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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NO. 0-26770
NOVAVAX, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-2816046
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
8320 GUILFORD ROAD, COLUMBIA, MARYLAND 21046
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (301) 854-3900
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED:
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Common Stock ($.01 par value) American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's Common Stock, par value $.01
per share, held by non-affiliates of the registrant at March 20, 1997, as
computed by reference to the closing price of such stock, was approximately
$35,000,000.
The number of shares of the registrant's Common Stock, par value $.01 per
share, outstanding at March 20, 1997 was 11,888,153 shares.
Documents Incorporated by Reference: Portions of the 1997 Novavax, Inc.
Proxy Statement are incorporated by reference into Part III of this Report.
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PART I
ITEM 1. BUSINESS
Novavax, Inc. ("Novavax" or the "Company") is a biopharmaceutical company
focusing on the research and development of proprietary topical and oral drug
delivery technologies. The Company's technology platforms involve the use of
proprietary microscopic organized lipid structures as vehicles for the delivery
of a wide variety of drugs and other therapeutic products, including certain
hormones, anti-bacterial and anti-viral products and vaccine adjuvants. The
Company's lead product candidates, ESTRASORB(TM), a topical estrogen cream and
Helicore(TM), an oral anti-bacterial preparation for the treatment of
Helicobacter pylori infection, have completed Phase I human clinical trials. The
Company has recently entered Phase I human clinical studies with ANDROSORB(TM),
a topical testosterone cream.
Historically, the focus of the Company was on the development of human
vaccines, vaccine adjuvants, drug delivery technologies and anti-infective
pharmaceuticals. Novavax developed several oral vaccines, two of which (ECOVAX
057(TM) and Shigella flexneri 2a) were granted Investigational New Drug
Application ("IND") approvals and completed Phase I human clinical studies. Both
vaccine studies were multiple dose Phase I safety trials in which no significant
toxicity was noted. Although the Company began development of its pharmaceutical
product candidates later than, and as byproducts of, its vaccine development,
its primary emphasis is now on these pharmaceutical product candidates for the
following reasons:
- Much larger potential markets
- Lower estimated clinical development costs
- Measurements of clinical efficacy are more easily defined
- Current financial resources do not permit concurrent development of both
multiple vaccine and pharmaceutical programs
Consistent with prudent use of the Company's limited cash resources, the
clinical development programs of both oral active vaccine immunization programs
have been presently suspended in favor of the development of the Company's three
lead pharmaceutical product candidates. The Company has the potential to develop
other human pharmaceutical products utilizing its proprietary drug delivery
platform technologies, dependent upon additional future capital.
Novavax, Inc. was incorporated in Delaware in 1987. On December 12, 1995,
the Company's former parent, IGI, Inc. ("IGI"), distributed its majority
interest in Novavax to the IGI stockholders (the "Distribution"). Until then,
Novavax had been the human pharmaceuticals subsidiary of IGI. The Company's
principal executive offices are located at 8320 Guilford Road, Columbia,
Maryland, 21046.
THE NOVAVAX TECHNOLOGY PLATFORMS
Novavax has developed proprietary topical and oral drug delivery
technologies using organized lipid structures. To date, the Company has utilized
its technology in the development of Novasome lipid vesicles and micellar
nanoparticles ("MNPs"), which are sub-micron size lipid structures that also
possess encapsulation capabilities. These structures may help in targeted
delivery and controlled release. The Company believes its technologies may allow
for more cost-effective delivery of a wide variety of drugs and other
therapeutics than is possible with phospholipid liposomes and other delivery
vehicles.
Most commercial liposomes are composed of delicate phospholipids. Due to
their inherent lack of stability and carrying capacity limitations, phospholipid
liposomes may only be used with a limited number of drugs. While capable of
encapsulating certain (principally water soluble) drugs, phospholipid liposomes
have a number of significant disadvantages, including their expense and the need
to use potentially hazardous organic solvents in their manufacture. In addition,
the standard, multi-step phospholipid manufacturing process yields relatively
small quantities of liposomes.
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Novasome(R) Lipid Vesicles
Novasome lipid vesicles are proprietary organized lipid structures in which
drugs or other materials can be encapsulated for delivery into the body
topically or orally. Novasome lipid vesicles are made using the Company's
patented manufacturing process from a variety of readily available chemicals
called amphiphiles. IGI, the Company's former parent, currently uses Novasome
lipid vesicles in a wide variety of cosmetic applications, including products
sold by Estee Lauder and Revlon under such labels as Prescriptives and Almay. To
date, IGI has sold hundreds of tons of products that incorporate Novasome
technologies.
The Company believes Novasome lipid vesicles have a number of proprietary
features that may be applicable in the delivery of human therapeutics. Because
Novasome lipid vesicles consist primarily of inexpensive chemicals and the
manufacturing process is a simple one, the Company believes that the
manufacturing cost of Novasome lipid vesicles is less than that of phospholipid
liposomes and other drug delivery vehicles. Novasome lipid vesicles also have a
large, stable central core that allows them to entrap and deliver a wide variety
of substances that may be too large or chemically disruptive for phospholipid
liposomes. In addition, the Company is able to manipulate the structure and size
of Novasome lipid vesicles in order to vary the amount and rate of drug delivery
into the body. This may enable Novasome lipid vesicles to be utilized for the
continuous delivery of therapeutics over extended periods of time.
Micellar Nanoparticles
Micellar nanoparticles are submicron-sized water miscible lipid structures
that have different structural characteristics and are generally smaller than
Novasome lipid vesicles. MNPs, like Novasome lipid vesicles, are derived from
amphiphile molecules.
Novavax scientists have demonstrated the ability to incorporate alcohol
soluble drugs, and pesticides, vaccine adjuvants, proteins, whole viruses,
flavors, fragrances and colors into MNPs. MNPs have the ability to entrap
ethanol or methanol soluble drugs and to deliver these drugs through intact
skin. The MNP formulations used for the transdermal delivery of drugs have
cosmetic properties similar to creams and lotions.
NOVAVAX PRODUCT CANDIDATES
Topical Drug Delivery
The Company is using its micellar nanoparticle technology in the
development of ESTRASORB, a cream designed for the delivery of estradiol
(natural estrogen) through the skin. Estrogen replacement therapy is currently
used worldwide by menopausal and post menopausal women to prevent osteoporosis,
cardiovascular disease and other menopausal symptoms (e.g. "hot flashes").
Current estrogen replacement products include oral tablets and more recently,
transdermal patches. Oral estrogen tablets, however, have been associated with
side effects primarily resulting from fluctuating blood hormone levels. Because
of these side effects, transdermal patches for estrogen replacement were
developed. While these patches help reduce blood hormone fluctuations, they may
cause skin irritation and patient inconvenience associated with wearing and
changing an external patch.
The Company believes that ESTRASORB may offer several advantages over
existing therapies used for estrogen replacement. ESTRASORB is a lotion that may
be applied to the skin much like a typical cosmetic cream. The Company believes
ESTRASORB will be able to deliver a continuous amount of estrogen to the patient
without the fluctuations in blood hormone levels associated with oral tablets.
In addition, ESTRASORB does not contain materials that may cause the skin
irritation associated with transdermal patches.
In 1995, the Company completed preclinical testing of ESTRASORB in a
primate model. Results of this study demonstrated that ESTRASORB can be utilized
to deliver estradiol through intact skin with maintenance of therapeutic serum
estradiol levels for six days after a single topical application. Based on these
results, the Company initiated a Phase I human clinical trial of ESTRASORB in 10
symptomatic menopausal women. In this study, each woman received a single
topical application of ESTRASORB. This study was completed in the fourth quarter
of 1996 with no significant adverse experiences noted. The Company plans to
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submit dose ranging clinical study plans for ESTRASORB to the United States Food
and Drug Administration (the "FDA") in the first quarter of 1997.
In September, 1996, the Company completed the preclinical testing of
ANDROSORB (testosterone) in its MNP transdermal drug delivery platform. In these
animal models, peak blood levels of testosterone delivered by ANDROSORB were
approximately three times higher than that of testosterone dissolved in ethanol.
After a single topical cream application, peak serum levels of testosterone were
as high as 35 nanograms per milliliter and persisted in the therapeutic range
for 48 hours.
Testosterone replacement therapy is currently used by males who are
testosterone deficient as a result of either primary or secondary hypogonadism.
Testosterone in males is required to maintain sexual function and libido,
maintain lean body mass, increase hemoglobin synthesis and maintain bone
density. Current testosterone replacement therapy products include deep
intramuscular injections or transdermal patches. The injections require frequent
visits to a physician and maybe associated with pain at the injection site and
abscess. The transdermal patches may cause skin irritation and patient
inconvenience associated with wearing and changing two to three external patches
per day.
The Company believes that ANDROSORB may offer several advantages over
current testosterone replacement therapies. ANDROSORB is a lotion that may be
applied to the skin. This would eliminate the need for intramuscular injections.
In addition, ANDROSORB does not contain materials that may cause the skin
irritation associated with transdermal patches. As a result of its successful
pre-clinical studies with ANDROSORB, the Company filed for and received an IND
with the FDA in the fourth quarter of 1996. The Company has initiated a Phase I
human clinical study in 10 testosterone deficient males. In this safety study,
each male will receive a single topical application of ANDROSORB.
In September, 1996, the Company also completed the preclinical testing of
PROGESTSORB(TM) (progesterone) in its MNP transdermal drug delivery platform.
PROGESTSORB was as effective as ethanol for delivery of progesterone
transdermally. A single topical cream application of PROGESTSORB provided peak
serum levels of 10 nanograms per milliliter, which persisted in the therapeutic
range for 48 hours. The Company is developing an estrogen-progesterone product
candidate in its MNP transdermal delivery system for preclinical testing.
With its MNP transdermal drug delivery platform, the Company has now
completed preclinical studies on three drugs (estradiol, testosterone and
progesterone). Novavax plans to proceed with clinical development of these
pharmaceutical products. The Company believes its MNP and other technologies are
suitable for the delivery of additional alcohol soluble, as well as other, drugs
through the skin.
Helicore Anti-microbial Preparations
The Company has developed proprietary lipid structure formulations that it
is using in the development of a non-antibiotic anti-bacterial preparation for
the treatment of Helicobacter pylori ("H. pylori") infection in humans.
H. pylori was recognized in 1994 by the National Institutes of Health (the
"NIH") as a causative agent of peptic ulcer disease, antral gastritis and
certain types of gastric cancer. It is estimated that 30-80 million adults in
the U.S. are infected with H. pylori. Each year the treatment of complications
of H. pylori infections (i.e. peptic ulcer disease) in the U.S. alone costs in
excess of five billion dollars.
