0001000694--12-312020Q3NOVAVAX 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Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File No. 000-26770

NOVAVAX, INC.

(Exact name of registrant as specified in its charter)

Delaware

    

22-2816046

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

21 Firstfield Road, Gaithersburg, MD

 

20878

(Address of principal executive offices)

 

(Zip code)

(240) 268-2000

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading
Symbol(s)

    

Name of each exchange on which registered

Common Stock, Par Value $0.01 per share

 

NVAX

 

The Nasdaq Global Select Market

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 No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No

The number of shares outstanding of the Registrant's Common Stock, $0.01 par value, was 63,659,952 as of October 31, 2020.

Table of Contents

NOVAVAX, INC.

TABLE OF CONTENTS

Page No.

PART I. FINANCIAL INFORMATION

1

Item 1.

Consolidated Financial Statements

1

Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019

1

Unaudited Consolidated Statements of Operations and Unaudited Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2020 and 2019

2

Unaudited Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the three and nine months ended September 30, 2020 and 2019

3

Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019

5

Notes to the Consolidated Financial Statements (unaudited)

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

39

Item 4.

Controls and Procedures

39

PART II. OTHER INFORMATION

40

Item 1A.

Risk Factors

40

Item 6.

Exhibits

46

SIGNATURES

48

i

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NOVAVAX, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share information)

    

September 30, 

December 31, 

    

2020

    

2019

(unaudited)

ASSETS

  

 

  

Current assets:

  

 

  

Cash and cash equivalents

$

334,171

$

78,823

Marketable securities

 

169,860

 

Restricted cash

 

67,154

 

2,947

Accounts receivable

12,355

7,500

Unbilled services

3,826

Prepaid expenses and other current assets

 

83,851

 

7,977

Total current assets

 

671,217

 

97,247

Restricted cash

 

411

 

410

Property and equipment, net

 

131,834

 

11,445

Intangible assets, net

 

5,332

 

5,581

Goodwill

 

126,932

 

51,154

Other non-current assets

 

8,294

 

7,120

Total assets

$

944,020

$

172,957

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

15,097

$

2,910

Accrued expenses

 

78,812

 

14,867

Accrued interest

 

2,031

 

5,078

Deferred revenue

 

81,814

 

1,678

Current portion of finance lease liabilities

55,860

Other current liabilities

 

5,604

 

1,262

Total current liabilities

 

239,218

 

25,795

Deferred revenue

 

2,500

 

2,500

Convertible notes payable

 

321,679

 

320,611

Non-current finance lease liabilities

63,099

Other non-current liabilities

 

11,262

 

10,068

Total liabilities

 

637,758

 

358,974

Commitments and contingencies

 

  

 

  

Preferred stock, $0.01 par value, 2,000,000 shares authorized; 438,885 shares of redeemable Series A Convertible Preferred Stock issued and outstanding at September 30, 2020 and no shares issued and outstanding at December 31, 2019

 

199,822

 

Stockholders' equity (deficit):

 

  

 

  

Common stock, $0.01 par value, 600,000,000 shares authorized at September 30, 2020 and December 31, 2019; and 63,318,888 shares issued and 62,927,485 shares outstanding at September 30, 2020 and 32,399,352 shares issued and 32,352,416 shares outstanding at December 31, 2019

 

633

 

324

Additional paid-in capital

 

1,848,644

 

1,260,551

Accumulated deficit

 

(1,696,635)

 

(1,431,801)

Treasury stock, 391,403 shares, cost basis at September 30, 2020 and 46,936 shares, cost basis at December 31, 2019

 

(41,207)

 

(2,583)

Accumulated other comprehensive loss

 

(4,995)

 

(12,508)

Total stockholders’ equity (deficit)

 

106,440

 

(186,017)

Total liabilities and stockholders’ equity (deficit)

$

944,020

$

172,957

The accompanying notes are an integral part of these financial statements.

