply Agreements
for ESTRASORB with Esprit Pharma, Inc. Under the License
Agreement, Esprit obtained exclusive rights to market ESTRASORB
in North America and we will continue to manufacture ESTRASORB.
In consideration for the rights granted, Esprit paid us a
minimum cash consideration of $12.5 million:
$2.0 million which was paid at closing, $8.0 million
which was paid in December 2005, and $2.5 million which was
paid in October 2006 on the first anniversary date of the
License Agreement. We receive royalties on all net sales of
ESTRASORB as well as milestone payments based on specific
pre-determined net sales levels of ESTRASORB. In 2005, we wrote
off $2.2 million, the remaining net balance of the
intangible asset for ESTRASORB rights at the date of the
transaction. As part of this transaction, Esprit also paid us
$0.3 million for inventory and sales and promotional
materials for which we had a book value of $0.4 million. We
incurred $20,000 of fees related to this transaction and
recorded a gain of $10.1 million.
In April 2006, we entered into a License and Development
Agreement and a Supply Agreement with Esprit to co-develop,
supply and commercialize our MNP testosterone product candidate
for the treatment of female
29
hypoactive sexual desire disorder. Under the terms of the
License and Development Agreement, Esprit was granted exclusive
rights to market any products developed and approved in North
America. We will receive a royalty on all net sales of the
product as well as milestone payments on specific pre-determined
clinical and regulatory milestones. Esprit will be responsible
for all development costs and will lead all clinical programs.
Under the term of the Supply Agreement, we will be responsible
for manufacturing any product.
Sublease
Agreement with PuriCore, Inc.
In April 2006, we entered into a sublease agreement with
Sterilox Technologies, Inc. (now known as PuriCore, Inc.) to
sublease 20,469 square feet of the Companys Malvern,
Pennsylvania corporate headquarters at a premium price per
square foot. The new sublease, with a commencement date of
July 1, 2006, expires on September 30, 2009. This
sublease is consistent with our strategic focus to increase our
presence in Rockville, Maryland, where our vaccine operations
are currently located. In line with that strategy, in October
2006, we entered into a lease for an additional
51,000 square feet in Rockville, Maryland. Accordingly, in
October 2006, the Company entered into an Amendment to the
Sublease Agreement with PuriCore, Inc. to sublease an additional
7,500 square feet of the Malvern corporate headquarters at
a premium price per square foot. This amendment has a
commencement date of October 25, 2006 and expires
concurrent with the initial lease on September 30, 2009.
License
Agreement Renewal with IGI, Inc.
In December 2005, we received a $1,000,000 payment from IGI,
Inc. in accordance with an option in a licensing agreement
signed between the Company and IGI in December 1995. This
payment gives IGI a ten-year renewal on licensed technologies in
specific fields and was recorded as licensing fee income for the
year ended December 31, 2005.
Asset
Purchase Agreement with Pharmelle, LLC (the Pharmelle
Transaction)
In September 2005, as part of the Companys strategic
repositioning, we entered into an Asset Purchase Agreement with
Pharmelle, LLC for the sale of assets related to the AVC Cream
and Suppositories, NovaNatal and NovaStart products, as well as
assets relating to certain formerly-marketed products. The
assets sold included, but were not limited to, intellectual
property, the New Drug Application for AVC products, inventory
and sales and promotional materials. In connection with the
sale, Pharmelle agreed to assume (i) those liabilities and
obligations arising after the closing date of the transaction in
connection with the performance by Pharmelle of certain assumed
contracts, (ii) those liabilities and obligations arising
after the closing date in connection with products sold by
Pharmelle after the closing date or the operation of the
business relating to such products or the assets after such date
(including any product liability claims associated with such
products), and (iii) all liability and responsibility for
returns of the products made after the closing date, regardless
of when such products were produced, manufactured or sold.
In consideration for the sale of these assets, Pharmelle paid us
$2.5 million in cash and assumed the liabilities noted
above. In addition, we are entitled to royalties on AVC for a
five-year period if net sales exceed certain levels. During
2005, we wrote off $1.1 million, the net balance of the
intangible assets related to the AVC product acquisition and
$0.3 million of inventory, recorded a $0.3 million
liability for future obligations and recorded a gain on the
transaction of $0.8 million.
In July 2006, we entered into an amendment to the Asset Purchase
Agreement with Pharmelle, LLC, to revise the royalty formula. We
are now entitled to royalties on AVC products for a five-year
period based on a percentage of gross margins if net sales
exceed certain levels. We did not record any royalty income
under this agreement during 2006.
Pharmelle has sold the asset and assigned the Asset Purchase
Agreement to Azur Pharma Inc. in early 2007.
30
Equity
Financing Transactions
In March 2006, we completed an agent-led equity offering of
5,205,480 shares of common stock at $7.30 per share,
for gross proceeds of $38.0 million. The stock was offered
and sold pursuant to an existing shelf registration statement.
Net proceeds were approximately $36.1 million.
In February 2006, we completed an offering of
4,597,700 shares of common stock at $4.35 per share
for gross proceeds of $20.0 million to a group of
institutional investors including Kleiner Perkins
Caufield & Byers and Prospect Venture Partners. The
stock was offered and sold pursuant to an existing shelf
registration statement. Net proceeds were approximately
$19.9 million.
In November 2005, we completed an agent-led offering of
4,186,047 shares of common stock at $4.30 per share,
for gross proceeds of $18.0 million. The stock was issued
pursuant to an existing shelf registration statement with net
proceeds of approximately $17.0 million.
In July 2005, we completed an agent-led offering of
4,000,000 shares of common stock at $1.00 per share,
for gross proceeds of $4.0 million. The stock was issued
pursuant to an existing shelf registration statement with net
proceeds of approximately $3.6 million.
Convertible
Notes Conversion
In March 2006, certain holders of $7.0 million principal
amount of our 4.75% senior convertible notes due
July 15, 2009 exercised their optional right to convert
their notes plus accrued interest of $68,000 into
1,294,564 shares of Novavax common stock, at the per share
conversion price of $5.46. This reduced the aggregated principal
of such notes outstanding from $29.0 million to
$22.0 million at December 31, 2006.
In October 2005, certain holders of $6.0 million face
amount of our 4.75% senior convertible notes due July 15,
2009 exercised their optional right to convert their notes plus
accrued interest of $81,000 into 1,070,635 shares of
Novavax common stock, at the per share conversion price of
$5.68. This reduced the aggregate principal amount of such notes
outstanding from $35.0 million to $29.0 million at
December 31, 2005.
Restructuring
of the Sales Force
From March through August 2005, we implemented measures to
reduce costs associated with our commercial operations by
downsizing and then eliminating our sales force to correspond
with our strategy of transitioning from a commercial business
model to one focused on our core competency of new product
development. The March 2005 restructuring reduced our sales
force from 100 to 47 employees and the August restructuring
eliminated the remaining sales force. Included in 2005 sales and
marketing expenses is $0.4 million related to these two
restructurings.
Cancellation
of King Pharmaceuticals Agreements
In January 2001, we entered into a co-promotion agreement with
King Pharmaceuticals, Inc. (King) for our topical
estrogen therapy, ESTRASORB, in the U.S. and Puerto Rico (the
Territory). We also entered into a license agreement
with King for many countries outside the U.S. The
co-promotion and license agreements (the Agreements)
granted King the right to share equally in the revenues and
expenses for manufacturing and marketing ESTRASORB in the
Territory and exclusive rights to many countries outside the
U.S. The Agreements also entitled us to up to
$5.0 million in milestone payments from King for
achievement of milestones outlined in the Agreements.
In June 2001, we amended the Agreements (the Amended
Agreements). The Amended Agreements clarified the terms of
two milestone payments totaling $5.0 million. The Amended
Agreements also granted King exclusive rights to promote, market
and distribute ESTRASORB in Canada, Switzerland, Greece, Italy,
Spain and the Netherlands, the only countries excluded from the
original license agreement. In addition, the Amended Agreements
included the co-promotion and license of a topical testosterone
therapy for testosterone deficient women that was in development.
31
In July 2004, we mutually agreed to terminate the Amended
Agreements (the King Transaction). The King
Transaction included the return to us of all worldwide rights
for ESTRASORB and the MNP testosterone product candidate, as
well as all rights to other womens health products that we
may successfully develop utilizing the MNP technology. The King
Transaction also included the redemption of $40.0 million
of our convertible notes held by King. Additionally, we hired 50
members of Kings womens health sales force to
provide competitive sales force coverage. As part of this
transaction, we paid King a net of $14.0 million in cash
and issued King 3,775,610 shares of common stock, which at
the time of closing were valued at approximately
$18.1 million.
The King Transaction resulted in a gain on the redemption of the
convertible notes held by King of $11.2 million for the
year ended December 31, 2004. This gain was determined
based on the fair value of the convertible notes plus accrued
interest as of the transaction date compared to the notes
total book value. In addition, an intangible asset for ESTRASORB
rights of $2.5 million was recorded, which represents the
difference between assets and liabilities acquired or written
off, the net cash paid in the transaction, the common stock
issued and transaction fees and expenses. The recorded
intangible was determined to be a fair value for the rights
re-acquired based on the sales levels of ESTRASORB, the status
of obtaining product approvals outside the U.S. and the
deferred further development of the MNP testosterone product
candidate. Included in the assets and liabilities written off
were deferred financing costs of $0.4 million relating to
the convertible notes held by King, and remaining deferred
revenue of $2.2 million relating to previous licensing fees
for ESTRASORB, mentioned above.
Critical
Accounting Policies and Use of Estimates
We prepare our consolidated financial statements in conformity
with accounting principles generally accepted in the
U.S. Such accounting principles require that our management
make estimates and assumptions that affect the reported amount
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. We base our estimates on historical and anticipated
results and trends and on various other assumptions that we
believe are reasonable under the circumstances, including
assumptions as to future events. These estimates form the basis
for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. By
their nature, estimates are subject to an inherent degree of
uncertainty. Actual results could differ materially from these
estimates. The items in our consolidated financial statements
that have required us to make significant estimates and
judgments are as follows:
Revenue
Recognition and Allowances
The Company recognizes revenue in accordance with the provisions
of Staff Accounting Bulleting No. 104, Revenue
Recognition (SAB No. 104). For product
sales, revenue is recognized when all of the following criteria
are met: persuasive evidence of an arrangement exists, delivery
has occurred, the price is fixed and determinable and
collectibility is reasonably assured. The Company establishes
allowances for estimated uncollectible amounts, product returns,
rebates and charge backs based on historical trends and
specifically identified problem accounts. A large part of the
Companys product sales are to Esprit or to distributors
who resell the products to their customers. The Company provides
rebates to members of certain buying groups who purchase from
the Companys distributors, to distributors that sell to
their customers at prices determined under a contract between
the Company and the customer, and 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. The Company estimates the amount of the rebate that
will be paid, and records the liability as a reduction of
revenue when the Company records our sale of the products.
Settlement of the rebate generally occurs from three to
12 months after sale. The Company regularly analyzes the
historical rebate trends and makes adjustments to recorded
reserves for changes in trends, distributor inventory levels,
product prescription data and generic competition and makes
adjustments to the recorded reserves for changes in trends,
distributor inventory levels, product prescription data and
generic competition and makes adjustments to the recorded
reserves based on such information.
Under the terms of the Asset Purchase Agreement with Pharmelle,
LLC, the Company no longer has responsibility for rebates or
returns related to
AVCtm
Cream and Suppositories, NovaNatal and NovaStart as of the date
of the sales of such assets. Under the License and Supply
Agreements with Esprit Pharma, Inc., the Company
32
no longer has responsibility for rebates related to ESTRASORB or
returns related to ESTRASORB sales made subsequent to entering
into the License Agreement on October 19, 2005.
The shipping and handling costs the Company incurs are included
in cost of products sold in its statements of operations.
For upfront payments and licensing fees related to contract
research or technology, the Company follows the provisions of
SAB No. 104 in determining if these payments and fees
represent the culmination of a separate earnings process or if
they should be deferred and recognized as revenue 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.
Revenue earned under research contracts is recognized in
accordance with the terms and conditions of such contracts for
reimbursement of costs incurred and defined milestones.
Stock-Based
Compensation
Prior to January 1, 2006, the Companys equity-based
employee compensation cost under its various stock incentive and
option plans was accounted for under the recognition and
measurement provisions of APB Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations,
as permitted by Standard of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation
(SFAS No. 123)
Effective January 1, 2006, the Company adopted the fair
value recognition provisions of Statement of Financial
Accounting Standard No. 123 (revised), Accounting for
Stock-based Payment (SFAS No. 123R)
using the modified-prospective method. This standard requires
the Company to measure the cost of employee services received in
exchange for equity share options granted based on the
grant-date fair value of options. The cost is recognized as
compensation expense over the vesting period of the options.
Research
and Development
Research and development costs are expensed as incurred. Such
costs include internal research and development expenditures
(such as salaries and benefits, raw materials and supplies) and
contracted services (such as sponsored research, consulting and
testing services) of proprietary research and development
activities and similar expenses associate with collaborative
research agreements.
Income
Taxes
The Companys income taxes are accounted for using the
liability method. Under the liability method, deferred income
taxes are recognized for the future tax consequences
attributable to differences between the consolidated financial
statement carrying amounts of existing assets and liabilities
and their respective tax basis and operating loss carry forward.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the year in
which those temporary differences are expected to be recovered
or settled.
The effect of changes in tax rates on deferred tax assets and
liabilities is recognized in operations in the period that
includes the enactment date. A valuation allowance is
established when necessary to reduce net deferred tax assets to
the amount expected to be realized. The Company has provided a
full valuation allowance against its net deferred tax assets as
of December 31, 2006 and 2005.
Goodwill
and Intangible Assets
Goodwill originally results from business acquisitions. Assets
acquired and liabilities assumed are recorded at their fair
values; the excess of the purchase price over the 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 (SFAS No. 142) 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
the indefinite-lived intangible assets can be recovered. Under
SFAS No. 142, goodwill
33
impairment is deemed to exist if the carrying value of a
reporting unit exceeds its estimated fair value. In accordance
with the requirements of SFAS No. 142, the Company
initially tested its goodwill for impairment as of
January 1, 2002 and determined that no impairment was
present. The Company thereafter performed the required annual
impairment test as of December 31 of each year on the
carrying amount of its goodwill.
The Company evaluates the recoverability of the carrying value
of its long-lived assets and identifiable intangibles
periodically and whenever events or changes in circumstances
indicate that the carrying value of the asset may not be
recoverable. Examples of events or changes in circumstances that
indicate that the recoverability of the carrying value of an
asset should be assessed include but are not limited to the
following: a significant decrease in the market value of an
asset, a significant change in the extent or manner in which an
asset is used, a significant physical change in an asset, a
significant adverse change in legal factors or in the business
climate that could affect the value of an asset, an adverse
action or assessment by a regulator, an accumulation of costs
significantly in excess of the amount originally expected to
acquire or construct an asset, a current period operating or
cash flow loss combined with a history of operating or cash flow
losses,
and/or a
projection of forecast that demonstrates continuing losses
associate with an asset used for the purpose of producing
revenue. 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 relation to the operating performance of the business
and future discounted and undiscounted cash flows is less than
the assets carrying value.
Recent
Accounting Pronouncements
Other than the adoption of Statement of Financial Accounting
Standards No. 123 (revised), Accounting for Stock-Based
Payment (SFAS No. 123R), there have
been no material changes in our critical accounting policies or
critical accounting estimates since December 31, 2005, nor
have we adopted any accounting policy that has or will have a
material impact on our consolidated financial statements. For
further discussion of our accounting policies see Note 2
Summary of Significant Accounting Policies in
the Notes to the Consolidated Financial Statements included
herewith.
SFAS No. 123R
As of January 1, 2006 (effective date), we
adopted SFAS No. 123R in accounting for stock options
issued to our employees, directors and consultants using the
modified prospective method. The modified prospective method
requires that compensation costs be recognized for all
share-based payments granted after the effective date and for
all awards granted prior to the effective date that are unvested
using the requirements of SFAS No. 123R. Prior to the
adoption of SFAS No. 123R, we accounted for our
stock-based compensation using the principles of Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB No. 25) as
permitted by Statement of Financial Accounting Standards
No. 123, Accounting for Stock Based Compensation
(SFAS No. 123). APB No. 25
generally did not require that options granted to employees be
expensed. Since we elected to use the modified prospective
method, there are no one-time effects from the adoption of
SFAS No. 123R, such as a cumulative effect adjustment.
There were no modifications to outstanding stock options as of
December 31, 2005 and 2006. There have been no changes in
the quantity or type of instruments used in share-based payment
programs. There has been no material modifications to the
valuation methodologies or assumptions from those used in
estimating the fair value of options under
SFAS No. 123 other than the adjustments for expected
volatility. Prior to the adoption of SFAS. No. 123R, we
utilized the preceding 12 month period historical stock
prices in determining the expected volatility. With the adoption
of SFAS No. 123R, we use the historical volatilities
based on stock prices since the inception of the stock plans in
determining the expected volatility. Forfeiture rates are
estimated based on historical activities since the inception of
the stock plans. There have been no changes in the normal terms
of share-based payments agreements. For grants awarded prior to
January 1, 2006, we accounted for compensation cost using a
graded method. For grants awarded on or after January 1,
2006, we accounted for compensation cost using a straight-line
method. As December 31, 2006, the aggregate fair value of
the remaining compensation cost of unvested options, as
determined using a Black-Scholes option valuation model, was
approximately $2.4 million (net of estimated forfeitures).
This remaining compensation costs is expected to be recognized
over a weighted average period of 1.7 years.
34
The effects of adopting SFAS No. 123R are recorded as
compensation costs in the operating costs and expenses as
follows:
|
|
|
|
|
|
|
Twelve Months
|
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cost of products sold (which
includes idle capacity)
|
|
$
|
48
|
|
Research and development
|
|
|
547
|
|
General and administrative
|
|
|
1,167
|
|
|
|
|
|
|
Total effect of adopting
SFAS No. 123R
|
|
$
|
1,776
|
|
|
|
|
|
|
SFAS No. 157
In September 2006, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 157,
Fair Value Measurements
(SFAS No. 157). SFAS No. 157
defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands
disclosures about fair value measurements.
