Edgar Filing: NOVAVAX INC

e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For Quarterly Period Ended June 30, 2006

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.)

508 Lapp Road, Malvern, PA		19355

(Address of principal executive offices)		(Zip code)

(484) 913-1200
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þ Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

o Large accelerated filer o Accelerated filer þ Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes þ No

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

Shares of Common Stock Outstanding at August 9, 2006: 61,528,693

NOVAVAX, INC.
Form 10-Q
For the Quarter Ended June 30, 2006

Table of Contents


		Page No.
Part I. Financial Information

Item 1	Financial Statements

	Consolidated Balance Sheets as of June 30, 2006 (unaudited) and December 31, 2005		1

	Consolidated Statements of Operations for the three-month and six-month periods ended June 30, 2006 and 2005 (unaudited)		2

	Consolidated Statements of Stockholders’ Equity for the three month periods ended March 31, 2006 and June 30, 2006 (unaudited)		3

	Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005 (unaudited)		4

	Notes to the Consolidated Financial Statements (unaudited)		5

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19

Item 3	Quantitative and Qualitative Disclosures About Market Risk		34

Item 4	Controls and Procedures		34

Part II. Other Information

Item 1	Legal Proceedings		35

Item 1A	Risk Factors		35

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		35

Item 3	Defaults Upon Senior Securities		35

Item 4	Submission of Matters to a Vote of Security Holders		35

Item 5	Other Information		36

Item 6	Exhibits		36

Signatures			37

Part I. Financial Information
Item 1. Financial Statements

NOVAVAX, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share information)


	June 30,			December 31,
	2006			2005
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	78,601		$	31,893
Accounts and other receivables, net of allowance for doubtful accounts of $325 and $429 as of June 30, 2006 and December 31, 2005, respectively		3,825			3,571
Inventory		757			800
Prepaid expenses and other current assets		1,306			1,347

Total current assets		84,489			37,611
Property and equipment, net		10,761			11,589
Goodwill		33,141			33,141
Other intangible assets, net		1,044			1,110
Other non-current assets		1,141			931

Total assets	$	130,576		$	84,382


LIABILITIES and STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	780		$	1,426
Accrued expenses		2,813			2,597
Current portion of notes payable		386			715
Facility exit costs		54			138

Total current liabilities		4,033			4,876


Convertible notes		22,000			29,000
Deferred rent		144			176
Non-current portion of notes payable		569			678

Stockholders’ equity:
Preferred stock, $.01 par value, 2,000,000 shares authorized; no shares issued and outstanding		––			––
Common stock, $.01 par value, 100,000,000 shares authorized; 61,784,738 shares issued and 61,536,871 outstanding at June 30, 2006, and 50,259,494 issued and 50,005,646 outstanding at December 31, 2005		618			503
Additional paid-in capital		260,400			195,361
Unearned compensation		––			(425	)
Notes receivable from directors		(1,032	)		(1,480	)
Accumulated deficit		(153,800	)		(141,894	)
Treasury stock, 247,867 shares at June 30, 2006 and 253,848 shares at December 31, 2005, cost basis		(2,356	)		(2,413	)

Total stockholders’ equity		103,830			49,652

Total liabilities and stockholders’ equity	$	130,576		$	84,382

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

NOVAVAX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share information)
(unaudited)


	Three months ended						Six months ended
	June 30,						June 30,
	2006			2005			2006			2005
Revenues:
Net product sales	$	378		$	1,889		$	1,097		$	2,608
Contract research and development		403			426			877			669
Royalties, milestone and licensing fees		58			––			168			––

Total revenues		839			2,315			2,142			3,277


Operating costs and expenses:
Cost of products sold		1,161			2,027			2,394			4,006
Excess inventory costs over market		677			––			992			––
Research and development		3,401			1,377			5,433			2,599
Selling and marketing		28			1,844			66			5,901
General and administrative		2,610			2,292			5,330			4,413

Total operating costs and expenses		7,877			7,540			14,215			16,919


Loss from operations		(7,038	)		(5,225	)		(12,073	)		(13,642	)


Interest income / (expense), net		627			(491	)		167			(960	)


Net loss	$	(6,411	)	$	(5,716	)	$	(11,906	)	$	(14,602	)


Basic and diluted loss per share	$	(.10	)	$	(.14	)	$	(.21	)	$	(.37	)


Basic and diluted weighted average number of common shares outstanding		61,465,003			39,553,876			56,891,602			39,553,876

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

NOVAVAX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Three Months Ended March 31, 2006 and June 30, 2006
(in thousands, except share information)
(unaudited)


					Additional						Notes									Total
	Common Stock				Paid-in			Unearned			Receivable			Accumulated			Treasury			Stockholders’
	Shares		Amount		Capital			Compensation			From Directors			Deficit			Stock			Equity
Balance, December 31, 2005		50,259,494	$	503	$	195,361		$	(425	)	$	(1,480	)	$	(141,894	)	$	(2,413	)	$	49,652

Netted unearned compensation against additional paid in capital in accordance with SFAS No. 123R		—		—		(425	)		425			—			—			—			—
Non-cash compensation costs for stock options		—		—		825			—			—			—			—			825
Exercise of stock options		158,750		1		797			—			—			—			—			798
Conversion of convertible debt		1,294,564		13		7,055			—			—			—						7,068
Restricted stock issued as compensation		155,000		2		—			—			—			—			—			2
Non-cash compensation cost for amortization of restricted stock		—		—		208			—			—			—			—			208
Treasury stock issued in lieu of payment of services rendered		—		—		(32	)		—			—			—			57			25
Sales of common stock		9,803,180		98		57,902			—			—			—			—			58,000
Financing costs incurred to raise additional capital		—		—		(1,978	)		—			—			—			—			(1,978	)
Net loss		—		—		—			—			—			(5,495	)		—			(5,495	)

Balance, March 31, 2006		61,670,988	$	617	$	259,713			—		$	(1,480	)	$	(147,389	)	$	(2,356	)	$	109,105

Non-cash compensation costs for stock options		—		—		420			—			—			—			—			420
Non-cash compensation cost for amortization of restricted stock		—		—		129			—			—			—			—			129
Restricted stock issued as compensation		60,000		1		—			—			—			—			—			1
Exercise of stock options		53,750		—		179			—			—			—			—			179
Financing costs incurred to raise additional capital		––		––		(41	)		—			—			—			—			(41	)
Reclassification due to change in status of a director		—		—		—			—			448			—			—			448
Net loss		––		––		––			—			––			(6,411	)		––			(6,411	)

Balance, June 30, 2006		61,784,738	$	618	$	260,400		$	—		$	(1,032	)	$	(153,800	)	$	(2,356	)	$	103,830

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

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


	Six months ended
	June 30,
	2006			2005
Operating Activities:
Net loss	$	(11,906	)	$	(14,602	)
Reconciliation of net loss to net cash used in operating activities:
Amortization		66			431
Depreciation		1,437			1,426
Provision for bad debts		(104	)		12
Retirement of capital assets		46			42
Amortization of deferred financing costs		417			206
Deferred rent		(32	)		(1	)
Non-cash expense for services		25			—
Non-cash stock compensation		1,585			15
Changes in operating assets and liabilities:
Trade accounts receivable		(150	)		(318	)
Inventory		43			2,063
Prepaid expenses and other assets		(41	)		440
Accounts payable and accrued expenses		(362	)		(2405	)
Facility exit costs		(84	)		(85	)
Other non-current assets		(97	)		38

Net cash used in operating activities		(9,157	)		(12,738	)


Investing Activities:
Capital expenditures		(655	)		(80	)

Net cash used in investing activities		(655	)		(80	)


Financing Activities:
Principal payments of notes payable		(438	)		(616	)
Net proceeds from sales of common stock		55,981			—
Proceeds from the exercise of stock options		977			—

Net cash provided by/(used in) financing activities		56,520			(616	)