Current therapies for the treatment of H. pylori include the use of
antibiotics alone or antibiotics in combination with drugs that inhibit acid
production in the stomach. Problems associated with such therapies include, but
are not limited to, cost, toxicity, failure to sufficiently eradicate all the
bacteria, and acquired resistance to the antibiotic.
In the fourth quarter of 1995, the Company completed a single-dose Phase I
human clinical study involving 20 subjects in which no clinically significant
side effects were found. Based on the results of this study, in March, 1996, the
Company began a multiple-dose Phase I human clinical trial involving 20 non-
symptomatic patients diagnosed with H. pylori infection. The Company recently
received permission from the
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FDA to proceed with the testing of Helicore (p10)(TM), an additional oral
non-antibiotic anti-bacterial preparation developed to eradicate H. pylori
bacteria. Helicore(p10) was given in multiple doses to 10 non-symptomatic H.
pylori positive subjects and no clinically significant side effects were noted.
This additional preparation brings the total number of Helicore products in
human clinical testing in non-symptomatic H. pylori infected patients to three.
The study was completed in the fourth quarter of 1996 with no significant
adverse experiences reported. The Company hopes to initiate Phase II clinical
trials with Helicore in 1997.
Vaccine Adjuvants
Adjuvants are substances that make vaccines more effective. The Company
believes that certain of its organized lipid structures (e.g. Novasome lipid
vesicles and MNPs) may provide effective and safe adjuvant carrier systems for a
variety of vaccines. The Company believes both Novasome lipid vesicles and MNPs
may be used as vaccine adjuvants and protective carriers in a variety of
circumstances, including: (i) encapsulation and protection of delicate antigenic
materials from destruction by the body's normal enzymatic processes; (ii)
encapsulation of toxic materials, such as endotoxins and other potent toxins,
for gradual releases thereby providing protection of the body from the toxin
while generating an immune response to the toxic antigen; (iii) presentation of
small peptide antigens to elicit a heightened cellular immune response; and (iv)
delivery of genes and other molecules into targeted cells.
MANUFACTURING
The development and manufacture of the Company's products are subject to
good laboratory practices ("GLP") and good manufacturing practices ("GMP")
requirements prescribed by the FDA and to other standards prescribed by the
appropriate regulatory agency in the country of use. With its patented
Novamix(R) and other production machinery, the Company currently has the ability
to produce quantities of Novasome lipid vesicles sufficient to support its
current needs. The Company also has the ability to produce quantities of
Novasome lipid vesicles and MNP sufficient to support its needs for early-stage
clinical trials. It does not presently have FDA certified facilities capable of
producing the larger quantities of pharmaceutical products required for larger
scale clinical trials or commercial production. The Company will need to acquire
such manufacturing facilities for later stage clinical trials and commercial
production of its own pharmaceuticals, or rely on collaborators, licensees or
contract manufacturers. There can be no assurance that the Company will be able
to obtain such facilities or manufacture such products in a timely fashion at
acceptable quality and prices, that it or its suppliers will be able to comply
with GLP or GMP, as applicable, or that it or its suppliers will be able to
manufacture an adequate supply of product.
MARKETING
The Company plans to market its pharmaceuticals and vaccine adjuvants for
which it obtains regulatory approvals either through joint ventures or corporate
partnering arrangements. The Company expects that such arrangements could
include technology licenses, research funding, milestone payments, collaborative
product development, royalties and equity investments in Novavax. Implementation
of this strategy will depend on many factors, including the market potential,
the success in developing relationships with distributors or marketing partners
for the Company's products and the financial resources available to the Company.
COMPETITION
A number of large companies, such as Novartis, Procter & Gamble, American
Home Products, Parke-Davis, Solvay Pharmaceuticals, SmithKline Beecham, Abbott
Laboratories, Ortho Pharmaceuticals and Mead Johnson Laboratories, produce and
sell estrogen preparations for clinical indications identical to those the
Company proposes to target. SmithKline Beecham currently markets a transdermal
testosterone patch and Novartis markets an estrogen transdermal patch. The
competition to develop FDA approved hormone replacement therapies is intense and
no assurance can be given that the Company's product candidates will be
developed into commercially successful products.
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Many companies, such as Merck, Merck-Astra, Glaxo-Wellcome, Procter &
Gamble, SmithKline Beecham, OraVax and others, are currently evaluating various
treatment programs for peptic ulcer disease and the treatment of H. pylori. Most
of the therapies under investigation today involve a combination of a currently
used ulcer treatment medication (e.g., Prilosec(R), Zantac(R) or Tagamet(R)) in
association with an antibiotic (e.g., Amoxicillin, Flagyl(R) or Biaxin(R)). The
market for the development of treatment programs for peptic ulcer disease and H.
pylori infection is competitive and no assurance can be given that the Company's
H. pylori product candidates will be developed into commercially successful
products.
A number of other companies have been working on vaccine adjuvants for use
in human vaccines. These include, but are not limited to, Chiron, Ribi
Immunochem Research, Cambridge Biotech, Iscotec, Proteus International and
Biomira. The competition to develop FDA-approved human vaccine adjuvants is
intense and no assurance can be given that the Company's adjuvant product
candidates will be developed into commercially successful products.
Primary competitors in the development of lipid structure and vesicle
encapsulation technologies are The Liposome Company, Sequus Pharmaceuticals,
Nexstar Pharmaceuticals and L'Oreal, as well as other pharmaceutical, vaccine
and chemical companies. The Company believes that, except for L'Oreal, these
companies have focused their development efforts on pharmaceutical carrier
systems for the treatment of infections and certain cancers. To the Company's
knowledge, The Liposome Company, Sequus and Nexstar all base their lipid vesicle
technologies on phospholipids.
Most of the Company's competitors are larger than the Company and have
substantially greater financial, marketing and technical resources. In addition,
many of these competitors have substantially greater experience than the Company
in developing, testing and obtaining FDA and other approvals of pharmaceuticals.
Furthermore, if the Company commences commercial sales of pharmaceuticals, it
will also be competing with respect to manufacturing efficiency and marketing
capabilities, areas in which it has limited or no experience. If any of the
competitors develop new encapsulation technologies that are superior to the
Company's Novasome encapsulation technology, the ability of the Company to
expand into the pharmaceutical and vaccine adjuvant markets will be materially
and adversely affected.
Competition among products will be based, among other things, on product
efficacy, safety, reliability, availability, price and patent position. An
important factor will be the timing of market introduction of the Company's or
competitors' products. Accordingly, the relative speed with which the Company
can develop products, complete the clinical trials and approval processes and
supply commercial quantities of the products to the market is expected to be an
important competitive factor. The Company's competitive position will also
depend upon its ability to attract and retain qualified personnel, to obtain
patent protection or otherwise develop proprietary products or processes and to
secure sufficient capital resources for the often substantial period between
technological conception and commercial sales.
RESEARCH AND DEVELOPMENT
The Company's research is focused principally on the development, marketing
and licensing of formulations for topical drug delivery and therapeutic
products, including anti-bacterial and anti-viral products and adjuvants for
vaccines. The Company intends to use third-party funding when available, either
through government or research grants or through collaborations, joint ventures
or strategic alliances with other companies, particularly potential users or
distributors of the Company's products. Because of the substantial funds
required for clinical trials, the Company will have to obtain additional
financing for its future human clinical trials. No assurance can be given that
such financing will be available on terms attractive to the Company, if at all.
The Company bases its development decisions on development costs and
potential return on investment, regulatory considerations, and the interest,
sponsorship and availability of funding from third parties.
As of December 31, 1996, the Company's research and development staff
numbered 11 individuals. In addition to its internal research and development
efforts, the Company encourages the development of product candidates in areas
related to its present lines by working with universities and government
agencies.
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Novavax's gross research and development expenditures, before amounts received
from other companies, approximated $3,716,000, $3,708,000 and $2,860,000 in the
years ended December 31, 1996, 1995 and 1994, respectively.
PATENTS AND PROPRIETARY INFORMATION
The Company, through a wholly-owned subsidiary, holds 36 U.S. patents and
58 foreign patents covering its technologies (which include a wide variety of
component materials, its continuous flow vesicle production process and its
Novamix production equipment). The Company believes that these patents are
important for the protection of its technology as well as certain of the
development processes that underlie that technology. In addition, 15 U.S. patent
applications and many foreign patent applications are pending covering various
components and applications of the Novavax technologies.
The Company expects to engage in collaborations, sponsored research
agreements and preclinical testing agreements in connection with its future
pharmaceutical products and vaccine adjuvants, as well as clinical testing
agreements with academic and research institutions and U.S. government agencies,
such as the NIH, to take advantage of the technical expertise and staff of these
institutions and to gain access to clinical evaluation models, patients and
related technologies. Consistent with pharmaceutical industry and academic
standards, and the rules and regulations promulgated under the federal
Technology Transfer Act of 1986, these agreements may provide that developments
and results will be freely published, that information or materials supplied by
the Company will not be treated as confidential and that the Company will be
required to negotiate a license to any such developments and results in order to
commercialize products incorporating them. There can be no assurance that the
Company will be able successfully to obtain any such license at a reasonable
cost or that such developments and results will not be made available to
competitors of the Company on an exclusive or nonexclusive basis.
GOVERNMENT REGULATION
The Company's research and development activities are subject to regulation
for safety, efficacy and quality by numerous governmental authorities in the
United States and other countries. The development, manufacturing and marketing
of human pharmaceuticals are subject to regulation in the United States for
safety and efficacy by the FDA in accordance with the Food, Drug and Cosmetic
Act.
In the United States, human pharmaceuticals are subject to rigorous FDA
regulation including preclinical and clinical testing. The process of completing
clinical trials and obtaining FDA approvals for a new drug is likely to take a
number of years, requires the expenditure of substantial resources and is often
subject to unanticipated delays. There can be no assurance that any product will
receive such approval on a timely basis, if at all.
The steps required before new products for use in humans may be marketed in
the United States include (i) preclinical tests, (ii) submission to the FDA of
an application for IND, which must be approved before human clinical trials
commence, (iii) adequate and well-controlled human clinical trials to establish
the safety and efficacy of the product, (iv) submission of a New Drug
Application ("NDA") for a new drug or a Product License Application ("PLA") for
a new biologic to the FDA and (v) FDA approval of the NDA or PLA prior to any
commercial sale or shipment of the product.
Preclinical tests include laboratory evaluation of product formulation, as
well as animal studies (if an appropriate animal model is available) to assess
the potential safety and efficacy of the product. Formulations must be
manufactured according to GMP and preclinical safety tests must be conducted by
laboratories that comply with FDA regulations regarding GLP. The results of the
preclinical tests, are submitted to the FDA as part of an IND and are reviewed
by the FDA prior to the commencement of human clinical trials. There can be no
assurance that submission of an IND will result in FDA authorization to commence
clinical trials. Clinical trials involve the administration of the
investigational new drug to healthy volunteers and to patients under the
supervision of a qualified principal investigator.
