Novavax
Annual Report 2007

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UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549Form 10-K(Mark One)  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2007ORoo TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934 For the transition period from to .Commission File No. 0-26770NOVAVAX, INC.(Exact name of Registrant as specified in its charter)Delaware(State or other jurisdiction ofincorporation or organization) 22-2816046(I.R.S. EmployerIdentification No.) 9920 Belward Campus Drive, Rockville, Maryland(Address of principal executive offices) 20850(Zip Code)Registrant’s telephone number, including area code:(240) 268-2000Securities registered pursuant to Section 12(b) of the Act:NONESecurities registered pursuant to Section 12(g) of the Act:Common Stock, Par Value $0.01 per shareIndicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No 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 Actof 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 tosuch filing requirements for the past 90 days. Yes  No oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not becontained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K. oIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.(Check one):Large accelerated filer o Accelerated filer  Non-accelerated filer o(Do not check if a smaller reporting company) Smaller reporting company oIndicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No As of June 30, 2007, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant based on theclosing sale price of such stock as reported by the NASDAQ National Market on such date was $179,823,824. For purposes of this calculation,shares of common stock held by directors, officers and stockholders whose ownership exceeds ten percent of the common stock outstanding atJune 30, 2007 were excluded. Exclusion of such shares held by any person should not be construed to indicate that the person possesses the power,direct or indirect, to direct or cause the direction of the management or policies of the Registrant, or that the person is controlled by or under commoncontrol with the Registrant.As of March 10, 2008, there were 61,962,120 shares of the Registrant’s Common Stock, par value $.01 per share, outstanding.DOCUMENTS INCORPORATED BY REFERENCEPortions of the Registrant’s Definitive Proxy Statement to be filed no later than 120 days after the fiscal year ended December 31, 2007 inconnection with the Registrant’s 2008 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. Table of Contents Page No.PART I Item 1. Business 1 Item 1A. Risk Factors 10 Item 1B. Unresolved Staff Comments 24 Item 2. Properties 24 Item 3. Legal Proceedings 24 Item 4. Submission of Matters to a Vote of Security Holders 24 PART II Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters 25 Item 6. Selected Financial Data 27 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 27 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 41 Item 8. Financial Statements and Supplementary Data 42 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 42 Item 9A. Controls and Procedures 43 Item 9B. Other Information 43 PART III Item 10. Directors, Executive Officers and Corporate Governance 43 Item 11. Executive Compensation 44 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 44 Item 13. Certain Relationships and Related Transactions and Director Independence 44 Item 14. Principal Accountant Fees and Services 44 PART IV Item 15. Exhibits and Financial Statement Schedules 45 Signatures 48 When used in this Annual Report on Form 10-K, except where the context otherwise requires, the terms “we”, “us”, “our”,“Novavax” and “the Company” refer to Novavax, Inc.i Table of Contents Page No.Index To The Consolidated Financial Statements Reports of Independent Registered Public Accounting Firms F-2 Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 2007 and 2006 F-5 Consolidated Statements of Operations for each of the three years in the period ended December 31, 2007 F-6 Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended December 31, 2007 F-7 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2007 F-8 Notes to the Consolidated Financial Statements F-9 ii PART IItem 1. BUSINESSThis Annual Report on Form 10-K contains forward-looking statements, within the meaning of the Private SecuritiesLitigation Reform Act that involve risks and uncertainties. In some cases, forward-looking statements are identified by words suchas “believe,” “anticipate,” “intend,” “plan,” “will,” “may” and similar expressions. You should not place undue reliance onthese forward-looking statements, which speak only as of the date of this report. All of these forward-looking statements are basedon information available to us at this time, and we assume no obligation to update any of these statements. Actual results coulddiffer from those projected in these forward-looking statements as a result of many factors, including those identified in the sectiontitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere.We urge you to review and consider the various disclosures made by us in this report, and those detailed from time to time in ourfilings with the Securities and Exchange Commission, that attempt to advise you of the risks and factors that may affect our futureresults.OverviewNovavax, Inc., a Delaware corporation (“Novavax” or the “Company”) was incorporated in 1987, and is a clinical-stagebiopharmaceutical company focused on creating differentiated, value-added vaccines that improve upon current preventive options for arange of infectious diseases. These vaccines leverage the Company’s virus-like particle (“VLP”) platform technology coupled with aunique, disposable production technology. In 2005, Novavax transitioned from a specialty pharmaceutical company that sold andmarketed women’s health products to an innovative, biopharmaceutical company focused on vaccines. The Company is now firmlyfocused on its VLP vaccine technology platform.VLPs imitate the three-dimensional structures of viruses but are composed of recombinant proteins believed to be incapable ofcausing infection and disease. The Company is initially focused on the pandemic (avian) influenza virus and seasonal flu developmentprograms. During 2007, the Company announced two additional discovery programs for the treatment of Varicella Zoster and anundisclosed disease target.Novavax made significant progress in 2007 in the development of its vaccine that targets the H5N1 avian influenza with pandemicpotential. In June 2007, the Company released results from an important preclinical study in which ferrets that received Novavax’spandemic vaccine were protected from a lethal challenge of the H5N1 virus. After filing an Investigational New Drug application (IND),Novavax initiated its Phase I/IIa human clinical trial in July 2007. Novavax released interim human data from the first portion of thisclinical trial in December 2007. These interim results demonstrated that Novavax’s pandemic influenza vaccine can generate a protectiveimmune response. The Company plans to begin patient enrollment in the second portion of the Phase I/IIa trial prior to March 31, 2008 togather additional patient immunogenicity and safety data and determine a final dose through the completion of this clinical trial. It isanticipated that initial immunogenicity and safety data will be available early in the third quarter of 2008 with study completion by theend of 2008 to include ongoing safety data collection.The Company progressed development of its VLP trivalent vaccine that targets seasonal influenza virus in 2007. In December 2007,Novavax announced results from a preclinical study in mice. The Company plans to conduct additional preclinical studies during thefirst quarter of 2008 with the goal of advancing its seasonal influenza program into human clinical trials late in the second quarter or earlythird quarter of 2008.Importantly, Novavax has developed a unique production process for making its recombinant VLP-based vaccines using portable,disposable manufacturing technology that has advantages over traditional egg-based vaccine manufacturing and other vaccines indevelopment. Because the equipment is both portable and disposable, a facility to produce VLP-based vaccines can be constructed andvalidated for production use in 12-18 months (depending on the capacity) as compared to current egg-based facilities which can take fouror more years to deploy. Our manufacturing technology requires substantially less capital costs than traditional egg-based manufacturing(currently estimated at up to 75% less capital cost). Due to the use of the Company’s proprietary VLP approach in developingrecombinant vaccines, the current production yields are encouraging compared to currently used egg-based vaccines as well as developingmammalian cell growth approaches.1 The following table shows the current stage of each product candidate in Novavax’s vaccine pipeline: Discovery Preclinical Phase I/IIa Phase IIb/III Pandemic Influenza üü üü üü Seasonal Influenza üü üü Varicella Zoster (Shingles) üü Undisclosed Disease Target üü The Company also has a drug delivery platform based on micellar nanoparticles (“MNPs”), proprietary oil and waternanoemulsions used for the topical delivery of drugs. The MNP technology was the basis for Novavax’s first FDA - approved estrogenreplacement product, Estrasorb®. In October 2005, the Company entered into license and supply agreements for Estrasorb with Allergan,Inc., successor-in-interest to Esprit Pharma, Inc. (“Allergan”), under which the Company manufactured Estrasorb, and Allergan had anexclusive license to sell Estrasorb in North America. In 2007, the Company and Allergan terminated the supply agreement. In April 2006,the Company entered into a License and Development Agreement and a Supply Agreement with Allergan to co-develop, supply andcommercialize the Company’s MNP-based testosterone product candidate for the treatment of female hypoactive sexual desire disorder. InOctober 2007, these agreements were mutually terminated. In February 2008, the Company entered into asset purchase and supplyagreements with Graceway Pharmaceuticals, LLC related to Estrasorb and supply of additional units of Estrasorb and terminated theEstrasorb license agreement with Allergan. The Company is seeking to capitalize on the value of its additional MNP technology assetsthrough a potential sale or license of the technology in fields of use outside vaccines and has engaged an investment bank to aid in thesearch for potential buyers or licensees.Our StrategyThe key elements of our business strategy are as follows: • Leverage our proven technologies in influenza and other vaccine candidates without the use of an adjuvant.Our recombinant VLP technology is well suited to create differentiated vaccines against pandemic and seasonal influenza andother infectious diseases. VLPs are a proven technology as they have been used in marketed vaccine products such as Gardasilsold by Merck & Co. Interim data from the Phase I/IIa study of our H5N1 vaccine candidate provided the humanproof-of-concept of our proprietary VLP platform. The data showed that, among the subjects in the study, the vaccine, withoutthe use of an adjuvant, was well tolerated and demonstrated a dose dependent response.This technology and our manufacturing process also address several of the technical and logistical issues associated with apotential pandemic. It allows rapid creation of new vaccines within 12 weeks of the identification of emerging strains ofinfluenza, and the manufacturing process can be rapidly commissioned and scaled up (as compared to existing vaccines that takeup to 6 months to produce a vaccine from the identification of a viral strain).Adjuvants are chemical substances that can boost the human immune system, but are subject to more scrutiny by the regulatoryagencies.In addition, the technology provides a platform for an immunogenic seasonal flu vaccine as well as other vaccines against otherinfectious diseases. • Build a robust pipeline of products based on our VLP technology.Novavax’s VLP technology is a platform technology which provides an efficient system to select lead candidates, refinemanufacturing processes and optimize development across product candidates. Based on this platform nature of the technology,Novavax currently has one vaccine in human clinical trials, one vaccine that is in late stage preclinical and toxicology studies,and two new proprietary vaccine programs for2 vaccines for which leading candidates are entering preclinical evaluation. Based on current plans, we expect to have two influenzavaccines in Phase II trials by the second half of 2008. • Maximize the potential of our unique and efficient manufacturing process.The baculovirus expression system manufacturing process of VLP vaccines has been developed using a portable, disposableapproach which requires less labor and infrastructure than egg-based vaccine manufacturing processes. In addition, usingprocess development techniques, the vaccines under development are providing yields which will lower cost of production, butalso allow the possibility of higher dose products that are commercially viable. Novavax can maximize these advantages in thenear term by producing vaccines for the preclinical and clinical needs of its vaccine pipeline of products, and in the long termthrough potential commercialization advantages. • Seek strategic collaborations and partnerships to advance products and technologies.We are engaged in seeking strategic collaborations and partnerships to further develop, co-market and potentially commercializeour vaccine products. In December 2007, the Company announced a marketing collaboration with GE Healthcare to provide anovel pandemic flu solution to select international countries. The agreement combines Novavax’s novel VLP and manufacturingapproach with GE Healthcare’s disposable manufacturing technologies. The goal of this partnership is to seek internationalcountries that desire in-border control over production and distribution of pandemic vaccines to their citizens. The relationshipwith GE Healthcare is driven by the novel vaccines that Novavax is developing coupled with GE Healthcare disposableequipment technologies. • Capitalize on the value of our MNP and other technologies through sales or licenses.The Company is seeking to capitalize, through asset sales or licensing transactions, on the value of the micellar nanoparticleprocess (“MNP”) drug delivery system, and its other technologies and products that remain from its specialty pharmaceuticalfocus.Research and Development Technology and ActivitiesVaccinesVLPs. We develop and produce biopharmaceutical proteins for use as vaccines against pandemic and seasonal influenza and otherinfectious diseases, and as tolerogens to prevent inflammatory responses in the initiation and progression of stroke and other illnesses.Our lead vaccine technology platform is based on virus-like particles (“VLPs”), which are self-assembling protein structures thatresemble viruses. These are noninfectious particles that, for many viral diseases, have been shown in animal and human studies to makeeffective vaccines. VLPs closely mimic natural virus particles with repeating protein structures that can elicit broad and strong antibodyand cellular immune responses, but lack the genetic material required for replication. We have several ongoing development programsinvolving VLP vaccines that address urgent medical needs, including pandemic and seasonal influenza, Varicella Zoster and