1

Table of Contents

NOVAVAX, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share information)

(unaudited)

For the Three Months Ended

For the Nine Months Ended

September 30, 

September 30, 

2020

    

2019

    

2020

    

2019

    

Revenue:

  

 

  

 

  

 

  

 

Grant and other

$

114,086

$

2,507

$

152,690

$

9,846

Government contract

42,938

43,249

Total revenue

 

157,024

 

2,507

 

195,939

 

9,846

Expenses:

 

  

 

  

 

  

 

  

Research and development

 

294,087

 

18,611

 

345,828

 

84,502

Gain on Catalent transaction

(9,016)

(9,016)

General and administrative

 

56,879

 

7,899

 

83,977

 

26,236

Total expenses

 

350,966

 

17,494

 

429,805

 

101,722

Loss from operations

 

(193,942)

 

(14,987)

 

(233,866)

 

(91,876)

Other income (expense):

 

  

 

  

 

  

 

  

Investment income

 

140

 

342

 

872

 

1,236

Interest expense

 

(4,460)

 

(3,403)

 

(11,266)

 

(10,209)

Other income (expense)

 

952

 

5

 

3,565

 

(15)

Net loss

$

(197,310)

$

(18,043)

$

(240,695)

$

(100,864)

Basic and diluted net loss per share

$

(3.21)

$

(0.74)

$

(4.39)

$

(4.43)

Basic and diluted weighted average number of common shares outstanding

 

61,554

 

24,327

 

54,810

 

22,761

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

    

For the Three Months Ended

For the Nine Months Ended

    

September 30, 

September 30, 

    

2020

    

2019

    

2020

    

2019

    

Net loss

$

(197,310)

$

(18,043)

$

(240,695)

$

(100,864)

Other comprehensive income (loss):

Net unrealized gains (losses) on marketable securities available-for-sale

 

(26)

 

 

18

 

5

Foreign currency translation adjustment

 

8,226

 

(1,564)

 

7,495

 

(2,668)

Other comprehensive income (loss)

 

8,200

 

(1,564)

 

7,513

 

(2,663)

Comprehensive loss

$

(189,110)

$

(19,607)

$

(233,182)

$

(103,527)

The accompanying notes are an integral part of these financial statements.

2

Table of Contents

NOVAVAX, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

Three Months Ended September 30, 2020 and 2019

(unaudited)

Additional

Other

Stockholders'

Common Stock

Paid-in

Accumulated

Treasury

Comprehensive

Equity

    

Shares

    

Amount

    

Capital

    

Deficit

    

Stock

    

Income (Loss)

    

(Deficit)

 

(in thousands, except share information)

Balances at June 30, 2020

 

61,262,632

$

612

$

1,699,072

$

(1,499,325)

$

(2,638)

$

(13,195)

$

184,526

Preferred stock beneficial conversion feature

Non-cash stock-based compensation

 

 

 

65,705

 

 

 

 

65,705

Stock issued under incentive programs

 

1,534,345

 

16

 

26,682

 

 

(38,569)

 

 

(11,871)

Issuance of common stock, net of issuance costs of $725

 

521,911

 

5

 

57,185

 

 

 

 

57,190

Unrealized loss on marketable securities

 

 

 

 

 

 

(26)

 

(26)

Foreign currency translation adjustment

 

 

 

 

 

 

8,226

 

8,226

Net loss

 

 

 

 

(197,310)

 

 

 

(197,310)

Balance at September 30, 2020

 

63,318,888

$

633

$

1,848,644

$

(1,696,635)

$

(41,207)

$

(4,995)

$

106,440

Balances at June 30, 2019

 

23,495,466

$

235

$

1,210,941

$

(1,381,928)

$

(2,451)

$

(12,290)

$

(185,493)

Non-cash stock-based compensation

 

 

 

2,624

 

 

 

 

2,624

Stock issued under incentive programs

122,485

1

181

(132)

50

Issuance of common stock, net of issuance costs of $161

 

1,957,627

 

20

 

12,568

 

 

 

 

12,588

Foreign currency translation adjustment

 

 

 

 

 

 

(1,564)

 

(1,564)

Net loss

 

 

 

 

(18,043)

 

 

 

(18,043)

Balance at September 30, 2019

 

25,575,578

$

256

$

1,226,314

$

(1,399,971)

$

(2,583)

$

(13,854)

$

(189,838)

The accompanying notes are an integral part of these financial statements.