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Clinical trials are typically conducted in three sequential phases,
although the phases may overlap. In Phase I, the investigational new drug
usually is administered to healthy human subjects and is tested for safety,
dosage, tolerance, absorption, distribution, metabolism, excretion and
pharmacokinetics. Phase II involves studies in a limited patient population to
(i) determine the efficacy of the investigational new drug for specific
indications, (ii) determine dosage tolerance and optimal dosage and (iii)
identify possible adverse effects and safety risks. When an investigational new
drug is found to be effective and to have an acceptable safety profile in Phase
II evaluation, Phase III trials are undertaken to further evaluate clinical
efficacy and to further test for safety within an expanded patient population at
geographically dispersed clinical study sites. There can be no assurance that
Phase I, Phase II or Phase III testing will be completed successfully within any
specified time period, if at all, with respect to any of the Company's products
subject to such testing. Furthermore, the Company or the FDA may suspend
clinical trials at any time if the participants are being exposed to an
unacceptable health risk. The FDA may deny an NDA or PLA if applicable
regulatory criteria are not satisfied, require additional testing or
information, or require post marketing testing and surveillance to monitor the
safety of the Company's products.
In addition to obtaining FDA approval for each PLA, an Establishment
License Application ("ELA") must be filed and approved by the FDA for the
manufacturing facilities of a biologic product before commercial marketing of
the biologic product is permitted. The regulatory process may take many years
and requires the expenditure of substantial resources.
All data obtained from development programs are submitted as an NDA or a
PLA to the FDA and the corresponding agencies in other countries for review and
approval. FDA approval of the NDA or PLA and the associated ELA is required
before marketing may begin in the United States. Although the FDA's policy is to
review priority applications within 180 days of their filing, in practice longer
times may be required. The FDA frequently requests that additional information
be submitted requiring significant additional review time. Essentially, all
proposed products of the Company will be subject to demanding and time-consuming
NDA or PLA or similar approval procedures in the countries where the Company
intends to market its products. These regulations define not only the form and
content of the development of safety and efficacy data regarding the proposed
product, but also impose specific requirements regarding manufacture of the
product, quality assurance, packaging, storage, documentation and record
keeping, labeling and advertising and marketing procedures. Effective
commercialization also requires inclusion of the Company's products in national,
state, provincial or institutional formularies or cost reimbursement systems.
In addition to regulations enforced by the FDA, the Company also is 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 future federal, state or local
regulations. The Company's research and development involves the controlled use
of hazardous materials, chemicals, viruses and various radioactive compounds.
Although the Company believes that its safety procedures for handling and
disposing of such materials comply with the standards prescribed by state and
federal regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident, the
Company could be held liable for any damages that result, and any such liability
could exceed the resources of the Company.
In both domestic and foreign markets, the ability of the Company to
commercialize its product candidates will depend, in part, on the availability
of reimbursement from third-party payers, such as government health
administration authorities, private health insurers and other organizations.
Third-party payers are increasingly challenging the price and cost-effectiveness
of medical products. There can be no assurance that Novavax-developed products
will be considered cost effective. Significant uncertainty exists as to the
reimbursement status of newly-approved medical products. There can be no
assurance that adequate third-party insurance coverage will be available for the
Company to establish and maintain price levels sufficient for realization of an
appropriate return on its investment in developing new therapies. Government and
other third-party payers are increasingly attempting to contain medical costs by
limiting both coverage and the level of reimbursement for new therapeutic
products approved for marketing by the FDA and by refusing, in some cases, to
provide coverage for uses of approved products for disease indications for which
the FDA has not granted marketing approval. If adequate coverage and
reimbursement levels are not provided by
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government and third-party payers for uses of the Company's therapeutic
products, the market acceptance of these products would be adversely affected.
There have been a number of federal and state proposals during the last few
years to subject the pricing of pharmaceuticals to government control and to
make other changes to the medical care system of the United States. It is
uncertain what legislative proposals will be adopted or what actions federal,
state or private payers for medical goods and services may take in response to
any medical reform proposals or legislation. The Company cannot predict the
effect medical reforms may have on its business, and no assurance can be given
that any such reforms will not have a material adverse effect on the Company.
EMPLOYEES
The Company had 18 full-time employees as of December 31, 1996, of whom 11
are in research and development. The Company has no collective bargaining
agreement with its employees and believes that its employee relations are good.
Under a Transition Services Agreement, established at the time of the
Distribution, IGI continued to provide certain administrative services to
Novavax, including services relating to human resources, purchasing and
accounting, data processing and payroll services from the day of the
Distribution until June 30, 1996. Novavax paid IGI a fee for all services
provided by IGI employees, based on IGI's cost.
In addition to the services described in the Transition Services Agreement,
Edward B. Hager served as Chairman of the Board and Chief Executive Officer
through June 30, 1996 (the "Transition Termination Date") and John P. Gallo
served as Chief Operating Officer through June, 1996 and Treasurer until May,
1996. Prior to the Transition Termination Date, Dr. Hager devoted the majority
of his time to IGI and received no compensation for his services as an officer
of Novavax. Mr. Gallo devoted approximately one half of his business time
through the Transition Termination Date to Novavax and its business, and IGI and
Novavax each agreed to pay Mr. Gallo one half of his annual compensation.
On July 1, 1996, John O. Marsh, Jr. succeeded Dr. Hager as Chairman and
Chief Executive Officer. Subsequently, Mr. Marsh appointed Denis M. O'Donnell,
M.D., the President of Novavax, to the additional position of Chief Operating
Officer to succeed Mr. Gallo in that role. Dr. Hager and Mr. Gallo remain
Directors of the Company. In addition, in May, 1996, Ms. Elaine T. Bennett was
appointed Vice President, Treasurer and Chief Financial Officer of the Company.
On February 25, 1997, Mr. Marsh announced his retirement as Chairman of the
Board of Directors, effective immediately, and as Chief Executive Officer
effective upon the arrival of his replacement. The Board then elected Richard F.
Maradie as Chief Executive Officer commencing March 4, 1997. Dr. Hager was
elected as Chairman of the Board of Directors.
ITEM 2. PROPERTIES
The Company leases approximately 12,000 square feet of administrative
offices and laboratory space located at 8320 Guilford Road, Columbia, Maryland.
The Company believes this space is adequate for its early stage clinical trials.
Additional funding will be necessary to meet the cost requirements of expanding
the manufacturing facility for later stage clinical trials and commercial
scale-up.
The Company also leases 1750 square feet of space located in Rockville,
Maryland. This space contains the Company's certified animal facility and
laboratories for its biologics development which includes the vaccine adjuvant
program.
ITEM 3. LEGAL PROCEEDINGS
On February 6, 1996, Johnson & Johnson and its wholly-owned subsidiary
Ortho-McNeil, Inc. (collectively, "J&J") filed a lawsuit against the Company's
subsidiary, Micro-Pak, Inc., and the Company's former parent, IGI, Inc. and its
subsidiaries in the United States District Court for the District of New Jersey
alleging trademark infringement and trademark dilution. J&J alleged that IGI's
use of the names NOVA
8
10
SKIN, NOVA SKIN CARE and NOVA-AESTHETICS infringed on rights associated with
J&J's trademark RENOVA for a prescription drug. This lawsuit has been settled,
with no liability incurred by the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's executive officers hold office until the first meeting of the
Board of Directors following the annual meeting of stockholders and until their
successors are duly chosen and qualified, or until they resign or are removed
from office in accordance with the Company's By-laws.
PRINCIPAL OCCUPATION AND OTHER BUSINESS
NAME AGE EXPERIENCE DURING PAST FIVE YEARS
- - ------------------------------ --- ------------------------------------------------------
Edward B. Hager, M.D. ........ 65 Chairman of the Board since February, 1997. Director
of Novavax since its founding in 1987. Chairman of the
Board and Chief Executive Officer of Novavax, Inc.
from 1987 through June, 1996. Chairman of the Board,
Chief Executive Officer and Director of IGI, Inc.,
an animal health products and cosmetics company,
since its founding in 1977.
Richard F. Maradie............ 49 Chief Executive Officer of Novavax since March, 1997.
Co-Founder, President and Chief Executive Officer of
Protyde Pharmaceuticals, Inc. from 1994 to 1997.
Executive Vice President and Chief Operating Officer
of Platelet Research Products, Inc. from 1991 to
1994. President and Chief Executive Officer of VimRx
Pharmaceuticals, Inc. from 1988 to 1991. Executive
Vice President and Chief Operating Officer of
Creative Biomolecules, Inc. from 1987 to 1988.
Senior Director Cetus Corp. and General Manager and
Chairman of the Board of Managers for Cetus/BenVenue
Oncology Therapeutics from 1983 to 1987. Director of
Oncology Marketing and Sales of Adria Laboratories,
Inc. from 1974 to 1983.
Denis M. O'Donnell, M.D. ..... 43 President of Novavax since September, 1995 and Chief
Operating Officer of Novavax since July, 1996. Vice
President, Business Development of Novavax from 1992
to September, 1995. Vice President of IGI from 1991
to 1995. From 1986 to 1991, Dr. O'Donnell was the
Director of the Clinical Research Center of MTRA,
Inc., a provider of contract pharmaceutical
research. Director of Elxsi Corporation, a holding
company for companies in diverse fields, since
March, 1996.
D. Craig Wright, M.D. ........ 46 Vice President, Research and Development and
Operations of Novavax since 1993. Founder and Senior
Director of Medical Research of Univax Biologics,
Inc., a biopharmaceutical company, from 1988 to
1992.
Elaine T. Bennett............. 41 Vice President,Treasurer and Chief Financial Officer
of Novavax since May, 1996. Controller of IGI, Inc. in
1996. Assistant Controller of IGI, from 1987 to
1996.
9
11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There were 1,058 stockholders of record as of March 20, 1997. The Company
has never paid cash dividends on its Common Stock. The Company currently
anticipates that it will retain all of its earnings for use in the development
of its business and does not anticipate paying any cash dividends in the
foreseeable future.
Since December 12, 1995, the principal market for the Company's Common
Stock ($.01 par value) has been the American Stock Exchange. The Company's stock
trades under the symbol "NOX". Prior to December 12, 1995, the Company was a
majority-owned subsidiary of IGI. The following table shows the range of high
and low closing prices of the Company's common stock on the American Stock
Exchange for the period indicated.