SFAS No. 157 applies under other accounting
pronouncements that require or permit fair value measurements,
but does not require any new fair value measurements.
SFAS No. 157 will become effective for financial
statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. We are currently evaluating what impact, if any,
SFAS No. 157 will have on our financial conditions,
results or operations or liquidity.
SAB No. 108
In September 2006, the SEC staff issued Staff Accounting
Bulleting No. 108, Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year
Financial Statements (SAB No. 108).
SAB No. 108 was issued to provide consistency between
how registrants quantify financial statement misstatements and
requires us to quantify financial statement misstatements and
requires us to quantify misstatements based on their impact on
each of our consolidated financial statements and related
disclosure. SAB No. 108 is effective as of the end of
our 2006 fiscal year, allowing a one-time transitional
cumulative effect adjustment to retained earning as of
January 1, 2006 for errors that were not previously deemed
material, but are material under the guidance in
SAB No. 108. The adoption of this SAB did not have any
impact on our consolidated financial statements.
FIN 48
In July 2006, the Financial Accounting Standards Board issued
FASB Interpretation 48, Accounting for Uncertainty in Income
Taxes: an interpretation of FASB Statement No. 109
(FIN 48) FIN 48, which clarifies
Statement 109, Accounting for Income Taxes,
establishes the criterion that an individual tax position
has to meet for some or all of the benefits of that position to
be recognized in the Companys financial statements. On
initial application, FIN 48 will be applied to all tax
positions for which the statute of limitations remains open.
Only tax positions that meet the more-likely-than-not
recognition threshold at the adoption date will be recognized or
continue to be recognized. The cumulative effect of applying
FIN 48 will be reported as an adjustment to retained
earnings at the beginning of the period in which it is adopted.
FIN 48 is effective for fiscal years beginning after
December 15, 2006, and will be adopted by the Company on
January 1, 2007. We are currently evaluating what impact,
if any, adopting FIN 48 will have on our consolidated
financial statements.
SFAS No. 159
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159 The Fair Value
Option for Financial Assets and Financial Liabilities
(SFAS No. 159). SFAS No. 159
provides companies an option to report certain financial assets
and liabilities at fair value. The intent of
SFAS No. 159 is to reduce the complexity in accounting
for financial instruments and the volatility in earnings caused
by measuring related assets
35
and liabilities differently. SFAS No. 159 is effective
for financial statements issued for fiscal years after November
15, 2007. The Company is evaluating the impact this new standard
will have on its financial position and results of operations.
Results
of Operations for Fiscal Years 2006, 2005 and 2004
(In thousands, except percentage changes and share and per share
information)
The following is a discussion of the historical consolidated
financial condition and results of operations of Novavax, Inc.
and its wholly owned subsidiary and should be read in
conjunction with the consolidated financial statements and notes
thereto set forth in this Annual Report on
Form 10-K.
Additional information concerning factors that could cause
actual results to differ materially from those in the
Companys forward-looking statements is contained from time
to time in the Companys SEC filings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Change from 2005
|
|
|
|
|
|
Change from 2004
|
|
|
2004
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net product sales
|
|
$
|
2,501
|
|
|
$
|
(2,048
|
)
|
|
|
(45
|
)%
|
|
$
|
4,549
|
|
|
$
|
(1,848
|
)
|
|
|
(29
|
)%
|
|
$
|
6,397
|
|
Contract research and development
|
|
|
1,886
|
|
|
|
88
|
|
|
|
5
|
%
|
|
|
1,798
|
|
|
|
60
|
|
|
|
3
|
%
|
|
|
1,738
|
|
Royalties, milestone and licensing
fees
|
|
|
296
|
|
|
|
(745
|
)
|
|
|
(72
|
)%
|
|
|
1,041
|
|
|
|
916
|
|
|
|
733
|
%
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,683
|
|
|
$
|
(2,705
|
)
|
|
|
(37
|
)%
|
|
$
|
7,388
|
|
|
$
|
(872
|
)
|
|
|
(11
|
)%
|
|
$
|
8,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues for 2006 consisted of product sales of
$2.5 million compared to $4.6 million in 2005;
contract research and development revenues of $1.9 million
in 2006 compared to $1.8 million in 2005; and royalties,
milestone and licensing fees of $0.3 million in 2006
compared to $1.0 million in 2005. Total revenues for 2006
were $4.7 million as compared to $7.4 million for
2005, a decrease of $2.7 million or 37%. The primary reason
for this decrease in revenues was the divestiture of assets
related to AVC Cream and Suppositories, NovaNatal and NovaStart
products to Pharmelle, LLC in September 2005 and the licensing
of exclusive rights to market ESTRASORB in North America to
Esprit Pharma, Inc. in October 2005. Under the terms of the
License and Supply Agreements with Esprit, the Company agreed to
manufacture and supply ESTRASORB. As a result, product sales for
2006 consist primarily of ESTRASORB sales to Esprit under the
October 2005 Supply Agreement and commercial Gynodiol sales.
Included in ESTRASORB net sales for 2006 was a
$(0.2) million adjustment to the ESTRASORB sales return
allowance for product sold commercially prior to the licensing
of ESTRASORB to Esprit. ESTRASORB sales were lower than expected
for 2006 due to weak market demand for this product. During
2006, Esprit established several marketing programs for
ESTRASORB that they anticipate will increase market demand.
Contract research and development revenues for 2006 totaled
$1.9 million as compared to 2005 contract research and
development revenues of $1.8 million. Revenues in the
current year were recognized under a National Institutes of
Health (NIH) grant to develop a second generation
HIV/AIDS vaccine, three manufacturing contracts and one
additional government contract.
Royalties, milestone and licensing fees for 2006 consisted of
$0.3 million from royalties pursuant to the License
Agreement with Esprit Pharma for ESTRASORB. This represents a
$0.7 million decrease from $1.0 million in royalties,
milestones and license fees for 2005 which consisted of a
$1.0 million renewal fee received from IGI, Inc. in
December 2005 in accordance with an option in a licensing
agreement signed between the Company and IGI in December 1995.
This payment gives IGI a ten-year renewal on licensed
technologies in specific fields.
Revenues for 2005 consisted of product sales of
$4.5 million compared to $6.4 million in 2004;
contract research revenues of $1.8 million compared to
$1.7 million in 2004; and royalties, milestone and
licensing fees of $1.0 million in 2005 compared to
$0.1 million in 2004. Total revenues for 2005 were
$7.4 million compared to $8.3 million for 2004, a
decrease of $0.9 million or 11%. Of the total decrease in
revenues, product sales accounted
36
for $1.8 million partially offset by a $0.9 million
increase in royalties, milestone and licensing fees. The reason
for the net decrease in net product sales is primarily due to
the following:
|
|
|
|
|
In September 2005, we entered into the Pharmelle Transaction for
the sale of assets related to AVC Cream and Suppositories,
NovaNatal and NovaStart products. As a result, the 2005 vitamin
and AVC product sales only reflect a partial year of revenues
for these product lines.
|
|
|
|
During 2005, the vitamin lines continued to be negatively
impacted by generic products and new product competition.
|
|
|
|
Sales of Gynodiol in 2005 were lower than the prior year
primarily due to an
out-of-stock
situation for certain prescription strengths.
|
|
|
|
In October 2005, we entered into the Esprit Transaction. Under
these agreements, Esprit obtained exclusive rights to market
ESTRASORB in North America and the Company agreed to manufacture
and sell ESTRASORB to Esprit for a lower price than what we
previously sold ESTRASORB to our distributors. 2005 ESTRASORB
net product sales include sales to our distributors through the
date of this agreement and to Esprit after this date.
|
Contract research revenues in 2005 totaled $1.8 million
compared to 2004 contract research revenues of
$1.7 million. Royalties, milestone and licensing fees
increased by $0.9 million from $0.1 million in 2004 to
$1.0 million in 2005 primarily due to a $1.0 million
license renewal fee received from IGI, Inc. for a ten year
renewal on licensed technologies in specific fields.
Operating
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Change from
|
|
|
|
|
|
Change from
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
2004
|
|
|
2004
|
|
|
Operating costs and
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
$
|
4,924
|
|
|
$
|
(867
|
)
|
|
|
(15
|
)%
|
|
$
|
5,791
|
|
|
$
|
2,301
|
|
|
|
66
|
%
|
|
$
|
3,490
|
|
Excess inventory costs over market
|
|
|
1,549
|
|
|
|
30
|
|
|
|
2
|
%
|
|
|
1,519
|
|
|
|
1,519
|
|
|
|
100
|
%
|
|
|
|
|
Research and development
|
|
|
11,529
|
|
|
|
6,454
|
|
|
|
127
|
%
|
|
|
5,075
|
|
|
|
(2,294
|
)
|
|
|
(31
|
)%
|
|
|
7,369
|
|
Selling and marketing
|
|
|
101
|
|
|
|
(6,819
|
)
|
|
|
(99
|
)%
|
|
|
6,920
|
|
|
|
(16,668
|
)
|
|
|
(71
|
)%
|
|
|
23,588
|
|
General and administrative
|
|
|
11,187
|
|
|
|
3,073
|
|
|
|
38
|
%
|
|
|
8,114
|
|
|
|
(602
|
)
|
|
|
(7
|
)%
|
|
|
8,716
|
|
Facility exit costs
|
|
|
|
|
|
|
(105
|
)
|
|
|
(100
|
)%
|
|
|
105
|
|
|
|
(618
|
)
|
|
|
(85
|
)%
|
|
|
723
|
|
Gain on sales of product assets
|
|
|
|
|
|
|
10,965
|
|
|
|
100
|
%
|
|
|
(10,965
|
)
|
|
|
(10,965
|
)
|
|
|
(100
|
)%
|
|
|
|
|
Gain on redemption of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,162
|
|
|
|
100
|
%
|
|
|
(11,162
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,290
|
|
|
$
|
12,731
|
|
|
|
77
|
%
|
|
$
|
16,559
|
|
|
$
|
(16,165
|
)
|
|
|
(50
|
)%
|
|
$
|
32,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
Products Sold and Idle Capacity
Cost of products sold, which includes fixed idle capacity costs
at our manufacturing facility, decreased to $4.9 million in
2006 compared to $5.8 million in 2005. Of the
$4.9 million cost of products sold for 2006,
$2.5 million was due to idle capacity costs at our
manufacturing facility compared to $3.2 million in 2005.
The remaining $2.4 million primarily represents the cost of
ESTRASORB sales to Esprit under our October 2005 Supply
Agreement, Gynodiol cost of products sold and costs related to
manufacturing contracts. Of the $5.8 million cost of
products sold for 2005, $3.2 million was due to idle
capacity at our manufacturing facility. Idle capacity costs for
2005 were $0.7 million higher than in 2006 due partially to
the accounting of excess inventory costs over market in 2006,
which is discussed in more detail below. Other factors
contributing to the decrease in cost of products sold was lower
production volumes, the divestiture of assets related to AVC
Cream and Suppositories, NovaNatal and NovaStart products to
Pharmelle, LLC in September 2005, and lower Gynodiol sales in
2006 when compared to the prior year.
37
Cost of products sold, which includes fixed idle capacity costs
at our manufacturing facility, increased to $5.8 million in
2005, compared to $3.5 million in 2004, a 66% increase. Of
the $5.8 million cost of products sold for 2005,
$3.2 million was due to idle plant capacity costs at our
manufacturing facility compared to $0.7 million in 2004.
The remaining $2.6 million increase was primarily due to
ESTRASORB, which accounted for 45% of net product sales in 2005,
as opposed to 28% of net product sales in 2004, and carries a
much higher cost of product sold than our other products.
ESTRASORB cost of product sold percentages have been and will
continue to be high until we increase production volumes for
both ESTRASORB and other manufactured products to offset the
fixed costs and depreciation related to the manufacturing
facility, on-going facility costs and costs associated with the
personnel required to manufacture products at this facility.
With the sale of vitamin and AVC lines, future cost of products
sold will correspond to our ESTRASORB sales to Esprit, Gynodiol
sales to distributors and manufacturing costs related to other
products produced at our manufacturing facility. Until this
facility reaches maximum capacity fixed idle capacity costs will
continue to be included in cost of products sold.
Excess
Inventory Costs over Market
As part of the October 2005 License and Supply Agreement for
ESTRASORB, we agreed to manufacture and sell ESTRASORB to Esprit
Pharma, Inc. at a price that was lower than our current
production costs for the inventory manufactured and sold. These
excess costs over the fixed price are being paid under the
Supply Agreement with Esprit totaled $1.5 million for the
year ended December 31, 2006 and $1.5 million for the
fourth quarter of fiscal year 2005. It is most likely we will
continue to manufacture ESTRASORB at a loss until production
volumes increase or we enter into additional contract
manufacturing agreements with third parties to more fully
utilize our manufacturing facilitys capacity. The current
facility is able to accommodate much greater production than is
currently scheduled, which, if more fully utilized, would offset
the fixed costs related to the manufacturing process and
facility. In addition, we are negotiating revisions to our
agreements for packaging costs of ESTRASORB as well as our fixed
lease costs for the manufacturing facility. If these
negotiations result in higher packaging or facility lease costs
for us, it may have a material adverse impact on future
operating and financial results.
Research
and Development Expenses
Research and development costs increased from $5.1 million
in 2005 to $11.5 million in 2006, an increase
of$6.5 million or 127%. This increase was due primarily to
higher research and development spending to support our
strategic focus on creating differentiated, value-added vaccines
that leverage the Companys proprietary virus-like particle
(VLP) technology. Research and development expenses
were significantly higher in 2006 due to increases in personnel,
facility and outside testing costs (including sponsored research
and consulting agreements) associated with expanded preclinical
testing and process development, manufacturing and
quality-related programs necessary to move the Companys
influenza vaccine candidates into clinical testing. Also
contributing to this increase was the recognition of
$0.5 million of non-cash compensation costs resulting from
the implementation of SFAS No. 123R in 2006, using the
modified prospective method, while no costs were recorded in
2005 utilizing the accounting recognition methods under APB
No. 25.
Research and development costs decreased from $7.4 million
in 2004 to $5.1 million in 2005. The decrease of
$2.3 million or 31% was due to manufacturing
start-up
costs in 2004 being accounted for as research and development
expense until April 2004. Manufacturing costs in the first
quarter of 2004 totaling $1.7 million were incurred to
prepare and validate the ESTRASORB facility for current Good
Manufacturing Practices and FDA compliance and not to build
inventory. Beginning in April 2004, manufacturing costs were
included in cost of sales and inventory. Vaccine contract
research costs, which are included in total research and
development expenses, decreased from $3.2 million in 2004
to $2.6 million in 2005. This decrease was due to higher
costs reimbursed or paid under a government contract in 2004, as
well as a reduction in facility costs for 2005.
Estimated
Cost and Time to Complete Major Projects
The expenditures that will be necessary to execute our business
plan are subject to numerous uncertainties, which may adversely
affect our liquidity and capital resources. As of
December 31, 2006, our proprietary product and vaccine
candidates were in early stages of development. Due to the
inherent nature of product development, future market demand for
products and factors outside of our control, such as clinical
results and regulatory
38
approvals, we are unable to estimate the completion dates and
the estimated total costs for those product candidates. The
duration and the cost of clinical trials may vary significantly
over the life of a project as a result of differences arising
during clinical trial protocol, including, but not limited to,
the following:
|
|
|
|
|
number of patients that ultimately participate in the trial;
|
|
|
|
duration of the patient
follow-up
that seems appropriate in view of the results;
|
|
|
|
number of clinical sites included in the trials; and
|
|
|
|
length of time required to enroll suitable patient subjects.
|
In addition, we test our potential products and vaccines in
numerous preclinical studies to identify, among other things,
the daily dosage amounts. We may conduct multiple clinical
trials to cover a variety of indications for each product
candidate. As we obtain results for our trials we may elect to
discontinue clinical trials for certain product candidates or
indications. We further believe that it is not possible to
predict the length of regulatory approval time. Factors that are
outside our control could significantly delay the approval and
marketability of our product candidates.
As a result of the uncertainties discussed above and other risks
and uncertainties, the duration and completion costs of our
research and development projects are difficult to estimate and
are subject to numerous variations. Our inability to complete
our research and development projects in a timely manner could
significantly increase our capital requirements and could
adversely impact our liquidity. These uncertainties could force
us to seek external sources of financing from time to time in
order to continue pursuing our business strategy. For more
discussion of the risks and uncertainties and our liquidity, see
Item 1A Risk Factors and see Liquidity
and Capital Resources.
Selling
and Marketing Expenses
Selling and marketing expenses were $101,000 in 2006 compared to
$6.9 million in 2005. This decrease of $6.8 million,
or 99%, was due to our strategy of transitioning from a
specialty pharmaceutical company, which included the sale and
marketing of products serving the womens health space, to
an innovative, biopharmaceutical company focused on creating
differentiated, value-added vaccines that leverage the
Companys proprietary VLP technology. With the sale of our
vitamin and AVC lines to Pharmelle, LLC in September 2005 and
the licensing of ESTRASORB in North America to Esprit in October
2005, our ongoing selling and marketing expenses consist
primarily of costs related to sales of Gynodiol. These ongoing
costs should be minimal.
Selling and marketing expenses were $6.9 million in 2005
compared to $23.6 million in 2004. This significant
decrease of $16.7 million, or 71%, was due to the reduction
of the Companys sales force in March 2005 and the
elimination of its remaining sales force in August 2005. This
corresponded with our strategy of transitioning from a
commercial business model to that of one focused on our core
competency of new product development. With the sale of our
vitamin and AVC lines to Pharmelle and the licensing of
ESTRASORB in North America to Esprit, the only remaining product
that we are selling directly to our distributors is Gynodiol.
General
and Administrative
General and administrative costs were $11.2 million in 2006
compared to $8.1 million in 2005. This $3.1 million
increase was partially due to $1.2 million of non-cash
compensation costs resulting from the implementation of
SFAS No. 123R in 2006, using the modified prospective
method, while no costs were recorded in 2005 utilizing the
accounting recognition methods under APB No. 25. Other
factors contributing to this increase were higher personnel,
legal and consulting costs related to the Companys
VLP-based vaccine development programs. The Company took steps
to strengthen its intellectual property portfolio and initiate
business development and commercial assessment activities
related to its new vaccine development strategy.