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NOVAVAX, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

Nine Months Ended September 30, 2020 and 2019

(unaudited)

Additional

Other

Stockholders'

Common Stock

Paid-in

Accumulated

Treasury

Comprehensive

Equity

    

Shares

    

Amount

    

Capital

    

Deficit

    

Stock

    

Income (Loss)

    

(Deficit)

 

(in thousands, except share information)

Balance at December 31, 2019

 

32,399,352

$

324

$

1,260,551

$

(1,431,801)

$

(2,583)

$

(12,508)

$

(186,017)

Preferred stock beneficial conversion feature

24,139

(24,139)

Non-cash stock-based compensation

 

 

 

77,602

 

 

 

 

77,602

Stock issued under incentive programs

 

1,884,399

 

19

 

35,689

 

 

(38,624)

 

 

(2,916)

Issuance of common stock, net of issuance costs of $5,870

29,035,137

290

450,663

450,953

Unrealized gain on marketable securities

 

 

 

 

 

 

18

 

18

Foreign currency translation adjustment

 

 

 

 

 

 

7,495

 

7,495

Net loss

 

 

 

 

(240,695)

 

 

 

(240,695)

Balance at September 30, 2020

 

63,318,888

$

633

$

1,848,644

$

(1,696,635)

$

(41,207)

$

(4,995)

$

106,440

Balance at December 31, 2018

 

19,245,302

$

192

$

1,144,621

$

(1,299,107)

$

(2,450)

$

(11,191)

$

(167,935)

Non-cash stock-based compensation

 

 

 

12,803

 

 

 

 

12,803

Stock issued under incentive programs

 

173,873

 

2

 

1,122

 

 

(132)

 

 

992

Fractional shares purchased in stock split

 

 

 

 

 

(1)

 

 

(1)

Issuance of common stock, net of issuance costs of $1,273

 

6,156,403

 

62

 

67,768

 

 

 

 

67,830

Unrealized gain on marketable securities

 

 

 

 

 

 

5

 

5

Foreign currency translation adjustment

 

 

 

 

 

 

(2,668)

 

(2,668)

Net loss

 

 

 

 

(100,864)

 

 

 

(100,864)

Balance at September 30, 2019

 

25,575,578

$

256

$

1,226,314

$

(1,399,971)

$

(2,583)

$

(13,854)

$

(189,838)

The accompanying notes are an integral part of these financial statements.

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NOVAVAX, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

Nine Months Ended

    

September 30, 

    

    

2020

    

2019

    

Operating Activities:

Net loss

$

(240,695)

$

(100,864)

Reconciliation of net loss to net cash used in operating activities:

Depreciation and amortization

 

3,091

 

4,744

Loss on disposal of property and equipment

 

 

88

Gain on Catalent transaction

(9,016)

Amortization of debt issuance costs

 

1,068

 

1,068

Non-cash stock-based compensation

 

77,602

 

12,803

Write off of right-of-use assets

187,193

Other

 

(4,119)

 

1,269

Changes in operating assets and liabilities:

 

 

Receivables, prepaid expenses and other assets

 

(78,788)

 

1,326

Accounts payable and accrued expenses

 

60,540

 

(16,882)

Deferred revenue

 

80,135

 

(7,416)

Net cash provided by (used in) operating activities

 

86,027

 

(112,880)

Investing Activities:

 

  

 

  

Capital expenditures

 

(12,610)

 

(1,641)

Acquisition of Novavax CZ, net of cash acquired

(164,204)

Proceeds from Catalent transaction

18,333

Purchases of marketable securities

 

(266,330)

 

(17,484)

Proceeds from maturities of marketable securities

 

96,488

39,500

Net cash (used in) provided by investing activities

 

(346,656)

 

38,708

Financing Activities:

 

  

 

  

Net proceeds from sale of preferred stock

199,822

Net proceeds from sales of common stock

 

447,070

 

67,220

Proceeds from the exercise of stock-based awards

 

35,708

 

992

Treasury stock related to tax withholding on stock-based awards

(37,024)

Finance lease payments

(65,424)

Net cash provided by financing activities

 

580,152

 

68,212

Effect of exchange rate on cash, cash equivalents and restricted cash

 

33

 

(69)

Net increase (decrease) in cash, cash equivalents and restricted cash

 

319,556

 

(6,029)

Cash, cash equivalents and restricted cash at beginning of period

 

82,180

 

81,959

Cash, cash equivalents and restricted cash at end of period

$

401,736

$

75,930

Supplemental disclosure of non-cash activities:

 

  

 

  

Sale of common stock under the Sales Agreement not settled at quarter-end

$

3,883

$

610

Capital expenditures included in accounts payable and accrued expenses

$

6,189

$

183

Right-of-use assets from new lease agreements

$

188,362

$

Supplemental disclosure of cash flow information:

 

 

Cash interest payments

$

12,188

$

12,188

The accompanying notes are an integral part of these financial statements.