HIGH LOW
---- ---
1996
First quarter........................................ $6 5/8 $3 3/8
Second quarter....................................... 8 1/4 5 1/4
Third quarter........................................ 7 1/8 3 1/8
Fourth quarter....................................... 4 5/8 2 7/8
1995
Fourth quarter (December 12, 1995 through
December 31, 1995)................................ $5 $3
10
12
ITEM 6. SELECTED FINANCIAL DATA
NOVAVAX, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- -----------
STATEMENT OF OPERATIONS
DATA:
Revenues:
Research revenues (1)..... $ 940,900 $ 380,700 $ 475,000 $ -- $ --
Sales..................... -- -- -- -- 55,553
Royalties from former
parent (2)............. 86,555 198,546 209,877 268,002 --
Total revenues............ 1,027,455 579,246 684,877 268,002 55,553
Costs and expenses:
Selling and
marketing............ 246,679 278,836 323,640 398,776 --
General and
administrative (3)... 1,314,741 1,976,356 2,162,431 2,905,873 1,874,418
Research and
development.......... 1,720,220 2,701,038 2,860,048 3,708,005 3,715,545
Interest expense to
former parent(4)..... 193,471 413,049 1,028,794 1,749,706 --
Interest income........ -- -- -- -- (137,539)
Income tax expense..... -- -- -- -- 98,094
Net loss.................. (2,447,656) (4,790,033) (5,690,036) (8,494,358) (5,494,985)
Loss per common and common
equivalent share....... $ (0.85) $ (0.54)
Weighted average number of
common shares
outstanding............ 9,937,936 10,132,896
BALANCE SHEET DATA:
Total current assets...... $ 174,932 $ 268,050 $ 501,845 $ 4,761,199 $ 3,153,105
Working capital........... 9,346 202,914 306,159 4,330,412 2,571,838
Total assets.............. 2,475,342 2,819,631 3,132,688 7,529,544 5,721,952
Capital lease
obligations............ -- -- -- -- 34,351
Stockholders' (deficit)
equity................. (609,309) (1,070,994) (2,202,868) 7,098,757 5,117,078
- - ---------------
(1) Includes payments for licensing agreements and technology application
review.
(2) Includes royalties for product sales in IGI's animal health products and
cosmetic and consumer products businesses through the date of the
Distribution.
(3) Includes administrative expenses incurred by IGI allocated to Novavax
through the date of the Distribution.
(4) Interest expense is solely attributable to debt incurred by Novavax to fund
its operations through the date of the Distribution.
11
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion may contain "forward-looking" statements, as that
term is defined by (i) the Private Securities Litigation Reform Act of 1995 (the
"Reform Act") and (ii) in releases made by the Securities and Exchange
Commission from time to time. Such statements should be read in conjunction with
the cautionary factors described in Exhibit 99 attached to this report and
incorporated into this discussion by this reference and the consolidated
financial statements and related notes included elsewhere. The Company's future
operating results may be affected by various trends and factors that are beyond
the Company's control. These include, among other factors, changes in general
economic conditions, rapid or unexpected changes in technologies and uncertain
business conditions that affect the pharmaceutical and vaccine industries.
Accordingly, past results and trends should not be used by investors to
anticipate future results or trends.
The following is a discussion of the historical consolidated financial
condition and results of operations of Novavax and its subsidiaries. The
discussion should be read in conjunction with the consolidated financial
statements and notes thereto set forth in Item 8 to this Report.
On December 12, 1995, the Company's former parent, IGI, Inc., distributed
its majority interest in Novavax to the IGI stockholders (the "Distribution").
Prior to the Distribution, IGI owned 93.2% of the outstanding shares of the
Company, all of which were distributed to IGI stockholders. Certain periods
covered by the discussion below occurred when the Company was a subsidiary of
IGI and may not be indicative of current or future performance.
RESULTS OF OPERATIONS
The Company has incurred net losses since its inception from the
development of its technologies to human pharmaceuticals, vaccines and vaccine
adjuvants. Novavax expects the losses to increase in the near-term, as it
conducts additional human clinical trials and seeks regulatory approval for its
product candidates. The Company also expects to continue to incur substantial
operating losses over the extensive time period required to develop the
Company's products , or until such time as revenues, to offset the losses, are
sufficient to fund its continuing operations.
Until the second quarter of 1996, the Company had recorded revenues from
two sources: (i) research revenues from industry partners in consideration of
either exclusive licenses or technology application reviews and (ii) royalty
revenues that were attributable to product sales by IGI. Revenues from the sale
of scientific prototype vaccines and adjuvants have been recorded in the second,
third and fourth quarters of 1996.
1996 COMPARED TO 1995
The net loss of $5,494,985 for the year ended December 31, 1996 was
$2,999,373, or 35%, lower than the net loss of $8,494,358 for the year ended
December 31, 1995. The 1996 net loss includes $1,506,790, compared to $101,183
included in the 1995 net loss, of non-cash compensation expense. This
compensation expense relates to the amortization of below-market priced stock
options and warrants issued at the time of the Distribution. Other non-cash
charges include $334,564 for the disposal of property and equipment and $328,226
of depreciation and patent amortization expense. Non-cash charges of $272,886
for depreciation and patent amortization have been included in the 1995 expense.
Revenues of $55,533 were recognized during the year ended December 31, 1996
from the sale of scientific prototype vaccines and adjuvants. Novavax earned
royalties from IGI of 10% of licensed product sales, or $268,002, in the year
ended December 31, 1995.
Total operating expenses were $5,589,963 in 1996, decreasing $1,422,691, or
20%, from the $7,012,654 incurred in 1995. Reduced cash resources have caused
the Company to reduce spending, achieve other efficiencies and have caused the
Company to focus its efforts on the development of its three lead product
candidates in connection with FDA human clinical trials.
Selling, general and administrative expenses include all costs associated
with the marketing of the Company's technology to potential industry partners,
related cost associated with management and adminis-
12
14
trative expenses. Costs associated with the Distribution are included in the
1995 expenses. Total selling, general and administrative expenses were
$1,874,418 and $3,304,649 for the years ended December 31, 1996 and 1995,
respectively. Nonrecurring charges of $230,474 were incurred through June 30,
1996 for transitional services provided by IGI. The agreement providing for
these services terminated on June 30, 1996 and no additional charges have been
recorded. Certain costs included in the 1995 expenses were estimates allocated
from IGI, based on Novavax being a separate public company, and may not compare
with the actual costs Novavax incurred in 1996. These estimated costs were
$850,000 for the year ended December 31, 1995.
Research and development expenses, including scientific staffing, supplies
and other costs related to the ongoing development of the Novavax technologies
were $3,715,545 and $3,708,005 for the years ended December 31, 1996 and 1995,
respectively. Although expenses appear to have remained relatively constant, the
1996 expenses include non-cash charges of $1,410,648, compared to $101,183 in
1995, related to the amortization of below-market priced stock options issued at
the time of the Distribution, and non-cash charges of $334,564 for the disposal
of property and equipment related to the closing of one of the Novavax
subsidiaries' laboratory.
Net interest income of $137,539 was recorded during the twelve months ended
December 31, 1996, compared with net interest expense of $1,749,706 for the same
period ended December 31, 1995, that was charged to Novavax by IGI for
borrowings and notes due to IGI through the date of the Distribution to fund
operating losses, capital equipment purchases and patent costs.
In connection with the filing of the Company's 1995 tax return during 1996,
it was determined that the Company had an Alternative Minimum Tax liability
resulting from the cash received from IGI in return for the license. Net income
tax expense of $98,094 for 1996 is attributable to the Alternative Minimum Tax
calculation.
1995 COMPARED TO 1994
Royalty revenues from IGI were $268,000 and $210,000 for the years ended
December 31, 1995 and 1994, respectively. There were research revenues of
$475,000 for the year ended December 31, 1994.
As a result of the IGI License Agreement, which was entered into as a
method of transferring the Novavax technologies, Novavax did not receive any
additional royalty payments in the period from the Distribution to the end of
fiscal year 1995. Novavax has presented the payment under the IGI License
Agreement as a capital contribution in its financial statements to reflect the
intercompany nature and substance of the transaction. The form was structured as
a prepaid license agreement to address various considerations of the
Distribution, including tax and financing considerations. For tax purposes, the
transaction was treated as income for the period ended December 31, 1995.
Novavax has recorded the license at its carryover basis because the transaction
is a transfer made among entities under common control. As all costs of
development for this technology have been expensed, with the exception of the
patents retained by Novavax, the historical basis is zero.
Selling, general and administrative expenses were approximately $3,305,000
and $2,486,000 for the years ended December 31, 1995 and 1994, respectively.
Certain costs included in these expenses were estimated based on Novavax being a
separate public company and may not reflect the actual costs that Novavax will
incur in the future. These estimated costs were $850,000 and $779,000 for the
years ended December 31, 1995 and 1994, respectively.
Research and development expenses were approximately $3,708,000 and
$2,860,000 for the years ended December 31, 1995 and 1994, respectively. The
increase in these expenses related principally to increased efforts in the
development of human vaccine and pharmaceutical applications of the Novavax
technologies in connection with IND filings.
Interest expense was approximately $1,750,000 and $1,029,000 for the years
ended December 31, 1995 and 1994, respectively. The increase related to
increased borrowing from IGI for operating losses, capital equipment and patent
costs.
13
15
LIQUIDITY AND CAPITAL RESOURCES
Novavax's future growth will depend on its ability to commercialize its
Novavax technologies for human pharmaceutical applications. Novavax's capital
requirements depend on numerous factors, including but not limited to the
progress of its research and development programs, the progress of preclinical
and clinical testing, the time and costs involved in obtaining regulatory
approvals, the costs of filing, prosecuting, defending and enforcing any patent
claims and other intellectual property rights, competing technological and
market developments, and changes in Novavax's development of commercialization
activities and arrangements. The Company's rapid evolution from a research phase
company to a development stage biopharmaceutical company with products in human
clinical trials prompted the need for expansion during 1996. On October 31,
1996, the Company completed the relocation of its administrative offices and
pharmaceutical laboratories to a leased facility in Columbia, Maryland. Further
expansion necessary to establish commercial-scale manufacturing capabilities and
the future purchases of capital equipment are subject to the Company's ability
to raise funds through additional equity financing, or collaborative
arrangements with corporate partners.
Net cash used in 1996 for operating activities was $3,315,990. From the
date of the Distribution, Novavax conducted its operations with approximately
$5,000,000 paid by IGI under the IGI License Agreement, revenues of $55,533 from
the sale of scientific prototype vaccines and adjuvants and $350,639 from the
exercise of stock options. On October 30, 1996, Novavax received $1,655,877, net
of all transaction costs, from the sale of 505,000 common shares that were
privately placed with accredited institutional investors by Vector Securities
International, Inc. On December 31, 1996, the Company had $2,982,078 in cash,
cash equivalents and marketable securities on hand.