Also included in 2006 is a $167,000 reserve against a note
receivable and its corresponding accrued interest due from a
former director of the Company. This reserve represents the
difference between the book value of the receivables less the
market value of the pledged shares of common stock of the
Company as of December 31, 2006. The Company also made a
loan to another director which is due to mature on
March 21, 2007.
39
Included in 2005 general and administrative expense was a
$400,000 offset for Opportunity Grant funds received from the
Commonwealth of Pennsylvania for the reimbursement of certain
costs incurred with the move of our corporate headquarters and
product development activities from Maryland to Pennsylvania. As
a result of the Companys recent decision to relocate its
corporate headquarters and vaccine development activities back
to Maryland, the Commonwealth of Pennsylvania has demanded
repayment of the $400,000 Opportunity Grant received in 2005.
The Company has recorded a liability in 2006 reflecting its
obligation to repay this amount.
General and administrative costs were $8.1 million in 2005
compared to $8.7 million in 2004. This $0.6 million
decrease, or 7%, is primarily due to receiving $0.4 million
from the Commonwealth of Pennsylvania for the reimbursement of
certain costs incurred with the move to our corporate
headquarters and product development activities to Malvern,
Pennsylvania as well as cost saving measures implemented in 2004
and 2005. This decrease was partially offset by increases in
legal fees and business development costs, related to strategic
initiatives.
Other
Operating Costs and Expenses
In 2005, we recorded gains on sales of product assets totaling
$11.0 million, which consisted of a $10.1 million gain
from the licensing of exclusive rights to market ESTRASORB in
North America to Esprit Pharma, Inc. in October 2005 and a
$0.9 million gain from the divestiture of assets related to
AVC Cream and Suppositories, NovaNatal and NovaStart products to
Pharmelle, LLC in September 2005.
In 2004, we recorded a one-time gain on the redemption of
convertible notes held by King Pharmaceuticals, Inc. of
$11.2 million related to the King Transaction (see
Summary of Significant Transactions).
A charge for facility exit costs of $0.7 million was
recorded in 2004. As previously described, in September 2004 we
moved to Malvern, Pennsylvania to consolidate and expand our
corporate headquarters and product development activities. We
vacated our facility in Columbia, Maryland and recorded a
liability of $0.2 million for lease termination costs and
wrote-off the net value of the Columbia leasehold assets of
$0.5 million. A further adjustment was made in 2005 of
$0.1 million for additional contract termination costs.
Interest
Income/(Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Change from 2005
|
|
|
|
|
|
Change from 2004
|
|
|
2004
|
|
|
Interest income
(expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
3,267
|
|
|
$
|
2,937
|
|
|
|
890
|
%
|
|
$
|
330
|
|
|
$
|
12
|
|
|
|
4
|
%
|
|
$
|
318
|
|
Interest expense
|
|
|
(1,727
|
)
|
|
|
(606
|
)
|
|
|
(26
|
)%
|
|
|
(2,333
|
)
|
|
|
489
|
|
|
|
27
|
%
|
|
|
(1,844
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,540
|
|
|
$
|
3,543
|
|
|
|
177
|
%
|
|
$
|
(2,003
|
)
|
|
$
|
477
|
|
|
|
31
|
%
|
|
$
|
(1,526
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income was $3.3 million in 2006 and
$0.3 million in 2005 and 2004. This increase in interest
income was due primarily to significantly higher investment
balances resulting from the net proceeds from three equity
financing transactions during the fourth quarter of 2005 and the
first quarter of 2006 which totaled $73.0 million as well
as higher interest rates. Interest expense was $1.7 million
in 2006, $2.3 million in 2005 and $1.8 million in
2004. Interest expense relates primarily to the convertible
notes with King Pharmaceuticals, Inc. of $40.0 million in
2003 through July 2004, at which time these notes were redeemed
and the Company issued new 4.75% senior convertible notes
totaling $35.0 million to a group of institutional
investors. In October 2005, certain holders of $6.0 million
face amount of the convertible notes exercised their optional
right to convert their notes plus accrued interest into
1,070,635 shares of Novavax common stock. This reduced the
aggregate principal amount of the convertible notes outstanding
to $29.0 million as of December 31, 2005. In March
2006, certain holders of $7.0 million face amount of the
convertible notes exercised their optional right to convert
their notes plus accrued interest into 1,294,564 shares of
Novavax common stock. This further reduced the aggregate
principal amount of the convertible notes outstanding to
$22.0 million as of December 31, 2006. Included in
interest expense for 2005 and 2006 is a $0.3 million and a
$0.3 million write-off of deferred financing costs that
corresponds to the conversion of $6.0 million in
convertible debt in 2005 and $7.0 million in convertible
debt in 2006. Also included in interest
40
expense for 2006, 2005 and 2004 is $0.3 million,
$0.4 million and $0.2 million, respectively, of
amortization of deferred financing costs that corresponds to the
issuance of the 4.75% senior convertible notes in 2004.
Net
Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Change from
|
|
|
|
|
|
Change from
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
2004
|
|
|
2004
|
|
|
Net loss
|
|
$
|
(23,068
|
)
|
|
$
|
(11,894
|
)
|
|
|
(106
|
)%
|
|
$
|
(11,174
|
)
|
|
$
|
14,746
|
|
|
|
57
|
%
|
|
$
|
(25,920
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
$
|
(0.39
|
)
|
|
$
|
(0.13
|
)
|
|
|
(50
|
)%
|
|
$
|
(0.26
|
)
|
|
$
|
0.44
|
|
|
|
63
|
%
|
|
$
|
(0.70
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted shares
outstanding
|
|
|
58,664,365
|
|
|
|
|
|
|
|
|
|
|
|
42,758,302
|
|
|
|
|
|
|
|
|
|
|
|
36,926,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for 2006 was $23.1 million or $(0.39) per share,
as compared to $11.2 million or $(0.26) per share for 2005,
an increase of $11.9 million. The increased loss was
primarily due to the gain on sales of product assets totaling
$11.0 million recorded in 2005. Also contributing to this
higher loss in 2006 was a $2.7 million decrease in
revenues, a $1.9 million increase in operating costs and
expenses in support of the Companys new vaccine
development strategy and $0.1 million in facility exit
costs offset by a $2.9 million increase in interest income
and a $0.6 million decrease in interest expense, all
previously discussed.
Net loss for 2005 was $11.2 million or $(0.26) per share,
as compared to $25.9 million or $(0.70) per share for 2004,
a decrease of $14.7 million, or $0.44 per share. The
decreased loss in 2005 was due to the gain on sales of product
assets of $11.0 million, a decrease of $15.7 million
in operating expenses and $0.6 million in facility exit
costs, partially offset by the $0.9 million decrease in
2005 revenues, the gain on redemption of convertible debt held
by King Pharmaceuticals, Inc. of $11.2 million and an
increase of $0.5 million in interest expense, all
previously discussed.
Weighted shares outstanding increased from 36.9 million
shares in 2004 to 58.7 million shares in 2006 due primarily
to the equity financing transactions in the second half of 2005
and the first quarter of 2006 coupled with the conversion of
$13.0 million of senior convertible notes into shares of
Novavax common stock during this same period. In addition,
exercises of stock options and issuance of restricted stock as
compensation also contributed to this increase in weighted
shares outstanding.
Liquidity
and Capital Resources
Our future capital requirements depend on numerous factors
including but not limited to, the commitments and progress of
our 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 manufacturing costs related to ESTRASORB. We
plan to continue to have multiple vaccines and products in
various stages of development and we believe our research and
development as well as general administrative expenses and
capital requirements will continue to exceed our revenues.
Future activities, particularly vaccine and product development,
41
are subject to our ability to raise funds through debt or equity
financing, or collaborative arrangements with industry partners
and government agencies.
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2006
|
|
|
|
(In thousands)
|
|
|
Summary of Cash
Flows:
|
|
|
|
|
Net cash (used in) provided by:
|
|
|
|
|
Operating activities
|
|
$
|
(14,810
|
)
|
Investing activities
|
|
|
(66,815
|
)
|
Financing activities
|
|
|
56,893
|
|
|
|
|
|
|
Net decrease in cash and cash
equivalents
|
|
|
(24,732
|
)
|
Cash and cash equivalents at
beginning of year
|
|
|
31,893
|
|
|
|
|
|
|
Cash and cash equivalents at end
of year
|
|
$
|
$7,161
|
|
|
|
|
|
|
In addition to revenues of $20.3 million during the
three-year period ended December 31, 2006, we have funded
our operations primarily from the following activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Proceeds (in Millions)
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Total
|
|
|
Sales of common stock in public
offerings, net
|
|
$
|
|
|
|
$
|
20.7
|
|
|
$
|
56.0
|
|
|
$
|
76.7
|
|
Sales of common stock in a private
placement
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
4.7
|
|
Sales of product assets
|
|
|
|
|
|
|
12.7
|
|
|
|
|
|
|
|
12.7
|
|
License payments received
|
|
|
|
|
|
|
1.0
|
|
|
|
2.5
|
|
|
|
2.5
|
|
Issuance of convertible notes
|
|
|
32.9
|
|
|
|
|
|
|
|
|
|
|
|
32.9
|
|
Uses associated with the King
Transaction
|
|
|
(15.0
|
)
|
|
|
|
|
|
|
|
|
|
|
(15.0
|
)
|
Exercise of stock options and
warrants
|
|
|
0.4
|
|
|
|
0.4
|
|
|
|
1.7
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23.0
|
|
|
$
|
34.8
|
|
|
$
|
60.2
|
|
|
$
|
117.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, we held $73.6 million in cash
and investments as compared to $31.9 million at
December 31, 2005. Of the $41.7 million increase in
cash and investments during 2006, $56.7 million was
obtained from financing activities, primarily reflecting
proceeds of $56.0 million from the issuance of common stock
and $1.7 million from purchases under the Companys
stock incentive programs offset by debt repayments of
$0.7 million; $14.8 million was used for operating
activities, consisting of a net loss of $23.1 million, as
previously discussed, offset by non-cash activities of
$5.6 million and $2.7 million generated by the change
in operating assets and liabilities; and $1.5 million was
used for investing activities (exclusive of short-term
investment purchases, sales and maturities) consisting of
general capital expenditures.
As of December 31, 2006, our working capital was
$72.0 million compared to $32.7 million as of
December 31, 2005. This $39.3 million increase
primarily reflects the $56.0 million net proceeds from two
equity financing transactions that occurred during the first
quarter of 2006, $1.7 million from the exercise of stock
options offset by $17.7 million in operating and capital
investment activities and $0.7 million in principal
payments on our outstanding debt obligations.
We intend to use the proceeds from our recent equity financing
transactions for general corporate purposes, including but not
limited to our internal research and development programs, such
as preclinical and clinical testing and studies for our vaccine
and other product candidates, the development of new
technologies, capital improvements and general working capital.
In the first quarter of 2007, we entered into sponsored research
and licensing arrangements with two academic institutions to
conduct early stage research in the vaccine area. These and
similar arrangements that we may enter into may aggregate to a
material amount of research and development spending that will
accelerate the use of such proceeds. We will continue to fund
our operations through product licensing, co-development
arrangements on new products, or the public or private sale of
securities of the Company. There can be no assurance that we
will be able to obtain additional capital or, if such capital is
available, that the terms of any financing will be satisfactory
to the Company.
42
As of December 31, 2006, the Company had $22 million
of senior convertible notes outstanding (the Notes).
The Notes carry a 4.75% coupon; are currently convertible into
shares of Novavax common stock at $5.46 per share; and
mature on July 19, 2009. The Note holders have the right to
redeem all or a portion of the Notes if the weighted average
price of the Companys common stock is less than the then
applicable conversion price (currently $5.46 per share) of
the Companys common stock on each of 30 trading days out
of the 40 consecutive trading days immediately prior to either
the third anniversary (July 19, 2007) or the fourth
anniversary (July 19, 2008) of the issue date of the
Notes. If the Note holders exercise their optional redemption
right, the Company may elect to pay up to 50 per cent of
the outstanding Notes being redeemed in shares of Common Stock.
The redemption of the Companys senior convertible notes
would have an adverse effect on the Companys current cash
position and its ability to fund its operations. Based on our
assessment of the availability of capital and our business
operations as currently contemplated, in the absence of new
financings, any potential redemption of Notes, licensing
arrangements or partnership agreements, we believe we will have
adequate capital resources into the second half of 2008.
If we are unable to obtain additional capital, we will continue
to assess our capital resources and we may be required to delay,
reduce the scope of, or eliminate one or more of our product
research and development programs, downsize our organization, or
reduce general and administrative infrastructure.
Contractual
Obligations and Commitments
We utilize different financing instruments, such as debt and
operating leases, to finance various equipment and facility
needs. The following table summarizes our current financing
obligations and commitments (in thousands) as of
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
1 - 3
|
|
|
4 - 5
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Commitments &
Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes
|
|
$
|
22,000
|
|
|
$
|
|
|
|
$
|
22,000
|
|
|
$
|
|
|
|
$
|
|
|
Operating leases
|
|
|
9,419
|
|
|
|
1,660
|
|
|
|
5,062
|
|
|
|
2,588
|
|
|
|
109
|
|
Notes payable
|
|
|
1,189
|
|
|
|
731
|
|
|
|
458
|
|
|
|
|
|
|
|
|
|
Manufacturing facility lease
|
|
|
2,460
|
|
|
|
1,140
|
|
|
|
1,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total principal payments
|
|
|
35,068
|
|
|
|
3,531
|
|
|
|
28,840
|
|
|
|
2,588
|
|
|
|
109
|
|
Less: Subleases
|
|
|
(1,315
|
)
|
|
|
(479
|
)
|
|
|
(836
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net principal payments
|
|
|
33,753
|
|
|
|
3,052
|
|
|
|
28,004
|
|
|
|
2,588
|
|
|
|
109
|
|
Interest
|
|
|
2,696
|
|
|
|
1,072
|
|
|
|
1,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commitments &
obligations
|
|
$
|
36,449
|
|
|
$
|
4,124
|
|
|
$
|
29,628
|
|
|
$
|
2,588
|
|
|
$
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance
Sheet Arrangements
The Company is not involved in any off-balance sheet agreements
that have or are reasonably likely to have a material future
effect on its financial condition, changes in financial
condition, revenues or expenses, results of operations,
liquidity, capital expenditures, or capital resources.
|
|
Item 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
The primary objective of our investment activities is to
preserve our capital until it is required to fund operations
while at the same time maximizing the income we receive from our
investments without significantly increasing risk. As of
December 31, 2006, we had cash and cash equivalents and
short-term investments of $73.6 million as follows:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7.2 million
|
|
Short-term investments
|
|
$
|
66.4 million
|
|
Our exposure to market risk is confined to our investment
portfolio. We maintain an investment portfolio of investment
grade government agency notes and corporate bonds. The
securities in our investment portfolio are classified as held
until maturity securities and are, due to their predominantly
short-term nature, subject to minimal
43
interest rate risk. While we do not believe that an increase in
market rates of interest would have any significant negative
impact on the realizable value of our investment portfolio,
changes in interest rates affect the investment income we earn
on our investments and, therefore, impact our cash flow and
results of operations. We are headquartered in the
U.S. where we conduct the vast majority of our business
activities. Accordingly, we have not had any material exposure
to foreign currency rate fluctuations.
At December 31, 2006, the Company had a total debt of
$23.2 million, most of which bears interest at fixed
interest rates. The Company therefore does not believe that it
is exposed to any material interest rate risk as a result of its
borrowing activities.
Information required under this section is also contained in
Part I, Item IA of this report and in Item 8 of
this report, and is incorporated herein by reference.
|
|
Item 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The information required by this item is set forth on pages F-1
to F-33.
|
|
Item 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
On April 17, 2006, Novavax, Inc. dismissed Ernst &
Young LLP as its independent registered public accounting firm.
The report of Ernst & Young LLP on the consolidated
financial statements for the fiscal year ended December 31,
2005 contained no adverse opinion or disclaimer of opinion and
was not qualified or modified as to uncertainty, audit scope or
accounting principles. The report of Ernst & Young LLP
on the consolidated financial statements for the fiscal year
ended December 31, 2004 contained no adverse opinion or
disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principles, except that
the opinion contained a going concern explanatory
paragraph. The Companys Audit Committee participated in
and approved the decision to change independent registered
public accounting firms.
In connection with its audits for the two most recent fiscal
years and through April 17, 2006, there have been no
disagreements with Ernst & Young LLP on any matter of
accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements
if not resolved to the satisfaction of Ernst & Young
LLP would have caused them to make reference thereto in their
report on the consolidated financial statements for such years.
During the two fiscal years ended December 31, 2005 and
2004 and through April 17, 2006, there were no reportable
events (as defined in
Regulation S-K
Item 304 (a)(1)(v)). The Registrant requested that
Ernst & Young LLP furnish it with a letter addressed to
the SEC stating whether or not it agrees with the above
statements. A copy of such letter, dated April 20, 2006 is
filed as Exhibit 16 to the
Form 8-K
filed on April 21, 2006.
On April 20, 2006, the Company engaged Grant Thornton LLP
to act as the Companys independent registered public
accounting firm. Grant Thornton LLP replaced Ernst &
Young LLP. Prior to the engagement of Grant Thornton, neither
the Company nor anyone on behalf of the Company consulted with
Grant Thornton during the Companys two most recent fiscal
years and through April 20, 2006, in any manner regarding:
(A) either the application of accounting principles to a
specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on the Companys
financial statements, and neither was a written report provided
to the Company nor was oral advice provided that Grant Thornton
concluded was an important factor considered by the Company in
reaching a decision as to the accounting, auditing, or financial
reporting issue, or (B) the subject of either a
disagreement or a reportable event, as defined in Item 304
(a)(1)(iv), respectively, of
Regulation S-K.
|
|
Item 9A.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
The Companys chief executive officer and chief financial
officer have reviewed and evaluated the effectiveness of the
Companys disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended) as of the
end of the period covered by this annual report. Based on that
review and evaluation, which included the participation of
management and certain other employees of the
44
Company, the chief executive officer and chief financial officer
have concluded that the Companys current disclosure
controls and procedures, as designed and implemented, are
effective.