otherinfectious diseases.Pandemic Influenza VLP Vaccine. In the recent past, unexpected subtypes of avian origin have resulted in severe morbidity andmortality in a limited number of people. Highly pathogenic H5N1 influenza viruses which are now widespread in poultry in Asia andhave spread to some European countries, have been linked to human infection. Genetic reassortment between avian and human influenzasubtypes, or genetic mutations, may lead to the emergence of a virus capable of causing worldwide illness, a pandemic. Proof-of-conceptof the VLP approach in H5N1 pandemic influenza has been demonstrated by the Phase I/IIa human clinical trial interim results releasedby Novavax in December 2007. The Company reported that its VLP vaccine for H5N1 influenza is immunogenic, that elicited immuneresponses at both 15 and 45 mcg doses. Before March 31, 2008, the second portion of the Phase I/IIa study is expected to beginenrollment of additional subjects using a range of doses of H5N1 to select a final dose for further study in humans. Ongoing safety datawill also be evaluated in this continuing study.Seasonal Influenza VLP Vaccine. According to the Center for Disease Control, every year between 5% and 20% of the UnitedStates population is infected by the influenza virus. While the severity of illness varies, influenza causes an estimated 36,000 deaths inthe United States and 500,000 worldwide annually. These seasonal outbreaks3 have in recent years been caused by subtypes of influenza virus designated as H3N2 and H1N1. The interim human results from thePhase I/IIa clinical trial for the H5N1 (pandemic) vaccine could be an early indicator of potential success of our seasonal influenzavaccine, which is scheduled to commence human clinical trials late in the second quarter or early in the third quarter of 2008.Varicella Zoster VLP Vaccine. In September 2007, the Company announced a new discovery-phase product indication target forthe prevention of a disease associated with Varicella Zoster virus in older patients, commonly referred to as Shingles. Shingles, a skinrash often with painful blisters, is caused by the same virus that causes chickenpox. Shingles most frequently occurs in patients60 years or older and manifests itself with acute pain (post-herpetic neuralgia-PHN) which occurs in 65% of affected patients. With onlyone approved vaccine currently approved for use, the potential market for Varicella Zoster is significant.Undisclosed Target VLP Vaccine. Novavax has another discovery-phase product indication target for a disease indication that ithas, for competitive reasons, not yet been disclosed.VLP Vaccine Manufacturing. All currently approved influenza vaccines are produced by growing virus in chicken eggs, fromwhich the virus is extracted and further processed. This 50-year-old egg-based production method requires a minimum of a six-monthlead time for production of a new strain of virus and significant investment in fixed production facilities, with relatively low productionyields. The vaccine shortage during the 2004 flu season (caused by a contamination issue at a facility in the United Kingdom) highlightedthe limitations of current production methods and the need for increased vaccine manufacturing capacity. It also heightened concernsregarding manufacturers’ capacity to respond to a pandemic, when the number of vaccine doses required will be higher than the numberrequired for seasonal flu vaccines and manufacturing lead times will be even shorter. We produce VLPs using a baculovirus expressionsystem in insect cells with disposable, low-cost equipment that can be readily dispersed both nationally and internationally. By notrequiring significant production batch sizes, production capacity can be employed quickly; estimated to be built and validated withintwelve to eighteen months compared to the current approved manufacturing technology that can take four years or more to deploy. Leadtimes for production against new virus strains are measured in weeks, not months.In 2007, we streamlined operations by consolidating our offices and laboratories into our new corporate headquarters in Rockville,Maryland where we leased a 51,000 square foot, stand-alone facility. This facility has ample office space, state of the art laboratoryspace, as well as utilities that allow for operating a Good Manufacturing Practice (“GMP”) pilot plant. In late 2007, we embarked onmaking leasehold improvements to create a GMP pilot plant in this facility that we expect to commission in the second quarter of 2008.This facility will showcase the capability of our disposable production technology to create vaccine production capacity rapidly, in a lowinfrastructure environment, at a fraction of the cost required to bring traditional vaccine facilities on line. In addition to lower capitalcosts, we have made substantial improvement in our production yields during 2007 which allows us to remain highly competitive from acost perspective even at higher vaccine doses. We will continue to operate our manufacturing operations for producing Phase I/II vaccinematerials at our Taft Court facility, also located in Rockville, Maryland, until the new GMP build out at our corporate headquarters iscompleted and validated which is anticipated to be in the second quarter of 2008.VLP Intellectual Property Rights. In March 2007, the Company secured additional intellectual property through the licensing ofadditional VLP technology through a license agreement with the University of Massachusetts using their proprietary paramyxoviruses asa core for building VLP vaccines. In July 2007, the Company entered into a non-exclusive license agreement with Wyeth HoldingsCorporation to obtain rights to a family of patent applications covering VLP technology for use in human vaccines in certain fields of use.Other VLP Projects. Novavax is working on certain other vaccine projects with sponsoring organizations. These projects,described below, are currently funded and controlled by other parties. As is typical with these research contracts, the Company does notcurrently have commercial rights to these products.HIV-1/AIDS VLP Vaccine. The human toll of AIDS is staggering and now kills more people worldwide than any other infectiousdisease. Nearly 34 million people are infected with HIV-1, including 2.5 million people who were newly infected in 2007, according to theWorld Health Organization (“WHO”). Under a five-year National Institutes of Health (“NIH”) grant, which was awarded in 2003, we areworking in collaboration with leading4 scientists from the University of Alabama — Birmingham, Emory University and Harvard Medical School in the development of asecond-generation AIDS vaccine. In January 2007, the Company announced that it has significantly enhanced both the quality and purityof its VLP vaccine for HIV/AIDS. This second generation AIDS vaccine is based on the HIV-1 viral envelope with a natural three-dimensional structure to trigger a protective immune response. Preclinical studies are under way using the improved HIV-1 vaccine, andplanning has begun to advance this new vaccine to human clinical trials in collaboration with the United States government potentially asearly as 2009. Early versions of Novavax’s VLP vaccine were successful in triggering immune responses in preclinical studies, however,attempts to develop a vaccine against this disease has proven to be elusive to date. Novavax scientists and its collaborators discovered away to optimize the expression of the HIV-1 envelope, which is a principal target for immunity in humans. The Company does not havecommercial rights to this potential vaccine; however, the project does demonstrate the breadth of potential application of VLPs to variousinfectious diseases.SARS VLP Vaccine. In 2005, the NIH awarded us a $1.1 million, three-year grant to develop a vaccine to prevent Severe AcuteRespiratory Syndrome (“SARS”). SARS is a severe form of pneumonia, accompanied by a fever and caused by a coronavirus. OurSARS VLP vaccine is also based on the production of coronavirus-like VLPs in insect cells. The vaccine candidate is anticipated to beentering preclinical studies in 2008. Novavax does not have the commercial rights to this product and continues to work with NIHfunding to support its development.E-Selectin Tolerogen. In collaboration with the National Institute of Neurological Disorders and Stroke (“NINDS”), we have beendeveloping E-selectin-based molecularly-derived products for the prevention of strokes. In September 2002, a published report in theprofessional journal “Stroke” provided experimental evidence on prevention of stroke in stroke-prone rats. These results providedsupportive evidence that E-selectin tolerization may help in the prevention of strokes and other illness where inflammatory and immuneresponses are involved in the initiation and progression of disease. We were awarded a government contract for the formulationdevelopment and manufacture of E-selectin for Phase I clinical trials to be run by the NINDS and the NIH. Formulation and product hasbeen produced by the Company for future preclinical and human clinical trials. Novavax does not have commercial rights to thisproduct.Research and Development FundingTotal externally contracted research and development costs were $1.0 million in 2007, $0.9 million in 2006 and $1.8 million in2005. Total internally sponsored research and development costs were $16.7 million in 2007, $10.6 million in 2006 and $3.3 million in2005. Development costs totaling $0.2 million for Estrasorb were included in 2005 internally sponsored research and development costs.CompetitionThe biopharmaceutical industry and the vaccine market are intensely competitive and are characterized by rapid technologicalprogress. There are a number of companies developing and selling vaccines for pandemic and seasonal influenza employing currenttechnology with some modifications, as well as new technologies. Our technology is based upon utilizing the baculovirus expressionsystem in insect cells to make VLPs. We believe this system offers many advantages when compared to other technologies and isuniquely suited for developing pandemic and seasonal influenza vaccines as well as other infectious diseases. The fact that we do not relyon the use of adjuvants, chemical substances that can boost the human immune system, leads us to believe we have a clearer regulatorypath toward approval of our vaccines with regulatory agencies. The table below provides a list of major vaccine competitors andcorresponding influenza vaccine technologies.Company Competing Technology Descriptionsanofi pasteur, Inc. Inactivated sub-unit (egg-based)MedImmune Vaccines, Inc. (a subsidiary of Astra-Zeneca, Inc.) Nasal, live attenuated (cell-based)GlaxoSmithKline Biologicals Inactivated (egg-based)Novartis, Inc. Inactivated sub-unit (egg-based)Merck & Co. Novel vaccines5 In general, competition among pharmaceutical products is based in part on product efficacy, safety, reliability, availability, priceand patent position. An important factor is the relative timing of the market introduction of our products and our competitors’ products.Accordingly, the speed with which we can develop products, complete the clinical trials and approval processes and supply commercialquantities of the products to the market is an important competitive factor. Our competitive position also depends upon our ability toattract and retain qualified personnel, obtain patent protection or otherwise develop proprietary products or processes, and securesufficient capital resources for the often substantial period between technological conception and commercial sale.Patents and Proprietary RightsWe generally seek patent protection for our technology and product candidates in the United States and abroad. The patent positionof biotechnology firms generally is highly uncertain and involves complex legal and factual questions. Our success will depend, in part,on whether we can: • Obtain patents to protect our own technologies and products; • Obtain licenses to use the technologies of third parties, which may be protected by patents; • Protect our trade secrets and know-how; and • Operate without infringing the intellectual property and proprietary rights of others.Patent rights; licenses. Novavax has intellectual property (patents, licenses, know-how) related to its vaccine, drug delivery,adjuvant and other technologies. Novavax currently has or has rights to over 50 United States patents and corresponding foreign patentsand patent applications relating to vaccines, biologics, and drug delivery systems, and applications for various biological and chemicaluses. Novavax’s core vaccine related intellectual property extends beyond 2020.In March 2007, the Company secured additional intellectual property through the licensing of additional VLP technology through alicense agreement with the University of Massachusetts using their proprietary paramyxoviruses as a core for building VLP vaccines. InJuly 2007, the Company entered into a non-exclusive license agreement with Wyeth Holdings Corporation to obtain rights to a family ofpatent applications covering VLP technology for use in human vaccines in certain fields of use.Consistent with statutory guidelines issued under the Federal Technology Transfer Act of 1986 designed to encourage thedissemination of science and technology innovation and provide sharing of technology that has commercial potential, our collaborativeresearch efforts with the United States government and with other private entities receiving federal funding provide that developments andresults must be freely published, that information or materials supplied by us will not be treated as confidential and that we will berequired to negotiate a license to any such developments and results in order to commercialize products. There can be no assurance that wewill be able to successfully obtain any such license at a reasonable cost, or that such developments and results will not be made availableto our competitors on an exclusive or non-exclusive basis.Trade Secrets. To a more limited extent, we rely on trade secret protection and confidentiality agreements to protect our interests. It isour policy to require employees, consultants, contractors, manufacturers, collaborators, and other advisors to execute confidentialityagreements upon the commencement of employment, consulting or collaborative relationships with us. We also require signedconfidentiality agreements from any entity that is to receive confidential information. With respect to employees, consultants andcontractors, the agreements generally provide that all inventions made by the individual while rendering services to us shall be assigned tous as our property.Government RegulationsThe development, production and marketing of pharmaceutical and biological products developed by Novavax or our collaboratorsis subject to regulation for safety, efficacy and quality by numerous governmental authorities in the United States and other countries. Inthe United States, the development, manufacturing and marketing of human pharmaceuticals and vaccines are subject to extensiveregulation under the federal Food, Drug, and Cosmetic Act, and biological products are subject to regulation both under provisions of thatAct and under the6 Public Health Service Act. The Food and Drug Administration (“FDA”) assesses the safety and efficacy of products and regulates, amongother things, the testing, manufacture, labeling, storage, record keeping, advertising and promotion. The process of obtaining FDAapproval for a new product