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NOVAVAX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(unaudited)

Note 1 – Organization

Novavax, Inc. (“Novavax,” and together with its wholly owned subsidiaries, Novavax AB and Novavax CZ (formerly, Praha Vaccines a.s.), the “Company”) is a late-stage biotechnology company that promotes improved global health through the discovery, development and commercialization of innovative vaccines to prevent serious infectious diseases and address urgent, global health needs. The Company’s vaccine candidates, including both its coronavirus vaccine candidate, NVX-CoV2373, and its lead influenza vaccine candidate, NanoFluTM, are genetically engineered, three-dimensional nanostructures of recombinant proteins critical to disease pathogenesis and may elicit differentiated immune responses, which may be more efficacious than naturally occurring immunity or traditional vaccines. The Company’s technology targets a variety of infectious diseases. The Company is also developing proprietary immune stimulating saponin-based adjuvants at Novavax AB, its wholly owned Swedish subsidiary. The Company’s lead adjuvant, Matrix-M™, has been shown to enhance immune responses and has been well-tolerated in multiple clinical trials.

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. The consolidated balance sheet as of September 30, 2020, the consolidated statements of operations and the consolidated statements of comprehensive loss for the three and nine months ended September 30, 2020 and 2019, the consolidated statements of changes in stockholders’ equity (deficit) for the three and nine months ended September 30, 2020 and 2019 and the consolidated statements of cash flows for the nine months ended September 30, 2020 and 2019 are unaudited, but include all adjustments (consisting of normal recurring adjustments) that the Company considers necessary for a fair presentation of the financial position, operating results, comprehensive loss, changes in stockholders’ equity (deficit) and cash flows, respectively, for the periods presented. Although the Company believes that the disclosures in these unaudited consolidated financial statements are adequate to make the information presented not misleading, certain information and footnote information normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted as permitted under the rules and regulations of the United States Securities and Exchange Commission (“SEC”).

The unaudited consolidated financial statements include the accounts of Novavax, Inc. and its wholly owned subsidiaries, Novavax AB and Novavax CZ. All intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements are presented in U.S. dollars. The functional currency of Novavax AB, which is located in Sweden, is the local currency (Swedish Krona), and the functional currency of Novavax CZ, which is located in the Czech Republic, is the local currency (Czech Koruna). The translation of assets and liabilities of these subsidiaries to U.S. dollars is made at the exchange rate in effect at the consolidated balance sheet date, while equity accounts are translated at historical rates. The translation of the statement of operations data is made at the average exchange rate in effect for the period. The translation of operating cash flow data is made at the average exchange rate in effect for the period, and investing and financing cash flow data is translated at the exchange rate in effect at the date of the underlying transaction. Translation gains and losses are recognized as a component of accumulated other comprehensive loss in the accompanying unaudited consolidated balance sheets. The foreign currency translation adjustment balance included in accumulated other comprehensive loss was $5.0 million and $12.5 million as of September  30, 2020 and December 31, 2019, respectively.

The accompanying unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019. Results for this or any interim period are not necessarily indicative of results for any future interim period or for the entire year. The Company operates in one business segment.

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Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. GAAP 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 consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents consist of highly liquid investments with maturities of three months or less from the date of purchase. Cash and cash equivalents consist of the following at (in thousands):

    

September 30, 

    

December 31, 

    

2020

    

2019

Cash

$

126,505

$

15,863

Money market funds

79,950

 

42,960

Government-backed securities

43,250

 

20,000

Treasury securities

24,998

Corporate debt securities

59,468

 

Cash and cash equivalents

$

334,171

$

78,823

Cash equivalents are recorded at cost, which approximate fair value due to their short-term nature.

Marketable Securities

Marketable securities consist of debt securities with maturities greater than three months from the date of purchase that include commercial paper, government-backed securities, treasury securities, corporate notes and agency securities. Classification of marketable securities between current and non-current is dependent upon the maturity date at the balance sheet date taking into consideration the Company's ability and intent to hold the investment to maturity.

Interest and dividend income are recorded when earned and included in investment income in the consolidated statements of operations. Premiums and discounts, if any, on marketable securities are amortized or accreted to maturity and included in investment income in the consolidated statements of operations. The specific identification method is used in computing realized gains and losses on the sale of the Company's securities.