On February 10, 1997, Novavax signed a definitive agreement to privately
place 1,200,000 common shares with Anaconda Opportunity Fund, L.P., an
accredited institutional investor, at an aggregate price of $5,100,000. As part
of the transaction, Novavax also granted warrants to purchase an additional
600,000 shares at a price of $6.00 per share and 600,000 shares at a price of
$8.00 per share. The warrants have a three-year term. The transaction was closed
on March 14, 1997. Upon closing, the Company received $4,100,000 in cash and a
promissory note due March 27, 1997 in the amount of $1,000,000. Novavax
estimates that the money received from the sale of the privately placed stock,
along with its existing cash resources, will be sufficient to finance its
operations at current levels of development activity for approximately 20 to 24
months.
Past spending levels are not necessarily indicative of future spending.
Future expenditures for product development, especially relating to outside
testing and human clinical trials, are discretionary and, accordingly, can be
adjusted to available cash. Moreover, the Company will seek to establish one or
more collaborations with industry partners to defray the costs of clinical
trials and other related activities. Novavax will also seek to obtain additional
funds through public or private equity or debt financings, collaborative
arrangements with pharmaceutical companies or from other sources. There can be
no assurance that additional funding or bank financing will be available at all
or on acceptable terms to permit successful commercialization of Novavax's
technologies and products. If adequate funds are not available, Novavax may be
required to significantly delay, reduce the scope of or eliminate one or more of
its research or development programs, or seek alternative measures including
arrangements with collaborative partners or others that may require Novavax to
relinquish rights to certain of its technologies, product candidates or
products.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and notes thereto listed in the accompanying index
to financial statements (Item 14) are filed as part of this Annual Report and
are incorporated herein by this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
14
16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in part under the
caption "Executive Officers of the Registrant" in Part I hereof, and the
remainder is contained in the Company's Proxy Statement for the Company's Annual
Meeting of Stockholders to be held on May 15, 1997 (the "1997 Proxy Statement")
under the captions "PROPOSAL 1 -- ELECTION OF DIRECTORS" and "Beneficial
Ownership of Common Stock" and is incorporated herein by this reference. The
Company expects to file the 1997 Proxy Statement within 120 days after the close
of the fiscal year ended December 31, 1996.
Officers are elected on an annual basis and serve at the discretion of the
Board of Directors.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained in the Company's 1997
Proxy Statement under the captions "EXECUTIVE COMPENSATION" and "Director
Compensation and Stock Options" and is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in the Company's 1997
Proxy Statement under the caption "Beneficial Ownership of Common Stock" and is
incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in the Company's 1997
Proxy Statement under the caption "Certain Relationships and Related
Transactions" and is incorporated herein by this reference.
15
17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements:
Report of Independent Accountants
Consolidated Balance Sheets as at December 31, 1996 and 1995
Consolidated Statements of Operations for the years ended December 31, 1996,
1995 and 1994
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedules are either not applicable or not required because the information
required is contained in the financial statements or notes thereto.
Condensed financial information of the Registrant is omitted since there are no
substantial amounts of restricted net assets applicable to the Company's
consolidated subsidiaries.
(3) Exhibits Required to be Filed by Item 601 of Regulation S-K.
(a) Exhibits marked with a single asterisk are filed herewith, and exhibits marked
with a double asterisk reference management contract, compensatory plan or
arrangement, filed in response to Item 14 (a)(3) of the instructions to Form
10-K. The other exhibits listed have previously been filed with the Commission
and are incorporated herein by reference.
* 3.1 Amended and Restated Certificate of Incorporation of Novavax, Inc.
* 3.2 Amended and Restated By-laws of Novavax, Inc.
4 Specimen stock certificate for shares of Common Stock par value $.01 per
share. [Incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement on Form 10, File No. 0-26770, filed September 14, 1995 (the "Form
10").]
10.1 Tax Matters Agreement between Novavax and IGI. [Incorporated by reference
to Exhibit 10.1 to the Form 10.]
10.2 Transition Services Agreement between Novavax and IGI. [Incorporated by
reference to Exhibit 10.2 to the Form 10.]
10.3 License Agreement between IGEN, Inc. And Micro-Pak, Inc. [Incorporated by
reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995, File No. 0-26770, filed April
1,1996, (the "1995 Form 10-K").]
** 10.4 1995 Stock Option Plan. [Incorporated by reference to Exhibit 10.4 to the
form 10.]
** 10.5 1995 Director Stock Option Plan. [Incorporated by reference to Exhibit
10.5 to the Form 10.]
10.6 Stock Purchase Agreement dated October 9, 1999 by and between the Company
and the purchasers named therein. [Incorporated by reference to Exhibit 4.4 to
the Company's Registration Statement on Form S-3, File No. 333-14305,
filed October 17, 1996.]
* 10.7 Agreement of Lease by and between the Company and Rivers Center Associates
Limited Partnership, dated September 25, 1996.
16
18
10.8 Stock and Warrant Purchase Agreement dated February 10, 1997 by and
between the Company and Anaconda Opportunity Fund, L.P. [Incorporated by
reference to Exhibit 4.4 to the Company's Registration Statement on Form
S-3, File No. 333-22685, filed March 4, 1997(the "Anaconda S-3").]
10.9 Form of Warrant issued by the Company to Anaconda Opportunity Fund, L.P.
[Incorporated by reference to Exhibit 4.5 to the Anaconda S-3.]
** 10.10 Letter of Agreement dated February 26, 1997, by and between the Company
* and Richard F. Maradie.
* 11 Net Loss Per Common Share and Common Equivalent Share
21 List of Subsidiaries [Incorporated by reference to Exhibit 21 to the 1995
Form 10-K.]
* 23 Consent of Coopers & Lybrand L.L.P.
* 27 Financial Data Schedule
* 99 Important Factors Regarding Forward-Looking Statements
(b) Reports on Form 8-K:
None.
17
19
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.
By: /s/ RICHARD F. MARADIE
------------------------------------
Richard F. Maradie
Chief Executive Officer
Date: March 20, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacity and on the date indicated.
NAME TITLE DATE
- - ------------------------------------------ ----------------------------- ---------------
/s/ EDWARD B. HAGER Chairman of the Board March 20, 1997
- - ------------------------------------------
Edward B. Hager
/s/ RICHARD F. MARADIE Chief Executive Officer March 20, 1997
- - ------------------------------------------
Richard F. Maradie
/s/ ELAINE T. BENNETT Vice President, Principal March 21, 1997
- - ------------------------------------------ Financial and Accounting
Elaine T. Bennett Officer
/s/ WAYNE A. DOWNING Director March 20, 1997
- - ------------------------------------------
Wayne A. Downing
/s/ JOHN P. GALLO Director March 20, 1997
- - ------------------------------------------
John P. Gallo
/s/ JANE E. HAGER Director March 20, 1997
- - ------------------------------------------
Jane E. Hager
/s/ MITCHELL J. KELLY Director March 20, 1997
- - ------------------------------------------
Mitchell J. Kelly
/s/ J. MICHAEL LAZARUS Director March 20, 1997
- - ------------------------------------------
J. Michael Lazarus
/s/ JOHN O. MARSH, JR. Director March 20, 1997
- - ------------------------------------------
John O. Marsh, Jr.
/s/ RONALD A. SCHIAVONE Director March 20, 1997
- - ------------------------------------------
Ronald A. Schiavone
/s/ RONALD H. WALKER Director March 20, 1997
- - ------------------------------------------
Ronald H. Walker
18
20
EXHIBIT INDEX
EXHIBIT PAGE
- - ------- ----
3.1
3.2
4 *
10.1 *
10.2 *
10.3 *
10.4 *
10.5 *
10.6 *
10.7
10.8 *
10.9 *
10.10
11
21 *
23
27
99
- - ---------------
* These exhibits are incorporated by reference
21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Novavax, Inc.:
We have audited the accompanying consolidated balance sheets of Novavax,
Inc. and Subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These 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.