is costly and time-consuming.Vaccine clinical development follows the same general pathway as for drugs and other biologics. A sponsor who wishes to beginclinical trials with a vaccine must submit an Investigational New Drug application (an “IND”) describing the vaccine, its method ofmanufacture and quality control tests for release. Before applying for FDA approval to market any new drug product candidates, wemust first submit an IND that explains to the FDA the results of pre-clinical testing conducted in laboratory animals and what we proposeto do for human testing. At this stage, the FDA decides whether it is reasonably safe to move forward with testing the drug on humans.We must then conduct Phase I human clinical trials and larger-scale Phase II and III human clinical trials that demonstrate the safety andefficacy of our products to the satisfaction of the FDA. Once these trials are complete, a Biologics License Application (“BLA”) (thebiologic equivalent to a New Drug Application) can be filed with the FDA requesting approval of the vaccine for marketing based on thevaccine’s effectiveness and safety.If successful, the completion of all three phases of clinical development can be followed by the submission of a BLA. Also duringthis stage, the proposed manufacturing facility undergoes a pre-approval inspection during which production of the vaccine as it is inprogress is examined in detail. Vaccine approval also requires the provision of adequate product labeling to allow health care providers tounderstand the vaccine’s proper use, including its potential benefits and risks, to communicate with patients and parents, and to safelydeliver the vaccine to the public. Until a vaccine is given to the general population, all potential adverse events cannot be anticipated.Thus, many vaccines undergo Phase IV studies after a BLA has been approved and the vaccine is licensed and on the market.In addition to obtaining FDA approval for each product, each domestic manufacturing establishment must be registered with theFDA, is subject to FDA inspection and must comply with current GMP regulations. To supply products for use either in the UnitedStates or outside the United States, including clinical trials, United States and foreign manufacturing establishments, including third-party facilities, must comply with GMP regulations and are subject to periodic inspection by the corresponding regulatory agencies intheir home country under reciprocal agreements with the FDA and/or by the FDA.Preclinical studies may take several years to complete and there is no guarantee that the FDA will permit an IND based on thosestudies to become effective and the product to advance to clinical testing. Clinical trials may take several years to complete. After thecompletion of the required phases of clinical trials, if the data indicate that the drug or biologic product is safe and effective, a BLA orNDA (depending on whether the product is a biologic or pharmaceutical product) is filed with the FDA to approve the marketing andcommercial shipment of the drug. This process takes substantial time and effort and the FDA may not accept the BLA or NDA forfiling, and, even if filed, the FDA might not grant approval. FDA approval of a BLA or NDA may take up to two years and may takelonger if substantial questions about the filing arise. The FDA may require post-marketing testing and surveillance to monitor the safetyof the applicable products.In addition to regulatory approvals that must be obtained in the United States, an investigational product is also subject to regulatoryapproval in other countries in which it is intended to be marketed. No such product can be marketed in a country until the regulatoryauthorities of that country have approved an appropriate license application. FDA approval does not assure approval by other regulatoryauthorities. In addition, in many countries, the government is involved in the pricing of the product. In such cases, the pricing reviewperiod often begins after market approval is granted.We are also subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the ToxicSubstances Control Act, the Resource Conservation and Recovery Act and other present and potential federal, state or local regulations.These and other laws govern our use, handling and disposal of various biological and chemical substances used in, and waste generatedby, our operations. Our research and development involves the controlled use of hazardous materials, chemicals and viruses. Although webelieve that our safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federalregulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such anaccident, we could be held liable for any damages that result, and any such liability could7 exceed our resources. Additionally, for formulations containing controlled substances, we are subject to Drug Enforcement Act (“DEA”)regulations.There have been a number of federal and state proposals during the last few years to subject the pricing of pharmaceutical andbiological products to government control and to make other changes to the medical care system of the United States. It is uncertain whatlegislative proposals will be adopted or what actions federal, state or private payers for medical goods and services may take in responseto any medical reform proposals or legislation. We cannot predict the effect medical or healthcare reforms may have on our business, andno assurance can be given that any such reforms will not have a material adverse effect.ManufacturingWe have a GMP facility in our other facility in Maryland which incorporates disposable cell culture equipment that supports themanufacturing requirements for early stage clinical trial materials for our VLP vaccine candidates, including pandemic and seasonalinfluenza vaccine candidates, and other biologic products.During the fourth quarter of 2007, the Company commenced the build out of a manufacturing suite in its Rockville, Marylandcorporate headquarters facility for a 5,000 square foot GMP facility to produce clinical trial material as well as modest commercializationquantities of its VLP vaccines. Due to its unique manufacturing platform, the Company is able to produce vaccines at up to 10 times theyields of traditional manufacturing methods (i.e. egg-based), depending on the vaccine dose, and at significantly lower capital costs thancurrently available vaccine technologies. Construction for this GMP suite is expected to be completed and validated, with clinical trialproduction commencing, in the second quarter of 2008. Any plans to further expand our manufacturing capabilities at our Rockville,Maryland facilities, including the facilities necessary to expand manufacturing quantities, test and package an adequate supply offinished products in order to meet any long term commercial needs, will require additional resources and will be subject to ongoinggovernment approval and oversight.We also have a 24,000 square foot manufacturing facility situated within a Catalent, Inc. facility in Philadelphia, Pennsylvania. It isstaffed by our employees and operates under our quality system. Estrasorb, our first FDA-approved commercial product, is beingmanufactured at this facility. There have been no adverse 483 observations from FDA inspections associated with the production ofEstrasorb. Based on the termination of the Supply Agreement with Allergan, we had planned to close this facility at the end of 2007 andtransfer production to a third party. However, in February 2008, the Company entered into an agreement with Graceway Pharmaceuticals,LLC (“Graceway”) to sell its manufacturing equipment and other assets related to Estrasorb. In addition to the sale of assets, theCompany agreed to produce additional lots of Estrasorb on behalf of Graceway, which is anticipated to be completed by July 2008, atwhich time the Company will close down this operation.Sources of SupplyMost of the raw materials and other supplies required in our business are generally available from various suppliers in quantitiesadequate to meet our needs. In some cases, we have only qualified one supplier for certain of our manufacturing components. We haveplans in place to qualify multiple suppliers for all critical supplies before the time we would put any of our product candidates intocommercial production. One of our major suppliers is GE Healthcare which supplies disposable components used in our manufacturingprocess. GE Healthcare utilizes a sophisticated, in depth process to qualify multiple vendors for the products that are supplied to us. Allthe materials and vendors that supply manufacturing materials to the Company are audited for compliance with GMP standards.Business DevelopmentWe continue to explore opportunities for corporate alliances and partners to help develop and ultimately commercialize and marketour technologies and product candidates. Our strategy is to enter into collaborative arrangements with pharmaceutical and other companiesfor some or all aspects of product development, manufacturing, marketing and sales of our products that will require broad marketingcapabilities and overseas marketing. These collaborators are generally expected to be responsible for funding or reimbursing all or aportion of the development costs, including the costs of later stage clinical testing necessary to obtain regulatory clearances8 and for commercial scale manufacturing, in exchange for rights to market specific products in particular geographic territories.EmployeesAs of March 10, 2008, we had 84 full-time employees and 2 part-time employees for a total of 86 employees, 25 of whom holdM.D. or Ph.D. degrees and 16 of whom hold other advanced degrees. Of our total workforce, 67 are engaged primarily in research,development and manufacturing activities and 19 are engaged primarily in business development, finance and accounting andadministrative functions. None of our employees are represented by a labor union or covered by a collective bargaining agreement, and weconsider our employee relations to be good.Executive OfficersOur executive officers hold office until the first meeting of the Board of Directors following the Annual Meeting of Stockholders anduntil their successors are duly chosen and qualified, or until they resign or are removed from office in accordance with our By-laws.The following table provides certain information with respect to our executive officers. Principal Occupation and Other BusinessName Age Experience During the Past Five YearsRahul Singhvi 43 President and Chief Executive Officer and Director of Novavax sinceAugust 2005. Senior Vice President and Chief Operating Officer ofNovavax from April 2005 to August 2005 and Vice President,Pharmaceutical Development and Manufacturing Operations from April2004 to April 2005. For 10 years prior to joining the Company, served inseveral positions with Merck & Co., culminating as Director of theMerck Manufacturing Division from 1999 to 2004.Len Stigliano 60 Vice President, Chief Financial Officer and Treasurer of Novavax sinceSeptember 2007. Served as a partner of the Philadelphia office of Tatum,LLC from December 2006 until he joined Novavax as Interim ChiefFinancial Officer in March 2007. President and Chief Operating Officerof Omnicare Clinical Research, Inc. a global clinical researchorganization from 2000 until December 2006.Raymond J. Hage, Jr. 40 Senior Vice President, Commercial Operations since October 2006.Senior Vice President and Chief Operating Officer from August 2005 toOctober 2006 and Vice President of Marketing and CorporateDevelopment of Novavax from January 2004 to August 2005. Prior tojoining the Company, served in several positions including anindependent marketing consultant with CHS, Inc. in 2003, Director ofMarketing with Cephalon, Inc. from 2002 to 2003 and for 10 years heldvarious marketing and sales roles at Eli Lilly culminating as Director ofUS Women’s Health from 2001 to 2002.Penny Heaton 43 Vice President, Research & Development and Chief Medical Officer ofNovavax since October 2006. Prior to joining the Company, served asSr. Director and Director of Vaccine Clinical Research at Merck & Co.,Inc. from 1999 to September 2006.Jim Robinson 47 Vice President, Technical Operations and Quality Operations atNovavax since March 2007. Served at sanofi pasteur, Inc. in its USVaccine Division in various positions, most recently, as Vice President,Industrial Operations from June 1986 to December 2006.9 Availability of InformationNovavax was incorporated in 1987 under the laws of the State of Delaware. Our principal executive offices are located at 9920Belward Campus Drive, Rockville, Maryland, 20850. Our telephone number is (240) 268-2000 and our website address iswww.novavax.com. The contents of our website are not part of this Annual Report on Form 10-K.We make available, free of charge and through our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,Current Reports on Form 8-K, and any amendments to any such reports filed or furnished pursuant to Section 13(a) or 15(d) of theSecurities Exchange Act of 1934, as amended, as soon as reasonably practicable after filed with or furnished to the Securities andExchange Commission.Item 1A. RISK FACTORSYou should carefully consider the following risk factors in evaluating our business. There are a number of risk factors thatcould cause our actual results to differ materially from those that are indicated by forward-looking statements. Some of the risksdescribed relate principally to our business and the industry in which we operate. Others relate principally to the securities marketand ownership of our common stock. The risks and uncertainties described below are not the only ones facing us. Additional risksand uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us.If any of the following risks occur, our business, financial condition or results of operations could be materially and adverselyaffected. You should also consider the other information included in this Annual Report on Form 10-K for the fiscal year endedDecember 31, 2007.RISKS RELATED TO OUR BUSINESSWe have a history of losses and our future profitability is uncertain.Our expenses have exceeded our revenues since our formation in 1987, and our accumulated deficit at December 31, 2007 was$199.7 million. Our net revenues for the last three fiscal years were $1.5 million in 2007, $1.7 million in 2006 and $5.3 million in2005. We have received a limited amount of related revenue from research contracts, licenses and agreements to provide vaccinecandidates, services and technologies. We cannot be certain that we will be successful in entering into strategic alliances or collaborativearrangements with other companies that will result in significant revenues to offset our expenses. Our net losses for the last three fiscalyears were $34.8 million in 2007, $23.1 million in 2006 and $11.2 million in 2005.Our historical losses have resulted from research and development expenses for our vaccine and drug delivery product candidates,sales and marketing expenses, and manufacturing expenses for Estrasorb, protection of our intellectual property and other generaloperating expenses. Our losses increased due to the launch of Estrasorb since 2004 as we expanded our manufacturing capacity, and salesand marketing capabilities. More recently, our losses have increased, and will continue to increase, as a result of higher research anddevelopment efforts to support the development of our vaccines, particularly our pandemic and seasonal influenza vaccines.We expect to continue to incur significant operating expenses and