The Company classifies its marketable securities with readily determinable fair values as “available-for-sale.” Investments in securities that are classified as available-for-sale are measured at fair market value in the consolidated balance sheets, and unrealized gains and losses on marketable securities are reported as a separate component of stockholders' deficit until realized. Marketable securities are evaluated periodically to determine whether a decline in value is “other-than-temporary.” The term “other-than-temporary” is not intended to indicate a permanent decline in value. Rather, it means that the prospects for a near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the security. Management reviews criteria, such as the magnitude and duration of the decline, as well as the Company's ability to hold the securities, including whether the Company will be required to sell a security prior to recovery of its amortized cost basis, the investment issuer's financial condition and business outlook to predict whether the loss in value is other-than-temporary. Realized gains and losses and declines in value determined to be other-than-temporary are recorded as other income (expense) in the consolidated statements of operations. The cost of securities sold is based on the specific identification method.

Restricted Cash

The Company’s current and non-current restricted cash includes payments received under the Coalition for Epidemic Preparedness Innovations (“CEPI”) funding agreements (see Note 12), payments received under the Bill & Melinda Gates Foundation (“BMGF”) grant agreements (see Note 12), escrow funds paid in connection with the acquisition of Novavax CZ (see Note 5), escrow funds received in connection with a transaction in 2019 with Catalent Maryland, Inc. (formerly Paragon Bioservices, Inc.), a unit of Catalent Biologics (“Catalent”), and cash collateral accounts under letters of credit that serve as security deposits for certain facility leases. The Company will utilize the CEPI and BMGF funds as it incurs expenses for services performed under these agreements.

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As of September 30, 2020, the restricted cash balances (both current and non-current) consisted of $9.1 million for payments received from BMGF, $46.3 million of payments under the CEPI funding agreements, $11.7 million held in escrow that was paid by the Company in connection with the Novavax CZ acquisition and $0.4 million of security deposits. As of December 31, 2019, the restricted cash balances (both current and non-current) consisted of $1.4 million for payments received from BMGF, $1.5 million held in escrow received in connection with the Catalent transaction and $0.4 million of security deposits.

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the statement of cash flows (in thousands):

    

September 30, 

    

December 31, 

    

2020

    

2019

Cash and cash equivalents

$

334,171

$

78,823

Restricted cash current

 

67,154

 

2,947

Restricted cash non-current

 

411

 

410

Cash, cash equivalents and restricted cash

$

401,736

$

82,180

Acquisitions

The Company applies the acquisition method of accounting to business combinations in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations. The Company’s consolidated financial statements include the operating results of an acquired entity from the date on which it obtains control of the business acquired. The Company recognizes and measures the identifiable assets acquired and liabilities assumed, as of the acquisition date, based on their estimated fair value with the excess purchase consideration, if any, recognized as goodwill. In determining fair value, the Company uses various recognized valuation methods, including the cost and market approaches. The Company initially performs these valuations based on preliminary estimates and assumptions by management or independent valuation specialists under Company supervision, where appropriate, and makes revisions as estimates and assumptions are finalized. The final determination of fair values must be completed no later than the first anniversary of the date of acquisition. The Company expenses acquisition related costs as incurred. See Note 5 for further discussion around the Company’s recent acquisition of Novavax CZ.

Lease Accounting

The Company determines at the inception of a contract if an arrangement is, or contains, a lease, which exists when the contract conveys the right to control the use of identified property or equipment for a period of time in exchange for consideration. Depending on the contract, the lease commencement date, defined as the date on which the lessor makes the underlying asset available for use by the lessee, may be different than the inception date of the contract. Leases are classified as either operating or finance leases based on the economic substance of the agreement.

The Company enters into non-cancelable lease agreements for office space and certain equipment. Further, the Company enters into supply agreements with contract manufacturing organizations and contract development and manufacturing organizations to manufacture its vaccine candidates. Certain of these supply agreements include the use of identified manufacturing facilities and equipment that are controlled by the Company and may qualify as an embedded lease. Supply agreements that contain a lease are treated as lease arrangements in their entirety.