Changes
in Internal Control over Financial Reporting
The Companys management, including our principal executive
officer and principal financial officer, has evaluated any
changes in the Companys internal control over financial
reporting that occurred during the year ended December 31,
2006, and has concluded that there was no change that occurred
during the year ended December 31, 2006 that has materially
affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.
Managements
Annual Report on Internal Control over Financial
Reporting
The management of the Company is responsible for establishing
and maintaining adequate internal control over financial
reporting. Internal control over financial reporting is defined
in
Rule 13a-15(f)
or 15d-15(f)
promulgated under the Securities Exchange Act of 1934, as
amended. Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting
as of December 31, 2006 based on the framework in Internal
Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
Based on that evaluation, our management concluded that our
internal control over financial reporting was effective as of
December 31, 2006.
Managements assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2006 has been audited by Grant Thornton LLP,
an independent registered public accounting firm, as stated in
their report which is included elsewhere herein.
|
|
Item 9B.
|
OTHER
INFORMATION
|
None.
PART III
|
|
Item 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
Certain of the information required by this item is set forth
below. The remainder is contained in our definitive Proxy
Statement for our 2007 Annual Meeting of Stockholders to be held
on June 20, 2007 (the 2007 Proxy Statement) and
is incorporated herein by this reference. We expect to file the
2007 Proxy Statement within 120 days after the close of the
fiscal year ended December 31, 2006.
Executive
Officers of the Registrant
Our 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 our By-laws.
45
The following table provides certain information with respect to
our executive officers.
|
|
|
|
|
|
|
|
|
|
|
Principal Occupation and Other Business
|
Name
|
|
Age
|
|
Experience During the Past Five Years
|
|
Rahul Singhvi
|
|
|
42
|
|
|
President and Chief Executive
Officer and Director of Novavax since August 2005. Senior Vice
President and Chief Operating Officer of Novavax from April 2005
to August 2005 and Vice President Pharmaceutical
Development and Manufacturing Operations from April 2004 to
April 2005. For 10 years prior to joining the Company,
served in several positions with Merck & Co.,
culminating as Director of the Merck Manufacturing Division from
1999 to 2004.
|
Jeffrey W. Church
|
|
|
50
|
|
|
Vice President, Chief Financial
Officer, Treasurer and Corporate Secretary of Novavax since
September 2006. For 8 years prior to joining the Company,
served as Chief Financial Officer, Treasurer and Secretary with
GenVec, Inc.
|
Raymond J. Hage, Jr.
|
|
|
39
|
|
|
Senior Vice President, Commercial
Operations since October 2006. Senior Vice President and Chief
Operating Officer from August 2005 to October 2006 and Vice
President of Marketing and Corporate Development of Novavax from
January 2004 to August 2005. Prior to joining the Company,
served in several positions including an independent marketing
consultant with CHS, Inc. in 2003, Director of Marketing with
Cephalon, Inc. from 2002 to 2003 and for 10 years held
various marketing and sales roles at Eli Lilly culminating as
Director of US Womens Health from 2001 to 2002.
|
Code of
Ethics
The Company has adopted a Code of Business Conduct and Ethics
applicable to its principal executive officer, principal
financial officer, controller, and persons performing similar
functions, and has made the code an exhibit to its Annual Report
on
Form 10-K
for the 2003 Fiscal Year ended December 31, 2003. The Code
is also available, and the Company will file and post a Current
Report on
Form 8-K
for amendments to and waivers of its Code for its principal
executive and financial officers, on its website at
www.novavax.com.
|
|
Item 11.
|
EXECUTIVE
COMPENSATION
|
We incorporate herein by reference the information concerning
executive compensation to be contained in the 2007 Proxy
Statement.
|
|
Item 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
We incorporate herein by reference the information concerning
security ownership of certain beneficial owners and management
and related stockholder matters to be contained in the 2007
Proxy Statement.
46
The following table provides the Companys equity
compensation plan information as of December 31, 2006.
Under these plans, the Companys common stock may be issued
upon the exercise of options. See also the information regarding
stock options of the Company in Note 9, Stock
Options to the Consolidated Financial Statements included
herewith.
Equity
Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available
|
|
|
|
|
|
|
|
|
|
for Future Issuance
|
|
|
|
Number of Securities
|
|
|
|
|
|
Under Equity
|
|
|
|
to be Issued
|
|
|
Weighted-Average
|
|
|
Compensation Plans
|
|
|
|
Upon Exercise of
|
|
|
Exercise Price of
|
|
|
(Excluding Securities
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
Reflected in Column
|
|
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
(a))
|
|
Plan Category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved
by security holders(1)
|
|
|
5,711,919
|
|
|
$
|
3.83
|
|
|
|
1,002,450
|
|
Equity compensation plans not
approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes the Companys 2005 Stock Incentive Plan, 1995
Stock Option Plan and 1995 Director Stock Option Plan. |
|
|
Item 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
We incorporate herein by reference the information concerning
certain related party transactions set forth in Note 13 to
our Consolidated Financial Statements included herewith. We
incorporate herein by reference the information concerning
certain other relationships and related transactions and
director independence to be contained in the 2007 Proxy
Statement.
|
|
Item 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
We incorporate herein by reference the information concerning
principal accountant fees and services to be contained in the
2007 Proxy Statement.
PART IV
|
|
Item 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
(a) The following documents are filed as part of the Annual
Report:
(1) Index to Consolidated Financial Statements
|
|
|
|
|
Reports of Independent Registered
Public Accounting Firms
|
|
|
F- 2
|
|
Consolidated Balance Sheets as of
December 31, 2006 and 2005
|
|
|
F- 5
|
|
Consolidated Statements of
Operations for the years ended December 31, 2006, 2005 and
2004
|
|
|
F- 6
|
|
Consolidated Statements of
Stockholders Equity for years ended December 31,
2006, 2005 and 2004
|
|
|
F- 7
|
|
Consolidated Statements of Cash
Flows for the years ended December 31, 2006, 2005 and 2004
|
|
|
F- 8
|
|
Notes to Consolidated Financial
Statements
|
|
|
F- 9
|
|
(2) Financial Statement Schedules
All financial statement schedules are omitted because they are
not applicable, not required under the instructions or all the
information required is set forth in the financial statements or
notes thereto.
47
(3) Exhibits
Exhibits marked with a single asterisk (*) are filed herewith.
Exhibits marked with a double plus sign () refer to
management contracts, compensatory plans or arrangements.
Confidential treatment has been requested for portions of
exhibits marked with a double asterisk (**).
All 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 Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 1996, filed
March 21, 1997 (the 1996
Form 10-K)),
as amended by the Certificate of Amendment dated
December 18, 2000 (Incorporated by reference to
Exhibit 3.4 to the Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 2000, filed
March 29, 2001 (the 2000
Form 10-K)),
as further amended by the Certificate of Amendment dated
July 8, 2004 (Incorporated by reference to Exhibit 3.1
to the Companys Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2004, filed August 9,
2004 (the 2004 2Q
Form 10-Q))
|
|
3
|
.2
|
|
Amended and Restated By-Laws of
the Company (Incorporated by reference to Exhibit 3.5 to
the Companys Quarterly Report on
Form 10-Q
for the fiscal quarter ended June 30, 2001, filed
August 13, 2001 (the 2001 Q2
Form 10-Q))
|
|
4
|
.1
|
|
Specimen stock certificate for
shares of common stock, par value $.01 per share
(Incorporated by reference to Exhibit 4.1 to the
Companys Registration Statement on Form 10, File
No. 0-26770,
filed September 14, 1995 (the Form 10))
|
|
4
|
.2
|
|
Rights Agreement, dated as of
August 8, 2002, by and between the Company and Equiserve
Trust Company, which includes the Form of Summary of Rights to
Purchase Series D Junior Participating Preferred Stock as
Exhibit A, the Form of Right Certificate as Exhibit B
and the Form of Certificate of Designation of Series D
Junior Participating Preferred Stock as Exhibit C.
(Incorporated by reference to Exhibit 4.1 to the
Companys Current Report on
Form 8-K,
filed August 9, 2002)
|
|
4
|
.3
|
|
Registration Rights Agreement,
dated as of July 16, 2004, by and between the Company and
the Buyers identified therein. (Incorporated by reference to
Exhibit 4.7 to the Registration Statement on
Form S-3,
File
No. 333-118210,
filed August 13, 2004)
|
|
10
|
.1
|
|
Novavax, Inc. 1995 Stock Option
Plan, as amended (Incorporated by reference to Appendix A
of the Companys Definitive Proxy Statement filed
March 31, 2003 in connection with the Annual Meeting held
on May 7, 2003)
|
|
10
|
.2
|
|
Novavax, Inc. 1995 Director
Stock Option Plan (Incorporated by reference to
Exhibit 10.5 to the Form 10)
|
|
10
|
.3
|
|
Novavax, Inc. 2005 Stock Incentive
Plan (Incorporated by reference to Appendix A of the
Companys Definitive Proxy Statement filed March 29,
2005 in connection with the Annual Meeting held on May 4,
2005)
|
|
10
|
.4
|
|
Employment Agreement, dated as of
November 9, 2005, by and between the Company and Rahul
Singhvi (Incorporated by reference to Exhibit 10.1 to the
Companys Current Report on
Form 8-K,
filed November 15, 2005)
|
|
10
|
.5
|
|
Employment Agreement, dated as of
November 9, 2005, by and between the Company and Raymond J.
Hage, Jr. (Incorporated by reference to Exhibit 10.2
to the Companys Current Report on
Form 8-K,
filed November 15, 2005)
|
|
10
|
.6
|
|
Employment Agreement, dated as of
August 11, 2006, by and between the Company and Jeffrey W.
Church (Incorporated by reference to Exhibit 10.1 to the
Companys Current Report on
Form 8-K
filed August 17, 2006)
|
|
10
|
.7
|
|
Change in Control Severance
Benefit Plan, as adopted August 10, 2005 (Incorporated by
reference to Exhibit 99.1 to the Companys Current
Report on
Form 8-K,
filed August 16, 2005)
|
|
10
|
.8
|
|
Amended and Restated Change in
Control Severance Benefit Plan, as adopted July 26, 2006
(Incorporated by reference to Exhibit 10.2 to the
Companys Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2006, filed
November 14, 2006)
|
48
|
|
|
|
|
|
10
|
.9
|
|
Form of Indemnity Agreement, as
authorized August 10, 2005 (Incorporated by reference to
Exhibit 99.2 to the Companys Current Report on
Form 8-K,
filed August 16, 2005)
|
|
10
|
.10
|
|
Secured Promissory Note, dated
March 21, 2002, by and between the Company and Mitchell J.
Kelly (Incorporated by reference to Exhibit 10.9 to the
Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 2002, File
No. 0-26770,
filed March 28, 2003 (the 2002
Form 10-K))
|
|
10
|
.11
|
|
Pledge Agreement, dated
March 21, 2002, by and between the Company and Mitchell J.
Kelly (Incorporated by reference to Exhibit 10.10 to the
2002
Form 10-K)
|
|
10
|
.12
|
|
Secured Promissory Note, dated
March 21, 2002, by and between the Company and Denis M.
ODonnell, M.D. (Incorporated by reference to
Exhibit 10.11 to the 2002
Form 10-K)
|
|
10
|
.13
|
|
Pledge Agreement, dated
March 21, 2002, by and between the Company and Denis M.
ODonnell, M.D. (Incorporated by reference to
Exhibit 10.12 to the 2002
Form 10-K)
|
|
10
|
.14
|
|
Facilities Reservation Agreement,
dated as of February 11, 2002, by and between the Company
and Packaging Coordinators, Inc. (Incorporated by reference to
Exhibit 10.13 to the 2001
Form 10-K)
|
|
10
|
.15
|
|
Lease Agreement, dated as of
July 15, 2004, between Liberty Property Limited Partnership
and the Company (Incorporated by reference to Exhibit 10.1
to the 2004 2Q
Form 10-Q)
|
|
10
|
.16
|
|
Sublease Agreement, dated
April 28, 2006, by and between the Company and Sterilox
Technologies, Inc. (Incorporated by reference to
Exhibit 10.3 to the Companys Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2006, filed August 14,
2006)
|
|
10
|
.17
|
|
Amendment dated as of
October 25, 2006 to the Sublease Agreement, dated
April 28, 2006, by and between the Company and Sterilox
Technologies, Inc. (Incorporated by reference to
Exhibit 10.3 to the Companys Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2006, filed
November 14, 2006)
|
|
10
|
.18
|
|
Lease, commencing April 1,
2005, by and between United Health Care Services, Inc. and the
Company (Incorporated by reference to Exhibit 10.1 to the
Companys Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2005, filed August 9,
2005)
|
|
10
|
.19
|
|
Sublease Agreement by and between
Human Genome Sciences, Inc., and the Company dated
October 6, 2006 (Incorporated by reference to
Exhibit 10.1 to the Companys Current Report on
Form 8-K,
filed December 13, 2006)
|
|
10
|
.20
|
|
License Agreement between IGEN,
Inc. and the Company (Incorporated by reference to
Exhibit 10.3 to the Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 1995, filed
April 1, 1996)
|
|
10
|
.21
|
|
Note, dated December 20,
2002, by and between the Company and PIDC Local Development
Corporation (Incorporated by reference to Exhibit 10.35 to
the 2002
Form 10-K)
|
|
10
|
.22
|
|
Security Agreement, dated
December 20, 2002, by and between the Company and PIDC
Local Development Corporation (Incorporated by reference to
Exhibit 10.36 to the 2002
Form 10-K)
|
|
10
|
.23
|
|
Note, dated December 20,
2002, by and between the Company and PIDC Local Development
Corporation (Incorporated by reference to Exhibit 10.37 to
the 2002
Form 10-K)
|
|
10
|
.24
|
|
Security Agreement, dated
December 20, 2002, by and between the Company and PIDC
Local Development Corporation (Incorporated by reference to
Exhibit 10.38 to the 2002
Form 10-K)
|
|
10
|
.25
|
|
HIV Vaccine Design and Development
Agreement, effective September 26, 2003, by and between the
Company and the National Institute of Allergy and Infectious
Diseases, a component of the National Institutes of Health, an
agency of the Department of Health and Human Services
(Incorporated by reference to Exhibit 10.33 to the
Companys Annual Report on
Form 10-K
(as amended) for the fiscal year ended December 31, 2004,
filed March 15, 2005)
|
|
10
|
.26
|
|
Form of Senior Convertible Note
(Incorporated by reference to Exhibits 99.4 to the
Companys Current Report on
Form 8-K,
filed July 19, 2004)
|
|
10
|
.27
|
|
Exchange Agreement, dated
July 16, 2004, between the Company, King Pharmaceuticals,
Inc. and Parkedale Pharmaceuticals, Inc. (Incorporated by
reference to Exhibit 99.5 to the Companys Current
Report on
Form 8-K,
filed July 19, 2004)
|
|
10
|
.28
|
|
Termination Agreement, dated as of
July 16, 2004 among King Pharmaceuticals, Inc., Parkedale
Pharmaceuticals, Inc. and the Company (Incorporated by reference
to Exhibit 99.6 to the Companys Current Report on
Form 8-K,
filed July 19, 2004)
|
49
|
|
|
|
|
|
10
|
.29
|
|
Asset Purchase Agreement, dated
and entered into as of September 22, 2005, by and among the
Company, Fielding Pharmaceutical Company and Pharmelle, LLC
(Incorporated by reference to Exhibit 10.1 to the
Companys Current Report on
Form 8-K,
filed September 28, 2005)
|
|
10
|
.30
|
|
Amendment dated and entered into
as of July 5, 2006, to Asset Purchase Agreement, dated and
entered into as of September 22, 2005, by and among the
Company, Fielding Pharmaceutical Company and Pharmelle, LLC
(Incorporated by reference to Exhibit 10.1 to the
Companys Quarterly Report on
Form 10-Q
for the quarter-ended September 30, 2006, filed
November 14, 2006)
|
|
10
|
.31**
|
|
License Agreement by and between
the Company and Esprit Pharma, Inc., dated October 18,
2005. (Incorporated by reference to Exhibit 10.33 to the
Companys Annual Report on
Form 10-K
for the year ended December 31, 2005, filed March 6,
2006)
|
|
10
|
.32**
|
|
Supply Agreement by and between
the Company and Esprit Pharma, Inc., dated October 18,
2005. (Incorporated by reference to Exhibit 10.33 to the
Companys Annual Report on
Form 10-K
for the year ended December 31, 2005, filed March 6,
2006)
|
|
10
|
.33**
|
|
License and Development Agreement,
dated April 26, 2006, by and between the Company and Esprit
Pharma, Inc. (Incorporated by reference to Exhibit 10.1 to
the Companys Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2006, filed August 14,
2006)
|
|
10
|
.34**
|
|
Exclusive License Agreement, dated
February 26, 2007, between the Company and the University
of Massachusetts *
|
|
14
|
|
|
Code of Business Conduct and
Ethics (Incorporated by reference to Exhibit 14 to the
Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 2003, filed
March 15, 2004)
|
|
23
|
.1
|
|
Consent of Grant Thornton LLP,
Independent Registered Public Accounting Firm*
|
|
23
|
.2
|
|
Consent of Ernst & Young
LLP, Independent Registered Public Accounting Firm*
|
|
31
|
.1
|
|
Certification of principal
executive officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002*
|
|
31
|
.2
|
|
Certification of principal
financial officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002*
|
|
32
|
.1
|
|
Certification Pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, by Rahul
Singhvi, President and Chief Executive Officer of the Company*
|
|
32
|
.2
|
|
Certification Pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, by Jeffrey
W. Church, Vice President, Chief Financial Officer, Treasurer
and Corporate Secretary of the Company*
|
50
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.