Net change in cash and cash equivalents		46,708			(13,434	)
Cash and cash equivalents at beginning of period		31,893			17,876


Cash and cash equivalents at end of period	$	78,601		$	4,442


Non-cash transactions:
Conversion of convertible debt and accrued interest to common stock	$	7,068		$	—


Cash Interest Payments:
Cash interest payments	$	778		$	862

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

NOVAVAX, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Organization

Novavax, Inc., a Delaware corporation (“Novavax” or the “Company”), was incorporated in 1987, and is a biopharmaceutical company focused on creating differentiated, value-added vaccines that leverage the Company’s proprietary virus-like particle (“VLP”) technology utilizing the baculovirus expression system in insect cells, as well as developing novel vaccine adjuvants based on Novasomes^{^®}. The Company is developing vaccines against the H5N1, H9N2 and other subtypes of avian influenza with pandemic potential and against human seasonal influenza as well as other viral diseases. The Company also has developed a drug delivery platform using micellar nanoparticle (“MNP”) technology, which was the basis for the development of its first Food and Drug Administration-approved product, ESTRASORB^{^®}. In October 2005, the Company entered into License and Supply Agreements for ESTRASORB. Under the agreements, the Company will continue to manufacture ESTRASORB and the licensee, Esprit Pharma, Inc., (“Esprit”), which was granted an exclusive license to sell ESTRASORB in North America.

The products currently under development or in clinical trials by the Company will require significant additional research and development efforts, including extensive pre-clinical and clinical testing and regulatory approval, prior to commercial use. There can be no assurance that the Company’s research and development efforts will be successful or that any potential products will prove to be safe and effective in clinical trials. Even if developed, these products may not receive regulatory approval or be successfully introduced and marketed at prices that would permit the Company to operate profitably. The Company also recognizes that the commercial launch of any product is subject to certain risks including, but not limited to, manufacturing scale-up and market acceptance. No assurance can be given that the Company can generate sufficient product revenue to become profitable or generate positive cash flow from operations at all or on a sustained basis.

NOVAVAX, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

The consolidated financial statements of Novavax for the three months and six months ended June 30, 2006 and 2005, are unaudited. These financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the results of operations for the interim periods presented. All such adjustments are of a normal recurring nature. These interim results are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2006.

Certain information in footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although the Company believes the disclosures are adequate to make the information presented not misleading. We suggest that these consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

2. Summary of Significant Accounting Policies

Basis of Presentation

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

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

NOVAVAX, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Revenue Recognition

The Company recognizes revenue in accordance with the provisions of Staff Accounting Bulletin No. 104, Revenue Recognition (“SAB No. 104”). For product sales, revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the seller’s price to the buyer is fixed or determinable and collectibility is reasonably assured. The Company recognizes these sales, net of allowances for returns, rebates and chargebacks. A large part of the Company’s product sales is to Esprit or to distributors who resell the products to their respective customers. The Company provides rebates to members of certain buying groups who purchase from the Company’s distributors, to distributors that sell to their customers at prices determined under a contract between the Company and the customer, and to state agencies that administer various programs such as the federal Medicaid and Medicare. Rebate amounts are usually based upon the volume of purchases or by reference to a specific price for a product. The Company estimates the amount of the rebate that will be paid, and records the liability as a reduction of revenue when the Company records its sale of the products. Settlement of the rebate generally occurs from three to 12 months after sale. The Company regularly analyzes the historical rebate trends and makes adjustments to recorded reserves for changes in trends and terms of rebate programs. In a similar manner, the Company estimates amounts for returns based on historical trends, distributor inventory levels, product prescription data and generic competition and makes adjustments to the recorded reserves based on such information.

Under the terms of an Asset Purchase Agreement with Pharmelle, LLC, the Company no longer has responsibility for rebates or returns related to AVC^™ Cream and Suppositories, NovaNatal and NovaStart. Under the License and Supply Agreements with Esprit, as of January 20, 2006, the Company no longer had responsibility for rebates related to ESTRASORB or for returns related to ESTRASORB sales made subsequent to October 19, 2005.

A roll-forward of the sales return allowances is as follows:


	(in thousands)
	(unaudited)
Balance, December 31, 2005	$	282
Provision for 2006 sales		7
Additional provision for 2004 sales		34
Returns received from 2004 sales		(113	)

Balance, March 31, 2006	$	210
Provision for 2006 sales		6
Additional provision for 2004 sales		105
Additional provision for 2005 sales		93
Returns received from 2004 sales		(77	)

Balance, June 30, 2006	$	337

NOVAVAX, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Revenue Recognition (continued):

The shipping and handling costs the Company incurs are included in cost of products sold in its statements of operations.

For upfront payments and licensing fees related to contract research or technology, the Company follows the provisions of SAB No. 104 in determining if these payments and fees represent the culmination of a separate earnings process or if they should be deferred and recognized as revenue earned over the life of the related agreement. Milestone payments are recognized as revenue upon achievement of contract-specified events and when there are no remaining performance obligations.

Revenue earned under research contracts is recognized per the terms and conditions of such contracts for reimbursement of costs incurred and defined milestones. Revenue earned under a drug development contract is recognized in proportion to the work performed.

Inventories

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


	June 30, 2006		December 31, 2005
	(unaudited)
	(amounts in thousands)
Raw materials	$	232	$	358
Work-in-process		—		38
Finished goods		525		404

	$	757	$	800

During the year ended December 31, 2005, the Company implemented Statement of Financial Accounting Standard No. 151, Inventory Costs — an amendment of ARB No. 43, Chapter 4 (“SFAS No. 151”). Under SFAS No. 151, the Company allocates fixed production overhead costs to inventories based on the anticipated normal capacity of its manufacturing facility at the time. Included in cost of products sold for the three months and six months ended June 30, 2006 is $728,000, or $(.01) per share, and $1,128,000, or $(.02) per share, respectively, of idle capacity costs, which amounts represent the excess of fixed production overhead costs over that allocated to inventories.

During the three months and six months ended June 30, 2006, $677,000 and $992,000, respectively, of inventory costs in excess of market value were included in the accompanying consolidated statement of operations related to the Supply Agreement with Esprit. Under the terms of this agreement, the Company sold ESTRASORB at a price which was below its manufacturing costs for the product during the first half of 2006.

NOVAVAX, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Inventories (continued):

It is most likely the Company will continue to manufacture ESTRASORB at a loss until production volumes increase or it enters into additional contract manufacturing agreements with third parties to more fully utilize its manufacturing facility’s capacity. The facility is able to accommodate much greater production than its current schedule, which, if more fully utilized, would offset the fixed costs related to the manufacturing process and facility. In addition, the Company is negotiating revisions to its agreements for packaging costs of ESTRASORB as well as its fixed lease costs for the manufacturing facility. If these negotiations result in higher packaging or lease costs to the Company, it may have a material adverse impact on future financial results.

Net Loss per Share

Basic loss per share is computed by dividing the net loss (the numerator) by the weighted average number of common shares outstanding (the denominator) during the period. Shares issued during the period and shares reacquired during the period are weighted for the portion of the period that they were outstanding. The computation of diluted loss per share is similar to the computation of basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued (e.g. upon exercise of stock options). Potentially dilutive common shares are not included in the computation of diluted earnings per share if they are anti-dilutive. Net loss per share as reported was not adjusted for potential common shares, as they are anti-dilutive.

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 of the assets, generally three to ten years. Amortization of leasehold improvements is provided over the shorter of the estimated useful lives of the improvements or the term of the respective lease. Repairs and maintenance costs are expensed as incurred.