For leases that have a lease term of more than 12 months at the lease commencement date, the Company recognizes lease liabilities, which represent the Company’s obligation to make lease payments arising from the lease, and corresponding right-of-use (“ROU”) assets, which represent the right to use an underlying asset for the lease term, based on the present value of the fixed future payments over the lease term. The Company calculates the present value of future payments using the discount rate implicit in the lease, if available, or the Company’s incremental borrowing rate.  For all leases that have a lease term of 12 months or less at the commencement date (referred to as “short-term” leases), the Company has elected to apply the practical expedient in ASC Topic 842, Leases (“ASC 842”), to not recognize a lease liability or ROU asset but instead, recognize lease payments as an expense on a straight-line basis over the lease term and variable lease payments that do not depend on an index or rate, as an expense in the period in which the variable lease costs are incurred based on performance or usage in accordance with contractual agreements.  In determining the lease period, the Company evaluates facts and circumstances that could affect the period over which it is reasonably certain to

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use the underlying asset while taking into consideration the non-cancelable period over which it has the right to use the underlying asset and any option period to extend or terminate the lease if it is reasonably certain to exercise the option. The Company reevaluates short-term leases that are modified and if they no longer meets the requirements to be treated as short-term leases, recognizes and measures the lease liability and ROU asset as if the date of the modification is the lease commencement date.

For operating leases, the Company recognizes lease expense related to fixed payments on a straight-line basis over the lease term and lease expense related to variable payments as incurred based on performance or usage in accordance with the contractual agreements. For finance leases, the Company recognizes the amortization of the ROU asset over the shorter of the lease term or useful life of the underlying asset. The Company expenses ROU assets acquired for research and development activities under ASC Topic 730, Research and Development, if they do not have an alternative future use, in research and development projects or otherwise.

The Company uses significant assumptions and judgment in evaluating its lease contracts and other agreements under ASC 842, including the determination of whether an agreement is or contains a lease, whether a lease represents an operating or finance lease, the discount rate used to determine the present value of lease obligations and the term of a lease embedded in its supply agreements.

Revenue Recognition

The Company performs research and development under government funding, grant, license and clinical development agreements. The revenue primarily consists of funding under U.S. government contracts and other arrangements to advance the clinical development and manufacturing of NVX-CoV2373. The Company’s U.S. government contracts are with the U.S. Department of Defense (the “DoD”) and its participation in Operation Warp Speed (“OWS”) (see Note 12). Other funding arrangements primarily include a grant and forgivable loan funding from CEPI (see Note 12).

At contract inception, the Company analyzes the revenue arrangement to determine the appropriate accounting under U.S. GAAP. Currently, the Company’s revenue arrangements represent customer contracts within the scope of ASC Topic 606, Revenue from Contracts with Customers (Topic 606) (“ASC 606”) or are contributions under the scope of ASC Topic 958-605, Not-for-Profit Entities – Revenue Recognition (“ASC 958-605”.) The Company recognizes revenue from arrangements within the scope of ASC 606 following the five-step model: (i) identify the contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenue when (or as) it satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that it will collect the consideration it is entitled to in exchange for the goods or services it transfers to its customer. The Company recognizes contribution revenue within the scope of ASC 958-605 when the funder-imposed conditions have been substantially met. Contributions are recorded as deferred revenue until the period in which research and development activities are performed that satisfy the funder-imposed conditions.

Under the U.S. government contracts, the Company is entitled to receive funding of up to $1.66 billion, on a reimbursable-cost or reimbursable-cost-plus-fixed-fee basis, to support certain activities related to the development, manufacture and delivery of NVX-CoV2373 to the U.S. government. The Company analyzed these contracts and determined that they are within the scope of ASC 606. The obligations under each of the contracts are not distinct in the context of the contract as they are highly interdependent or interrelated and, as such, they are accounted for as a single performance obligation. The transaction price under these arrangements is the consideration the Company is expecting to receive and consists of the funded contract amount and the unfunded variable amount to the extent that it is probable that a significant reversal of revenue will not occur. The Company recognizes revenue for these contracts over time as the Company transfers control over the goods and services and satisfies the performance obligation. The Company measures progress toward satisfaction of the performance obligation using an Estimate-at-Completion (“EAC”) process, which is a cost-based input method that reviews and monitors the progress towards the completion of the Company’s performance obligation. Under this process, management considers the costs that have been incurred to-date, as well as projections to completion using various inputs and assumptions, including, but not limited to, progress towards completion, labor costs and productivity, material and subcontractor costs and identified risks. Estimating the total allowable cost at completion of the performance obligation under a contract is subjective and requires the Company to make assumptions about future activity and cost drivers. Changes in these estimates can occur for a variety of reasons and, if significant, may impact the timing of revenue and fee recognition on the Company’s contracts. Allowable contract costs include direct costs incurred