and Subsidiaries at December 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Rockville, Maryland
February 7, 1997 except
as to Note 13 for which
the date is March 14, 1997
22
NOVAVAX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
1996 1995
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 2,481,258 $ 4,634,236
Marketable securities......................................... 500,820 --
Receivable from former parent, net............................ -- 54,754
Prepaid expenses and other current assets..................... 171,027 72,209
------------ ------------
Total current assets....................................... 3,153,105 4,761,199
------------ ------------
Property and equipment, net..................................... 977,911 1,400,998
Patent costs, net............................................... 1,494,880 1,357,547
Other assets.................................................... 96,056 9,800
------------ ------------
Total assets.......................................... $ 5,721,952 $ 7,529,544
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Capital lease obligations..................................... $ 10,744 $ --
Accounts payable.............................................. 367,754 391,887
Accrued payroll............................................... 196,593 38,900
Payable to former parent...................................... 6,176 --
------------ ------------
Total current liabilities.................................. 581,267 430,787
------------ ------------
Capital lease obligations, less current maturities.............. 23,607 --
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 2,000,000 shares
authorized................................................. -- --
Common stock, $.01 par value, 30,000,000 shares authorized,
10,660,710 and 9,937,936 shares issued and outstanding in
1996 and 1995, respectively................................ 106,607 99,379
Additional-paid in capital.................................... 32,409,899 30,188,122
Accumulated deficit........................................... (26,796,164) (21,301,179)
Deferred compensation on stock options granted................ (603,264) (1,887,565)
------------ ------------
Total stockholders' equity................................. 5,117,078 7,098,757
------------ ------------
Total liabilities and stockholders' equity............ $ 5,721,952 $ 7,529,544
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
23
NOVAVAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
----------- ----------- -----------
Revenues:
Research revenues................................. $ -- $ -- $ 475,000
Sales............................................. 55,533 -- --
Royalties from former parent...................... -- 268,002 209,877
----------- ----------- -----------
Total revenues................................. 55,533 268,002 684,877
----------- ----------- -----------
Operating expenses:
Selling and marketing............................. -- 398,776 323,640
General and administrative........................ 1,874,418 2,905,873 2,162,431
Research and development.......................... 3,715,545 3,708,005 2,860,048
----------- ----------- -----------
Total operating expenses....................... 5,589,963 7,012,654 5,346,119
----------- ----------- -----------
Loss from operations.............................. (5,534,430) (6, 744,652) (4,661,242)
Interest expense to former parent -- (1,749,706) (1,028,794)
Interest income, net.............................. 137,539 -- --
----------- ----------- -----------
Loss before income taxes.......................... (5,396,891) (8,494,358) (5,690,036)
----------- ----------- -----------
Income tax expense.................................. (98,094) -- --
----------- ----------- -----------
Net loss............................................ $(5,494,985) $(8,494,358) $(5,690,036)
=========== =========== ===========
Loss per common and common equivalent share......... $ (0. 54) $ (0.85)
=========== ===========
Weighted average number of common shares
outstanding....................................... 10,132,896 9,937,936
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
24
NOVAVAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
----------- ----------- -----------
Cash flows from operating activities:
Net loss.......................................... $(5,494,985) $(8,494,358) $(5,690,036)
Reconciliation of net loss to net cash used by
operating activities:
Non-cash restructuring and
recapitalization.......................... -- 1,513,253 --
Reimbursement to former parent............... -- (250,000) --
Non-cash compensation expense................ 1,506,790 101,183 --
Depreciation and amortization................ 328,225 272,886 255,901
Disposal of property and equipment........... 334,564 -- --
Changes in assets and liabilities:
Accounts receivable.......................... -- 475,000 (341,000)
Prepaid expenses and other assets............ (185,074) (58,993) 149,971
Payable to/Receivable from former parent..... 60,930 (54,754) --
Accounts payable and accrued expenses........ 133,560 235,101 130,549
----------- ----------- -----------
Net cash used by operating activities............... (3,315,990) (6,260,682) (5,494,615)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of marketable securities................. (500,820) -- --
Capital expenditures.............................. (98,363) (45,562) (128,269)
Deferred patent costs............................. (244,321) (367,418) (251,404)
----------- ----------- -----------
Net cash used by investing activities............... (843,504) (412,980) (379,673)
----------- ----------- -----------
Cash flows from financing activities:
Payable to former parent.......................... -- 2,081,776 1,314,381
Notes payable to former parent.................... -- 4,172,401 4,558,162
License agreement with former parent.............. -- 5,000,000 --
Exercise of stock options......................... 350,639 37,500 --
Proceeds from the private placement of common
stock, net................................... 1,655,877 -- --
----------- ----------- -----------
Net cash provided by financing activities........... 2,006,516 11,291,677 5,872,543
----------- ----------- -----------
Net change in cash and cash equivalents............. (2,152,978) 4,618,015 (1,745)
Cash and cash equivalents at beginning of the
period............................................ 4,634,236 16,221 17,966
----------- ----------- -----------
Cash and cash equivalents at end of the period...... $ 2,481,258 $ 4,634,236 $ 16,221
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
25
NOVAVAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
DEFERRED
COMMON STOCK ADDITIONAL NOTE PAYABLE COMBINED COMPENSATION
--------------------- PAID-IN TO FORMER ENTITY ON STOCK
SHARES DOLLARS CAPITAL PARENT CAPITAL DEFICIT OPTIONS GRANTED
---------- -------- ----------- ------------ ----------- ------------ ---------------
Balance, January 1,
1994................ 14,973 $ 8,293,437 $ 4,974,000 $(14,338,431)
Proceeds from
payable to former
parent............ 4,558,162
Net loss............ (5,690,036)
---------- ------------ ----------- ------------
Balance, December 31,
1994................ 14,973 12,851,599 4,974,000 (20,028,467)
Proceeds from
payable to former
parent............ 7,221,646
Proceeds from note
payable to former
parent............ 4,172,401
Restructuring and
recapitalization... 9,872,963 98,879 23,162,374 (17,024,000) (4,974,000)
License agreement
with former
parent............ 5,000,000
Options granted as
compensation...... 1,988,748 (1,988,748)
Amortization of
deferred
compensation...... 101,183
Exercise of stock
options........... 50,000 500 37,000
Net loss............ (8,494,358)
---------- -------- ----------- ------------ ----------- ------------ -----------
Balance, December 31,
1995................ 9,937,936 99,379 30,188,122 -- -- (21,301,179) (1,887,565)
Options and warrants
granted as
compensation...... 222,489 (222,489)
Amortization of
deferred
compensation...... 1,506,790
Private sale of
common stock,
net............... 505,000 5,050 1,650,827
Exercise of stock
options........... 217,774 2,178 348,461
Net loss............ (5,494,985)
---------- -------- ----------- ------------ ----------- ------------ -----------
Balance, December 31,
1996................ 10,660,710 $106,607 $32,409,899 $ -- $ -- $(26,796,164) $ (603,264)
========== ======== =========== ============ =========== ============ ===========
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-------------
Balance, January 1,
1994................ $(1,070,994)
Proceeds from
payable to former
parent............ 4,558,162
Net loss............ (5,690,036)
-----------
Balance, December 31,
1994................ (2,202,868)
Proceeds from
payable to former
parent............ 7,221,646
Proceeds from note
payable to former
parent............ 4,172,401
Restructuring and
recapitalization... 1,263,253
License agreement
with former
parent............ 5,000,000
Options granted as
compensation...... --
Amortization of
deferred
compensation...... 101,183
Exercise of stock
options........... 37,500
Net loss............ (8,494,358)
-----------
Balance, December 31,
1995................ 7,098,757
Options and warrants
granted as
compensation...... --
Amortization of
deferred
compensation...... 1,506,790
Private sale of
common stock,
net............... 1,655,877
Exercise of stock
options........... 350,639
Net loss............ (5,494,985)
-----------
Balance, December 31,
1996................ $ 5,117,078
===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
26
NOVAVAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Novavax, Inc., a Delaware corporation ("Novavax" or the "Company"), is a
biopharmaceutical company focusing on the research and development of
proprietary topical and oral drug delivery technologies. The Company's
technology platforms involve the use of proprietary organized lipid structures
made into microscopic vesicles for the delivery of a wide variety of drugs and
other therapeutic products, including certain hormones, anti-bacterial and
anti-viral products and vaccine adjuvants. The Company currently has three lead
product candidates in human clinical trials. ESTRASORB, a topical estrogen
cream, and Helicore, an oral anti-bacterial preparation for the treatment of
Helicobacter pylori infection, have completed Phase I studies. ANDROSORB, a
topical testosterone cream, recently entered Phase I studies. The regulatory
process is lengthy, requiring substantial funds, and the Company cannot predict
when approval of any product or a license to sell any product might be issued.
In addition, there can be no assurances the Company will have sufficient funds
necessary or that the additional funds will be available at all or on acceptable
terms. The Company also recognizes that the commercial launch of any product is
subject to certain risk such as manufacturing scale-up and market acceptance.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Novavax (formerly Molecular Packaging Systems, Inc.), its wholly-owned
subsidiaries (Micro-Pak, Inc.) ("Micro-Pak") and Micro Vesicular Systems, Inc.
("MVS")), and Lipovax, Inc. ("Lipovax", formerly known as Novavax, Inc.). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
The financial statements for the period January 1, 1995 through December
12, 1995 and for the year ended December 31, 1994 have been prepared for the
aforementioned companies on a combined basis from books and records maintained
by IGI, Inc. ("IGI"). These combined financial statements reflect the financial
position and results of operations of the combined companies at their historical
bases, including allocations of certain costs by IGI. The accounts and
transactions between the companies have been eliminated. The financial
statements may not be indicative of the results that would have been attained
had the entities operated together independently of IGI.
2. DISTRIBUTION
On December 12, 1995 (the "Distribution Date"), IGI distributed to the
holders of record of IGI's common stock, at the close of business on the Record
Date, November 28, 1995, one share of the Company's common stock for every one
share of IGI common stock outstanding (the "Distribution"). The Distribution
resulted in 93.2% of the outstanding shares of the Company's common stock being
distributed to holders of IGI common stock on a proportionate basis after taking
into account the Restructuring and Recapitalization described in Note 3. As a
result of the Distribution, the Company is no longer a subsidiary of IGI but an
independent publicly-owned company whose shares are traded on the American Stock
Exchange.
3. RESTRUCTURING AND RECAPITALIZATION
Prior to the Distribution, IGI consolidated its animal health products and
cosmetics and consumer products businesses (the "Core Businesses") within itself
and its subsidiaries and consolidated the biotechnology business (the
"Biotechnology Business") within Novavax and its subsidiaries (the
"Restructuring"). At the time of the Restructuring, IGI owned, through its
wholly-owned subsidiary, IGEN, Inc. ("IGEN"), the following percentages of the
voting power of the subsidiaries conducting the Biotechnology Business: 84.7% of
the voting power of Novavax, the sole stockholder of both Micro-Pak and MVS, and
90.3% of the voting
F-6
27
NOVAVAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
power of Lipovax. The Biotechnology Business resided, and continues to reside,
within Novavax, Micro-Pak, MVS and Lipovax. Prior to the Restructuring, the
current and former employees of Novavax and Lipovax held approximately 15.3% and
9.7% of the voting power of Novavax and Lipovax, respectively.
On September 20, 1995, Novavax, Lipovax and Novavax Acquisition Subsidiary,
Inc., a wholly-owned subsidiary of Novavax created for purposes of the
Restructuring ("Acquisition Corporation"), entered into a merger agreement (the
"Merger Agreement"). The Merger Agreement, which was approved by Lipovax
stockholders on October 12, 1995, provided, among other things, for a reverse
triangular merger (the "Merger") in which Acquisition Corporation merged with
and into Lipovax and Lipovax became a wholly-owned subsidiary of Novavax. As
consideration for the Merger, Novavax issued an aggregate of 21,698 shares, of
which 90.3% were issued to IGEN and the remaining 9.7% to the minority
stockholders of Lipovax. The issuance of shares to the minority stockholders of
Lipovax resulted in a charge to the statement of operations of $866,966 to
reflect the purchase of in process research and development. After the Merger,
IGEN owned 85.5% of the outstanding shares of Novavax, and the remaining 14.5%
were held by the minority stockholders of Novavax (8.8%) and by the former
minority stockholders of Lipovax (5.7%).
As part of the Restructuring, Novavax issued to IGEN 41,569 shares of
Novavax Common Stock in exchange for the transfer by IGEN to Novavax of all of
IGEN's rights to the payment of $17,024,000 aggregate indebtedness owed to
ImmunoGenetics, Inc., a wholly-owned subsidiary of IGEN (and the primary
operating entity of the Core Businesses ("Immunogentics")), by MVS ($9,996,504)
and Lipovax ($7,027,496) (collectively, "Novavax Sub Debt"). The Novavax Sub
Debt resulted from loans made by ImmunoGenetics to MVS and Lipovax during the
period from 1991 to the Distribution Date.
The number of shares of Novavax Common Stock issued in exchange for the
Novavax Sub Debt was based on the value of $409.54 per share of Novavax Common
Stock. In connection with the Restructuring, Novavax converted $17,024,000 of
these loans for 41,569 shares of Novavax stock.
In addition to the Restructuring, Novavax recapitalized its capital stock
(the "Recapitalization"). Immediately prior to the Recapitalization, Novavax's
issued and outstanding capital stock consisted of approximately 75,240 shares of
Class A Common Stock and 3,000 shares of Class B Common Stock. As a result of
the Recapitalization, each share of Class A and Class B Common Stock was
converted into approximately 126.37944 shares of Novavax Common Stock. After the
Restructuring and Recapitalization, there were 9,887,936 shares of Novavax
Common Stock outstanding.