NOVAVAX, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Property and Equipment (continued):

Property and equipment is comprised of the following:


	As of
	June 30, 2006			December 31,2005
	(unaudited)
	(amounts in thousands)
Machinery and equipment	$	11,765		$	11,275
Leasehold improvements		6,248			6,201
Computer software and hardware		344			320

		18,357			17,796
Less accumulated depreciation		(7,596	)		(6,207	)

	$	10,761		$	11,589

Accounting for Facility Exit Costs

In July 2004, the Company entered into a long-term agreement to lease a 32,900 square foot facility in Malvern, Pennsylvania for the consolidation and expansion of corporate headquarters and product development activities. The lease, with a commencement date of September 15, 2004, has an initial term of ten years with two five year renewal options and an early option to terminate after the first five years of the lease. Standard annual escalation rental rates are in effect during the initial lease term. In April 2006, the Company entered into a sublease agreement with Sterilox Technologies, Inc. to sublease 20,469 square feet of the Malvern corporate headquarters at a premium price per square foot. The new sublease, with a commencement date of July 1, 2006, expires on September 30, 2009.

The Company applied the principles of SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, in accounting for contract termination costs and associated costs that will continue to be incurred under the operating lease expiring on October 31, 2006 related to the Company’s former corporate offices located in Columbia, Maryland.

NOVAVAX, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

A roll-forward of this liability is as follows:


				Non-
	Current			Current
	(in thousands)
Original amount expensed and recorded as a liability	$	151		$	101
Lease payments applied to the liability		(58	)		(161	)
Adjustment to original estimate		45			60

Balance as of December 31, 2005		138			—
Lease payments applied to the liability		(86	)		—
Adjustment to original estimate		2			—

Balance as of June 30, 2006 (unaudited)	$	54		$	—

Goodwill and Other Intangible Assets

Goodwill originally resulted from business acquisitions. Assets acquired and liabilities assumed were recorded at their fair values; the excess of the purchase price over the identifiable net assets acquired was recorded as goodwill. Other intangible assets are a result of product acquisitions, non-compete arrangements, and internally-discovered patents. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”), goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to impairment tests annually, or more frequently should indicators of impairment arise. The Company utilizes a discounted cash flow analysis that includes profitability information, estimated future operating results, trends and other information in assessing whether the value of indefinite-lived intangible assets can be recovered. Under SFAS No. 142, goodwill impairment is deemed to exist if the carrying value of a reporting unit exceeds its estimated fair value.

Other intangible assets are amortized on a straight-line basis over their estimated useful lives, ranging from five to 17 years. Amortization expense was $33,000 and $215,000 for the three months ending June 30, 2006 and 2005, respectively, and $66,000 and $431,000 for the six months ending June 30, 2006 and 2005, respectively.

NOVAVAX, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Goodwill and Other Intangible Assets (continued):

As of June 30, 2006 and December 31, 2005, the Company’s intangible assets and related accumulated amortization consisted of the following (in thousands):


	As of June 30, 2006							As of December 31, 2005
	(unaudited)
			Accumulated							Accumulated
	Gross		Amortization			Net		Gross		Amortization			Net
Goodwill, net
Goodwill — Company acquisition	$	33,141	$	—		$	33,141	$	33,141	$	—		$	33,141


Other intangible assets, net
Patents	$	2,525	$	(1,481	)	$	1,044	$	2,525	$	(1,415	)	$	1,110

Stock-Based Compensation

The Company has various stock incentive and option plans, which are described in Note 9 of the Notes to the Consolidated Financial Statements to the Company’s 2005 Annual Report on Form 10-K, that provide for the grant of options and restricted stock to eligible employees, officers, directors and consultants of the Company.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standard No. 123 (revised), Accounting for Stock-Based Compensation (“SFAS No. 123R”) using the modified prospective method. This standard requires the Company to measure the cost of employee services received in exchange for equity share options granted based on the grant-date fair value of the options. The cost is recognized as compensation expense over the vesting period of the options. Under the modified prospective method, compensation cost included in operating expenses was $420,000 and $1,245,000 for the three months and six months ended June 30, 2006, respectively, and included both the compensation cost of stock options granted prior to but not yet vested as of January 1, 2006 and compensation cost for all options granted subsequent to December 31, 2005. No tax benefit was recorded as of June 30, 2006 in connection with these compensation costs due to the uncertainty regarding ultimate realization of certain net operating loss carryforwards.

NOVAVAX, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Stock-Based Compensation (continued):

As of June 30, 2006, there were 5,826,386 stock options outstanding. At June 30, 2006, the aggregate fair value of the remaining compensation cost of unvested options, as determined using a Black-Scholes option valuation model, was approximately $2,104,000 (net of estimated forfeitures). During the three and six months ended June 30, 2006, the Company granted 112,500 and 864,000 stock options, respectively, with a fair value of approximately $394,000 and $2,482,000 (net of estimated forfeitures), respectively, and 28,625 and 31,375 options were forfeited, respectively.

Prior to adopting SFAS No. 123R on January 1, 2006, the Company’s equity-based employee compensation cost under its various stock incentive and option plans was accounted for under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, as permitted by Standard of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”). Under the modified prospective method, results for prior periods have not been restated to reflect the effects of implementing SFAS No. 123R. Therefore, for the three and six month periods ended June 30, 2005, no option based employee compensation cost is reflected in the Company’s net loss, because all options granted had an exercise price equal to the underlying common stock price on the date of grant. The following table which is presented for comparative purposes only, provides the pro forma information as required by SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, — an amendment of FASB Statement No. 123, and illustrates the effect on net loss and loss per common share for the three month and six month periods ended June 30, 2005 presented as if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock based employee compensation prior to January 1, 2006.


	Three Months Ended			Six Months Ended
	June 30, 2005			June 30, 2005
	(unaudited)
	{(Amounts in thousands, except per share data)
Net loss, as reported	$	(5,716	)	$	(14,602	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards (revised)		(363	)		(786	)

Pro forma net loss (revised)	$	(6,079	)	$	(15,388	)

Net loss per share:
Basic and diluted — as reported	$	(.14	)	$	(.37	)
Basic and diluted — pro forma (revised)	$	(.15	)	$	(.39	)

NOVAVAX, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Stock-Based Compensation (continued):

The weighted average fair value of stock options on the date of grant and the assumptions used to estimate the fair value of stock options issued during the three and six months ended June 30, 2006 and 2005, using the Black-Scholes options valuation model were as follows:


	Three Months Ended						Six Months Ended
	June 30,							June 30,
	2006			2005				2006			2005
Weighted average fair value of options granted	$	3.50		$	.90			$	2.87		$	1.05
Expected life (years)		4.9			4.7				4.2-4.9			4.7
Expected volatility		85	%		73	%			85	%		64–73	%
Risk free interest rate		4.94-5.02	%		3.75	%			4.28-5.02	%		3.75	%
Expected dividend		0	%		0	%			0	%		0	%
Expected forfeiture rate		20.37	%		0	%			20.37	%		0	%

The expected life of options granted was based on the Company’s historical share option exercise experience using the historical expected term from vesting date. The expected volatility of the options granted during the three and six month periods ended June 30, 2006 was determined using historical volatilities based on stock prices since the inception of the plans. The expected volatility of the options granted during the three and six months ended June 30, 2005 was determined using historical volatilities based on stock prices for the preceding 12 month periods. The risk-free interest rate was determined using the yield available for zero-coupon U.S. government issues with a remaining term equal to the expected life of the options. The forfeiture rate for the three and six month periods ended June 30, 2006 was determined using historical rates since the inception of the plans. The Company has never paid a dividend, and as such the dividend yield is zero.

Compensation cost for grants issued prior to January 1, 2006 was accounted for using a graded method. Compensation cost for grants issued on or after January 1, 2006 was accounted for using a straight-line method.