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on the contract and indirect costs that are applied in the form of rates to the direct costs. Billings under the contracts are initially based on provisional indirect billing rates, agreed upon between the Company and the U.S. government. These indirect rates are subject to audit on an annual basis. The Company records the impact of changes in the indirect billing rates in the period when such changes are identified. These changes reflect the difference between actual indirect costs incurred compared to the estimated amounts used to determine the provisional indirect billing rates agreed upon with the U.S. government. The Company recognizes revenue on the U.S government contracts based on reimbursable allowable contract costs incurred in the period up to the transaction price. For reimbursable-cost-plus-fixed-fee contracts, the Company recognizes the fixed-fee based on the proportion of reimbursable contract costs incurred to total estimated allowable contract costs expected to be incurred on completion of the underlying performance obligation as determined under the EAC process. The Company recognizes changes in estimates related to the EAC process in the period when such changes are made on a cumulative catch-up basis. The Company includes the transaction price comprising both funded and unfunded portions of customer contracts, in this estimate. As of September 30, 2020, $1.62 billion of the total transaction price of $1.66 billion was not yet satisfied and the Company had a contract asset of $3.8 million and a contract liability of $26.5 million.

The Company’s other funding agreements currently include funding from CEPI of $399.5 million in the form of a grant of $257.0 million (“CEPI Grant Funding”) and one or more forgivable no interest term loans of $142.5 million (“CEPI Forgivable Loan Funding”). Under the Company’s grant funding arrangements, including the CEPI Grant Funding, the Company is primarily entitled to reimbursement for costs that support development related activities of NVX-CoV2373. The CEPI Forgivable Loan Funding is designated for the prepayment of certain manufacturing activities. The Company analyzed these other funding arrangements and determined that they are not within the scope of ASC 606 as they do not provide a direct economic benefit to the grantor. Payments received under the grant funding arrangements are considered conditional contributions under the scope of ASC 958-605 and are recorded as deferred revenue until the period in which such research and development activities are actually performed that satisfy the funder-imposed conditions. Payments received under the CEPI Forgivable Loan Funding agreements are only repayable if the proceeds of sales to one or more third parties of NVX-CoV2373 cover the Company’s costs of manufacturing such vaccine candidate, not including manufacturing costs funded by CEPI. As the financial risk remains with CEPI, the Company determined that the use of the CEPI Forgivable Loan Funding is outside the scope of ASC Topic 470, Debt. The research and development risk is considered substantive, such that it is not yet probable that the development will be successful. Therefore, the Company has concluded that ASC 730 is considered applicable and most appropriate. Given the financial risk associated with the research and development activities lies with CEPI because repayment of any funds provided by CEPI depends solely on the results of the research and development activities having future economic benefit, the Company has accounted for the obligation under the CEPI Forgivable Loan Funding as a contract to perform research and development for others. The Company has determined that payments received under these agreements should be recorded as revenue under ASC 958-605 rather than a reduction to research and development expenses. This is consistent with the Company’s policy of presenting such amounts as revenue. In reaching this determination, the Company considered a number of factors, including whether it is principal under the arrangement, and whether the arrangement is significant to, and part of, the Company’s core operations. The Company will record revenue as it performs the contractual research and development services.

Net Loss per Share

Net loss per share is computed using the weighted average number of shares of common stock outstanding. As of September 30, 2020 and 2019, the Company had outstanding stock options, stock appreciation rights (“SARs”) and unvested restricted stock units (“RSUs”) totaling 6,623,466 and 5,041,526, respectively. In addition, as of September 30, 2020, the Company had 438,885 shares outstanding of its newly designated Series A Convertible Preferred Stock , which are convertible into 4,388,850 shares of the Company’s common stock.

As of September 30, 2020, the Company’s Notes (see Note 8) would have been convertible into approximately 2,385,800 shares of the Company’s common stock assuming a common stock price of $136.20 or higher. These and any shares due to the Company upon settlement of its capped call transactions are excluded from the computation, as their effect is antidilutive.