anticipate that our expenses and losses will increase in theforeseeable future as we seek to: • complete our human Phase I/IIa clinical trial for our pandemic flu vaccines; • initiate Phase I/II clinical trials for our seasonal flu vaccine; • initiate additional preclinical studies for Varicella Zoster and our undisclosed product candidate using our VLP vaccinetechnology platform; • expand our VLP manufacturing capacity through our current expansion project in Rockville, Maryland, which requires that webuild-out a portion of our research and development space as a Food and Drug Administration, or FDA, compliant and validatedproduct manufacturing facility; • complete the manufacture of Estrasorb for Graceway and transition the assets to Graceway;10 • maintain, expand and protect our intellectual property portfolio; • hire additional clinical, quality control, scientific and management personnel; and • add operations, financial, accounting, facilities engineering and information systems personnel, consistent with expanding ouroperations.As a result, we expect our cumulative operating loss to increase until such time, if ever, that product sales, licensing fees, royalties,milestones, contract research and other sources generate sufficient revenue to fund our continuing operations. We cannot predict when, ifever, we might achieve profitability and cannot be certain that we will be able to sustain profitability, if achieved.We have repositioned ourselves from a specialty pharmaceutical company and face all the risks inherent in theimplementation of a new business strategy.We have changed the focus of the Company from the development and commercialization of specialty pharmaceutical products tothe research and development of new products using our proprietary virus-like particle vaccine technology platform. We cannot predictwhether we will be successful in implementing our new business strategy.We intend to focus our research and development activities on vaccines, an area in which we have particular strengths and atechnology that appears promising. The outcome of any research and development program is highly uncertain. Only a small fraction ofbiotechnology development programs ultimately result in commercial products or even product candidates and a number of events coulddelay our development efforts and negatively impact our ability to obtain regulatory approval for, and to market and sell, a productcandidate. Product candidates that initially appear promising often fail to yield successful products. In many cases, preclinical or clinicalstudies will show that a product candidate is not efficacious or that it raises safety concerns or has other side effects that outweigh itsintended benefit. Success in preclinical or early clinical trials may not translate into success in large-scale clinical trials. Further, successin clinical trials will likely lead to increased investment, accelerating cumulative losses, to bring such products to market. Even after aproduct is approved and launched, general usage or post-marketing studies may identify safety or other previously unknown problemswith the product, which may result in regulatory approvals being suspended, limited to narrow indications or revoked, which mayotherwise prevent successful commercialization.We have limited financial resources and we are not certain that we will be able to maintain our operations or to fund thedevelopment of future products.We do not expect to generate revenues from product sales, licensing fees, royalties, milestones, contract research or other sources inan amount sufficient to fund our operations, and we will therefore use our cash resources and expect to require additional funds tomaintain our operations, continue our research and development programs, commence future preclinical studies and clinical trials, seekregulatory approvals and manufacture and market our products. We will seek such additional funds through public or private equity ordebt financings, collaborative arrangements and other sources. We cannot be certain that adequate additional funding will be available tous on acceptable terms, if at all. If we cannot raise the additional funds required for our anticipated operations, we may be required todelay significantly, reduce the scope of or eliminate one or more of our research or development programs, downsize our general andadministrative infrastructure, or seek alternative measures to avoid insolvency, including arrangements with collaborative partners orothers that may require us to relinquish rights to certain of our technologies, product candidates or products. If we raise additional fundsthrough future offerings of shares of our common stock or other securities, such offerings would cause dilution of existing stockholders’percentage ownership in the Company. These future offerings also could have a material and adverse effect on the price of our commonstock.11 Many of our competitors have significantly greater resources and experience, which may negatively impact our commercialopportunities and those of our current and future licensees.The biotechnology and pharmaceutical industries are subject to intense competition and rapid and significant technological change.We have many potential competitors, including major drug and chemical companies, specialized biotechnology firms, academicinstitutions, government agencies and private and public research institutions. Many of our competitors have significantly greaterfinancial and technical resources, experience and expertise in: • research and development; • preclinical testing; • designing and implementing clinical trials; • regulatory processes and approvals; • production and manufacturing; and • sales and marketing of approved products.Principal competitive factors in our industry include: • the quality and breadth of an organization’s technology; • management of the organization and the execution of the organization’s strategy; • the skill and experience of an organization’s employees and its ability to recruit and retain skilled and experienced employees; • an organization’s intellectual property portfolio; • the range of capabilities, from target identification and validation to drug discovery and development to manufacturing andmarketing; and • the availability of substantial capital resources to fund discovery, development and commercialization activities.Large and established companies such as Merck & Co., Inc., GlaxoSmithKline PLC, Novartis, Inc., sanofi pasteur, Inc. andMedImmune Inc. (a subsidiary of Astra-Zeneca, Inc.), among others, compete in the vaccine market. In particular, these companies havegreater experience and expertise in securing government contracts and grants to support their research and development efforts, conductingtesting and clinical trials, obtaining regulatory approvals to market products, and manufacturing such products on a broad scale andmarketing approved products.Smaller or early-stage companies and research institutions may also prove to be significant competitors, particularly throughcollaborative arrangements with large and established pharmaceutical or other companies. As these companies develop their technologies,they may develop proprietary positions, which may prevent or limit our product development and commercialization efforts. We will alsoface competition from these parties in recruiting and retaining qualified scientific and management personnel, establishing clinical trialsites and patient registration for clinical trials, and in acquiring and in-licensing technologies and products complementary to ourprograms or potentially advantageous to our business. If any of our competitors succeed in obtaining approval from the FDA or otherregulatory authorities for their products sooner than we do or for products that are more effective or less costly than ours, our commercialopportunity could be significantly reduced.In order to effectively compete, we will have to make substantial investments in development, testing, manufacturing and sales andmarketing or partner with one or more established companies. There is no assurance that we will be successful in gaining significantmarket share for any product or product candidate. Our technologies and products also may be rendered obsolete or noncompetitive as aresult of products introduced by our competitors to the marketplace more rapidly and at a lower cost.12 We may have product liability exposure.The administration of drugs to humans, whether in clinical trials or after marketing clearances are obtained, can result in productliability claims. We maintain product liability insurance coverage in the total amount of $10 million for claims arising from the use of ourcurrently marketed products and products in clinical trials prior to FDA approval. Coverage is relatively expensive, and the marketpricing can significantly fluctuate, therefore, we may not be able to maintain insurance at a reasonable cost. There can be no assurancethat we will be able to maintain our existing insurance coverage or obtain coverage for the use of our other products in the future. Thisinsurance coverage and our resources may not be sufficient to satisfy liabilities resulting from product liability claims. A successfulclaim may prevent us from obtaining adequate product liability insurance in the future on commercially desirable items, if at all. Even ifa claim is not successful, defending such a claim would be time-consuming and expensive, may damage our reputation in themarketplace, and would likely divert management’s attention.If we lose or are unable to attract key management or other personnel, we may experience delays in product development.We depend on our senior executive officers as well as key scientific and other personnel. The loss of these individuals could harmour business and significantly delay or prevent the achievement of research, development or business objectives. We have not purchasedkey-man life insurance on any of our executive officers or key personnel, and therefore may not have adequate funds to find acceptablereplacements for them. Competition for qualified employees is intense among pharmaceutical and biotechnology companies, and the lossof qualified employees, or an inability to attract, retain and motivate additional highly skilled employees required for the expansion of ouractivities, could hinder our ability to complete human studies successfully and develop marketable products.We also rely from time-to-time on outside advisors who assist us in formulating our research and development and clinical strategy.We may not be able to attract and retain these individuals on acceptable terms, which could have a material adverse effect on ourbusiness, financial condition and results of operations.We have experienced significant management turnover.Our current President and Chief Executive Officer, Rahul Singhvi, assumed this responsibility in August 2005. Most of ourexecutive officers have joined us since that time. This lack of management continuity, and the resulting lack of long-term history with ourCompany, could result in operational and administrative inefficiencies and added costs. If we were to experience additional turnover at theexecutive level, these risks would be exacerbated.Our substantial indebtedness could adversely affect our cash flow.As of December 31, 2007, we had $23.4 million principal amount of outstanding indebtedness. Our substantial amount ofoutstanding indebtedness could have significant consequences. For example, it: • limits our ability to obtain additional debt, even when necessary to maintain adequate liquidity; • could increase our vulnerability to general adverse economic and industry conditions; • matures if we default under the terms of any other material indebtedness; and • limits our flexibility in planning for, or reacting to, changes in our business and the industry, which may place us at acompetitive disadvantage compared with competitors that have less indebtedness.We may incur additional indebtedness for various reasons, which would increase the risks associated with our substantial leverage.13 The conversion of our outstanding convertible debt and future financing activities may cause dilution of existing securityholders’ interests in the Company and may cause the price of our common stock to go down.As of December 31, 2007, we had outstanding convertible notes in the aggregate principal amount of $22 million, although forfinancial reporting purposes the value was held at $21.3 million, net of debt discount, that will be accrued to the principal amount overthe term of the debt. The note holders may convert the outstanding principal, accrued and unpaid interest and accrued and unpaid latefees, if any, into shares of our common stock at any time at a price of $4.00 per share. At maturity, we have the option to pay up to 50%of the outstanding principal, accrued and unpaid interest and accrued and unpaid late fees, if any, into shares of our common stock at aprice based on the average trading price of our common stock at the time of maturity. In addition, we have the option to require the noteholders to convert the outstanding principal, accrued and unpaid interest and accrued and unpaid late fees, if any, into shares of ourcommon stock if the weighted average price of our common stock, as reported on NASDAQ Global Markets, exceeds $7.00 per share for15 out of 30 consecutive trading days. These potential conversions would dilute existing shareholders.We are limited in our ability to raise additional capital.We anticipate that we will need to engage in capital raising activities in the future. Our convertible notes significantly restrict ourability to incur additional indebtedness. Due to current market conditions, we may not be able to sell shares of our common stock at aprice favorable to us or we may need to sell a large block of stock to raise sufficient capital. A sale of shares of equity would cause animmediate and potentially substantial equity dilution for existing stockholders. This may depress the market price of our common stockand further impair our ability to raise additional capital by selling our common stock.We have made loans to certain of our directors, which if not repaid, would result in a loss to the Company.We have two outstanding notes to former directors which are secured by shares of our common stock. The notes were initially dueupon the earlier of (a) the date the individual ceased to be a director of Novavax, (b) in whole or in part, to the extent of net proceeds on thedate on which the director sold all or a portion of the pledged shares, or (c) March 21, 2007. Both individuals have resigned and neitherof the notes has been repaid. The Company has extended the maturity of the note once for each director. The Company is currentlynegotiating a second extension for one of the former directors. In addition, the Company has the right to sell the pledged shares if thetrading price of Novavax’s common stock, as reported on the NASDAQ Global Market, reaches certain targets. We do not know if theprice of our common stock will reach the target prices and, if we issue additional shares in an equity fundraising transaction, the dilutioncould further lower the trading price of our stock reducing the likelihood of selling the collateral to satisfy the debts. Even if we are able tosell some or all of the pledged shares, we may not recover the full amount outstanding under either note. There are no assurances that theformer directors will be able to repay the notes when due under the terms of the current agreements.PRODUCT DEVELOPMENT