NOVAVAX, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Stock-Based Compensation (continued):

Activity under the 2005 Plan, the 1995 Plan and the Director Plan was as follows:


	2005 Stock Option Plan					1995 Stock Option Plan					1995 Director Stock
											Option Plan
				Weighted					Weighted				Weighted
				Average					Average				Average
	Stock			Exercise		Stock			Exercise		Stock		Exercise
	Options			Price		Options			Price		Options		Price
Balance, December 31, 2005		2,103,925		$	1.21		3,120,161		$	5.30		170,000	$	3.95
Granted		751,500			4.72		––			––		––		––
Exercised		(100,000	)		5.81		(58,750	)		3.70		––		––
Expired or canceled		(1,000	)		4.60		(29,275	)		5.04		––		––

Balance, March 31, 2006		2,754,425		$	2.00		3,032,136		$	5.33		170,000	$	3.95

Granted		112,500			5.04		––			––		––		––
Exercised		(15,000	)		1.48		(38,750	)		4.05		––		––
Expired or canceled		(39,375	)		2.98		(149,550	)		6.25		––		––

Balance, June 30, 2006		2,812,550		$	2.11		2,843,836		$	5.30		170,000	$	3.95

Shares exercisable at June 30, 2006		929,941		$	1.60		2,306,390		$	5.58		170,000	$	3.95


Available for grant at June 30, 2006		1,211,643

The following table provides certain information with respect to stock options outstanding and exercisable at June 30, 2006:


			Weighted		Weighted				Weighted
	Number of		Average		Average		Number of		Average
	Options		Remaining		Exercise		Options		Exercise
	Outstanding		Contractual Life		Price		Exercisable		Price

Options issued at market value:
$ 0.00 -$ 1.17		710,000		9.1	$	0.87		185,000	$	1.03
$ 1.17 -$ 2.33		1,670,988		8.7		1.51		779,591		1.48
$ 2.33 -$ 3.50		276,450		3.9		3.30		276,450		3.30
$ 3.50 -$ 4.66		1,600,520		7.3		4.22		887,312		4.06
$ 4.66 -$ 5.83		286,500		4.3		5.44		228,000		5.46
$ 5.83 -$ 6.99		719,983		7.2		6.02		488,033		6.04
$ 6.99 -$ 8.16		133,334		1.3		7.76		133,334		7.76
$ 8.16 -$ 9.32		264,225		4.0		8.84		264,225		8.84
$ 9.32 -$10.49		129,386		5.0		9.53		129,386		9.53
$10.49- $11.65		35,000		4.4		10.98		35,000		10.98

		5,826,386		7.2	$	3.72		3,406,331	$	4.41

NOVAVAX, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Stock-Based Compensation (continued):

During the three and six months ended June 30, 2006, the Company granted 60,000 and 215,000 shares of restricted common stock, respectively, under the 2005 Plan totaling $303,000 and $1,174,000, respectively, in value at the date of grant to officers, a director and a consultant of the Company, which vest upon the achievement of certain milestones or over a period of up to three years.

Non-cash compensation expense related to all restricted stock issued has been recorded as compensation cost in accordance with SFAS No. 123R using the straight-line method of amortization. For the three and six months ended June 30, 2006, $129,000 and $337,000, respectively, of non-cash stock compensation expense was included in total operating costs and expenses and additional paid-in capital was increased accordingly. For the three and six months ended June 30, 2005, $15,000 of non-cash stock compensation expense was included in total operating costs and expenses and additional paid in capital was increased accordingly.

For restricted stock issued prior to January 1, 2006, non-cash compensation cost was recorded using the straight-line method of amortization and unearned compensation was increased accordingly. The initial issuance of restricted stock increased common stock and additional paid-in capital and was offset by unearned compensation, which was included in the stockholders’ equity section of the consolidated balance sheet. The balance as of December 31, 2005 for the unearned compensation account was $425,000 and in accordance with SFAS No. 123R was netted against additional paid-in capital as of January 1, 2006.

Sales and Issuance of Common and Treasury Stock

During the three and six months ended June 30, 2006, the Company received net proceeds of $179,000 and $977,000, respectively, from the exercise of 53,750 and 212,500 common stock options, respectively, at a range of $1.48 to $5.81 per share.

During the three and six months ended June 30, 2005, there were no sales or issuances of common stock.

NOVAVAX, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Segment Information

The Company currently operates in one business segment, which is the creation of differentiated value-added vaccines, the development of novel vaccine adjuvants and the development of a drug delivery platform using MNP technology. The Company is managed and operated as one business. A single management team that reports to the Chief Executive Officer comprehensively manages the entire business. The Company does not operate separate lines of business with respect to its products or product candidates. Accordingly, the Company does not have separately reportable segments as defined by SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information.

Related Party Transactions

On March 21, 2002, pursuant to the Novavax, Inc. 1995 Stock Option Plan, the Company approved the payment of the exercise price of options by two of its directors, through the delivery of full-recourse, interest-bearing promissory notes in the aggregate principal amount of $1,480,000. The borrowings accrued interest at 5.07% per annum and were secured by an aggregate of 261,667 shares of common stock owned by the directors. The notes were payable upon the earlier to occur of the following: (i) payable in full upon the date on which the director ceases for any reason to be a director of the Company, (ii) payable in part to the extent of net proceeds, upon the date on which the director sells all or any portion of the pledged shares or (iii) payable in full on March 21, 2007. In May 2006, one of these directors resigned from the Company’s board of directors. Following his resignation the Company approved an extension of the former director’s $448,000 note. Accordingly, the note has been reclassified out of stockholders’ equity and into other non-current assets on the consolidated balance sheet as of June 30, 2006. The corresponding accrued interest receivable has been reclassified from current assets to non-current assets on the consolidated balance sheet as of June 30, 2006. The note continues to accrue interest at 5.07% per annum and is secured by 95,000 shares of common stock owned by the former director and is payable on December 31, 2007, or earlier to the extent of the net proceeds from any sale of the pledged shares. In connection with this extension, the former director executed a general release of all claims against the Company. The terms and interest rate remain unchanged for the active director. As of June 30, 2006, accrued interest receivable related to the borrowing for the active director was $224,000. As of December 31, 2005, accrued interest receivable related to the borrowings for both directors was $284,000.

In April 2004, the Company paid $54,000 to a current officer of the Company at the time of his initial employment, at which time he was not an officer, as reimbursement of his education costs that a previous employer had paid on his behalf. This cost is to be forgiven over a three year period conditional on this officer remaining in employment with the Company and is included in compensation cost over the three year period. As of

June 30, 2006 and December 31, 2005, the remaining cost that had not been expensed was $13,000 and $22,000, respectively, and is included in accounts and other receivables on the consolidated balance sheets.

NOVAVAX, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

License and Development Agreement and Supply Agreement with Esprit Pharma, Inc.

In April 2006, the Company entered into a License and Development Agreement and a Supply Agreement with Esprit to co-develop, supply and commercialize the Company’s MNP testosterone medicine for the treatment of female hypoactive sexual desire disorder. Under the terms of the License and Development Agreement, Esprit was granted exclusive rights to market the product in North America. The Company will receive a royalty on all net sales of the product as well as milestone payments on specific pre-determined clinical and regulatory milestones. Esprit will be responsible for all development costs and will lead the clinical programs. Under the terms of the Supply Agreement, the Company will be responsible for manufacturing the product.

Restructuring of the Sales Force

From March through August 2005, the Company implemented measures to reduce costs associated with its commercial operations by downsizing and then eliminating its sales force to correspond with the Company’s strategy of transitioning from a commercial business model to one focused on the Company’s core competency of new product development. The March restructuring reduced the Company’s sales force from 100 to 47 employees, or 53%, and the August restructuring eliminated all of the remaining sales force personnel. Included in sales and marketing expenses in the accompanying consolidated statement of operations for the three months and six months ended June 30, 2005 are $32,000 and $238,000, respectively, related to the first of these two restructurings. Included in this amount as of the six months ended June 30, 2005 are (i) one-time termination benefits of $129,000, (ii) auto lease contract termination costs of approximately $95,000, and (iii) $14,000 of other associated costs, all of which were paid as of December 31, 2005.