President and Chief Executive Officer and Director
Date: March 12, 2007
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 and in the capacities and on the
dates indicated:
|
|
|
|
|
|
|
Name
|
|
Title
|
|
Date
|
|
/s/ RAHUL
SINGHVI
Rahul
Singhvi
|
|
President and Chief Executive
Officer and Director (Principal Executive Officer)
|
|
March 12, 2007
|
|
|
|
|
|
/s/ JEFFREY
W. CHURCH
Jeffrey
W. Church
|
|
Vice President, Chief Financial
Officer, Treasurer and Corporate Secretary (Principal Financial
and Accounting Officer)
|
|
March 12, 2007
|
|
|
|
|
|
/s/ JOHN
LAMBERT
John
Lambert
|
|
Chairman of the Board of Directors
|
|
March 12, 2007
|
|
|
|
|
|
/s/ GARY
C. EVANS
Gary
C. Evans
|
|
Lead Director
|
|
March 12, 2007
|
|
|
|
|
|
/s/ JOHN
O. MARSH, JR.
John
O. Marsh, Jr.
|
|
Director
|
|
March 12, 2007
|
|
|
|
|
|
/s/ MICHAEL
A. McMANUS
Michael
A. McManus
|
|
Director
|
|
March 12, 2007
|
|
|
|
|
|
/s/ THOMAS
P. MONATH
Thomas
P. Monath
|
|
Director
|
|
March 12, 2007
|
|
|
|
|
|
/s/ DENIS
M.
ODONNELL, M.D.
Denis
M. ODonnell, M.D.
|
|
Director
|
|
March 12, 2007
|
|
|
|
|
|
/s/ JAMES
B. TANANBAUM
James
B. Tananbaum
|
|
Director
|
|
March 12, 2007
|
51
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and 2004
Contents
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Novavax, Inc.
We have audited the accompanying consolidated balance sheet of
Novavax, Inc. (a Delaware corporation) and Subsidiary as of
December 31, 2006, and the related consolidated statements
of operations, stockholders equity, and cash flows for the
year then ended. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (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 our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Novavax, Inc. and Subsidiary as of December 31,
2006, and the results of their operations and their cash flows
for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
As described in footnote 2 to the financial statements,
Novavax, Inc. adopted Statement of Financial Accounting Standard
No. 123(R) as of January 1, 2006.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Novavax Inc.s internal control over
financial reporting as of December 31, 2006, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO) and our report dated
March 12, 2007 expressed an unqualified opinion thereon.
Philadelphia, Pennsylvania
March 12, 2007
F-2
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Novavax, Inc.
We have audited managements assessment, included in the
accompanying
Form 10-K,
that Novavax, Inc. (a Delaware Corporation) maintained effective
internal control over financial reporting as of
December 31, 2006, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Novavaxs management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion
on managements assessment and an opinion on the
effectiveness of the companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Novavax, Inc.
maintained effective internal control over financial reporting
as of December 31, 2006, is fairly stated, in all material
respects, based on criteria established in Internal
Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
Also in our opinion, Novavax, Inc. maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2006, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of Novavax, Inc. and Subsidiary as of
December 31, 2006, and the related consolidated statements
of operations, stockholders equity, and cash flows for the
year then ended and our report dated March 12, 2007
expressed an unqualified opinion thereon.
Philadelphia, Pennsylvania
March 12, 2007
F-3
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Novavax, Inc.
We have audited the accompanying consolidated balance sheet of
Novavax, Inc. as of December 31, 2005, and the related
consolidated statements of operations, stockholders equity
and cash flows for each of the two years in the period ended
December 31, 2005. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (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 our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above,
present fairly, in all material respects, the consolidated
financial position of Novavax, Inc. at December 31, 2005,
and the consolidated results of its operations and its cash
flows for each of the two years in the period ended
December 31, 2005, in conformity with U.S. generally
accepted accounting principles.
March 3, 2006
Philadelphia, Pennsylvania
F-4
NOVAVAX,
INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except share information)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,161
|
|
|
$
|
31,893
|
|
Short-term investments
|
|
|
66,434
|
|
|
|
|
|
Accounts and other receivables,
net of allowance for doubtful accounts
of $117 and $429 at December 31, 2006 and 2005
|
|
|
1,274
|
|
|
|
3,571
|
|
Inventory
|
|
|
600
|
|
|
|
800
|
|
Prepaid expenses and other current
assets
|
|
|
1,873
|
|
|
|
1,347
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
77,342
|
|
|
|
37,611
|
|
Property and equipment, net
|
|
|
9,861
|
|
|
|
11,589
|
|
Goodwill
|
|
|
33,141
|
|
|
|
33,141
|
|
Intangible assets, net
|
|
|
978
|
|
|
|
1,110
|
|
Other non-current assets
|
|
|
555
|
|
|
|
931
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
121,877
|
|
|
$
|
84,382
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,530
|
|
|
$
|
1,426
|
|
Accrued expenses and other current
liabilities
|
|
|
3,078
|
|
|
|
2,597
|
|
Current portion of notes payable
|
|
|
731
|
|
|
|
715
|
|
Facility exit costs
|
|
|
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
5,339
|
|
|
|
4,876
|
|
Convertible notes
|
|
|
22,000
|
|
|
|
29,000
|
|
Non-current portion of notes
payable
|
|
|
458
|
|
|
|
678
|
|
Deferred rent
|
|
|
79
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
27,876
|
|
|
|
34,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
100,000,000 shares authorized; 62,139,851 shares
issued and 61,791,089 shares outstanding at
December 31, 2006, and 50,259,494 shares issued and
50,005,646 shares outstanding at December 31, 2005
|
|
|
622
|
|
|
|
503
|
|
Additional paid-in capital
|
|
|
261,822
|
|
|
|
195,361
|
|
Unearned compensation
|
|
|
|
|
|
|
(425
|
)
|
Notes receivable from directors
|
|
|
(1,031
|
)
|
|
|
(1,480
|
)
|
Accumulated deficit
|
|
|
(164,962
|
)
|
|
|
(141,894
|
)
|
Treasury stock,
348,762 shares at December 31, 2006 and
253,848 shares at December 31, 2005, cost basis
|
|
|
(2,450
|
)
|
|
|
(2,413
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
94,001
|
|
|
|
49,652
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
121,877
|
|
|
$
|
84,382
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
NOVAVAX,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except share and per share information)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net product sales
|
|
$
|
2,501
|
|
|
$
|
4,549
|
|
|
$
|
6,397
|
|
Contract research and development
|
|
|
1,886
|
|
|
|
1,798
|
|
|
|
1,738
|
|
Royalties, milestone and licensing
fees
|
|
|
296
|
|
|
|
1,041
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
4,683
|
|
|
|
7,388
|
|
|
|
8,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
4,924
|
|
|
|
5,791
|
|
|
|
3,490
|
|
Excess inventory costs over market
|
|
|
1,549
|
|
|
|
1,519
|
|
|
|
|
|
Research and development
|
|
|
11,529
|
|
|
|
5,075
|
|
|
|
7,369
|
|
Selling and marketing
|
|
|
101
|
|
|
|
6,920
|
|
|
|
23,588
|
|
General and administrative
|
|
|
11,187
|
|
|
|
8,114
|
|
|
|
8,716
|
|
Facility exit costs
|
|
|
|
|
|
|
105
|
|
|
|
723
|
|
Gain on sales of product assets
|
|
|
|
|
|
|
(10,965
|
)
|
|
|
|
|
Gain on redemption of debt
|
|
|
|
|
|
|
|
|
|
|
(11,162
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
29,290
|
|
|
|
16,559
|
|
|
|
32,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(24,607
|
)
|
|
|
(9,171
|
)
|
|
|
(24,464
|
)
|
Interest income (expense), net
|
|
|
1,539
|
|
|
|
(2,003
|
)
|
|
|
(1,526
|
)
|
Other income
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(23,068
|
)
|
|
$
|
(11,174
|
)
|
|
$
|
(25,920
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.39
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
(0.70
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares used in computing basic and diluted net loss per share
|
|
|
58,664,365
|
|
|
|
42,758,302
|
|
|
|
36,926,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
NOVAVAX,
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
For the
Years Ended December 31, 2006, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Notes
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Unearned
|
|
|
Receivable
|
|
|
Accumulated
|
|
|
Treasury
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
From Directors
|
|
|
Deficit
|
|
|
Stock
|
|
|
Equity
|
|
|
|
(In thousands, except share information)
|
|
|
|
|
|
Balance, December 31,
2003
|
|
|
34,972,183
|
|
|
$
|
349
|
|
|
$
|
144,288
|
|
|
|
|
|
|
$
|
(1,480
|
)
|
|
$
|
(104,800
|
)
|
|
$
|
(2,413
|
)
|
|
$
|
35,944
|
|
Exercise of stock options
|
|
|
107,550
|
|
|
|
1
|
|
|
|
368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
369
|
|
Stock options issued as compensation
|
|
|
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
|
|
Shares issued for King Transaction
|
|
|
3,775,610
|
|
|
|
38
|
|
|
|
18,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,123
|
|
Sale of common stock
|
|
|
952,381
|
|
|
|
10
|
|
|
|
4,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
Financing costs allocated to
raising additional capital
|
|
|
|
|
|
|
|
|
|
|
(288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(288
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,920
|
)
|
|
|
|
|
|
|
(25,920
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2004
|
|
|
39,807,724
|
|
|
$
|
398
|
|
|
$
|
167,496
|
|
|
$
|
|
|
|
$
|
(1,480
|
)
|
|
$
|
(130,720
|
)
|
|
$
|
(2,413
|
)
|
|
$
|
33,281
|
|
Exercise of stock options
|
|
|
342,654
|
|
|
|
3
|
|
|
|
392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
395
|
|
Issuance of common stock for prior
services
|
|
|
300,000
|
|
|
|
3
|
|
|
|
252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
255
|
|
Restricted stock issued as
compensation
|
|
|
552,434
|
|
|
|
6
|
|
|
|
570
|
|
|
|
(425
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
151
|
|
Conversion of convertible debt
|
|
|
1,070,635
|
|
|
|
11
|
|
|
|
6,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,081
|
|
Sales of common stock
|
|
|
8,186,047
|
|
|
|
82
|
|
|
|
21,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,000
|
|
Financing costs allocated to
raising additional capital
|
|
|
|
|
|
|
|
|
|
|
(1,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,337
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,174
|
)
|
|
|
|
|
|
|
(11,174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2005
|
|
|
50,259,494
|
|
|
$
|
503
|
|
|
$
|
195,361
|
|
|
$
|
(425
|
)
|
|
$
|
(1,480
|
)
|
|
$
|
(141,894
|
)
|
|
$
|
(2,413
|
)
|
|
$
|
49,652
|
|
Unearned compensation against
additional paid in capital in accordance with
SFAS No. 123R
|
|
|
|
|
|
|
|
|
|
|
(425
|
)
|
|
|
425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash compensation costs for
stock options
|
|
|
|
|
|
|
|
|
|
|
1,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,776
|
|
Exercise of stock options
|
|
|
497,613
|
|
|
|
5
|
|
|
|
1,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,718
|
|
Conversion of convertible debt
|
|
|
1,294,564
|
|
|
|
13
|
|
|
|
7,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,068
|
|
Restricted stock issued as
compensation
|
|
|
285,000
|
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of restricted stock
for compensation
|
|
|
|
|
|
|
|
|
|
|
491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
491
|
|
Treasury stock issued in lieu of
payment of services rendered
|
|
|
|
|
|
|
|
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
|
|
|
|
25
|
|
Sales of common stock
|
|
|
9,803,180
|
|
|
|
98
|
|
|
|
57,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,000
|
|
Financing costs allocated to
raising additional capital
|
|
|
|
|
|
|
|
|
|
|
(2,016
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,016
|
)
|
Reclassification due to change in
status of a director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
449
|
|
|
|
|
|
|
|
|
|
|
|
449
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(94
|
)
|
|
|
(94
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,068
|
)
|
|
|
|
|
|
|
(23,068
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2006
|
|
|
62,139,851
|
|
|
$
|
622
|
|
|
$
|
261,822
|
|
|
$
|
|
|
|
$
|
(1,031
|
)
|
|
$
|
(164,962
|
)
|
|
$
|
(2,450
|
)
|
|
$
|
94,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
NOVAVAX,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(23,068
|
)
|
|
$
|
(11,174
|
)
|
|
$
|
(25,920
|
)
|
Reconciliation of net loss to net
cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
132
|
|
|
|
681
|
|
|
|
776
|
|
Depreciation
|
|
|
2,921
|
|
|
|
2,794
|
|
|
|
2,277
|
|
Provision for bad debts
|
|
|
111
|
|
|
|
4
|
|
|
|
413
|
|
Reserve for note receivable and
accrued interest
|
|
|
167
|
|
|
|
|
|
|
|
|
|
Amortization of net discounts on
short-term investments
|
|
|
(1,135
|
)
|
|
|
|
|
|
|
|
|
Amortization of deferred financing
costs
|
|
|
797
|
|
|
|
662
|
|
|
|
166
|
|
Retirement of capital assets
|
|
|
382
|
|
|
|
65
|
|
|
|
58
|
|
Deferred rent
|
|
|
(97
|
)
|
|
|
10
|
|
|
|
12
|
|
Non-cash expense for services
|
|
|
25
|
|
|
|
|
|
|
|
|
|
Non-cash stock compensation
|
|
|
2,267
|
|
|
|
406
|
|
|
|
53
|
|
Facility exit costs
|
|
|
|
|
|
|
105
|
|
|
|
723
|
|
Gain on redemption of debt
|
|
|
|
|
|
|
|
|
|
|
(11,162
|
)
|
Gain on sales of product assets
|
|
|
|
|
|
|
(10,965
|
)
|
|
|
|
|
Net proceeds from sales of product
assets
|
|
|
|
|
|
|
12,733
|
|
|
|
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts and other receivables
|
|
|
2,186
|
|
|
|
(248
|
)
|
|
|
720
|
|
Inventory
|
|
|
200
|
|
|
|
2,102
|
|
|
|
(2,609
|
)
|
Prepaid expenses and other current
assets
|
|
|
281
|
|
|
|
852
|
|
|
|
(1,128
|
)
|
Accounts payable and accrued
expenses
|
|
|
594
|
|
|
|
(3,866
|
)
|
|
|
5,311
|
|
Facility exit costs
|
|
|
(138
|
)
|
|
|
(168
|
)
|
|
|
(51
|
)
|
Other assets
|
|
|
(435
|
)
|
|
|
198
|
|
|
|
262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by operating
activities
|
|
|
(14,810
|
)
|
|
|
(5,809
|
)
|
|
|
(30,099
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(1,516
|
)
|
|
|
(230
|
)
|
|
|
(1,608
|
)
|
Proceeds from disposal of property
and equipment
|
|
|
|
|
|
|
68
|
|
|
|
|
|
Purchases of short-term investments
|
|
|
(121,546
|
)
|
|
|
|
|
|
|
|
|
Proceeds from maturities of
short-term investments
|
|
|
56,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(66,815
|
)
|
|
|
(162
|
)
|
|
|
(1,608
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of
convertible notes
|
|
|
|
|
|
|
|
|
|
|
32,943
|
|
Net payments associated with King
Transaction
|
|
|
|
|
|
|
|
|
|
|
(15,010
|
)
|
Principal payments on notes payables
|
|
|
(715
|
)
|
|
|
(1,070
|
)
|
|
|
(1,064
|
)
|
Net proceeds from issuance of
common stock
|
|
|
55,984
|
|
|
|
20,663
|
|
|
|
4,712
|
|
Proceeds from the exercise of stock
options
|
|
|
1,718
|
|
|
|
395
|
|
|
|
369
|
|
Purchase of treasury stock
|
|
|
(94
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
56,893
|
|
|
|
19,988
|
|
|
|
21,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash
equivalents
|
|
|
(24,732
|
)
|
|
|
14,017
|
|
|
|
(9,757
|
)
|
Cash and cash equivalents at
beginning of year
|
|
|
31,893
|
|
|
|
17,876
|
|
|
|
27,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
year
|
|
$
|
7,161
|
|
|
$
|
31,893
|
|
|
$
|
17,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of
non-cash transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of convertible debt and
accrued interest to common stock
|
|
$
|
7,068
|
|
|
$
|
6,081
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment purchases included in
accounts payable
|
|
$
|
59
|
|
|
$
|
139
|
|
|
$
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financed insurance premiums
|
|
$
|
511
|
|
|
$
|
501
|
|
|
$
|
862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock reissued for accrued
interest to King
|
|
$
|
|
|
|
$
|
|
|
|
$
|
800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
1,233
|
|
|
$
|
1,719
|
|
|
$
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
NOVAVAX,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
Novavax, Inc., a Delaware corporation (Novavax or
the Company), was incorporated in 1987, and is a
biopharmaceutical company focused on creating differentiated,
value-added vaccines that leverage the Companys
proprietary virus-like particle (VLP) technology as
well as its proprietary
Novasomes®
adjuvants. VLPs imitate the three-dimensional structures of
viruses but are composed of recombinant proteins and therefore,
are believed incapable of causing infection and disease. Our
proprietary production technology uses insect cells rather than
chicken eggs or mammalian cells. The Companys product
targets include vaccines against the H5N1, H9N2 and other
subtypes of avian influenza with pandemic potential and against
human seasonal influenza as well as other infectious diseases.
The Company also has a drug delivery platform based on its
micellar nonparticle (MNP) technology, proprietary
oil and water nano emulsions used for the topical delivery of
drugs. The MNP technology was the basis for the development of
the Companys first Food and Drug
Administration approved estrogen replacement
product,
ESTRASORB®.
During 2005, Novavax transitioned from a specialty
pharmaceutical company, which included the sale and marketing of
products serving the womens health space, to an
innovative, biopharmaceutical company.
|
|
|
|
|
In October 2005, the Company entered into a License and Supply
Agreement for ESTRASORB with Esprit Pharma, Inc.
(Esprit). Under these agreements, the Company
continues to manufacture ESTRASORB and Esprit has an exclusive
license to sell ESTRASORB in North America.
|
|
|
|
In April 2006, the Company entered into a License and
Development Agreement and a Supply Agreement with Esprit to
co-develop, supply and commercialize the Companys
MNP-based testosterone product candidate for the treatment of
female hypoactive sexual desire disorder. Esprit was granted
exclusive rights to market the product in North America.
|
The Company has a unique blend of capabilities consisting of
formulation technologies, vaccine technologies and drug
development infrastructure, including clinical and commercial
production facilities. The Company is leveraging its
capabilities to develop differentiated, value-added vaccine
products and licensing them at various stages of development to
realize their value.