RISKSBecause our vaccine product development efforts depend on new and rapidly evolving technologies, we cannot be certainthat our efforts will be successful.Our vaccine work depends on new, rapidly evolving technologies and on the marketability and profitability of our products.Commercialization of our vaccine products could fail for a variety of reasons, and include the possibility that: • our VLP technology, any or all of the products based on VLP technology or our proprietary manufacturing process will beineffective or unsafe, or otherwise fail to receive necessary regulatory clearances; • the products, if safe and effective, will be difficult to manufacture on a large scale or uneconomical to market;14 • we will fail to have our GMP pilot plant validated or that the plant will fail to continue to pass regulatory inspections; • proprietary rights of third parties will prevent us or our collaborators from exploiting technologies or marketing products; and • third party competitors will gain greater market share due to superior products or marketing capabilities.We have not completed the development of vaccine products other than Estrasorb and we may not succeed in obtaining theFDA approval necessary to sell additional products.The development, manufacture and marketing of our pharmaceutical and biological products are subject to government regulation inthe United States and other countries. In the United States and most foreign countries, we must complete rigorous preclinical testing andextensive human clinical trials that demonstrate the safety and efficacy of a product in order to apply for regulatory approval to marketthe product. Estrasorb is the only product developed by the Company to have been approved for sale in the United States. We also haveproduct candidates in human clinical trials and preclinical laboratory or animal studies.The steps required by the FDA before our proposed investigational products may be marketed in the United States include: • performance of preclinical (animal and laboratory) tests; • submissions to the FDA of an IND which must become effective before human clinical trials may commence; • performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of the investigationalproduct in the intended target population; • performance of a consistent and reproducible manufacturing process intended for commercial use; • submission to the FDA of a BLA or a New Drug Application (“NDA”); and • FDA approval of the BLA or NDA before any commercial sale or shipment of the product.The processes are expensive and can take many years to complete, and we may not be able to demonstrate the safety and efficacy ofour products to the satisfaction of such regulatory authorities. Regulatory authorities may also require additional testing, and we may berequired to demonstrate that our proposed products represent an improved form of treatment over existing therapies, which we may beunable to do without conducting further clinical studies. Moreover, if the FDA grants regulatory approval of a product, the approval maybe limited to specific indications or limited with respect to its distribution. Expanded or additional indications for approved drugs maynot be approved, which could limit our revenues. Foreign regulatory authorities may apply similar limitations or may refuse to grant anyapproval. Consequently, even if we believe that preclinical and clinical data are sufficient to support regulatory approval for our productcandidates, the FDA and foreign regulatory authorities may not ultimately grant approval for commercial sale in any jurisdiction. If ourdrug candidates are not approved, our ability to generate revenues will be limited and our business will be adversely affected.We must identify products and product candidates for development with our VLP technology and establish successful third-party relationships.The near and long-term viability of our vaccine product candidates will depend in part on our ability to successfully establish newstrategic collaborations with pharmaceutical and biotechnology companies and government agencies. Establishing strategic collaborationsand obtaining government funding is difficult and time-consuming. Potential collaborators may reject collaborations based upon theirassessment of our financial, regulatory or intellectual property position; government agencies may reject contract or grant applicationsbased on their assessment of public need, the public interest and our products’ ability to address these areas. If we fail to establish asufficient number of collaborations or government relationships on acceptable terms, we may not be able to commercialize our vaccineproduct candidate or generate sufficient revenue to fund further research and development efforts.15 Even if we establish new collaborations or obtain government funding, these relationships may never result in the successfuldevelopment or commercialization of any vaccine product candidates for several reasons, including the fact that: • we may not have the ability to control the activities of our partner and cannot provide assurance that they will fulfill theirobligations to us, including with respect to the license, development and commercialization of products and product candidates,in a timely manner or at all; • such partners may not devote sufficient resources to our products and product candidates or properly maintain or defend ourintellectual property rights; • any failure on the part of our partners to perform or satisfy their obligations to us could lead to delays in the development orcommercialization of our products and product candidates, and affect our ability to realize product revenues; and • disagreements, including disputes over the ownership of technology developed with such collaborators, could result in litigation,which would be time-consuming and expensive, and may delay or terminate research and development efforts, regulatoryapprovals, and commercialization activities.Our collaborators will be subject to the same regulatory approval of the manufacturing facility and process as Novavax. Before wecould begin commercial manufacturing of any of our product candidates, we and our collaborators must pass a pre-approval inspectionbefore FDA approval and comply with the FDA’s current Good Manufacturing Practices. If our collaborators fail to comply with theserequirements, our product candidates would not be approved. If our collaborators fail to comply with these requirements after approval,we would be subject to possible regulatory action and may be limited in the jurisdictions in which we are permitted to sell our products.If we or our partners fail to maintain our existing agreements or in the event we fail to establish agreements as necessary, we could berequired to undertake research, development, manufacturing and commercialization activities solely at our own expense. These activitieswould significantly increase our capital requirements and, given our lack of sales, marketing and distribution capabilities, significantlydelay the commercialization of products and product candidates.Because we depend on third parties to conduct some of our laboratory testing and human studies, we may encounter delaysin or lose some control over our efforts to develop products.We are dependent on third-party research organizations to conduct some of our laboratory testing and human studies. If we areunable to obtain any necessary testing services on acceptable terms, we may not complete our product development efforts in a timelymanner. If we rely on third parties for laboratory testing and human studies, we may lose some control over these activities and becometoo dependent upon these parties. These third parties may not complete testing activities on schedule or when we request. We may not beable to secure and maintain suitable research organizations to conduct our laboratory testing and human studies.Our collaboration agreements may prohibit us from conducting research in areas that may compete with our collaborationproducts, while our collaborators may not be limited to the same extent. This could negatively affect our ability to developproducts and, ultimately, prevent us from achieving a continuing source of revenues.We anticipate that some of our corporate or academic collaborators will be conducting multiple product development efforts withineach disease area that is the subject of its collaboration with us. We generally have agreed not to conduct independently, or with any thirdparty, certain research that is competitive with the research conducted under our collaborations. Therefore, our collaborations may havethe effect of limiting the areas of research that we may pursue, either alone or with others. Some of our collaborators, however, maydevelop, either alone or with others, products in related fields that are competitive with the products or potential products that are thesubject of their collaborations with us. In addition, competing products, either developed by the collaborators or to which the collaboratorshave rights, may result in their withdrawing support for our product candidates.16 Generally, under our academic collaborations, we retain the right to exclusively license any technologies developed using funding weprovided. If we elect to not license a particular technology, the academic collaborator is typically free to use the technology for anypurpose, including the development and commercialization of products that might compete with our products.Our relationship with GE Healthcare may not be profitable.We have entered into a co-marketing agreement with GE Healthcare to co-market a pandemic influenza vaccine solution to selectinternational countries. The collaboration incorporates GE Healthcare’s bioprocess solutions and design expertise with Novavax’s VLPmanufacturing platform. We cannot predict when, if at all, we will be able to successfully negotiate a definitive agreement with a targetcountry. Even if we do enter into a definitive agreement, it may not result in significant revenues.Even though we have received governmental support in the past, we may not continue to receive support at the same level orat all.The United States government, through its various agencies, has provided grants to fund certain research and development efforts.There can be no assurances that the Company will continue to receive the same level of funding from the United States government, if atall.If we are unable to manufacture our vaccines in sufficient quantities or are unable to obtain regulatory approvals for amanufacturing facility for our vaccines, we may experience delays in product development and clinical trials.Completion of our clinical trials and commercialization of our vaccine product candidates require access to, or development of,facilities to manufacture a sufficient supply of our product candidates. We have limited experience manufacturing any of our productcandidates in the volumes that will be necessary to support large-scale clinical trials or commercial sales. Efforts to establish capabilitiesmay not meet initial expectations as to scheduling, reproducibility, yield, purity, cost, potency or quality.If we are unable to manufacture our product candidates in clinical quantities or, when necessary, in commercial quantities, then wewill need to rely on third parties to manufacture compounds for clinical and commercial purposes. These third-party manufacturers mustalso receive FDA approval before they can produce clinical material or commercial products. Our vaccines may be in competition withother products for access to these facilities and may be subject to delays in manufacture if third parties give other products greaterpriority. In addition, we may not be able to enter into any necessary third-party manufacturing arrangements on acceptable terms, or on atimely basis. In addition, we would have to enter into a technical transfer agreement and share our know-how with the third partymanufacturer.We rely on a limited number of suppliers for some of our manufacturing materials. Any problems experienced by any ofthese suppliers could negatively affect our operations.We rely on third-party suppliers and vendors for some of the materials used in the manufacture of our product candidates. Forsupply of early clinical trial materials, we rely on a limited number of suppliers. Any significant problem experienced by one of oursuppliers could result in a delay or interruption in the supply of materials to us until such supplier resolves the problem or an alternativesource of supply is located. We have limited experience with alternative sources of raw materials. Any delay or interruption couldnegatively affect our operations.17 We have limited marketing capabilities, and if we are unable to enter into collaborations with marketing partners or developour own sales and marketing capability, we may not be successful in commercializing any approved products.We currently have no sales, marketing or distribution capabilities. As a result, we will depend on collaborations with third partiesthat have established distribution systems and sales forces. To the extent that we enter into co-promotion or other licensing arrangements,our revenues will depend upon the efforts of third parties, over which we may have little or no control. If we are unable to reach andmaintain agreements with one or more pharmaceutical companies or collaborators, we may be required to market our products directly.Developing a marketing and sale force is expensive and time consuming and could delay a product launch. We cannot be certain that wewill be able to attract and retain qualified sales personnel or otherwise develop this capability.If reforms in the health care industry make reimbursement for our potential products less likely, the market for our potentialproducts will be reduced, and we could lose potential sources of revenue.Our successes may depend, in part, on the extent to which reimbursement for the costs of therapeutic products and relatedtreatments will be available from third-party payers such as government health administration authorities, private health insurers,managed care programs, and other organizations. Over the past decade, the cost of health care has risen significantly, and there have beennumerous proposals by legislators, regulators, and third-party health care payers to curb these costs. Some of these proposals haveinvolved limitations on the amount of reimbursement for certain products. Similar federal or state health care legislation may be adoptedin the future and any products that we or our collaborators seek to commercialize may not be considered cost-effective. Adequate third-party insurance coverage may not be available for us to establish and maintain price levels that are sufficient for realization of anappropriate return on our investment in product development. Moreover, the existence or threat of cost control measures could cause ourcorporate collaborators to be less willing or able to pursue research and development programs related to our product candidates.RISKS REGARDING ESTRASORB AND OUR MNP TECHNOLOGYOur costs related to manufacturing Estrasorb may exceed our estimates and reduce expected cash flow from the sale of theEstrasorb related assets.In February 2008, Novavax entered into asset sale and supply agreements for Estrasorb related assets with GracewayPharmaceuticals, LLC. It is anticipated that the manufacturing of Estrasorb under this agreement will be completed by July 2008, atwhich time the Company will exit the Philadelphia manufacturing location. This transaction is