Item 2.

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

Certain statements contained herein or as may otherwise be incorporated by reference herein constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements regarding product sales, future product development and related clinical trials, and future research and development, including Food and Drug Administration approval. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from those expressed or implied by such forward-looking statements.

Such factors include, among other things, the following: general economic and business conditions; competition; ability to enter into future collaborations with industry partners; unexpected changes in technologies and technological advances; ability to obtain rights to technology; ability to obtain and enforce patents; ability to commercialize and manufacture products; ability to maintain commercial-scale manufacturing capabilities; results of clinical studies; progress of research and development activities; business abilities and judgment of personnel; availability of qualified personnel; changes in, or failure to comply with, governmental regulations; ability to obtain adequate financing in the future through product licensing, co-promotional arrangements, public or private equity financing or otherwise; and other factors referenced herein.

All forward-looking statements contained in this quarterly report are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements, except as specifically required by law. Accordingly, past results and trends should not be used to anticipate future results or trends.

Overview

During 2005, Novavax successfully transitioned from a specialty pharmaceutical company, which included the sale and marketing of products serving the women’s health space, to an innovative, biopharmaceutical company committed to becoming a leader in the fight against infectious disease by developing novel, highly potent vaccines that are safer and more effective than current preventive options. The Company’s platforms include the virus-like particle (“VLP”) technology for vaccines, which utilizes the baculovirus expression system in insect cells, as well as novel vaccine adjuvants based on Novasomes^{^®}.

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

Currently, our main focus is to leverage our proprietary VLP technology to develop vaccines against influenza viruses that have the potential to cause a pandemic outbreak. VLPs are genetically engineered particles that mimic three-dimensional structures of viruses but are composed of recombinant proteins lacking viral genetic material and therefore are believed to be incapable of causing infection and disease. Our proprietary production technology employs insect cells rather than eggs. We believe we can more rapidly produce a safe, effective, low-cost vaccine as compared with the labor-intensive egg-based process. Key advantages of the technology are the ability to rapidly respond to emerging threats of new strains and a reduced risk of allergic reactions associated with egg-based processes. A proof-of-concept study, conducted in collaboration with the NIH and CDC, demonstrated that a recombinant VLP vaccine against the H9N2 strain of avian influenza reduced disease morbidity in mice against a live H9N2 virus challenge when compared with unvaccinated animals. This study is the basis for the development of VLP vaccines against H5N1 strains of avian and human seasonal influenza. In addition, the Company is studying the applicability of its proprietary adjuvants in conjunction with VLP vaccines to further enhance the immunogenicity of vaccines. Other projects in development using our proprietary VLP technology include vaccines for seasonal influenza and HIV.

We also are committed to creating value by leveraging our MNP drug delivery technology. ESTRASORB, our first internally-developed product using MNP technology, is the first topical emulsion for estrogen therapy approved by the FDA for the treatment of moderate to severe vasomotor symptoms (hot flashes) associated with menopause. ESTRASORB was licensed in October 2005 to Esprit Pharma, Inc. (“Esprit”) for marketing in North America. In April 2006, we entered into agreements with Esprit to co-develop, supply and commercialize our MNP testosterone medicine for the treatment of female hypoactive sexual desire disorder. We remain in discussions with several pharmaceutical companies to co-develop and co-market or license additional products.

The products currently under development or in clinical trials by the Company will require significant additional research and development efforts, including extensive pre-clinical and clinical testing and regulatory approval, prior to commercial use. There can be no assurance that our research and development efforts will be successful or that any potential products will prove to be safe and effective in clinical trials. Even if developed, these products may not receive regulatory approval or be successfully introduced and marketed at prices that would permit us to operate profitably. We also recognize that the commercial launch of any product is subject to certain risks including, but not limited to, manufacturing scale-up and market acceptance. No assurance can be given that we can generate sufficient product revenue to become profitable or generate positive cash flow from operations at all or on a sustained basis.

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

Significant Transactions in 2006 and 2005

License and Development Agreement and Supply Agreement with Esprit Pharma, Inc.

In April 2006, we entered into a License and Development Agreement and a Supply Agreement with Esprit to co-develop, supply and commercialize our MNP testosterone medicine for the treatment of female hypoactive sexual desire disorder. Under the terms of the License and Development Agreement, Esprit was granted exclusive rights to market the product in North America. We will receive a royalty on all net sales of the product as well as milestone payments on specific pre-determined clinical and regulatory milestones. Esprit will be responsible for all development costs and will lead clinical programs. Under the terms of the Supply Agreement, we will be responsible for manufacturing the product.

Sublease Agreement with Sterilox Technologies, Inc.

In April 2006, we entered into a sublease agreement with Sterilox Tehnologies, Inc. to sublease 20,469 square feet of the Malvern corporate headquarters at a premium price per square foot. The new sublease, with a commencement date of July 1, 2006, expires on September 30, 2009.

License and Supply Agreements with Esprit Pharma, Inc (“Esprit Transaction”)

In October 2005, we entered into License and Supply Agreements for ESTRASORB with Esprit. Under the License Agreement, Esprit obtained exclusive rights to market ESTRASORB in North America and we will continue to manufacture ESTRASORB.

In consideration for the rights granted, Esprit agreed to pay us a minimum cash consideration of $12.5 million: $2.0 million which was paid at closing, $8.0 million which was paid in December 2005, and the remaining $2.5 million that is scheduled to be paid on the first anniversary date of the License Agreement in October 2006. We also will receive a royalty on all net sales of ESTRASORB as well as milestone payments based on specific pre-determined net sales levels of ESTRASORB. As of the year ended December 31, 2005, we wrote off $2.2 million, the remaining net balance of our intangible asset for ESTRASORB rights at the date of the transaction. As part of this transaction, Esprit also paid us $0.3 million for inventory and sales and promotional materials for which we had a book value of $0.4 million. We incurred $20,000 of fees related to this transaction and recorded a gain of $10.1 million.

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

Asset Purchase Agreement with Pharmelle, LLC

In September 2005, we entered into an Asset Purchase Agreement with Pharmelle, LLC for the sale of assets related to AVC Cream and Suppositories, NovaNatal and NovaStart products, as well as assets relating to formerly-marketed products. The assets sold included, but were not limited to, intellectual property, the New Drug Application for AVC products, inventory and sales and promotional materials. In connection with the sale, Pharmelle agreed to assume (i) those liabilities and obligations arising after the closing date of the transaction in connection with the performance by Pharmelle of certain assumed contracts, (ii) those liabilities and obligations arising after the closing date in connection with products sold by Pharmelle after the closing date or the operation of the business relating to such products or the assets after such date (including any product liability claims associated with such products), and (iii) all liability and responsibility for returns of the products made after the closing date, regardless of when such products were produced, manufactured or sold.

In consideration for the sale of these assets, Pharmelle paid us $2.5 million in cash and assumed the liabilities noted above. In addition, we are entitled to royalties on AVC for a five-year period if net sales exceed certain levels. As of the year ended December 31, 2005, we wrote off $1.1 million, the net balance of the intangible assets related to the AVC product acquisition and $0.3 million of inventory, recorded a $0.3 million liability for future obligations and recorded a gain on the transaction of $0.8 million.

Equity Financing Transactions

In March 2006, we completed an agent-led offering of 5,205,480 shares of common stock at $7.30 per share, for gross proceeds of $38.0 million. The stock was offered and sold pursuant to an existing shelf registration statement. Net proceeds were approximately $36.1 million.

In February 2006, we completed an offering of 4,597,700 shares of common stock at $4.35 per share for gross proceeds of $20.0 million. The stock was offered and sold pursuant to an existing shelf registration statement. Net proceeds were approximately $19.9 million.