The products currently under development or in clinical trials
by the Company will require significant additional research and
development efforts, including extensive preclinical and
clinical testing and regulatory approval, prior to commercial
use. There can be no assurance that the Companys research
and development efforts will be successful or that any potential
products will prove to be safe and effective in clinical trials.
Even if developed, these products may not receive regulatory
approval or be successfully introduced and marketed at prices
that would permit the Company 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. No 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 the Company and its wholly owned subsidiary
(Fielding Pharmaceutical Company). All significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of
Estimates
The preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the
U.S. requires management to make estimates and assumptions
that affect the reported amounts of
F-9
NOVAVAX,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 materially from those
estimates.
Reclassifications
Amounts appearing in the prior years footnote disclosure
have been reclassified to conform to the current years
presentation.
Cash
Equivalents and Short-Term Investments
Cash equivalents consist of highly liquid investments with
original maturities of three months or less from the date of
purchase. As of December 31, 2006, the Company had
short-term investments, with original maturity dates ranging
from 105 days to six months. These short-term investments
have been classified as held to maturity securities, as the
Company has the positive intent and ability to hold them until
maturity. Investments are recorded at face value less any
premiums or discounts. These premiums or discounts are then
amortized over the remaining maturity periods of the investments
using the straight-line method. Included in net interest income
on the consolidated statement of operations for the year ended
December 31, 2006 is $1,135,000 of amortization of
premiums/discounts related to these short-term investments. The
Company had no short-term investments in 2005.
As of December 31, 2006, short-term investments were
comprised of $55,760,000 of commercial paper, $1,628,000 of
asset-backed securities and $9,046,000 of corporate obligations.
There were no short-term investments as of December 31,
2005.
Financial
Instruments and Concentration of Credit Risk
Financial instruments, which possibly expose the Company to
concentration of credit risk, consist primarily of cash and cash
equivalents, short-term investments, accounts receivable and
convertible notes payable. The Company has invested its cash in
asset backed securities, high-grade corporate debt securities
and money market instruments. The Companys investment
policy limits investments to certain types of instruments,
places restrictions on maturities and concentrations in certain
industries and requires the Company to maintain a certain level
of liquidity. The Company has not experienced any losses on such
accounts and management believes the risk of loss to be minimal.
The carrying value of cash and cash equivalents, short-term
investments and accounts receivable approximates their fair
value based on their short-term maturities at December 31,
2006 and 2005. The Company has certain debt instruments at fixed
rates, with lower interest rates than the prevailing market
rates. The Company has obtained favorable rates through January
2010. The fair values of convertible notes approximate their
carrying value as of December 31, 2006 and 2005 based on
rates currently available to the Company for debt with similar
terms and remaining maturities.
Accounts
and Other Receivables
Accounts receivables are reported in the consolidated balance
sheets as outstanding principal less any charge-offs and
allowance for doubtful accounts. The Company charges off
uncollectible receivables when the likelihood of collection is
remote. Generally, the Company considers receivables past due
30 days subsequent to the billing date. The Company
performs ongoing credit evaluations of its customers and
generally extends credit without requiring collateral. The
Company maintains an allowance for doubtful accounts that is
determined based on historical experience and managements
expectations of future losses. Accounts deemed uncollectible are
charged to the allowance. Provisions for bad debts and
recoveries on accounts previously provided for are added to the
allowance. As of December 31, 2006 and 2005, the Company
had an allowance for doubtful accounts of approximately $117,000
and $429,000, respectively.
F-10
NOVAVAX,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Included in accounts and other receivables as of
December 31, 2005 was $2,500,000 due from Esprit Pharma,
Inc. related to the License Agreement with Esprit (see
Note 3 Summary of Significant Transactions) which
was paid in full in October 2006.
As of December 31, 2006, 2005 and 2004, three customers
accounted for 87%, 80% and 81% of the Companys gross
product sales and 78%, 98% and 74% of the Companys product
sales accounts receivable, respectively.
Inventories
Inventories consist of raw materials,
work-in-process
and finished goods, and are priced at the lower of cost or
market using the
first-in-first-out
method and consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Raw materials
|
|
$
|
263
|
|
|
$
|
358
|
|
Work-in-process
|
|
|
86
|
|
|
|
38
|
|
Finished goods
|
|
|
251
|
|
|
|
404
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
600
|
|
|
$
|
800
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2005, the Company
implemented Statement of Financial Accounting Standard
No. 151, Inventory Costs an amendment
of ARB No. 43, Chapter 4
(SFAS No. 151). Under
SFAS No. 151, the Company allocated fixed production
overhead costs to inventories based on the anticipated normal
capacity of its manufacturing facility at the time. Included in
cost of products sold for the year ended December 31, 2006
and 2005 is $2.5 million and $3.2 million,
respectively, of idle capacity costs which represents the excess
of fixed production overhead over that allocated to inventories.
During the year ended December 31, 2006 and 2005,
$1.5 million and $1.5 million, respectively of
inventory costs in excess of market value were included in the
accompanying consolidated statement of operations related to the
Supply Agreement with Esprit (see Note 3 Summary of
Significant Transactions). Under the terms of this Supply
Agreement, the Company sold ESTRASORB at a price below its
manufacturing costs during the fourth quarter of 2005 and the
year ended December 31, 2006.
It is likely the Company will continue to manufacture ESTRASORB
at a loss until production volumes increase or it enters into
additional contract manufacturing agreements with third parties
to more fully utilize this manufacturing facilitys
capacity. The facility is able to accommodate a much greater
production than its current schedule, which, if more fully
utilized, would offset the fixed costs related to the
manufacturing process and facility. In addition, the Company is
negotiating revisions to its agreements for packaging costs for
ESTRASORB as well as its fixed lease costs for the manufacturing
facility. If these negotiations result in higher packaging or
lease costs to the Company, it may have a material adverse
impact on future financial results.
Property
and Equipment
Property and equipment are stated at cost and are depreciated
using the straight-line method over the estimated useful lives
of the assets, generally three to ten years. Amortization of
leasehold improvements is provided over the shorter of the
estimated useful lives of the improvements or the term of the
lease. Repairs and maintenance costs are expensed as incurred.
F-11
NOVAVAX,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Property and equipment is comprised of the following at
December 31:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Machinery and equipment
|
|
$
|
12,193
|
|
|
$
|
11,275
|
|
Leasehold improvements
|
|
|
6,248
|
|
|
|
6,201
|
|
Computer software and hardware
|
|
|
396
|
|
|
|
320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,837
|
|
|
|
17,796
|
|
Less accumulated depreciation and
amortization
|
|
|
(8,976
|
)
|
|
|
(6,207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,861
|
|
|
$
|
11,589
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was approximately $2,921,000, $2,794,000,
and $2,277,000 for the years ended December 31, 2006, 2005
and 2004, respectively.
Goodwill
and Intangible Assets
Goodwill originally results from business acquisitions. Assets
acquired and liabilities assumed are recorded at their fair
values; the excess of the purchase price over the identifiable
net assets acquired is recorded as goodwill. Other intangible
assets are a result of internally discovered patents. In
accordance with SFAS No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142),
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. In accordance with the requirements of
SFAS No. 142, the Company initially tested its
goodwill for impairment as of January 1, 2002 and
determined that no impairment was present. The Company
thereafter performed the required annual impairment test as of
December 31 of each year on the carrying amount of its
goodwill, which indicated the Companys estimated fair
value; of goodwill exceeded its carrying value; therefore, no
impairment was identified during December 31, 2006 or 2005.
Goodwill and intangible assets consist of the following at
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
|
(In thousands)
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill-Company acquisition
|
|
$
|
33,141
|
|
|
$
|
|
|
|
$
|
33,141
|
|
|
$
|
33,141
|
|
|
$
|
|
|
|
$
|
33,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
2,525
|
|
|
$
|
(1,547
|
)
|
|
$
|
978
|
|
|
$
|
2,525
|
|
|
$
|
(1,415
|
)
|
|
$
|
1,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-12
NOVAVAX,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Intangible assets are amortized on a straight-line basis over
their estimated useful lives, ranging from five to
17 years. Amortization expense was $132,000, $681,000 and
$776,000 for the years ended December 31, 2006, 2005 and
2004, respectively. Estimated future amortization expenses for
intangible assets as of December 31, 2006 are as follows:
|
|
|
|
|
|
|
Amortization
|
|
Year
|
|
Expense
|
|
|
2007
|
|
$
|
132
|
|
2008
|
|
|
132
|
|
2009
|
|
|
132
|
|
2010
|
|
|
132
|
|
2011
|
|
|
132
|
|
Thereafter
|
|
|
318
|
|
|
|
|
|
|
|
|
$
|
978
|
|
|
|
|
|
|
The Company evaluates the recoverability of the carrying value
of its long-lived assets and identifiable intangibles
periodically and whenever events or changes in circumstances
indicate that the carrying value of the asset may not be
recoverable. Examples of events or changes in circumstances that
indicate that the recoverability of the carrying value of an
asset should be assessed include, but are not limited to, the
following: a significant decrease in the market value of an
asset, a significant change in the extent or manner in which an
asset is used, a significant physical change in an asset, a
significant adverse change in legal factors or in the business
climate that could affect the value of an asset, an adverse
action or assessment by a regulator, an accumulation of costs
significantly in excess of the amount originally expected to
acquire or construct an asset, a current period operating or
cash flow loss combined with a history of operating or cash flow
losses,
and/or a
projection or forecast that demonstrates continuing losses
associated with an asset used for the purpose of producing
revenue. 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 relation 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 is less
than the assets carrying value. No such impairment losses
have been recognized to date, with the exception of the
leasehold assets written off in relation to the facility exit
mentioned in Note 4 Long-term Lease and Accounting for
Facility Exit Costs.
Revenue
Recognition and Allowances
The Company recognizes revenue in accordance with the provisions
of Staff Accounting Bulletin No. 104, Revenue
Recognition (SAB No. 104). For product
sales, revenue is recognized when all of the following criteria
are met: persuasive evidence of an arrangement exists, delivery
has occurred, the sellers price to the buyer is fixed or
determinable and collectibility is reasonably assured. The
Company recognizes these sales, net of allowances for returns
and rebates. A large part of the Companys product sales
are to Esprit or to distributors who resell the products to
their customers. The Company provides rebates to members of
certain buying groups who purchase from the Companys
distributors, to distributors that sell to their customers at
prices determined under a contract between the Company and the
customer, and 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. The Company
estimates the amount of the rebate that will be paid, and
records the liability as a reduction of revenue when the Company
records our sale of the products. Settlement of the rebate
generally occurs from three to 12 months after sale. The
Company regularly analyzes the historical rebate trends and
makes adjustments to recorded reserves for changes in trends and
terms of rebate programs. In a similar manner, the Company
estimates amounts for returns based on historical trends,
distributor inventory levels, product
F-13
NOVAVAX,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
prescription data and generic competition and makes adjustments
to the recorded reserves based on such information.
Under the terms of the Asset Purchase Agreement with Pharmelle,
LLC (see Note 3 Summary of Significant Transactions)
the Company no longer has responsibility for rebates or returns
related to
AVCtm
Cream and Suppositories, NovaNatal and NovaStart as of the date
of the sale of such assets. Under the License and Supply
Agreements with Esprit Pharma, Inc. (see Note 3 Summary
of Significant Transactions) the Company no longer has
responsibility for rebates related to ESTRASORB or for returns
related to ESTRASORB sales made subsequent to entering into the
License Agreement on October 19, 2005.
The shipping and handling costs the Company incurs are included
in cost of products sold in its consolidated statements of
operations.
For upfront payments and licensing fees related to contract
research or technology, the Company follows the provisions of
SAB No. 104 in determining if these payments and fees
represent the culmination of a separate earnings process or if
they should be deferred and recognized as revenue 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.
Revenue earned under research contracts is recognized in
accordance with the terms and conditions of such contracts for
reimbursement of costs incurred and defined milestones. In 2005,
revenue earned under a drug development contract was recognized
on the
percentage-of-completion
method, whereby revenue was recognized in proportion to the
estimated
cost-to-complete
the contract. In 2005, revenue earned under the renewal of the
IGI agreement was recognized completely upon receipt of payment
because the Company had no further performance obligations. Also
in 2005, revenue earned under the License Agreement with Esprit
Pharma, Inc. was recognized at the time of the agreement since
the Company had no further performance obligations related to
the license agreement (see Note 3 Summary of Significant
Transactions).
Stock-Based
Compensation
Effective January 1, 2006, the Company adopted the fair
value recognition provisions of Statement of Financial
Accounting Standard No. 123 (revised), Accounting for
Share-based Payment (SFAS No. 123R) using
the modified prospective method. This standard requires the
Company to measure the cost of employee services received in
exchange for equity share options granted based on the
grant-date fair value of options. The cost is recognized as
compensation expense over the vesting period of the options.
Under the modified prospective method, compensation cost is
included in operating expenses for the year ended
December 31, 2006 and includes both the compensation cost
of stock options granted prior to but not yet vested as of
January 1, 2006 and compensation cost for all options
granted subsequent to December 31, 2005.
Prior to adopting SFAS No. 123R on January 1,
2006, the Companys equity-based employee compensation cost
under its various stock incentive and option plans was accounted
for under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations, as permitted by
Standard of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation
(SFAS No. 123). Under the modified
prospective method, results for prior periods have not been
restated to reflect the effects of implementing
SFAS No. 123R. Therefore, for the years ended
December 31, 2005 and 2004, no option based employee
compensation cost is reflected in the Companys net loss,
because all options granted had an exercise price equal to the
underlying common stock price on the date of grant. The
following table which is presented for comparative purposes
only, provides the pro forma information as required by
Statement of Financial Accounting Standard No. 148,
Accounting for Stock-Based Compensation-Transition and
Disclosure, an amendment of SFAS No. 123,
(SFAS No. 148), and illustrates the effect on
net loss and loss per share for the years
F-14
NOVAVAX,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
ended December 31, 2005 and 2004 presented as if the
Company had applied the fair value recognition provisions of
SFAS No. 123 to stock based employee compensation
prior to January 1, 2006.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share data)
|
|
|
Net loss, as reported
|
|
$
|
(11,174
|
)
|
|
$
|
(25,920
|
)
|
Deduct: Total stock-based employee
compensation expense determined under fair value-based method
for all awards(1) (Revised)
|
|
|
(1,999
|
)
|
|
|
(4,358
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net loss (Revised)
|
|
$
|
(13,173
|
)
|
|
$
|
(30,278
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted as
reported (Revised)
|
|
$
|
(0.26
|
)
|
|
$
|
(0.70
|
)
|
Basic and diluted pro
forma (Revised)
|
|
$
|
(0.31
|
)
|
|
$
|
(0.82
|
)
|
|
|
|
(1) |
|
Does not include restricted stock compensation expense of
$491,000 which is reported in the consolidated statements of
operations. |
These pro forma amounts are not necessarily indicative of future
effects of applying the fair value-based method due to, among
other things, the vesting period of the stock options and the
fair value of additional stock options issued in future years.
The weighted average fair value of stock options on the date of
grant and the assumptions used to estimate the fair value of
stock options issued during the years ended December, 31,
2005 and 2004, using the Black-Scholes options valuation model
were as follows:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Weighted average fair value of
options granted
|
|
$
|
3.17
|
|
|
$
|
3.32
|
|
Expected life (years)
|
|
|
4.4
|
|
|
|
4.7
|
|
Expected volatility
|
|
|
129
|
%
|
|
|
59
|
%
|
Risk free interest rate
|
|
|
4.0
|
%
|
|
|
3.0
|
%
|
Expected dividend
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected forfeiture
|
|
|
0
|
%
|
|
|
0
|
%
|
The expected life of options granted was based on the
Companys historical share option exercise experience using
the historical expected term from the vesting date. The expected
volatility of the options granted for the years ended
December 31, 2005 and 2004 was determined using historical
volatilities based on stock prices since the inception of the
plans. The expected volatility of the options granted for the
years ended December 31, 2005 and 2004 was determined using
historical volatilities based on stock prices for the preceding
12 month periods. The risk-free interest rate was
determined using the yield available for zero-coupon
U.S. government issues with a remaining term equal to the
expected life of the options. The forfeiture rate for the years
ended December 31, 2005 and 2004 was determined using
historical rates since the inception of the plans. The Company
has never paid a dividend, and as such the dividend yield is
zero.
Compensation cost for grants issued prior to January 1,
2006 was accounted for using a graded method. Compensation cost
for grants on or after January 1, 2006 was accounted for
using a straight-lined method. Non-cash compensation expense
related to all restricted stock issued has been recorded as
compensation cost in accordance with SFAS No. 123R
using the straight-line method of amortization.
For restricted stock issued prior to January 1, 2006,
non-cash compensation cost was recorded using the straight-line
method of amortization and unearned compensation was increased
accordingly. The initial issuance of
F-15
NOVAVAX,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
restricted stock increased common stock and additional paid-in
capital and was offset by unearned compensation, which was
included in the stockholders equity section of the
consolidated balance sheet. The balance as of December 31,
2005 for the unearned compensation account was $425,000 and in
accordance with SFAS No. 123R was netted against
additional paid-in capital as of January 1, 2006.
Advertising
and Promotion Costs
All costs associated with advertising and promotions are
expensed as incurred. Advertising and promotion expense was $0
in 2006, $1,730,000 in 2005 and $12,607,000 in 2004.
Research
and Development Costs
Research and development costs are expensed as incurred. Such
costs include internal research and development expenditures
(such as salaries and benefits, raw materials and supplies) and
contracted services (such as sponsored research, consulting and
testing services) of proprietary research and development
activities and similar expenses associated with collaborative
research agreements.
The Company is part of a consortium that received a National
Institute of Allergy and Infectious Diseases (NIAID)
project program grant to develop HIV vaccine candidates. The
Company expects to receive approximately $1.0 million
through February 2008 for its participation in this grant effort.