To complete the separation of the Core Businesses from the Biotechnology
Business, on December 12, 1995, IGEN distributed all of the shares of Novavax
Common Stock held by IGEN (approximately 93.2% of the voting securities of
Novavax) to IGI in a transaction intended to qualify as a tax-free distribution
under section 355 of the Code. IGI received a private letter ruling from the
Internal Revenue Service("IRS") that the Distribution would not be taxable to
IGI or its shareholders.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents and Marketable Securities
Cash equivalents are considered to be short-term highly liquid investments
with original maturities of 90 days or less. Marketable securities consist of
investments in fixed income securities with original maturities of greater than
three months and less than one year. Marketable securities are stated at cost
which approximates market. Interest income is accrued as earned.
Property and Equipment
Property and equipment are recorded at cost. Depreciation of furniture,
fixtures and equipment is provided under the straight-line method over the
estimated useful lives, generally five years. Amortization of
F-7
28
NOVAVAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
leasehold improvements is provided over the estimated useful lives of the
improvements or the term of the lease, which ever is shorter. Furniture and
equipment held under capital leases are amortized under the straight-line method
over the shorter of the lease term or the estimated useful life of the asset.
Repair and maintenance costs are charged to operations as incurred while
major improvements are capitalized. When assets are retired or disposed of, the
cost and accumulated depreciation thereon are removed from the accounts and any
gains or losses are included in operations.
Patent Cost
Costs associated with obtaining patents, principally legal costs and filing
fees, are being amortized on a straight line basis over the remaining economic
lives of the respective patents. The Company periodically evaluates the carrying
amount of these assets based on current licensing and future commercialization
efforts and if warranted, impairment would be recognized. Accumulated
amortization of patent costs were $430,057 and $323,069 at December 31, 1996 and
1995, respectively.
Revenue Recognition
Revenues from the sale of scientific prototype vaccines and adjuvants are
recorded as the products are produced and shipped. Revenues earned under
research contracts are recognized when the related contract provisions are met.
Net loss per share
Net loss per share of common stock is computed by dividing the net loss by
the weighted average number of shares of common stock and dilutive common stock
equivalents outstanding during the twelve month period ended December 31, 1996.
Pro forma net loss per common and common equivalent share for the year ended
December 31, 1995 is based upon weighted average shares outstanding of 9,937,936
representing primarily shares issued in connection with the Recapitalization.
These shares have been treated as outstanding as if the transaction had occurred
on January 1, 1995. Options and warrants granted subsequent to the Distribution
Date are antidilutive and therefore have not been included in shares
outstanding.
Income Taxes
The Company's income taxes are determined in accordance with the provisions
of Statement of Financial Accounting Standards (SFAS) No. 109 which requires the
asset and liability method of accounting for income taxes. Under the asset and
liability method deferred income taxes are recognized for the tax consequences
of temporary differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax basis of existing assets and liabilities.
The effect on deferred taxes of changes in tax rates is recognized in
income in the period that includes the enactment date. A valuation allowance is
record based on management's determination of the ultimate realizability of
future deferred tax assets. Novavax was included in IGI's consolidated federal
income tax return through the effective date of the Distribution. Provisions for
income taxes were calculated on a separate return basis and were determined in
accordance with the provisions of SFAS No. 109.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates include
F-8
29
NOVAVAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
valuation of patent costs and benefits for income taxes and related valuation
allowances. Actual results could differ from those estimates.
5. TRANSACTIONS WITH FORMER PARENT
Charges
Through the Distribution Date, IGI charged Novavax for expenses incurred on
its behalf, including executive, legal, accounting, data processing, consulting,
cash management, human resources and employee benefits. These costs were
allocated on a variety of methods, including:
- Specific identification based on estimates of time and services provided
- Relative identification allocated based on Novavax's relationship to the
entire pool of beneficiaries
The allocation methods, while reasonable under the current circumstances,
may not represent the cost of similar activities on a separate entity basis.
Such costs have been included in general and administrative expenses, along with
interest expense on these accumulated amounts for the periods presented. These
amounts have been accumulated on Novavax's accompanying Balance Sheet as payable
to parent through the Distribution Date, at which time such amounts were
reversed to the Deficit since these charges will not be repaid.
The net change in the payable to former parent consists of:
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1995 1994
----------- ----------
Allocated general and administrative expenses.............. $ 839,650 $ 779,223
Interest expense........................................... 434,592 201,099
Royalty revenues........................................... (268,002) (209,877)
Payment of royalty revenues................................ 268,002 546,324
Credit for income taxes.................................... 797,000 --
Miscellaneous items........................................ 10,534 (2,388)
Reversal against deficit of payable to former parent....... (7,221,646) --
----------- -----------
Net change in payable to parent............................ $(5,139,870) $1,314,381
=========== ===========
Borrowing Arrangements
On the Distribution Date, Novavax had a note payable to IGI under which
borrowings bore interest at IGI's borrowing rate. The note was converted into
shares of Novavax common stock based on an appraisal of Novavax common stock.
The outstanding loan balance of $17,024,000 was converted into 5,253,494 shares
of Novavax common stock after the Restructuring and Recapitalization. Such
amount was included in the Distribution and, accordingly, has been included in
stockholders' equity in the accompanying balance sheets. In accordance with the
plan of Distribution, $250,000, representing loans made by IGI to Novavax in
excess of $17,024,000, was deducted from IGI's $5,000,000 payment due under the
License Agreement. Novavax has no outside borrowing arrangements.
Transition Services
Under a Transition Services Agreement, established at the time of the
Distribution, IGI continued to provide certain administrative services to
Novavax, including services relating to human resources, purchasing and
accounting, data processing and payroll services from the day of the
Distribution until June 30, 1996. Novavax paid IGI a fee for all services
provided by IGI employees, based on IGI's cost. The agreement was
F-9
30
NOVAVAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
terminated on June 30, 1996. Costs of $230,474 had been incurred for the six
month period ended June 30, 1996. For the period December 13, 1995 through
December 31, 1995, $35,000 of such costs were incurred. These charges have been
offset in part by receivables due from IGI and recorded as a payable to former
parent on the balance sheet.
Royalty Revenues
Novavax earned royalties from IGI at 10% of the sales of the licensed
products. The agreements were terminated in connection with the Distribution and
execution of the License Agreement. In connection with the Distribution, IGI
paid Novavax $5,000,000 in return for a fully paid-up, ten-year license (the
"License Agreement") entitling it to the exclusive use of the Novavax
Technologies in the fields of (i) animal pharmaceuticals, biologicals and other
animal health products; (ii) foods, food applications, nutrients and flavorings;
(iii) cosmetics, consumer products and dermatological over-the-counter and
prescription products (excluding certain topically delivered hormones); (iv)
fragrances; and (v) chemicals, including herbicides, insecticides, pesticides,
paints and coatings, photographic chemicals and other specialty chemicals; and
the processes for making the same. IGI has the option, exercisable within the
last year of the ten-year term, to extend the License Agreement for an
additional ten-year period for $1,000,000. Novavax will retain the right to use
its Novavax Technologies for all other applications, including human vaccines
and pharmaceuticals. Novavax has presented the payment under the License
Agreement as a capital contribution in its financial statements to reflect the
intercompany nature and substance of the transaction. The form was structured as
a prepaid license agreement to address various considerations of the
Distribution including tax and financing considerations. For tax purposes, the
transaction was treated as income for the period ended December 31, 1995. IGI
has no further obligations or intentions to fund Novavax.
6. SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid an alternative-minimum tax liability, related to the tax
effect of the licensing agreement with IGI and paid interest expense during
1996. The balances as of December 31, 1996, 1995 and 1994 are as follows:
1996 1995 1994
-------- ---- ----
Tax liability....................................... $100,000 -- --
Interest paid....................................... 10,955 -- --
For the years ended December 31, 1996, 1995 and 1994, the Company had the
following non-cash financing and investing activities:
1996 1995 1994
------- ---------- ----
Reversal against deficit of payable to former -- $7,221,646
parent......................................... --
Options granted as compensation.................. -- $1,988,748 --
Capital lease obligation for the purchase of $36,285
furniture and equipment........................
F-10
31
NOVAVAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, is comprised of the following:
1996 1995
---------- ----------
Leasehold improvements.......................... $ 321,506 $ 335,898
Machinery and equipment......................... 993,202 1,645,272
Equipment under capital leases.................. 36,285 --
Furniture and fixtures.......................... 32,130 125,604
---------- ----------
1,383,123 2,106,774
Less accumulated depreciation................... (405,212) (705,776)
---------- ----------
$ 977,911 $1,400,998
========== ==========
During 1996, the disposal of $856,365, at cost, of property and equipment
and $521,801 of accumulated depreciation was recorded relating to the closing of
one of the Novavax subsidiaries' laboratory. Depreciation expense of $221,237,
$189,085 and $193,401 was recorded in the years ended December 31, 1996, 1995
and 1994, respectively.
8. STOCK OPTIONS AND WARRANTS
1995 Stock Option Plan
Various directors, officers and employees of IGI including those employed
by Novavax have been awarded stock options under various IGI stock option plans
at 100% of the fair market value of IGI's stock at the date of grant. In
connection with the Distribution, the Board of Directors of Novavax authorized
the grant of Novavax options to all holders of options to purchase IGI Common
Stock as of the Distribution Date ("Spin-off Options"). The Spin-off Options
were granted to such holders on substantially similar terms to the corresponding
options to purchase IGI Common Stock. The number of shares of Novavax common
stock under the options as compared to their IGI counterparts reflects the
distribution ratio of one share of Novavax common stock for one share of IGI
common stock. Exercise prices of the options were based on the relative market
capitalization of IGI and Novavax on the 20 trading days immediately following
the Distribution Date to restore holders of each option to the economic position
prior to the Distribution Date. As of the Distribution Date, 2,034,015 Spin-off
Options to purchase shares of Novavax common stock were granted to holders of
options to purchase IGI common stock at $3.69 per share.
Under the Novavax 1995 Stock Option Plan, options may be granted to
officers, employees and consultants or advisors to Novavax and any future
subsidiary to purchase a maximum of 4,000,000 shares of Novavax common stock
(including the Spin-off Options). Incentive options, having a maximum term of
ten years, can be granted at no less than 100% of the fair market value of
Novavax's stock at the time of grant and are generally exercisable in cumulative
increments over four years commencing one year from the date of grant. Both
incentive and non-statutory stock options may be granted under the 1995 plan.
There is no minimum exercise price for non-statutory stock options.