Restructuring of the Sales Force

From March through August 2005, we implemented measures to reduce costs associated with our commercial operations by downsizing and then eliminating our sales force to correspond with our strategy of transitioning from a commercial business model to one focused on our core competency of new product development. The March 2005 restructuring reduced our sales force from 100 to 47 employees and the August restructuring eliminated all of the remaining sales force personnel.

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

Critical Accounting Policies and Changes to Accounting Policies

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Other than the adoption of Statement of Financial Accounting Standards No. 123 (revised), Accounting for Stock-Based Compensation (“SFAS No. 123R”), there have been no material changes in our critical accounting policies or critical accounting estimates since December 31, 2005, nor have we adopted any accounting policy that has or will have a material impact on our consolidated financial statements. For further discussion of our accounting policies see Note 2 Summary of Significant Accounting Policies, in the Notes to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q and Note 2 in the Notes to the Consolidated Financial Statements for our Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

SFAS No. 123R

As of the effective date of January 1, 2006 (“effective date”), we began applying the principles of SFAS No. 123R in accounting for stock options issued to our employees, directors and consultants using the modified prospective method. The modified prospective method requires that compensation costs be recognized for all share-based payments granted after the effective date and for all awards granted prior to the effective date that are unvested using the requirements of SFAS No. 123R. Prior to the adoption of SFAS No. 123R, we accounted for our stock-based compensation using the principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”) as permitted by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”). APB No. 25 generally did not require that options granted to employees be expensed. Since we elected to use the modified prospective method, there are no one-time effects from the adoption of SFAS No. 123R, such as a cumulative effect adjustment.

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

There were no modifications to outstanding stock options as of December 31, 2005. There have been no changes in the quantity or type of instruments used in share-based payment programs. There have been no material modifications to the valuation methodologies or assumptions from those used in estimating the fair value of options under SFAS No. 123 other than the adjustments for expected volatility. Prior to the adoption of SFAS No. 123R, we utilized the preceding 12 month period historical stock prices in determining the expected volatility. With the adoption of SFAS No. 123R, we use the historical volatilities based on stock prices since the inception of the stock plans in determining the expected volatility. Forfeiture rates are estimated based on historical activities since the inception of the stock plans. There have been no changes in the normal terms of share-based payments agreements. For grants awarded prior to January 1, 2006, we accounted for compensation cost using a graded method. For grants awarded on or after January 1, 2006, we accounted for compensation cost using a straight-line method.

The effects of adopting SFAS No. 123R are recorded as compensation costs in the operating costs and expenses as follows:


	Three Months		Six Months
	Ended June 30,		Ended June 30,
	2006		2006
	(unaudited and in thousands)
Cost of products sold (which includes idle capacity)	$	13	$	29
Research and development		146		383
General and administrative		261		833

Total effect of adopting SFAS No. 123R	$	420	$	1,245

Results of Operations

The following is a discussion of the historical consolidated financial condition and results of operations of Novavax, Inc. and its wholly-owned subsidiary and should be read in conjunction with the consolidated financial statements and notes thereto set forth in this Quarterly Report on Form 10-Q. Additional information concerning factors that could cause actual results to differ materially from those in the Company’s forward-looking statements is contained from time to time in the Company’s SEC filings, including but not limited to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 and the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006.

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

Three months ended June 30, 2006 (“2006”) compared to the three months ended June 30, 2005 (“2005”): (In thousands)

Revenues:


	2006		2005		$ Change			% Change
	(unaudited)		(unaudited)
Product Sales:
Product lines sold in 2005	$	—	$	906	$	(906	)		-100	%
Gynodiol and other products		260		292		(32	)		-11	%
ESTRASORB		118		691		(573	)		-83	%

Total product sales		378		1,889		(1,511	)		-80	%
Contract research and development		403		426		(22	)		-5	%
Royalties, milestone and licensing fees		58		—		57			100	%

	$	839	$	2,315	$	(1,476	)		-64	%

Revenues for 2006 consisted of product sales of $0.4 million, compared to $1.9 million in 2005; contract revenues of $0.4 million in 2006, compared to $0.4 million in 2005; and royalties, milestone and licensing fees of $58,000 in 2006, compared to zero in 2005. Total net revenues for 2006 were $0.8 million, as compared to $2.3 million for 2005, a decrease of $1.5 million or 64%. The primary cause for the decrease was our divesture of our direct sales of prenatal vitamins and AVC Cream in 2005. Product sales for 2006 consisted primarily of ESTRASORB sales to Esprit, as well as commercial Gynodiol sales. Included in ESTRASORB net sales for 2006 was a $(0.2) million adjustment to the ESTRASORB sales return allowance for product sold commercially prior to the licensing of ESTRASORB to Esprit. ESTRASORB sales to Esprit were lower in the second quarter of 2006 compared to the first quarter of 2006 due to lower production levels at our manufacturing facility.

Contract research and development revenue for 2006 consisted of $0.3 million from a National Institutes of Health grant to develop a second generation AIDS vaccine compared to $0.4 million received in 2005 under the same NIH grant. In addition, $0.1 million of revenue was also recognized in 2006 for a commercial manufacturing contract.

Royalties, milestone and licensing fees for 2006 consisted of $58,000 relating primarily to royalties pursuant to the Licensing Agreement with Esprit for ESTRASORB.

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

Operating costs and expenses:


	2006		2005		$ Change			% Change
	(unaudited)		(unaudited)
Cost of products sold, (which includes idle capacity)	$	1,161	$	2,027	$	(866	)		-43	%
Excess inventory costs over market		677		—		677			100	%
Research and development		3,401		1,377		2,024			147	%
Selling and marketing		28		1,844		(1,816	)		-98	%
General and administrative		2,610		2,292		318			14	%

	$	7,877	$	7,540	$	337			4	%

Cost of Products Sold and Idle Capacity

Cost of products sold, which includes fixed idle capacity costs at our manufacturing facility, decreased to $1.2 million in 2006, compared to $2.0 million in 2005. Of the $1.2 million cost of products sold for 2006, $0.7 million was due to idle plant capacity costs at our manufacturing facility. The remaining $0.5 million primarily represents the cost of ESTRASORB sales to Esprit and Gynodiol cost of products sold. Of the $2.0 million cost of products sold for 2005, $1.0 million was due to idle plant capacity costs at our manufacturing facility. The additional $0.3 million of idle capacity costs for 2005 compared to 2006 was partially due to the accounting of excess inventory costs over market in 2006, which is further discussed below.

Excess Inventory Costs over Market

As part of the Esprit Transaction (see “Significant Transactions in 2006 and 2005”) we agreed to sell ESTRASORB at a price that is lower than our current manufacturing costs for the inventory manufactured and sold. These excess costs over the fixed price totaled $0.7 million for the three months ended June 30, 2006.

It is most likely we will continue to manufacture ESTRASORB at a loss until production volumes increase or we enter into additional contract manufacturing agreements with third parties to more fully utilize our manufacturing facility’s capacity. The facility is able to accommodate much greater production than its current schedule, which, if more fully utilized, would offset the fixed costs related to the manufacturing process and facility. In addition, we are negotiating revisions to our agreements for packaging costs of ESTRASORB as well as our fixed lease costs for the manufacturing facility. If these negotiations result in higher packaging or lease costs for us, it may have a material adverse impact on future financial results.

Research and Development Expenses

Research and development costs increased from $1.4 million in 2005 to $3.4 million in 2006, or 147%. The increase of $2.0 million was primarily due to an increase in research and development spending to support our development of flu vaccines.

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

Selling and Marketing Expenses

Selling and marketing costs were $28,000 in 2006 compared to $1.8 million in 2005. The decrease of $1.8 million, or 98%, was due to our strategy of transitioning from a commercial business model to one focused on our core competency of vaccine and new product development. With the sale of our vitamin and AVC lines to Pharmelle in 2005 and the licensing of ESTRASORB in North America to Esprit, our ongoing selling expenses consist primarily of costs related to the sale of Gynodiol.