expected to generate a small profit for thetransaction and, due to non-cash charges of fixed assets, is anticipated to create a positive cash flow in excess of $2 million over the firsthalf of 2008. If the cost of manufacturing the additional lots of Estrasorb, transitioning the assets to Graceway or closing themanufacturing facility exceed expectations for any reason, the anticipated cash flow would be lower.Efforts to sell other MNP technologyThe Company has begun efforts to divest its non-vaccine MNP technology through sales or licenses. The Company’s efforts to sellthis technology may not be successful because the Company may not be able to identify a potential buyer or licensee and, even if theCompany does identify a buyer or licensee, the price and terms may not be acceptable to the Company.REGULATORY RISKSWe may fail to obtain regulatory approval for our products on a timely basis or comply with our continuing regulatoryobligations after approval is obtained.Delays in obtaining regulatory approval can be extremely costly in terms of lost sales opportunities, losing any potential marketingadvantage of being early to market and increased trial costs. The speed with which we complete18 our preclinical trials necessary to begin human studies, human clinical trials and our applications for marketing approval will depend onseveral factors, including the following: • our ability to manufacture or obtain sufficient quantities of materials for use in necessary preclinical studies and clinical trials; • prior regulatory agency review and approval; • Institutional Review Board approval of the protocol and the informed consent form; • the rate of patient enrollment and retention, which is a function of many factors, including the size of the patient population, theproximity of patients to clinical sites, the eligibility criteria for the study and the nature of the protocol; • negative test results or side effects experienced by trial participants; • analysis of data obtained from preclinical and clinical activities, which are susceptible to varying interpretations and whichinterpretations could delay, limit or prevent further studies or regulatory approval; • the availability of skilled and experienced staff to conduct and monitor clinical studies and to prepare the appropriate regulatoryapplications; and • changes in the policies of regulatory authorities for drug or vaccine approval during the period of product development.We have limited experience in conducting and managing the preclinical studies and clinical trials necessary to obtain regulatorymarketing approvals. We may not be permitted to continue or commence additional clinical trials. We also face the risk that the results ofour clinical trials may be inconsistent with the results obtained in preclinical studies or clinical trials of similar products, or that theresults obtained in later phases of clinical trials may be inconsistent with those obtained in earlier phases. A number of companies in thebiopharmaceutical and product development industry have suffered significant setbacks in advanced clinical trials, even afterexperiencing promising results in early animal and human testing.Furthermore, even if a product gains regulatory approval, such approval is likely to limit the indicated uses for which it may bemarketed, and the product and the manufacturer of the product will be subject to continuing regulatory review, including adverse eventreporting requirements and the FDA’s general prohibition against promoting products for unapproved uses. Failure to comply with anypost-approval requirements can, among other things, result in warning letters, product seizures, recalls, substantial fines, injunctions,suspensions or revocations of marketing licenses, operating restrictions and criminal prosecutions. Any of these enforcement actions, anyunanticipated changes in existing regulatory requirements or the adoption of new requirements, or any safety issues that arise with anyapproved products, could adversely affect our ability to market products and generate revenues and thus adversely affect our ability tocontinue our business.We also may be restricted or prohibited from marketing or manufacturing a product, even after obtaining product approval, ifpreviously unknown problems with the product or its manufacture are subsequently discovered and we cannot provide assurance thatnewly discovered or developed safety issues will not arise following any regulatory approval. With the use of any drug by a wide patientpopulation, serious adverse events may occur from time to time that initially do not appear to relate to the drug itself, and only if thespecific event occurs with some regularity over a period of time does the drug become suspect as having a causal relationship to theadverse event. Any safety issues could cause us to suspend or cease marketing of our approved products, possibly subject us tosubstantial liabilities, and adversely affect our ability to generate revenues and our financial condition.Because we are subject to environmental, health and safety laws, we may be unable to conduct our business in the mostadvantageous manner.We are subject to various laws and regulations relating to safe working conditions, laboratory and manufacturing practices, theexperimental use of animals, emissions and wastewater discharges, and the use and disposal of hazardous or potentially hazardoussubstances used in connection with our research, including infectious disease agents. We also cannot accurately predict the extent ofregulations that might result from any future legislative or19 administrative action. Any of these laws or regulations could cause us to incur additional expense or restrict our operations.We have facilities in Maryland and Pennsylvania that are subject to various local, state and federal laws and regulations relating tosafe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use and disposal of hazardousor potentially hazardous substances, including chemicals, microorganisms and various hazardous compounds used in connection withour research and development activities. In the United States, these laws include the Occupational Safety and Health Act, the Toxic TestSubstances Control Act and the Resource Conservation and Recovery Act. We cannot eliminate the risk of accidental contamination ordischarge or injury from these materials. Federal, state, and local laws and regulations govern the use, manufacture, storage, handlingand disposal of these materials. We could be subject to civil damages in the event of an improper or unauthorized release of, or exposure ofindividuals to, these hazardous materials. In addition, claimants may sue us for injury or contamination that results from our use or theuse by third parties of these materials, and our liability may exceed our total assets. Compliance with environmental laws and regulationsmay be expensive, and current or future environmental regulations may impair our research, development or production efforts.Although we have general liability insurance, these policies contain exclusions from insurance against claims arising from pollutionfrom chemical or pollution from conditions arising from our operations. Our collaborators are working with these types of hazardousmaterials in connection with our collaborations. In the event of a lawsuit or investigation, we could be held responsible for any injury weor our collaborators cause to persons or property by exposure to, or release of, any hazardous materials. However, we believe that we arecurrently in compliance with all applicable environmental and occupational health and safety regulations.INTELLECTUAL PROPERTY RISKSOur success depends on our ability to maintain the proprietary nature of our technology.Our success in large part depends on our ability to maintain the proprietary nature of our technology and other trade secrets,including our proprietary drug delivery and biological technologies. To do so, we must prosecute and maintain existing patents, obtainnew patents and pursue trade secret and other intellectual property protection. We also must operate without infringing the proprietaryrights of third parties or allowing third parties infringe our rights. We currently have or have rights to over 50 United States patents andcorresponding foreign patents and patent applications covering our technologies. However, patent issues relating to pharmaceuticals andbiologics involve complex legal, scientific and factual questions. To date, no consistent policy has emerged regarding the breadth ofbiotechnology patent claims that are granted by the United States Patent and Trademark Office or enforced by the federal courts.Therefore, we do not know whether our patent applications will result in the issuance of patents, or that any patents issued to us willprovide us with any competitive advantage. We also cannot be sure that we will develop additional proprietary products that arepatentable. Furthermore, there is a risk that others will independently develop or duplicate similar technology or products or circumventthe patents issued to us.There is a risk that third parties may challenge our existing patents or claim that we are infringing their patents or proprietary rights.We could incur substantial costs in defending patent infringement suits or in filing suits against others to have their patents declaredinvalid or claim infringement. It is also possible that we may be required to obtain licenses from third parties to avoid infringing third-party patents or other proprietary rights. We cannot be sure that such third-party licenses would be available to us on acceptable terms, ifat all. If we are unable to obtain required third-party licenses, we may be delayed in or prohibited from developing, manufacturing orselling products requiring such licenses.Although our patents include claims covering various features of our products and product candidates, including composition,methods of manufacture and use, our patents do not provide us with complete protection against the development of competing products.Some of our know-how and technology is not patentable. To protect our proprietary rights in unpatentable intellectual property and tradesecrets, we require employees, consultants, advisors and collaborators to enter into confidentiality agreements. These agreements may notprovide meaningful protection for our trade secrets, know-how or other proprietary information20 If we infringe or are alleged to infringe intellectual property rights of third parties, it will adversely affect our business,financial condition and results of operations.Our research, development and commercialization activities, including any product candidates or products resulting from theseactivities, may infringe or be claimed to infringe patents owned by third parties and to which we do not hold licenses or other rights.There may be rights we are not aware of, including applications that have been filed but not published that, when issued, could beasserted against us. These third parties could bring claims against us, and that would cause us to incur substantial expenses and, ifsuccessful against us, could cause us to pay substantial damages. Further, if a patent infringement suit were brought against us, wecould be forced to stop or delay research, development, manufacturing or sales of the product or biologic drug candidate that is the subjectof the suit.As a result of patent infringement claims, or in order to avoid potential claims, we may choose or be required to seek a license fromthe third party. These licenses may not be available on acceptable terms, or at all. Even if we are able to obtain a license, the license wouldlikely obligate us to pay license fees or royalties or both, and the rights granted to us might be nonexclusive, which could result in ourcompetitors gaining access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or beforced to cease some aspect of our business operations, if, as a result of actual or threatened patent infringement claims, we are unable toenter into licenses on acceptable terms. All of the issues described above could also impact our collaborators, which would also impact thesuccess of the collaboration and therefore us.There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in thepharmaceutical and biotechnology industries. In addition to infringement claims against us, we may become a party to other patentlitigation and other proceedings, including interference proceedings declared by the United States Patent and Trademark Office andopposition proceedings in the European Patent Office, regarding intellectual property rights with respect to our products and technology.We may become involved in lawsuits to protect or enforce our patents or the patents of our collaborators or licensors, whichcould be expensive and time consuming.Competitors may infringe our patents or the patents of our collaborators or licensors. As a result, we may be required to fileinfringement claims to counter infringement for unauthorized use. This can be expensive, particularly for a company of our size, andtime-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable, ormay refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover its technology. Anadverse determination of any litigation or defense proceedings could put one or more of our patents at risk of being invalidated orinterpreted narrowly and could put our patent applications at the risk of not issuing.Interference proceedings brought by the United States Patent and Trademark Office may be necessary to determine the priority ofinventions with respect to our patent applications or those of our collaborators or licensors. Litigation or interference proceedings may failand, even if successful, may result in substantial costs and distraction to our management. We may not be able, alone or with ourcollaborators and licensors, to prevent misappropriation of our proprietary rights, particularly in countries where the laws may not protectsuch rights as fully as in the United States.Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is arisk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, during thecourse of this kind of litigation, there could be public announcements of the results of hearings, motions or other interim proceedings ordevelopments. If investors perceive these results to be negative, the market price for our common stock could be significantly harmed.21 We may need to license intellectual property from third parties and if our right to use the intellectual property we license isaffected, our ability to develop and commercialize our product candidates may be harmed.We expect that we will need to license intellectual property from third parties in the future and that these licenses will be material toour business. We will not own the patents or patent applications that underlie these licenses, and we will not control the enforcement of thepatents. We will rely upon our licensors to properly prosecute and file those patent applications and prevent infringement of those patents.Our license agreement with Wyeth Holdings Corporation, which gives us rights to a family of patent applications covering VLPtechnology for use in human vaccines in certain fields of use, is non-exclusive. These applications are very significant to our businessand payments under this agreement could aggregate up to $6.5 million during 2008 depending upon the clinical milestones achieved. Ourlicense with the University of Massachusetts gives us exclusive rights to a key patent application covering virus-like particles technologyfor use in human vaccines in all fields for human use.While many of the licenses under which we have rights provide us with rights in specified fields, the scope of our rights under theseand other licenses may be subject to dispute by our licensors or third parties. In addition, our rights to use these technologies and practicethe inventions claimed in the licensed patents and patent applications are subject to our licensors abiding by the terms of those licensesand not terminating them. Any of our licenses may be terminated by the licensor if we are in breach of a term or condition of the licenseagreement, or in certain other circumstances.Our product candidates and potential product candidates will require several components that may each be the subject of a licenseagreement. The cumulative license fees and royalties for these components may make the commercialization of these product candidatesuneconomical.If patent laws or the interpretation of patent laws change, our competitors may be able to develop and commercialize ourdiscoveries.Important legal issues remain to be resolved as to the extent and scope of available patent protection for biotechnology products andprocesses in the United States and other important markets outside the United States, such as Europe and Japan. Foreign markets maynot provide the same level of patent protection as provided under the United States patent system. We expect that litigation oradministrative proceedings will likely be necessary to determine the validity and scope of certain of our and others’ proprietary rights.Any such litigation or proceeding may result in a significant commitment of resources in the future and could force us to do one or moreof the following: cease selling or using any of our products that incorporate the challenged intellectual property, which would adverselyaffect our revenue; obtain a license from the holder of the intellectual property right alleged to have been infringed, which license may notbe available on reasonable terms, if at all; and redesign our products to avoid infringing the intellectual property rights of third parties,which may be time-consuming or impossible to do. In addition, changes in, or different interpretations of, patent laws in the UnitedStates and other countries may result in patent laws that allow others to use our discoveries or develop and commercialize our products.We cannot provide assurance that the patents we obtain or the unpatented technology we hold will afford us significant commercialprotection.RISKS RELATED TO OUR COMMON STOCK AND ORGANIZATIONAL STRUCTUREBecause our stock price has been and will likely continue to be volatile, the market price of our common stock may be loweror more volatile than expected.Our stock price has been highly volatile. The stock market in general and the market for biotechnology companies in particular haveexperienced extreme volatility that has often been unrelated to the operating performance of particular companies. From January 1, 2007through March 1, 2008, the closing price of our22 common stock has been as low as $2.59 per share and as high as $4.50 per share. The market price of our common stock may beinfluenced by many factors, including: • future announcements about our Company or our collaborators or competitors, including the results of testing, technologicalinnovations or new commercial products; • clinical trial results; • depletion of our cash reserves and/or the approach of our convertible debt maturity date if additional revenues are not generated oradditional capital is not raised; • changes in government regulations; • developments in our relationships with our collaboration partners; • announcements relating to health care reform and reimbursement levels for new drugs; • announcement by us of significant acquisitions, strategic partnerships, joint ventures or capital commitments; • sales of substantial amounts of our stock by existing stockholders (including stock by insiders or 5% stockholders); • litigation; • public concern as to the safety of our products; • significant set-backs or concerns with the industry or the market as a whole; and • the other factors described in this “Risk Factor” section.The stock market has experienced extreme price and volume fluctuation that have particularly affected the market price for manyemerging and biotechnology companies. These fluctuations have often been unrelated to the operating performance of these companies.These broad market fluctuations may cause the market price of our common stock to be lower or more volatile than expected.We have never paid dividends on our capital stock, and we do not anticipate paying any such dividends in the foreseeablefuture.We have never paid cash dividends on our common stock. We currently anticipate that we will retain all of our earnings for use inthe development of our business and do not anticipate paying any cash dividends in the foreseeable future. As a result, capitalappreciation, if any, of our common stock would be the only source of gain for stockholders until dividends are paid, if at all.Provisions of our Certificate of Incorporation and By-laws, Delaware law, and our Shareholder Rights Plan could delay orprevent the acquisition of the Company, even if such acquisition would be beneficial to stockholders, and could impedechanges in our Board.Our organizational documents could hamper a third party’s attempt to acquire, or discourage a third party from attempting toacquire control of, the Company. We have also adopted a shareholder rights plan, or “poison pill,” that empowers our Board to delay ornegotiate, and thereby possibly thwart, any tender offer or takeover attempt the Board opposes. Stockholders who wish to participate inthese transactions may not have the opportunity to do so. These provisions also could limit the price investors are willing to pay in thefuture for our securities and make it more difficult to change the composition of our Board in any one year. These provisions include theright of the Board to issue preferred stock with rights senior to those of common stock without any further vote or action by stockholders,the existence of a staggered Board with three classes of directors serving staggered three-year terms and advance notice requirements forstockholders to nominate directors and make proposals.The Company also is afforded the protections of Section 203 of the Delaware General Corporation Law, which will prevent us fromengaging in a business combination with a person who acquires at least 15% of our common23 stock for a period of three years from the date such person acquired such common stock, unless advance board or stock holder approvalwas obtained.Any delay or prevention of a change of control transaction or changes in our Board of Director or management could deter potentialacquirers or prevent the completion of a transaction in which our stockholders could receive a substantial premium over the then currentmarket price for their shares.Item 1B. UNRESOLVED STAFF COMMENTSNone.Item 2. PROPERTIESWe have current operations in four leased facilities. In January 2007, we commenced a lease for approximately 51,200 square feet inRockville, Maryland, which is our corporate headquarters and includes administrative offices, vaccine research and development alongwith future expansion activities. We lease approximately 13,900 square feet at our other facility in Rockville, Maryland for contractvaccine research, development and manufacturing of early stage clinical supplies. We lease approximately 32,900 square feet foradministrative office space and research and development activities at our former corporate headquarters in Malvern, Pennsylvania ofwhich approximately 28,000 square feet is being subleased. Our manufacturing facility for Estrasorb and other contract manufacturing islocated in Philadelphia, Pennsylvania, where we lease approximately 24,000 square feet of manufacturing space which we expect to vacatein mid 2008. We believe that these facilities are sufficient for our current needs. We have additional space in our current facilities toaccommodate our anticipated growth over the next several years.A summary of our current facilities is set forth below. Approximate Property Location Square Footage Rockville, MD 51,200 Corporate headquarters and vaccine research and developmentRockville, MD 13,900 Vaccine research and development and early clinical phase manufacturingMalvern, PA 32,900 Former corporate headquarters and research and developmentPhiladelphia, PA 24,000 Manufacturing and packaging facility for EstrasorbTotal square footage 122,000 Malvern, PA sublease (28,000) Net square footage 94,000 Item 3. LEGAL PROCEEDINGSThe Company is a defendant in a lawsuit filed in December 2003 by a former director alleging that the Company wrongfullyterminated the former director’s stock options. In April 2006, a directed verdict in favor of the Company was issued and the case wasdismissed. The plaintiff has filed an appeal with the court. Management believes the lawsuit is without merit and the likelihood of anunfavorable outcome of such appeal is minimal. Accordingly, no liability related to this contingency is accrued in the consolidatedfinancial statements as of December 31, 2007.Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSNo matters were submitted to a vote of our security holders during the fourth quarter of the fiscal year ended December 31, 2007.24 PART IIItem 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERSOur common stock trades on the NASDAQ Global Market under the symbol “NVAX”. The following table sets forth the range ofhigh and low closing sale prices for our common stock as reported on The NASDAQ Global Market for each quarter in the two mostrecent years:Quarter Ended High Low March 31, 2007 $4.50 $2.59 June 30, 2007 $3.46 $2.71 September 30, 2007 $3.72 $2.74 December 31, 2007 $4.20 $3.00 March 31, 2006 $8.31 $3.88 June 30, 2006 $7.62 $4.19 September 30, 2006 $4.99 $2.84 December 31, 2006 $5.30 $3.67 On February 29, 2008, the last sale price reported on the NASDAQ National Market for our common stock was $2.80. Ourcommon stock was held by approximately 566 stockholders of record as of February 29, 2008, one of which is Cede & Co., a nomineefor Depository Trust Company (or “DTC”). All of the shares of common stock held by brokerage firms, banks and other financialinstitutions as nominees for beneficial owners are deposited into participant accounts at DTC, and are therefore considered to be held ofrecord by Cede & Co. as one stockholder. We have not paid any cash dividends on our common stock since our inception. We do notanticipate declaring or paying any cash dividends in the foreseeable future.Securities Authorized for Issuance under our Equity Compensation PlansInformation regarding our equity compensation plans, including both stockholder approved plans and non-stockholder approvedplans, is included in Item 12. of this Annual Report on Form 10-K.Unregistered Sales of Equity Securities; Use of Proceeds from Registered SecuritiesDuring the year ended December 31, 2005, the Company issued unregistered shares of its common stock to two individuals. InAugust 2005, the Company issued 50,000 shares of restricted common stock to its former Chairman of the Board, Denis M.O’Donnell, M.D., in connection with his separation from the Company as an employee.Also in August 2005, the Company issued 250,000 shares of restricted common stock to Nelson M. Sims, the Company’s formerPresident, Chief Executive Officer and Director, in connection with his separation from the Company. The Company issued the sharespursuant to Section 4(2) of the Securities Act of 1933 and received no cash consideration. In accordance with his separation agreement,Mr. Sims agreed to the cancellation of all then-outstanding options and other rights to purchase shares of the Company. In exchange,Mr. Sims received his salary through the date of resignation and reimbursement of certain expenses. The Company also agreed to pay himseverance benefits, part of which included the 250,000 shares of restricted common stock.25 The graph below compares the cumulative total stockholders return on the Common Stock of the Company for the last fiscal yearswith the cumulative total return on the NASDAQ Stock Market (United States and Foreign) Index and the NASDAQ PharmaceuticalIndex (which includes Novavax) over the same period, assuming the investment of $100 in the Company’s Common Stock, theNASDAQ Stock Market (United States and Foreign) Index and the NASDAQ’s Pharmaceutical Index on December 31, 2002, andinvestments of all dividends.COMPARISON OF 5 YEAR CUMULATIVE TOTAL VALUE*Among Novavax, Inc., The NASDAQ Composite IndexAnd The NASDAQ Pharmaceutical Index* Value of $100 invested on 12/31/02 in stock or index-including reinvestment of dividends. Fiscal year ending December 31. 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07Novavax, Inc. $100 $230.77 $125.38 $148.08 $157.69 $128.08 NASDAQ Stock Market (United Statesand Foreign) $100 $150.01 $162.89 $165.13 $180.85 $198.60 NASDAQ Pharmaceutical Index $100 $145.75 $154.68 $159.06 $160.69 $168.05 This section is not “soliciting material”, is not deemed “filed” with the Securities and Exchange Commission and is not to beincorporated by reference in any filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act, whether madebefore or after the date hereof and irrespective of any general incorporation language in any such filing.26 Item 6. SELECTED FINANCIAL DATAThe following table sets forth selected financial data for each of the years in the five-year period ended December 31, 2007. Theinformation below should be read in conjunction with our financial statements and notes thereto and “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” included elsewhere in the Annual Report on Form 10-K. These historicalresults are not necessarily indicative of results that may be expected for future periods. For The Years Ended December 31, 2003 2004 2005 2006 2007 (In thousands, except per share data) Statements of Operations Data: Revenues $11,785 $6,498 $5,343 $1,738 $1,455 Loss from operations (11,447) (21,933) (4,316) (21,116) (30,271)Loss from continuing operations (12,666) (23,389) (6,319) (19,577) (28,590)Loss from discontinued operations (4,607) (2,531) (4,855) (3,491) (6,175)Net loss (17,273) (25,920) (11,174) (23,068) (34,765)Basic and diluted net loss per share: Loss per share from continuing operations $(0.42) $(0.63) $(0.15) $(0.33) $(0.47)Loss per share from discontinued operations (0.16) (0.07) (0.11) (0.06) (0.10)Basic and diluted net loss per share $(0.58) $(0.70) $(0.26) $(0.39) $(0.57)Shares used in computing basic and diluted netloss per share 29,852,797 36,926,034 42,758,302 58,664,365 61,101,474 As of December 31, 2003 2004 2005 2006 2007 Balance Sheet Data: Cash and investments $27,633 $17,876 $31,893 $73,595 $46,489 Total current assets 32,062 23,937 37,611 77,342 49,016 Working capital 27,226 15,361 32,735 72,003 42,810 Total assets 84,159 77,993 84,382 121,877 91,291 Long term debt, less current portion 41,100 35,970 29,678 22,458 21,629 Accumulated deficit (104,800) (130,720) (141,894) (164,962) (199,727)Total stockholders’ equity 35,944 33,281 49,652 94,001 63,065 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONSCertain 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 future product development and related clinical trials and future research and development, including Food and DrugAdministration approval and product sales. Such forward-looking statements involve known and unknown