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Recent Accounting Pronouncements

Recently Adopted

In January 2017, the FASB issued Accounting Standards Update (“ASU”) No. 2017-04, Intangibles-Goodwill and Other (Topic 350) (“ASU 2017-04”), which will simplify the goodwill impairment calculation by eliminating Step 2 from the current goodwill impairment test. The new standard does not change how a goodwill impairment is identified. The Company will continue to perform its quantitative goodwill impairment test by comparing the fair value of its reporting unit to its carrying amount, but if the Company is required to recognize a goodwill impairment charge, under the new standard, the amount of the charge will be calculated by subtracting the reporting unit's fair value from its carrying amount. Under the current standard, if the Company is required to recognize a goodwill impairment charge, Step 2 requires it to calculate the implied value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination and the amount of the charge is calculated by subtracting the reporting unit's implied fair value of goodwill from the goodwill carrying amount. The standard was effective January 1, 2020 for the Company and will be applied prospectively from the date of adoption. The adoption of ASU 2017-04 did not have a material impact on the Company’s historical financial statements.

Not Yet Adopted

In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which will simplify the accounting for certain financial instruments with characteristics of liabilities and equity, including certain convertible instruments and contracts on an entity’s own equity. Specifically, the new standard will remove the separation models required for convertible debt with cash conversion features and convertible instruments with beneficial conversion features. It will also remove certain settlement conditions that are currently required for equity contracts to qualify for the derivative scope exception and will simplify the diluted earnings per share calculation for convertible instruments. ASU 2020-06 will be effective January 1, 2022 for the Company and may be applied using a full or modified retrospective approach. Early adoption is permitted, but no earlier than January 1, 2021 for the Company. Management is evaluating the impact of adopting ASU 2020-06 and whether it will have a material impact on the Company’s consolidated financial statements.

Note 3 – Fair Value Measurements

The following table represents the Company's fair value hierarchy for its financial assets and liabilities measured at fair value (in thousands):

    

Fair Value at September 30, 2020

    

Fair Value at December 31, 2019

Assets

    

Level 1

    

Level 2

    

Level 3

    

Level 1

    

Level 2

    

Level 3

Money market funds(1)

$

79,950

$

$

$

42,960

$

$

Government-backed securities(2)

 

 

43,250

 

 

 

20,000

 

Treasury securities(3)

65,093

Corporate debt securities(4)

 

 

148,583

 

 

 

 

Agency securities

$

40,651

Total cash equivalents and marketable securities

$

79,950

$

297,577

$

$

42,960

$

20,000

$

Liabilities

 

  

 

  

 

  

 

  

 

  

 

  

Convertible notes payable

$

$

389,217

$

$

$

125,811

$

(1)

Classified as cash and cash equivalents as of September 30, 2020 and December 31, 2019, respectively, on the consolidated balance sheets.

(2)

Includes $43,250 and $20,000 classified as cash and cash equivalents as of September 30, 2020 and December 31, 2019, respectively, on the consolidated balance sheets.

(3)

Includes $24,998 classified as cash and cash equivalents as of September 30, 2020 on the consolidated balance sheets.

(4)

Includes $59,468 classified as cash and cash equivalents as of September 30, 2020 on the consolidated balance sheets.

Fixed-income investments categorized as Level 2 are valued at the custodian bank by a third-party pricing vendor's valuation models that use verifiable observable market data, e.g., interest rates and yield curves observable at

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commonly quoted intervals and credit spreads, bids provided by brokers or dealers or quoted prices of securities with similar characteristics. Pricing of the Company's Notes (see Note 8) has been estimated using other observable inputs, including the price of the Company's common stock, implied volatility, interest rates and credit spreads among others.

During the nine months ended September 30, 2020 and 2019, the Company did not have any transfers between levels.

The amount recorded in the Company's unaudited consolidated balance sheets for accounts payable and accrued expenses approximates its fair value due to its short-term nature.

Note 4 – Marketable Securities

Marketable securities classified as available-for-sale as of September 30, 2020 and December 31, 2019 were comprised of (in thousands):

    

September 30, 2020

    

December 31, 2019

Gross

Gross

Gross

Gross

    

Amortized

    

Unrealized

    

Unrealized

    

    

Amortized

    

Unrealized

    

Unrealized

    

Cost

Gains

Losses

Fair Value

Cost

Gains

Losses

Fair Value

Treasury securities

$