General and Administrative Expenses

General and administrative costs were $2.6 million in 2006 compared to $2.3 million in 2005. The increase of $0.3 million was primarily due to non-cash compensation costs resulting from the implementation of SFAS No. 123R in 2006, using the modified prospective method, while no costs were recorded in 2005 utilizing the accounting recognition methods under APB No. 25.

Interest income / (expense), net:


	2006			2005			$ Change		% Change
	(unaudited)			(unaudited)
Interest income	$	967		$	42		$	925		2202	%
Interest expense		(340	)		(533	)		193		36	%

	$	627		$	(491	)	$	1,118		228	%

Net interest income was $0.6 million for 2006 compared to interest expense of $0.5 million for 2005. Interest income increased from zero in 2005 to $1.0 million in 2006, primarily due to the increase in our cash balance from 2005 to 2006. The equity financing transactions that occurred during the fourth quarter of 2005 and the first quarter of 2006 accounted for such increase in cash. Interest expense decreased from $0.5 million in 2005 to $0.3 million in 2006, or $0.2 million. This decrease is due to the conversion of $6.0 million of our 4.75% senior convertible notes in October 2005 and $7.0 million in March 2006.

Net loss:


	2006			2005			$ Change			%Change
	(unaudited)			(unaudited)
Net loss	$	(6,411	)	$	(5,716	)	$	695			12	%

Net loss per share	$	(.10	)	$	(.14	)	$	(.04	)		-28	%

Weighted shares outstanding		61,465,003			39,533,876			21,931,127			55	%

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

Net loss for 2006 was $6.4 million or $(.10) per share, as compared to $5.7 million or $(.14) per share for 2005, an increase of $0.7 million and a decrease of $(.04) per share. The increase was primarily due to the decrease in revenues of $1.5 million and the increase in other operating expenses of $0.3 million, partially offset by the $1.1 million increase in net interest income, all previously discussed. The weighted shares outstanding increased from 39,533,876 in 2005 to 61,465,003 in 2006 due to the equity financing transactions in the second half to 2005 and the first quarter of 2006 and the conversion of an aggregate $13.0 million of notes to equity during the same period. In addition, stock options were exercised throughout the second half of 2005 as well as during 2006.

Six months ended June 30, 2006 (“2006”) compared to the six months ended June 30, 2005 (“2005”): (In thousands)

Revenues:


	2006		2005		$ Change			% Change
	(unaudited)		(unaudited)
Product Sales:
Product lines sold in 2005	$	31	$	1,238	$	(1,207	)		-98	%
Gynodiol and other products		291		335		(44	)		-13	%
ESTRASORB		775		1,035		(260	)		-25	%

Total product sales		1,097		2,608		(1,511	)		-58	%
Contract research and development		877		669		208			31	%
Royalties, milestone and licensing fees		168		—		168			100	%

	$	2,142	$	3,277	$	(1,135	)		-35	%

Revenues for 2006 consisted of product sales of $1.1 million, compared to $2.6 million in 2005; contract revenues of $0.9 million in 2006, compared to $0.7 million in 2005; and royalties, milestone and licensing fees of $0.2 million in 2006, compared to zero in 2005. Total net revenues for 2006 were $2.1 million, as compared to $3.3 million for 2005, a decrease of $1.2 million or 35%. The primary cause for the decrease was the divesture of our direct sales of prenatal vitamins and AVC Cream in 2005. Product sales for 2006 consist primarily of ESTRASORB sales to Esprit, as well as commercial Gynodiol sales. Included in ESTRASORB net sales for 2006 was a $(0.2) million adjustment to the ESTRASORB sales return allowance for product sold commercially prior to the licensing of ESTRASORB to Esprit. ESTRASORB sales to Esprit were lower than expected for 2006 due to lower production levels at our manufacturing facility.

Contract research and development revenue for 2006 is primarily due to $0.6 million from a NIH grant to develop a second generation AIDS vaccine compared to $0.4 million received in 2005 under the same NIH grant. In addition, $0.3 million of revenue was also recognized in 2006 from two manufacturing contracts. Contract research and development revenue for 2005 also includes $0.3 million from other grants that were completed in 2005.

Royalties, milestone and licensing fees for 2006 consist of $0.2 million relating primarily to royalties pursuant to the Licensing Agreement with Esprit for ESTRASORB.

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

Operating costs and expenses:


	2006		2005		$ Change			% Change
	(unaudited)		(unaudited)
Cost of products sold (which includes idle capacity)	$	2,394	$	4,006	$	(1,612	)		-40	%
Excess inventory costs over market		992		—		992			100	%
Research and development		5,433		2,599		2,834			109	%
Selling and marketing		66		5,901		(5,835	)		-99	%
General and administrative		5,330		4,413		917			21	%

	$	14,215	$	16,919	$	(2,704	)		-16	%

Cost of Products Sold and Idle Capacity

Cost of products sold, which includes fixed idle capacity costs at our manufacturing facility, decreased to $2.4 million in 2006, compared to $4.0 million in 2005. Of the $2.4 million cost of products sold for 2006, $1.1 million was due to idle plant capacity costs at our manufacturing facility. The remaining $1.3 million primarily represents the cost of ESTRASORB sales to Esprit and Gynodiol cost of products sold. Of the $4.0 million cost of products sold for 2005, $2.5 million was due to idle plant capacity costs at our manufacturing facility. Idle capacity costs for 2005 were $1.4 million higher than in 2006, partially due to the accounting of excess inventory costs over market in 2006, which is further discussed below. The remaining positive variance is a result of streamlining of costs and lower production volumes.

Excess Inventory Costs over Market

As part of the Esprit Transaction (see “Significant Transactions in 2006 and 2005”), we agreed to sell ESTRASORB at a price that is lower than our current manufacturing costs for the inventory manufactured and sold. These excess costs over the fixed price totaled $1.0 million for the six months ended June 30, 2006.

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

Research and Development Expenses

Research and development costs increased from $2.6 million in 2005 to $5.4 million in 2006, or 109%. The increase of $2.8 million was primarily due to an increase in research and development spending to support our development of flu vaccines.

Selling and Marketing Expenses

Selling and marketing costs were $66,000 in 2006 compared to $5.9 million in 2005. The decrease of $5.8 million, or 99%, was due to our strategy of transitioning from a commercial business model to one focused on our core competency of vaccine and new product development. With the sale of our vitamin and AVC lines to Pharmelle and the licensing of ESTRASORB in North America to Esprit, our ongoing selling expenses consist primarily of costs related to the sale of Gynodiol.

General and Administrative Expenses

General and administrative costs were $5.3 million in 2006 compared to $4.4 million in 2005. The increase of $0.9 million was primarily due to non-cash compensation costs resulting from the implementation of SFAS No. 123R in 2006, using the modified prospective method, while no costs were recorded in 2005 utilizing the accounting recognition methods under APB No. 25.

Interest income/ (expense), net:


	2006			2005			$ Change		% Change
	(unaudited)			(unaudited)
Interest income	$	1,218		$	103		$	1,115		1082	%
Interest expense		(1,051	)		(1,063	)		12		1	%

	$	167		$	(960	)	$	1,127		117	%

Net interest income was $0.2 million for 2006 compared to interest expense of $1.0 million for 2005. Interest income increased from $0.1 million in 2005 to $1.2 million in 2006, primarily due to the increase in our cash balance from 2005 to 2006. The equity financing transactions that occurred during the fourth quarter of 2005 and the first quarter of 2006 accounted for such increase in cash. Interest expense was comparable from 2005 to 2006. The conversion of $6.0 million of our 4.75% senior convertible notes in October 2005 and $7.0 million in March 2006 resulted in lower interest expense for 2006 but was offset by the write off of $0.3 million of deferred financing costs relating to the conversion of the notes in March 2006.