Income
Taxes
The Companys income taxes are accounted for using the
liability method. Under the liability method, deferred income
taxes are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax basis and operating loss carryforward. Deferred
tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the year in which those
temporary differences are expected to be recovered or settled.
The effect of changes in tax rates on deferred tax assets and
liabilities is recognized in income in the period that includes
the enactment date. A valuation allowance is established when
necessary to reduce net deferred tax assets to the amount
expected to be realized. The Company has provided a full
valuation allowance against its net deferred tax assets as of
December 31, 2006 and 2005.
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 (e.g. upon exercise of stock options). Potentially
dilutive common shares are not included in the computation of
diluted earnings per share if they are anti-dilutive. Net loss
per share as reported was not adjusted for potential common
shares, as they are anti-dilutive.
Comprehensive
Loss
Under SFAS No. 130, Reporting Comprehensive
Income, the Company is required to display comprehensive
loss and its components as part of its consolidated financial
statements. Comprehensive loss is comprised of the net loss and
other comprehensive income (loss), which includes certain
changes in equity that are excluded from the net loss.
Comprehensive loss for the Company was the same as net loss for
the years ended December 31, 2006, 2005 and 2004.
F-16
NOVAVAX,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Segment
Information
The Company currently operates in one business segment, which is
the research, development and commercialization of proprietary
products utilizing its proprietary drug delivery and biological
technologies. The Company is managed and operated as one
business. A single management team that reports to the Chief
Executive Officer comprehensively manages the entire business.
The Company does not operate separate lines of business with
respect to its products or product candidates. Accordingly, the
Company does not have separately reportable segments as defined
by Statement of Financial Accounting Standards No. 131,
Disclosure about Segments of an Enterprise and Related
Information.
Recent
Accounting Pronouncements
Other than the adoption of Statement of Financial Accounting
Standards No. 123 (revised), Accounting for Stock-Based
Compensation (SFAS No. 123R), there
have been no material changes in the Companys critical
accounting policies or critical accounting estimates since
December 31, 2005, nor has the Company adopted any
accounting policy that has or will have a material impact on its
consolidated financial statements. For further discussion of the
Companys accounting policies see Note 2
Summary of Significant Accounting Policies.
SFAS No. 157
In September 2006, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 157,
Fair Value Measurements
(SFAS No. 157). SFAS No. 157
defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands
disclosures about fair value measurements.
SFAS No. 157 applies under other accounting
pronouncements that require or permit fair value measurements,
but does not require any new fair value measurements.
SFAS No. 157 will become effective for financial
statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. The Company is currently evaluating what impact, if any,
SFAS No. 157 will have on its financial condition,
results of operations or liquidity.
SAB No. 108
In September 2006, the SEC staff issued Staff Accounting
Bulletin No. 108, Considering the Effects of Prior
Year Misstatements When Quantifying Misstatements in Current
Year Financial Statements
(SAB No. 108). SAB No. 108
was issued to provide consistency between how registrants
quantify financial statement misstatements and requires the
Company to quantify financial statement misstatements based on
their impact on each of its consolidated financial statements
and related disclosure. SAB No. 108 is effective as of
the end of the Companys 2006 fiscal year, allowing a
one-time transitional cumulative effect adjustment to retained
earning as of January 1, 2006 for errors that were not
previously deemed material, but are material under the guidance
in SAB No. 108. The adoption of this SAB did not have
any impact on the Companys consolidated financial
statements.
FIN 48
In July 2006, the Financial Accounting Standards Board issued
FASB Interpretation 48, Accounting for Uncertainty in Income
Taxes: an interpretation of FASB Statement No. 109
(FIN 48). FIN 48, which clarifies
Statement of Accounting Standard No. 109, Accounting for
Income Taxes, establishes the criterion that an individual
tax position has to meet for some or all of the benefits of that
position to be recognized in the Companys financial
statements. On initial application, FIN 48 will be applied
to all tax positions for which the statute of limitations
remains open. Only tax positions that meet the
more-likely-than-not recognition threshold at the adoption date
will be recognized or continue to be recognized. The cumulative
effect of applying FIN 48 will be reported as an adjustment
to retained earnings at the beginning of the period in which it
is adopted.
F-17
NOVAVAX,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FIN 48 is effective for fiscal years beginning after
December 15, 2006, and was adopted by the Company on
January 1, 2007. The Company has not been able to complete
its evaluation of the impact of adopting FIN 48 and as a
result, is not able to estimate the effect the adoption will
have on its financial position and results of operations.
SFAS No. 159
In February 2007, the FASB issued a Statement of Financial
Accounting Standards No. 159 The Fair Value
Option for Financial Assets and Financial Liabilities
(SFAS No. 159), which provides
companies an option to report certain financial assets and
liabilities at fair value. The intent of SFAS No. 159
is to reduce the complexity in accounting for financial
instruments and the volatility in earnings caused by measuring
related assets and liabilities differently.
SFAS No. 159 is effective for financial statements
issued for fiscal years after November 15, 2007. The
Company is evaluating the impact this new standard will have on
its financial position and results of operations.
|
|
3.
|
Summary
of Significant Transactions
|
License
Agreement Renewal with IGI, Inc.
In December 2005, the Company received a $1,000,000 payment from
IGI, Inc. (IGI) in accordance with an option in a
licensing agreement signed between the Company and IGI in
December 1995. This payment gives IGI a ten-year renewal on
licensed technologies in specific fields and was included in
royalties, milestone and licensing fees on the accompanying
consolidated statement of operations for the year ended
December 31, 2005.
License
and Supply Agreements with Esprit Pharma, Inc.
In October 2005, the Company entered into License and Supply
agreements for ESTRASORB with Esprit Pharma, Inc.
(Esprit) Under the License Agreement, Esprit
obtained exclusive rights to market ESTRASORB in North America
and, under the Supply Agreement the Company will continue to
manufacture ESTRASORB.
In consideration for the rights granted, Esprit paid the Company
a minimum cash consideration of $12,500,000: $2,000,000 which
was paid at closing, $8,000,000 which was paid in December 2005,
and the remaining $2,500,000 which was paid in October 2006 in
accordance with the License Agreement. The Company receives
royalties on all net sales of ESTRASORB as well as milestone
payments based on specific pre-determined net sales levels of
ESTRASORB. The Company wrote off $2,175,000, the remaining net
balance of its intangible asset for ESTRASORB rights at the date
of the transaction. As part of the Supply Agreement, Esprit paid
the Company $273,000 for inventory and sales and promotional
materials for which the Company had a book value of $437,000.
The Company incurred $200,000 of fees related to this
transaction and recorded a gain of $10,125,000, which is
included in gain on sales of product assets on the accompanying
consolidated statement of operations for the year ended
December 31, 2005.
License
and Development Agreement and Supply Agreement with Esprit
Pharma, Inc.
In April 2006, the Company entered into a second License and
Supply Agreement with Esprit to co-develop, supply and
commercialize our MNP testosterone medicine for the treatment of
female hypoactive sexual desire disorder. Under the terms of the
License and Development Agreement, Esprit was granted exclusive
rights to market the products in North America. The Company will
receive a royalty on all net sales of the product as well as
milestone payments on specific pre-determined clinical and
regulatory milestones. Esprit will be responsible for all
development costs and will lead all clinical programs. Under the
term of the Supply Agreement, the Company will be responsible
for manufacturing the product.
Asset
Purchase Agreement with Pharmelle, LLC ( the Pharmelle
Transaction)
In September 2005, the Company entered into an Asset Purchase
Agreement with Pharmelle, LLC for the sale of assets related to
the AVC Cream and Suppositories, NovaNatal and NovaStart
products, as well as assets relating
F-18
NOVAVAX,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
to certain formerly marketed products Vitelle, Nestabs, Gerimed,
Irospan and Nessentials. The assets sold included, but were not
limited to, intellectual property, the New Drug Application for
AVC products, inventory and sales and promotional materials. In
connection with the sale, Pharmelle agreed to assume those
liabilities and obligations arising after the closing date of
the transaction in connection with the performance by Pharmelle
of certain assumed contracts, those liabilities and obligation
arising after the closing date in connection with products sold
by Pharmelle after the closing date or the operation of the
business relating to such products or the assets after such date
(including any product liability claims associated with such
products), and all liability and responsibility for returns of
the products made after the closing date, regardless of when
such products were produced, manufactured or sold.
In consideration for the sale of these assets, Pharmelle paid
the Company $2,500,000 in cash and assumed the liabilities noted
above. In addition, the Company is entitled to royalties on AVC
for a five-year period if net sales exceed certain levels. The
Company wrote off $1,082,000, the net balance of its intangible
assets related to the AVC product acquisition and $289,000 of
inventory, recorded a $289,000 liability for future obligations
and recorded a gain on the transaction of $840,000. This gain is
included in gain on sales of product assets on the accompanying
consolidated statement of operations for the year ended
December 31, 2005.
In July 2006, the Company entered into an amendment to the Asset
Purchase Agreement with Pharmelle to revise the royalty formula.
The Company is now entitled to royalties on AVC products for a
five-year period based on a percentage of gross margin if net
sales exceed certain levels.
Restructuring
of the Sales Force
From March through August 2005, the Company implemented measures
to reduce costs associated with its commercial operations by
downsizing its sales force to correspond with the Companys
strategy of transitioning from a commercial business model to
that of one focused on the Companys core competency of new
product development. The March restructuring reduced the
Companys sales force numbers significantly while the
August restructuring eliminated the remaining sales force.
Included in sales and marketing expenses in the accompanying
consolidated statement of operations for the year ended
December 31, 2005 is $444,000 related to these two
restructurings. Included in this amount are (i) one-time
termination benefits of $305,000, all of which were paid as of
December 31, 2005, (ii) auto lease contract
termination costs of approximately $125,000, of which $2,000 is
still included in accrued expenses as of December 31, 2005,
and (iii) $14,000 of other associated costs, all of which
were paid as of December 31, 2005.
Opportunity
Grant Funds
In July 2005, the Company received a $400,000 Opportunity Grant
from the Commonwealth of Pennsylvania for the reimbursement of
certain costs incurred in connection with the move of the
Companys corporate headquarters and product development
activities to Malvern, Pennsylvania. These funds were included
as an offset to general and administrative expenses included in
the Consolidated Statement of Operations for the year ended
December 31, 2005. The Opportunity Grant had the following
conditions: (i) the Company would create 95 full time jobs
at the Malvern facility within three years; (ii) the
Company would invest at least $9.4 million in capital
improvements and fixtures and equipment at the Malvern facility
within three years; and (iii) the Company would operate at
the Malvern facility for a minimum of five years. If the Company
failed to meet these conditions, it would be liable for a
penalty equal to the full amount of the grant.
In line with its business strategy, the Company announced in
December 2006, that it had signed a long-term lease for its new
corporate headquarters and R & D facility in Rockville,
Maryland, where its vaccine operations were currently located.
As a result of the Companys failure to comply with the
conditions of the grant, the Department of Community &
Economic Development (DCED) of the Commonwealth of
Pennsylvania requested that the Company repay the full amount of
the Opportunity Grant. The Company has recorded a current
liability of $400,000 in the accompanying Consolidated Balance
Sheet as of December 31, 2006 and a corresponding expense
F-19
NOVAVAX,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
in general and administrative expenses in the Consolidated
Statement of Operations for the year ended December 31,
2006.
Cancellation
of King Pharmaceuticals Agreements
In January 2001, the Company entered into a co-promotion
agreement with King Pharmaceuticals, Inc. for the Companys
topical estrogen therapy, ESTRASORB, in the U.S. and Puerto Rico
(the Territory). The Company also entered into a
license agreement with King for many countries outside the
U.S. The co-promotion and license agreements (the
Agreements) granted King the right to share equally
in the revenues and expenses for manufacturing and marketing
ESTRASORB in the Territory and exclusive rights to many
countries outside the U.S. The Agreements also entitled the
Company to up to $5,000,000 in milestone payments from King for
achievement of milestones outlined in the Agreements.
In June 2001, the Company amended the Agreements (the
Amended Agreements). The Amended Agreements
clarified the terms of two milestone payments totaling
$5,000,000. The Amended Agreements also granted King exclusive
rights to promote market and distribute ESTRASORB in Canada,
Switzerland, Greece, Italy, Spain and the Netherlands, the only
countries excluded from the original license agreement. In
addition, the Amended Agreements included the co-promotion and
license of a topical testosterone therapy for testosterone
deficient women, that was in development.
In July 2004, King and the Company mutually agreed to terminate
the Amended Agreements, among others, (the King
Transaction). The King Transaction included the return to
Novavax of all rights worldwide for ESTRASORB and the
testosterone product candidate, as well as all rights to other
womens health products that the Company may successfully
develop utilizing the MNP technology. The transaction also
included the redemption of $40.0 million of the
Companys convertible notes held by King. Additionally,
Novavax hired 50 members of Kings womens health
sales force to provide competitive sales force coverage. As part
of the King Transaction, the Company paid King a net of
$14.0 million in cash and issued King 3,775,610 shares
of common stock, which at the time of closing were valued at
approximately $18,123,000.
The King Transaction resulted in a gain on the redemption of the
convertible notes held by King of $11,162,000, which is included
in gain on redemption of debt on the consolidated statement of
operations for the year ended December 31, 2004. This gain
was determined based on the fair value of the convertible notes
plus accrued interest as of the transaction date compared to the
notes total book value. In addition, an intangible asset
for ESTRASORB rights of $2,514,000 was recorded, which
represents the difference between assets and liabilities
acquired or written off, the net cash paid in the transaction,
the common stock issued and transaction fees and expenses. The
recorded intangible was determined to be a fair value for the
rights re-acquired based on the sales levels of ESTRASORB, the
status of obtaining approval outside the U.S. and the deferred
further development of the testosterone product candidate.
Included in the assets and liabilities written off were deferred
financing costs of $351,000 relating to the convertible notes
held by King, and remaining deferred revenue of $2,250,000
relating to previous licensing fees for ESTRASORB, mentioned
above.
|
|
4.
|
Long-term
Leases and Accounting for Facility Exit Costs
|
In December 2003, the Company prepared for the consolidation of
warehousing and distribution functions for all its products by
closing its distribution facility in Maryland Heights, Missouri.
The Company entered into a service arrangement with Cardinal
Health in Nashville, Tennessee for customer service, warehousing
and product shipment to distribute current and future products.
Prior to this restructuring, the Company purchased its prenatal
vitamins in bulk and packaged the vitamins at the Missouri
facility. As part of the restructuring, the Company also entered
into an agreement with a third-party packager for the vitamin
line of products.
One time costs associated with this restructuring included
moving costs of approximately $15,000, along with transition
payments to 10 production and support employees of approximately
$75,000 in the aggregate were
F-20
NOVAVAX,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
included in general and administrative expenses. In addition,
the Company held an auction, selling off most of the fixed
assets that were located at the facility. The auction resulted
in a loss on disposal of assets of approximately $129,000. As of
December 31, 2004, all costs associated with the
restructuring had been paid.
In July 2004, the Company entered into a lease agreement for a
32,900 square foot facility in Malvern, Pennsylvania for
the consolidation and expansion of its corporate headquarters
and product development activities. The lease, with a
commencement date of September 15, 2004, has an initial
term of ten years with two five-year renewal options and an
early option to terminate after the first five years of the
lease. Standard annual escalation rental rates were in effect
during the initial lease term. In April, 2006 the Company
entered into a sublease agreement with Sterilox Technologies,
Inc., now known as PuriCore, Inc., to sublease
20,469 square feet of the Malvern corporate headquarters at
premium price per square foot. The new sublease, has a
commencement date of July 1, 2006 and expires on
September 30, 2009. Consistent with its strategic focus,
the Company increased its presence in Rockville, Maryland, where
its vaccine operations are currently located. On
December 7, 2006, the Company finalized a sublease
agreement with Human Genome Sciences, Inc. (HGS) all
initial contingencies for which have been met or been waived. On
October 6, 2006, the Company and HGS executed a sublease
agreement (the HGS sublease) whereby the Company
will lease approximately 51,000 square feet of office,
laboratory and administrative space in Rockville, MD. The office
space will be used as the Companys new corporate
headquarters. The term of the HGS sublease commences on the
dates of December 12, 2006 or the date on which a certain
portion of the leased space is delivered to the Company and
expires on the last day of the month which is six years
following the date of delivery. The Company has the option to
renew the HGS sublease for two additional periods of three years
each and a third option to renew the HGS sublease until
March 30, 2021.
In October 2006, the Company entered into an Amendment to the
Sublease Agreement with PuriCore, Inc. to sublease an additional
7,500 square feet of the Malvern corporate headquarters at
a premium price per square foot. This amendment has a
commencement date of October 25, 2006 and expires on
September 30, 2009. As a result of the premium price
received on these sublease agreements, there were no facility
exit costs associated with this transaction.
During 2004 through 2006, the Company applied the principles of
SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, in accounting for lease
termination and other associated costs that would continue to be
incurred under the operating lease which expired on
October 31, 2006 related to the Companys former
corporate offices located in Columbia, Maryland.