The Board of Directors of Novavax granted, as of the Distribution Date,
options to purchase 600,000 shares of Novavax common stock to various employees
at an exercise price of $.01 per share. Concurrently, the Board granted options
to purchase 415,000 shares of Novavax common stock at $3.24 per share to Novavax
employees, the estimated fair market value. 890,000 of these options first
become exercisable on the six month anniversary of the Distribution Date as to
50% of the shares covered thereby and as to an additional 25% of the shares on
each of the first and second anniversaries of the Distribution Date. 125,000 of
these options first become exercisable in increments of 25% of the shares on
each of the first through fourth anniversaries of the Distribution Date. These
options become immediately exercisable in the event of the
F-11
32
NOVAVAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquisition of Novavax, including a merger in which Novavax is not the surviving
entity, the sale of all or substantially all of the assets of Novavax or the
acquisition of a majority of the equity securities of Novavax. The options also
become immediately exercisable in the event the optionee is terminated without
cause. As of the Distribution Date, substitute options were issued in exchange
for options to purchase Lipovax and MPS shares, which existed prior to the
Distribution Date. 22,749 substitute options were issued for 180 options to
purchase MPS shares using the recapitalization rate of 126.37944 shares
described in Note 3. 28,871 substitute options were issued to purchase Lipovax
shares.
1995 Director Stock Option Plan
The 1995 Director Stock Option Plan provides for the issuance of up to
500,000 shares of Novavax Common Stock. 80,000 and 120,000 options were granted
under this plan in 1996 and 1995, respectively. In addition, each Eligible
Director then serving as a director on the last business day of each of 1997 and
1998 will be granted a non-qualified option to purchase 10,000 shares of Common
Stock. The exercise price per share is the fair market value on the date of
grant. Options granted to Eligible Directors are exercisable in full beginning
six months after the date of grant and terminate ten years after the date of
grant.
Such options cease to be exercisable at the earlier of their expiration or
three years after an Eligible 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
death, his outstanding options (whether exercisable or not on the date of death)
may be exercised within three years after such date (subject to the condition
that no such option may be exercised after the expiration of ten years from its
date of grant).
Activity under the 1995 Stock Option Plan and 1995 Director Stock Option
Plan was:
WEIGHTED AVERAGE
SHARES PRICE PRICE PER SHARE
---------- ------------- ----------------
Balance January 1, 1993......................... 22,749 $0.04 $ 0.04
1995 Activity:
Granted....................................... 3,197,886 $0.01 -- $5.37 $ 2.97
Exercised..................................... (50,000) $0.75 $ 0.75
Canceled...................................... (2,000) $3.66 $ 3.66
----------
December 31, 1995
1996 Activity:
Shares under option........................... 3,168,635 $0.01 -- $5.37 $ 2.99
Granted....................................... 740,000 $3.38 -- $7.00 $ 4.96
Exercised..................................... (217,774) $0.01 -- $5.37 $ 1.61
Canceled...................................... (18,000) $3.66 -- $5.28 $ 3.84
December 31, 1996
Shares under option........................... 3,672,861 $ 3.11
==========
Weighted average remaining contractual life
(years)....................................... 5.7
==========
Shares available for grant at December 31,
1996.......................................... 559,365
==========
WEIGHTED AVERAGE
PRICE PER SHARE
----------------
Shares subject to outstanding options:
Exercisable at December 31, 1996.............. 2,903,170 $ 3.34
==========
Exercisable at December 31, 1995.............. 1,753,470
==========
F-12
33
NOVAVAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with its stock option plans, Novavax makes no charges to
operations in connection with stock options granted at the fair market value at
the date of grant. With respect to options which were granted below fair market
value at the date of grant, the Company records compensation expense for the
difference between the fair market value at the date of grant and the exercise
price as the options become exercisable. $1,410,648 ane $101,183 related to such
options has been included as compensation expense in 1996 and 1995,
respectively.
The Company has adopted the disclosure -- only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS 123") as they pertain to financial
statement recognition of compensation expense attributable to option grants. As
such, no compensation cost has been recognized on the Company's option plans. If
the Company had elected to recognize the compensation cost for the 1995 Stock
Option Plan and the 1995 Director Stock Option Plan consistent with SFAS 123,
the Company's net loss and loss per share on a pro forma basis would be:
1996 1995
----------- ------------
Net loss
As reported.................................... $(5,494,985) $ (8,494,358)
Pro forma...................................... (6,354,089) (10,110,754)
Net loss per share
As reported.................................... $(.54) $(.85)
Pro forma...................................... $(.63) $(1.02)
The fair value of each option grant was estimated using the Black-Scholes
option pricing model with the following weighted average assumptions:
-- Risk-free interest rate: 5.97%
-- Volatility: Options issued by Novavax after November 28, 1995 is 75%,
prior to November 28, 1995 is 50%.
-- Dividend yield: 0%
-- Expected life of options:
Employees -- 6 years
Directors -- 3 years
-- Forfeiture rate: 5% per year for options vesting over a four year
period.
Non-Employee Options
The Company has entered into agreements to receive advisory and consulting
services from several individuals, four of whom serve on the Novavax Scientific
Advisory Board. Non-qualified stock options have been granted to these
individuals under the 1995 Stock Option Plan. Using the Black-Scholes option
pricing model, a charge of $30,107 related to these options has been recorded in
the 1996 Statement of Operations.
Common Stock Warrants
In connection with the October 1996 private stock sale, the Company
provided the underwriter warrants for the purchase of 50,000 shares of common
stock, par value $.01 per share. The warrants are fully exercisable at $3.75 per
share and expire on October 30, 2001. In November, in consideration for services
performed by a consultant, the Company also issued warrants for 50,000 shares of
common stock, par value $.01 per share. The warrants are exercisable at $5.00
per share, with 50% vested as of December 31, 1996 and the remainder vesting in
increments of 25% upon completion of services. These warrants expire on November
18, 2001. As of December 31, 1996, no warrants had been exercised. Using the
Black-Scholes option pricing model, a charge of $66,035 related to these
warrants has been recorded in the 1996 Statement of Operations and $66,035 has
been recorded as Deferred Compensation on the 1996 Balance Sheet.
F-13
34
NOVAVAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
Deferred tax assets (liabilities) included in the balance sheets consist of
the following:
1996 1995
----------- -----------
Net operating losses.............................. $ 3,516,909 $ 2,131,571
Research tax credits.............................. 721,333 670,641
Disqualifying stock options....................... 523,746 --
Deferred patent costs............................. (515,675) (388,760)
Alt-min tax credit................................ 93,674 --
Other............................................. 10,927 (14,562)
----------- -----------
4,350,914 2,398,890
Less valuation allowance.......................... (4,350,914) (2,398,890)
----------- -----------
Deferred taxes, net............................... $ -- $ --
=========== ===========
In connection with the filing of the Company's 1995 tax return during 1996,
it was determined that the Company had an Alternative Minimum Tax liability
resulting from the cash received from IGI in return for the license. The 1996
income tax expense is fully attributable to the Alternative Minimum Tax
calculation.
Federal net operating losses and tax credits available to Novavax and are
as follows:
Net operating losses expiring through the year 2011...... $7,803,024
Research tax credits expiring through the year 2011...... 721,333
Alt-min tax credit (no expiration)....................... 93,674
10. COMMITMENTS AND CONTINGENCIES
Novavax leases laboratory and office space, machinery and equipment under
capital and noncancelable operating lease agreements expiring at various dates
through 2006. Future minimum rental commitments under noncancelable leases as of
December 31, 1996 are as follows:
OPERATING LEASES CAPITAL LEASES
---------------- --------------
1997............................................ $ 180,941 $ 14,822
1998............................................ 171,412 14,822
1999............................................ 145,409 12,062
2000............................................ 145,416 --
2001............................................ 145,735 --
Thereafter...................................... 759,939 --
---------- -------
Total lease payments............................ $1,554,852 $ 41,706
==========
Less: amount representing interest.............. (7,355)
-------
Present value of net minimum lease payments..... $ 34,351
=======
Aggregate rental expenses approximated $183,327, $260,041, and $172,566 in
1996, 1995, and 1994, respectively.
In October 1996, the Company entered into a 10-year operating lease for
office and laboratory facilities. In connection with this lease agreement,
Novavax is required to maintain a "Net Asset Value" of $2,000,000. The term "Net
Asset Value" is defined as the difference between the total assets and the total
liabilities. If the Net Asset Value falls below $2,000,000, the Company is
required to provide other reasonable financial assurances to the Landlord within
five (5) days of the Landlords request. The financial assurances may be, but
F-14
35
NOVAVAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
without limitation to, the following: a bond for the Landlord's benefit, an
increase in the deposit, or a letter of credit, as reasonable believed necessary
by the Landlord or its lenders.
Also in October 1996, the Company entered into a 2-year operating lease for
approximately 1750 square feet of laboratory space. This shared space houses the
Company's certified animal facility and laboratories for its biologics
development which includes the vaccine adjuvant program. Both leases include
various renewal options, purchase options, and escalation clauses.
11. LITIGATION
On February 6, 1996, Johnson & Johnson and its wholly-owned subsidiary
Ortho-McNeil, Inc. (collectively, "J & J") filed a lawsuit against the Company's
subsidiary Micro-Pak, Inc. and the Company's former parent, IGI, Inc. and its
subsidiaries, in the United States District Court for the District of New Jersey
alleging trademark infringement and trademark dilution. J & J alleged that IGI's
use of the names NOVA SKIN, NOVA SKIN CARE, and NOVA-AESTHETICS infringed on
rights associated with J & J's trademark RENOVA for a prescription drug. The
lawsuit has been settled, with no liability incurred by the Company.
12. SIGNIFICANT CUSTOMERS
Novavax's research revenue includes amounts earned from arrangements with
various industry partners. In the year ended December 31, 1994, four different
customers each represented in excess of 10% of research revenues.
13. SUBSEQUENT EVENTS
On February 10, 1997, Novavax signed a definitive agreement to privately
place 1,200,000 common shares with Anaconda Opportunity Fund L.P., an accredited
institutional investor, at an aggregate price of $5,100,000. As part of the
transaction, Novavax also granted warrants to purchase an additional 600,000
shares at a price of $6.00 per share and 600,000 shares at a price of $8.00 per
share. The warrants have a three-year term. The transaction was closed on March
14, 1997. Upon closing, the Company received $4,100,000 in cash and a promissory
note due March 27, 1997 in the amount of $1,000,000. Novavax estimates that the
money received from the sale of the privately placed stock, along with its
existing cash resources, will be sufficient to finance its operations at current
levels of development activity for approximately 20 to 24 months.
F-15
36
EXHIBIT INDEX
EXHIBIT PAGE
- - ------- ----
3.1
3.2
4 *
10.1 *
10.2 *
10.3 *
10.4 *
10.5 *
10.6 *
10.7
10.8 *
10.9 *
10.10
11
21 *
23
27
99
- - ---------------
* These exhibits are incorporated by reference