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

Net loss:


	2006			2005			$ Change			%Change
	(unaudited)			(unaudited)
Net loss	$	(11,906	)	$	(14,602	)	$	(2,696	)		-18	%

Net loss per share	$	(.21	)	$	(.37	)	$	(.16	)		-43	%

Weighted shares outstanding		56,891,602			39,533,876			17,357,726			44	%

Net loss for 2006 was $11.9 million or $(.21) per share, as compared to $14.6 million or $(.37) per share for 2005, a decrease of $2.7 million or $(.16) per share. The decrease was primarily due to the decrease in revenues of $1.2 million offset by the decrease in other operating expenses of $2.7 million, and the increase of net interest income of $1.1 million, all previously discussed. The weighted shares outstanding increased from 39,533,876 in 2005 to 56,891,602 in 2006 due to the equity financing transactions in the second half to 2005 and the first quarter of 2006 and the conversion of an aggregate $13.0 million of notes to equity during the same period. In addition, stock options were exercised throughout the second half of 2005 as well as during 2006.

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

Liquidity and Capital Resources

Our capital requirements depend on numerous factors, including but not limited to the commitments and progress of our research and development programs, the progress of preclinical and clinical testing, the time and cost involved in obtaining regulatory approvals, the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, competing technological and market developments, and manufacturing costs related to ESTRASORB. We plan to have multiple vaccines and products in various stages of development and we believe our research and development as well as general administrative expenses and capital requirements will continue to exceed our revenues. Future activities, particularly vaccine and product developments, are subject to our ability to raise funds through debt or equity financing, or collaborative arrangements with industry partners.

Summary of Cash Flows:


	Six months
	ended
	June 30, 2006
	(in thousands)
	(unaudited)
Net cash provided by/(used in):
Operating activities	$	(9,157	)
Investing activities		(655	)
Financing activities		56,520

Net change in cash and cash equivalents		46,708
Beginning cash and cash equivalents		31,893

Ending cash and cash equivalents	$	78,601

Cash and cash equivalents were $78.6 million at June 30, 2006, an increase of $46.7 million from the December 31, 2005 balance of $31.9 million. Of the $46.7 million of cash provided in the first six months of 2006, $9.2 million was used for operating activities and $0.7 million for investing activities and $56.6 million was obtained from financing activities. Operating activities consisted of the net loss of $11.9 million, as previously discussed, non-cash activities of $3.4 million, offset by $0.7 million of net changes in balance sheet accounts. Working capital was $80.5 million at June 30, 2006 compared to $32.7 million at December 31, 2005. The increase in working capital of $47.8 million was primarily due to the $55.9 million net proceeds of the two equity financing transactions that occurred during the first quarter ended March 31, 2006, $1.0 million from the exercise of stock options, offset by $9.2 million in operating activities.

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

We intend to use the proceeds from our recent equity financing transactions for general corporate purposes, including but not limited to our internal research and development programs, such as preclinical and clinical testing and studies for our product candidates, the development of new technologies, capital improvement and general working capital. We will continue to pursue obtaining capital through product licensing, co-development arrangements on new products, or the public or private sale of securities of the Company. We have demonstrated our ability to obtain capital, as required; however, there can be no assurance that we will be able to obtain additional capital or, if such capital is available, that the terms of any financing will be satisfactory to the Company. Based on our assessment of the availability of capital and our business operations as currently contemplated, in the absence of new financings, licensing arrangements or partnership agreements, we believe we will have adequate capital resources to sustain operations into 2008.

If we are unable to obtain additional capital, we will continue to assess our capital resources and we may be required to delay, reduce the scope of, or eliminate one or more of our product research and development programs, downsize our organization, or reduce general and administrative infrastructure.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes during the period from the end of our last fiscal year through June 30, 2006 to the information concerning the Company’s quantitative and qualitative disclosures about market risk set forth in Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2005 as filed with the SEC.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s chief executive officer and chief accounting officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this quarterly report. Based on that review and evaluation, which included inquiries made to certain other employees of the Company, the chief executive officer and chief accounting officer have concluded that the Company’s current disclosure controls and procedures, as designed and implemented, are effective to ensure that such officers are provided in a timely manner with material information relating to the Company required to be disclosed in the reports the Company files or submits under the Exchange Act.

Management’s Report on Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our chief executive officer and chief accounting officer, the Company conducted an evaluation of the effectiveness of our internal control over financial reporting as of June 30, 2006 based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of June 30, 2006.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the quarter to which this report relates.

Part II. Other Information

Item 1 — Legal Proceedings

The Company was a defendant in a lawsuit filed by a former director alleging that the Company wrongfully terminated the former director’s stock options. In April 2006, a directed verdict in favor of Novavax was issued and the case was dismissed. The plaintiff has filed an appeal with the court. Management believes the likelihood of an unfavorable outcome of such appeal is minimal. Accordingly, no liability related to this contingency has been accrued in the consolidated balance sheet as of June 30, 2006.

Item 1A. — Risk Factors

There are no material changes to the Company’s risk factors as described in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005, as filed with the SEC, other than mentioned below

It is most likely the Company will continue to manufacture ESTRASORB at a loss until production volumes increase or it enters into additional contract manufacturing agreements with third parties to more fully utilize its manufacturing facility’s capacity. The facility is able to accommodate much greater production than its current schedule, which, if more fully utilized, would offset the fixed costs related to the manufacturing process and facility. In addition, the Company is negotiating revisions to its agreements for packaging costs of ESTRASORB as well as its fixed lease costs for the manufacturing facility. If these negotiations result in higher packaging or lease costs for us, it may have a material adverse impact on future financial results.

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3 — Defaults Upon Senior Securities

Not applicable.

Item 4 — Submission of Matters to a Vote of Security Holders

At the Company’s Annual Meeting of Stockholders held on April 26, 2006, the following proposal was adopted by the votes specified below:

To elect three directors as Class II directors to serve on the Board of Directors for a three-year term expiring at the 2009 Annual Meeting of Stockholders.


	FOR		WITHHELD
Gary C. Evans		46,412,988		479,488
John O. Marsh, Jr.		46,430,545		461,961
James B. Tananbaum, M.D.		46,542,721		349,755

In addition to the three Class II directors elected at this year’s Annual Meeting of Stockholders, the Board is composed of one Class III Director and two Class I Directors. The continuing Class III Director, whose term will expire at the Company’s 2007 Annual Meeting, is Michael A. McManus, Jr. The continuing Class I Directors, whose terms will expire at the Company’s 2008 Annual Meeting, are Denis M. O’Donnell, M.D. and Rahul Singhvi. J. Michael Lazarus, M.D. retired as a director as of the Annual Meeting of Stockholders held on April 26, 2006 and Mitchell J. Kelly resigned as director subsequent to the Annual Meeting.

Item 5 — Other Information

Not applicable.

Item 6 — Exhibits

	10.1		License and Development Agreement, dated April 26, 2006, by and between the Company and Esprit Pharma, Inc. Confidential information has been omitted from this exhibit and filed separately with the Securities and Exchange Commission due to a confidential treatment request.

	10.2		Supply Agreement, dated April 26, 2006, by and between the Company and Esprit Pharma, Inc. Confidential information has been omitted from this exhibit and filed separately with the Securities and Exchange Commission due to a confidential treatment request.

	10.3		Sublease Agreement, dated April 28, 2006, by and between the Company and Sterilox Technologies, Inc.

	31.1		Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2		Certification of principal accounting officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Rahul Singhvi, President and Chief Executive Officer of the Company.

	32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Patricia A. Hall, Chief Accounting Officer of the Company.

SIGNATURES

Pursuant to the requirements 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. (Registrant)
Date: August 14, 2006	By:	/s/ Patricia A. Hall
		Patricia A. Hall
		Chief Accounting Officer (Principal Accounting Officer)