A roll-forward of the facility exit cost liability is as follows:
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Non-Current
|
|
|
|
(In thousands)
|
|
|
Original amount expensed and
set up as a liability
|
|
$
|
151
|
|
|
$
|
101
|
|
Lease payments applied to the
liability
|
|
|
(58
|
)
|
|
|
(161
|
)
|
Adjustment to original estimate
|
|
|
45
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2005
|
|
|
138
|
|
|
|
|
|
Lease payments applied to the
liability
|
|
|
(142
|
)
|
|
|
|
|
Adjustment to original estimate
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2006
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
F-21
NOVAVAX,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
Supplemental
Financial Data
|
Allowance
for Doubtful Accounts
A roll-forward of the allowance for doubtful accounts is as
follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
Balance, December 31,
2003
|
|
$
|
376
|
|
Provision for bad debts
|
|
|
413
|
|
Write off bad debts
|
|
|
(37
|
)
|
|
|
|
|
|
Balance, December 31,
2004
|
|
|
752
|
|
Provision for bad debts
|
|
|
4
|
|
Other adjustments
|
|
|
(327
|
)
|
|
|
|
|
|
Balance, December 31,
2005
|
|
|
429
|
|
Provision for bad debts
|
|
|
111
|
|
Write off bad debts
|
|
|
(423
|
)
|
|
|
|
|
|
Balance, December 31,
2006
|
|
$
|
117
|
|
|
|
|
|
|
Prepaid
Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the
following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Prepaid insurance
|
|
$
|
720
|
|
|
$
|
593
|
|
Current portion of deferred
financing costs
|
|
|
259
|
|
|
|
341
|
|
Non-trade receivables
|
|
|
|
|
|
|
75
|
|
Notes receivable from former
director, net of reserve
|
|
|
281
|
|
|
|
|
|
Interest receivable on
directors notes
|
|
|
359
|
|
|
|
284
|
|
Other current assets
|
|
|
53
|
|
|
|
54
|
|
Interest receivable
|
|
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,873
|
|
|
$
|
1,347
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment
Property and equipment is comprised of the following at
December 31:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Machinery and equipment
|
|
$
|
12,193
|
|
|
$
|
11,275
|
|
Leasehold improvements
|
|
|
6,248
|
|
|
|
6,201
|
|
Computer software and hardware
|
|
|
396
|
|
|
|
320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,837
|
|
|
|
17,796
|
|
Less accumulated depreciation
|
|
|
(8,976
|
)
|
|
|
(6,207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,861
|
|
|
$
|
11,589
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was approximately $2,921,000, $2,794,000,
and $2,277,000 for the years ended December 31, 2006, 2005
and 2004, respectively.
F-22
NOVAVAX,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accrued
Expenses
Accrued expenses consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Sales return allowance
|
|
$
|
238
|
|
|
$
|
282
|
|
Sales rebate allowance
|
|
|
14
|
|
|
|
18
|
|
Employee benefits and compensation
|
|
|
822
|
|
|
|
754
|
|
Operating expenses
|
|
|
1,529
|
|
|
|
917
|
|
Interest expense
|
|
|
475
|
|
|
|
626
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,078
|
|
|
$
|
2,597
|
|
|
|
|
|
|
|
|
|
|
Sales
Return Allowance
A roll-forward of the sales return allowance is as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
Balance, December 31,
2003
|
|
$
|
158
|
|
Provision for returns for 2004
sales
|
|
|
885
|
|
Additional provision for returns
for 2003 sales
|
|
|
771
|
|
Additional provision for returns
for 2002 sales
|
|
|
463
|
|
Returns received for 2002 sales
|
|
|
(447
|
)
|
Returns received for 2003 sales
|
|
|
(556
|
)
|
|
|
|
|
|
Balance, December 31,
2004
|
|
|
1,274
|
|
Provision for 2005 sales
|
|
|
95
|
|
Additional provision for 2004 sales
|
|
|
98
|
|
Additional provision for 2003 sales
|
|
|
341
|
|
Returns received from 2003 sales
|
|
|
(926
|
)
|
Returns received from 2004 sales
|
|
|
(600
|
)
|
|
|
|
|
|
Balance, December 31,
2005
|
|
|
282
|
|
Provision for 2006 sales
|
|
|
218
|
|
Additional provision for 2005 sales
|
|
|
41
|
|
Returns received from 2004 sales
|
|
|
(129
|
)
|
Returns received from 2005 sales
|
|
|
(174
|
)
|
|
|
|
|
|
Balance, December 31,
2006
|
|
$
|
238
|
|
|
|
|
|
|
F-23
NOVAVAX,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Notes Payable
Notes payable consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Note payable; bears interest at
3.00% per annum; principal and interest due in monthly
installments of $6,600 through December 2009
|
|
$
|
215
|
|
|
$
|
287
|
|
Note payable; bears interest at
2.850% per annum; principal and interest due in monthly
installments of $6,573 through January 2010
|
|
|
233
|
|
|
|
303
|
|
Note payable; bears interest at
2.38% per annum; principal and interest due in monthly
installments of $6,468 through January 2010
|
|
|
231
|
|
|
|
302
|
|
Note payable; insurance financing;
bears interest at 5.09% per annum; principal and interest
due in monthly installments of $56,868 through September 2006
|
|
|
|
|
|
|
501
|
|
Note payable; insurance financing;
bears interest at 5.43% per annum; principal and interest
due in monthly installments of $58,097 through September 2007
|
|
|
510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,189
|
|
|
|
1,393
|
|
Less current portion
|
|
|
(731
|
)
|
|
|
(715
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
458
|
|
|
$
|
678
|
|
|
|
|
|
|
|
|
|
|
The notes payable (except for the notes payable for financing
insurance premiums) are secured by $2.4 million of the
Companys machinery and equipment located at its
manufacturing facility in Philadelphia, Pennsylvania.
Convertible
Notes
From 2000 to 2002, the Company entered into a series of note
purchase agreements with King Pharmaceuticals Inc.
(King) totaling $40,000,000. All of the notes would
have matured on December 19, 2007 with interest payable in
semi-annual installments on June 30 and December 31.
As part of the King Transaction, the Company redeemed these
notes on July 19, 2004. For the six months ended
June 30, 2004, the Company accrued interest of $800,000
relating to the King notes. This accrued interest was written
off as part of the King Transaction and included in the
resulting gain on the redemption of the convertible notes held
by King (see Note 3 Summary of Significant
Transactions). For the year ended December 31, 2003,
the Company made cash interest payments of $1.6 million for
the King notes. For the year ended December 31, 2002, the
Company made cash interest payments of $600,000 and accrued an
additional $800,000 for interest expense at year-end for which
King agreed to accept payment in common stock. In February 2003,
the Company issued King 307,692 shares of common stock to
satisfy the accrued interest payable. For the year ended
December 31, 2003, the Company capitalized $386,717 for
interest incurred on debt used to finance the build-out of its
manufacturing facility.
Concurrent with the King Transaction, in July 2004 the Company
also entered into definitive agreements for the private
placement of $35,000,000 aggregate principal amount of senior
convertible notes to a group of institutional investors. The
notes carry a 4.75% coupon, payable semi-annually, mature in
five years and are currently convertible into shares of common
stock at $5.46 per share. From the third anniversary of the
issue date of the notes, and subject to certain conditions, the
Company has the right to effect a mandatory conversion of the
notes if the weighted average price of the common stock exceeds
175% of the then conversion price for each of 15 trading days
out of any 30 consecutive trading days. Note holders have the
right to require the Company to redeem all or a portion of the
notes if the weighted average price of the common stock for each
of 30 trading days out of 40 consecutive trading days prior to
either the third or fourth anniversary of the issue date of the
notes is less than the
F-24
NOVAVAX,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
then applicable conversion price of the Companys common
stock, provided, that a holders right to effect
this optional redemption will not apply if certain revenue
targets for ESTRASORB are achieved. The notes are also
redeemable upon the occurrence of specified events of default as
well as a change of control (as that term is defined
in the notes) of Novavax. At December 31, 2006 and 2005,
the Company had accrued interest of $475,260 and $626,000
respectively, relating to these notes.
In October 2005, certain holders of $6,000,000 face amount of
the Companys senior convertible notes exercised their
optional conversion right to convert their notes plus accrued
interest of $81,000 into 1,070,635 shares of Novavax common
stock, at the per share conversion price then in effect of
$5.68. This reduced the aggregate principal amount of such notes
outstanding from $35,000,000 to $29,000,000.
In March 2006, certain holders of $7,000,000 face amount of the
Companys senior convertible notes exercised their optional
conversion right to convert their notes plus accrued interest of
$68,000 into 1,294,564 shares of Novavax common stock, at
the per share conversion of $5.46. This reduced the aggregate
principal amount of such notes outstanding from $29,000,000 to
$22,000,000.
As a result of the financing and the King Transaction, the
Company incurred $3,355,000 of transaction expenses, which
increased the intangible asset for ESTRASORB rights by
$1,010,000 (included in the total intangible asset for ESTRASORB
rights of $2,514,000), decreased additional paid-in capital by
$288,000, and increased deferred financing costs by $2,057,000.
The deferred financing costs are being amortized over the life
of the convertible notes. During the years ended
December 31, 2006, 2005 and 2004, $279,000, $400,000 and
$184,000, respectively, of deferred financing costs amortization
were included in interest expense on the accompanying
consolidated statements of operations. Concurrent with the
conversions of $6,000,000 and $7,000,000 of senior convertible
debt (mentioned above), the Company wrote off in 2006 and 2005,
$267,000 and $262,000, respectively, of deferred financing
costs. These write offs are included in interest expense on the
accompanying consolidated statements of operations for the years
ended December 31, 2006 and 2005.
Convertible notes consist of the following on December 31:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Note payable; 4.75% senior
convertible, issued July 19, 2004, due July 15, 2009,
currently convertible into 4,029,304 shares of Novavax
common stock at $5.46 per share
|
|
$
|
22,000
|
|
|
$
|
29,000
|
|
|
|
|
|
|
|
|
|
|
Aggregate future minimum principal payments on debt at
December 31, 2006 are as follows:
|
|
|
|
|
Year
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
2007
|
|
$
|
731
|
|
2008
|
|
|
226
|
|
2009
|
|
|
22,219
|
|
2010
|
|
|
13
|
|
|
|
|
|
|
|
|
$
|
23,189
|
|
|
|
|
|
|
Total cash interest payments for the three years ended
December 31, 2006, 2005 and 2004 were $1,233,011,
$1,719,000 and $54,000, respectively.
F-25
NOVAVAX,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During 2004, the Company received net proceeds of $369,000 from
the exercise of 107,550 common stock options at a range of $3.24
to $4.30 per share.
Concurrent with the King Transaction, in July 2004 the Company
issued 952,381 shares of common stock at $5.25 per
share, for gross proceeds of $5.0 million to an accredited
investor in reliance on Regulation D promulgated under the
Securities Act of 1933, as amended. A resale registration
statement was filed and declared effective for such shares in
August 2004.
In July 2005, the Company completed an agent-led offering of
4,000,000 shares of common stock at $1.00 per share
for gross proceeds of $4,000,000. The stock was issued pursuant
to an existing shelf registration statement. Net proceeds after
deducting underwriter, legal, accounting and other miscellaneous
fees were approximately $3,631,000.
In August 2005, the Company issued 250,000 shares of common
stock in a private placement to its former Chief Executive
Officer for prior services, which had a fair market value of
$215,000 at the time of issuance.
In August 2005, the Company approved the issuance of
50,000 shares of common stock to a director in a private
placement for prior services and for his agreement to pledge
such shares to a brokerage firm to secure the debt guarantee by
the Company (see Note 13 Related Party
Transactions). The fair value at the time of the approval of
these shares was $37,000 and they were issued in December 2005.
In November 2005, the Company completed an offering of
4,186,047 shares of common stock at $4.30 per share.
The stock was offered and sold pursuant to an existing shelf
registration statement. Net proceeds after deducting underwriter
fees, legal and other miscellaneous fees were approximately
$17,032,000.
In February 2006, the Company completed an offering of
4,597,700 shares of common stock at $4.35 per share
for gross proceeds of $20 million. The stock was offered
and sold pursuant to an existing shelf registration statement.
Net proceeds were approximately $19.9 million.
In March 2006, the Company completed an agent-led offering of
5,205,480 shares of common stock at $7.30 per share,
for gross proceeds of $38.0 million. The stock was offered
and sold pursuant to an existing shelf registration statement.
Net proceeds were approximately $36.1 million.
During 2006, the Company received net proceeds of $1,718,000 for
the exercise of 497,613 common stock options at a range of $0.74
to $5.81 per share.
On August 7, 2002, the Company adopted a Shareholder Rights
Plan which provides for the issuance of rights to purchase
shares of Series D Junior Participating Preferred Stock,
par value $0.01 per share (the Preferred
Shares), of the Company. Under the Shareholder Rights
Plan, the Company distributed one preferred share purchase right
(a Right) for each outstanding share of common
stock, par value $.01 (the Common Shares), of the
Company. The Rights were distributed to stockholders of record
on August 16, 2002.
Each Right entitles the holder to purchase from the Company
one-thousandth of a Preferred Share at a price of $40, subject
to adjustment. The Rights become exercisable, with certain
exceptions, 10 business days after any party, without prior
approval of the Board of Directors, acquires or announces an
offer to acquire beneficial ownership of 15% or more of the
Companys Common Shares. In the event that any party
acquires 15% or more of the Companys common stock, the
Company enters into a merger or other business combination, or
if a substantial amount of the Companys assets are sold
after the time that the Rights become exercisable, the Rights
provide that the holder will receive, upon exercise, shares of
the common stock of the surviving or acquiring company, as
applicable, having a market value of twice the exercise price of
the Right.
F-26
NOVAVAX,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Rights expire August 7, 2012, and are redeemable by the
Company at a price of $0.00025 per Right at any time prior
to the time that any party acquires 15% or more of the
Companys Common Shares. Until the earlier of the time that
the Rights become exercisable, are redeemed or expire, the
Company will issue one Right with each new Common Share issued.
|
|
9.
|
Stock
Options and Restricted Stock Awards
|
The Company recorded compensation costs in the consolidated
statement of operation associated with SFAS No. 123R
as follows:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2006
|
|
|
|
(In thousands)
|
|
|
Cost of products sold (which
includes idle capacity)
|
|
$
|
48
|
|
Research and development
|
|
|
561
|
|
General and administrative
|
|
|
1,167
|
|
|
|
|
|
|
Total effect of adopting
SFAS No. 123R
|
|
$
|
1,776
|
|
|
|
|
|
|
The Company has granted stock option incentive awards under
several plans. Under the 2005 Stock Incentive Plan (the
2005 Plan), approved in May 2005 by the stockholders
of the Company, options may be granted to officers, employees,
consultants and advisors to Novavax and any present or future
subsidiary to purchase a maximum of 2,000,000 shares of
Novavax common stock and an additional 565,724 shares of
common stock that had been held in reserve under the
Companys 1995 Stock Option Plan (the 1995
Plan), were unused and were transferred to the Company
2005 Plan. In addition, a maximum 5,746,468 shares of
common stock subject to existing options under the 1995 Plan may
revert to and become issuable under the 2005 Plan if such
existing options granted under the 1995 Plan should for any
reason expire or otherwise terminate.
Under the 2005 Plan, the 1995 Plan and the 1995 Director
Stock Option Plan (the 1995 Director Plan)
incentive stock options, having a maximum term of 10 years,
can be or were granted at no less than 100% of the fair market
value of Novavaxs 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 these plans. There is no
minimum exercise price for non-statutory stock options.
The exercise price is the fair market value per share of the
Companys common stock on the date of grant. Options
granted to eligible directors are exercisable in full beginning
six months after the date of grant and expire 10 years from
the grant date. All options available under the
1995 Director Plan have been granted. Such options cease to
be exercisable at the earlier of their expiration or three years
after an eligible director ceases to be a director for any
reason. In the event that an eligible director ceases to be a
director on account of his or her death, any 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 10 years from its date of grant).
F-27
NOVAVAX,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Activity under the 2005 Plan, 1995 Plan and Director Plan was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1995 Director Stock
|
|
|
|
2005 Stock Option Plan
|
|
|
1995 Stock Option Plan
|
|
|
Option Plan
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Stock Options
|
|
|
Exercise Price
|
|
|
Stock Options
|
|
|
Exercise Price
|
|
|
Stock Options
|
|
|
Exercise Price
|
|
|
Balance, December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
4,211,643
|
|
|
$
|
5.61
|
|
|
|
270,000
|
|
|
$
|
4.03
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
1,308,150
|
|
|
|
5.46
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
(107,550
|
)
|
|
|
3.43
|
|
|
|
|
|
|
|
|
|
Expired or canceled
|
|
|
|
|
|
|
|
|
|
|
(350,275
|
)
|
|
|
7.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
5,061,968
|
|
|
|
5.48
|
|
|
|
270,000
|
|
|
|
4.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,192,775
|
|
|
$
|
1.22
|
|
|
|
486,825
|
|
|
|
2.13
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
(312,654
|
)
|
|
|
0.96
|
|
|
|
(30,000
|
)
|
|
|
3.15
|
|
Expired or canceled
|
|
|
(88,850
|
)
|
|
|
1.46
|
|
|
|
(2,115,978
|
)
|
|
|
5.64
|
|
|
|
(70,000
|
)
|
|
|
4.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
2,103,925
|
|
|
$
|
1.21
|
|
|
|
3,120,161
|
|
|
$
|
5.30
|
|
|
|
170,000
|
|
|
$
|
3.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,409,500
|
|
|
$
|
4.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(235,571
|
)
|
|
|
3.21
|
|
|
|
(242,042
|
)
|
|
$
|
3.69
|
|
|
|
(20,000
|
)
|
|
$
|
3.44
|
|
Expired or canceled
|
|
|
(241,916
|
)
|
|
|
2.41
|
|
|
|
(352,150
|
)
|
|
|
5.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
3,035,938
|
|
|
$
|
2.49
|
|
|
|
2,525,969
|
|
|
$
|
5.43
|
|
|
|
150,000
|
|
|
$
|
4.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares exercisable at
December 31, 2004
|
|
|
|
|
|
$
|
|
|
|
|
2,683,195
|
|
|
$
|
5.40
|
|
|
|
270,000
|
|
|
$
|
4.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares exercisable at
December 31, 2005
|
|
|
354,165
|
|
|
$
|
1.31
|
|
|
|
2,220,857
|
|
|
$
|
5.71
|
|
|
|
170,000
|
|
|
$
|
3.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares exercisable at
December 31, 2006
|
|
|
1,104,121
|
|
|
$
|
1.83
|
|
|
|
2,124,856
|
|
|
$
|
5.70
|
|
|
|
150,000
|
|
|
$
|
4.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for grant at
December 31, 2006
|
|
|
1,002,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of the stock options granted for the year ended
December 31, 2006, was estimated at the date of grant using
the Black-Scholes option-pricing model with the following
assumptions:
|
|
|
Weighted average fair value of
options granted
|
|
$2.75
|
Risk-free interest rate
|
|
4.28% - 5.10%
|
Dividend yield
|
|
0.0%
|
Volatility
|
|
85.0%
|
Expected life (in years)
|
|
4.4
|
Expected forfeiture rate
|
|
20.37%
|
F-28