risks, uncertainties andother factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materiallydifferent from those expressed or implied by such forward-looking statements.Such factors include, among other things, the following: our ability to progress any product candidates into pre-clinical or clinicaltrials; the scope, rate and progress of our preclinical studies and clinical trials and other research and development activities; clinical trialresults; the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; our ability toobtain rights to technology; our ability to enter into future collaborations with industry partners and the terms, timing and success of anysuch collaboration; the27 cost, timing and success of regulatory filings and approvals; our ability to obtain adequate financing in the future through productlicensing, co-promotional arrangements, public or private equity or debt financing or otherwise; general economic and businessconditions; competition; business abilities and judgment of personnel; availability of qualified personnel; and other factors referencedherein.All forward-looking statements contained in this annual report are based on information available to the Company on the date hereof,and the Company assumes no obligation to update any such forward-looking statements, except as specifically required by law.Accordingly, past results and trends should not be used to anticipate future results or trends.OverviewNovavax, Inc., a Delaware corporation (“Novavax” or the “Company”), was incorporated in 1987, and is a clinical-stagepharmaceutical company focused on creating differentiated, value-added vaccines that leverage the Company’s proprietary virus-likeparticle (“VLP”) technology. VLPs imitate the three-dimensional structures of viruses but are composed of recombinant proteins andtherefore, are believed incapable of causing infection and disease. Our proprietary production technology uses insect cells rather thanchicken or mammalian eggs. The Company’s current product targets include vaccines against the H5N1, H9N2 and other subtypes ofavian influenza with pandemic potential, human seasonal influenza, Varicella Zoster, which causes shingles and a fourth undiscloseddisease target.On July 31, 2007, the Company began Phase I/IIa clinical trials for its H5N1 pandemic influenza vaccine. In December 2007, theCompany announced favorable interim results for its pandemic influenza vaccine that demonstrated immunogenicity and safety. TheCompany plans to begin patient enrollment in the second portion of the Phase I/IIa trial before March 31, 2008 to gather additional patientimmunogenicity and safety data, as well as determining a final dose through completion of this clinical trial. It is anticipated that initialimmunogenicity and safety data will be available early in the third quarter of 2008 with study completion by the end of 2008 to includeon-going safety data collection.The Company also has a drug delivery platform based on its micellar nanoparticle (“MNP”) technology, proprietary oil and waternano emulsions used for the topical delivery of drugs. The MNP technology was the basis for the development of the Company’s firstFood and Drug Administration (“FDA”) approved estrogen replacement product known as Estrasorb®. In February 2008, the Companysold assets related to Estrasorb® in the United States, Canada and Mexico to Graceway Pharmaceuticals, LLC (“Graceway”). TheCompany is seeking to divest its non-vaccine MNP technology through sales and licenses.The Company’s vaccine products currently under development or in clinical trials will require significant additional research anddevelopment efforts, including extensive pre-clinical and clinical testing and regulatory approval, prior to commercial use. There can beno assurance that the Company’s research and development efforts will be successful or that any potential products will prove to be safeand effective in clinical trials. Even if developed, these vaccine products may not receive regulatory approval or be successfullyintroduced and marketed at prices that would permit the Company to operate profitably. The commercial launch of any vaccine productis subject to certain risks including, but not limited to, manufacturing scale-up and market acceptance. No assurance can be given thatthe Company can generate sufficient product revenue to become profitable or generate positive cash flow from operations at all or on asustained basis. The Company’s efforts to divest the MNP technology may not be successful because the Company may not be able toidentify a potential licensee or buyer and, even if the Company does identify a licensee or buyer, the price and terms may not beacceptable to the Company.Summary of Significant TransactionsGraceway AgreementsIn February 2008, the Company entered into an asset purchase agreement with Graceway Pharmaceuticals, LLC (“Graceway”),pursuant to which Novavax sold Graceway its assets related to Estrasorb® in the United States, Canada and Mexico. The assets soldinclude certain patents related to the micellar nanoparticle technology (the “MNP Technology”), trademarks, know-how, manufacturingequipment, customer and supplier relations, goodwill28 and other assets. Novavax retained the rights to commercialize Estrasorb® outside of the United States, Canada and Mexico.In February 2008, Novavax and Graceway also entered into a supply agreement, pursuant to which Novavax has agreed tomanufacture additional units of Estrasorb with final delivery expected in July 2008. Graceway will pay a preset transfer price per unit ofEstrasorb for the supply of this product. Once Novavax has delivered the required quantity of Estrasorb, Novavax must clean themanufacturing equipment and prepare the equipment for transport. Graceway will remove the equipment from the manufacturing facilityand Novavax will then exit the facility.In February 2008, Novavax and Graceway also entered into a license agreement, pursuant to which Graceway granted Novavax anexclusive, non-transferable (except for certain allowed assignments and sublicenses), royalty-free, limited license to the patents and know-how that Novavax sold to Graceway pursuant to the asset purchase agreement. The licensed grant allows Novavax to make, use and selllicensed products and services in certain, limited fields.The net cash proceeds from these transactions are expected to be in excess of $2.0 million over the first half of 2008. The license andsupply agreements with Allergan, Inc., successor-in-interest to Esprit Pharma, Inc., were terminated in February 2008 and October 2007,respectively.License Agreement with Wyeth Holdings CorporationOn July 5, 2007, we entered into a License Agreement with Wyeth Holdings Corporation, a subsidiary of Wyeth (“Wyeth”). Thelicense is a non-exclusive, worldwide license to a family of patent applications covering VLP technology for use in human vaccines incertain fields of use. The agreement provides for an upfront payment, annual license fees, milestone payments and royalties on anyproduct sales. Payments under the agreement to Wyeth could aggregate up to $6.5 million in 2008, depending on the achievement ofclinical development milestones. The agreement will remain effective as long as at least one claim of the licensed patent rights cover themanufacture, sale or use of any product unless terminated sooner at Novavax’s option or by Wyeth for an uncured breach by Novavax.License Agreement with University of Massachusetts Medical SchoolEffective February 26, 2007, we entered into a worldwide agreement to exclusively license a VLP technology from the University ofMassachusetts Medical School (“UMMS”). Under the agreement, we have the right to use this technology to develop VLP vaccines for theprevention of any viral diseases in humans. We made an upfront cash payment to UMMS. In addition, we will make certain paymentsbased on development milestones as well as future royalties on any sales of products that may be developed using the technology.Sublease Agreement with PuriCore, Inc.In April 2006, we entered into a sublease agreement with Sterilox Technologies, Inc. (now known as PuriCore, Inc.) to sublease20,469 square feet of the Company’s Malvern, Pennsylvania corporate headquarters at a premium price per square foot. The sublease,with a commencement date of July 1, 2006, expires on September 30, 2009. This sublease is consistent with our strategic focus toincrease our presence in Rockville, Maryland, where our vaccine operations are currently located. In line with that strategy, in October2006, we entered into a lease for an additional 51,000 square feet in Rockville, Maryland. Accordingly, in October 2006, the Companyentered into an amendment to the Sublease Agreement with PuriCore, Inc. to sublease an additional 7,500 square feet of the Malverncorporate headquarters at a premium price per square foot. This amendment has a commencement date of October 25, 2006 and expiresconcurrent with the initial lease on September 30, 2009.Convertible NotesOn June 15, 2007, we entered into amendment agreements (the “Amendments”) with each of the holders of the outstanding4.75% senior convertible notes (the “Notes”) to amend the terms of the Notes. As of December 31, 2007, $22.0 million aggregate principalamount remained outstanding under the Notes. The Amendments (i) lowered the conversion price from $5.46 to $4.00 per share,(ii) eliminated the holders’ right to require the29 Company to redeem the Notes if the weighted average price of the Company’s common stock is less than the conversion price on 30 of the40 consecutive trading days preceding July 19, 2007 or July 19, 2008 and (iii) mandated that the Notes be converted into Companycommon stock if the weighted average price of the Company’s common stock is greater than $7.00 (a decrease from $9.56) in any 15out of 30 consecutive trading days after July 19, 2007.Notes with Former DirectorsIn March 2002, pursuant to the Novavax, Inc. 1995 Stock Option Plan, we approved the payment of the exercise price of. optionsby two of directors through the delivery of full-recourse, interest-bearing promissory notes in the aggregate amount of $1,480,000. Thenotes were secured by an aggregate of 261,667 shares of our common stock.In May 2006, one of these directors resigned from the Company’s board of directors. Following his resignation, the Companyapproved an extension of the former director’s $448,000 note to be payable on December 31, 2007, or earlier to the extent of the netproceeds from any sale of the pledged shares. This note has not yet been paid and the Company and the former director are currentlynegotiating the terms of an extension.In March 2007, the other director resigned. Following his resignation, the Company approved an extension of the former director’s$1,031,668 note. The note continues to accrue interest at 5.07% per annum and is secured by shares of common stock owned by theformer director and is payable on June 30, 2009, or earlier to the extent of the net proceeds from any sale of the pledged shares. Inaddition, the Company has the option to sell the pledged shares on behalf of the former director at any time that the market price of ourcommon stock, as reported on NASDAQ Global Market, exceeds $7.00 per share.As of December 31, 2007, the Company has reserved an amount of $1,041,005 for the outstanding note receivables. This amounthas been netted against the pledged common stock. Due to heightened sensitivity in the current environment surrounding related-partytransactions and the extensions of the maturity dates, these transactions could be viewed negatively in the market and our stock pricecould be negatively affected.Critical Accounting Policies and Use of EstimatesWe prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States.Such accounting principles require that our management make estimates and assumptions that affect the reported amount of assets andliabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. We base our estimates on historical and anticipated results and trends and on various otherassumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form thebasis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By theirnature, estimates are subject to an inherent degree of uncertainty. Actual results could differ materially from these estimates. The items inour consolidated financial statements that have required us to make significant estimates and judgments are as follows:Revenue Recognition and AllowancesThe 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 anarrangement exists, delivery has occurred, the price is fixed and determinable and collectability is reasonably assured. The Companyestablishes allowances for estimated uncollectible amounts, product returns, rebates and charge backs based on historical trends andspecifically identified problem accounts. A large part of the Company’s product sales are to Allergan or to distributors who resell theproducts to their customers. The Company provides rebates to members of certain buying groups who purchase from the Company’sdistributors, to distributors that sell to their customers at prices determined under a contract between the Company and the customer, andto state agencies that administer various programs such as the federal Medicaid and Medicare programs. Rebate amounts are usuallybased upon the volume of purchases or by reference to a specific price for a product. The Company estimates the amount of the rebatethat will be paid, and records the liability as a reduction of30 revenue when the Company records the sale of the products. Settlement of the rebate generally occurs from three to twelve months after thesale. The Company regularly analyzes the historical rebate trends and adjusts recorded reserves for changes in trends, distributorinventory levels, product prescription data and generic competition.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 ofSAB No. 104 in determining if these payments and fees represent the culmination of a separate earnings process or if they should bedeferred and recognized as revenue as earned over the life of the related agreement. Milestone payments are recognized as revenue uponachievement of contract-specified events and when there are no remaining performance obligations. Revenue earned under researchcontracts is recognized in accordance with the terms and conditions of such contracts for reimbursement of costs incurred and definedmilestones.SFAS No. 123RAs of January 1, 2006 (“effective date”), we adopted SFAS No. 123R in accounting for stock options issued to our employees,directors and consultants using the modified prospective method. The modified prospective method requires that compensation costs berecognized for all share-based payments granted after the effective date and for all awards granted prior to the effective date that areunvested using the requirements of SFAS No. 123R. Prior to the adoption of SFAS No. 123R, we accounted for our stock-basedcompensation using the principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APBNo. 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 themodified prospective method, there are no one-time effects from the adoption of SFAS No. 123R, such as a cumulative effect adjustment.There were no modifications to outstanding stock options as of December 31, 2006 and 2007. There have been no changes in thequantity or type of instruments used in share-based payment programs. There has been no material modifications to the valuationmethodologies or assumptions from those used in estimating the fair value of options under SFAS No. 123 other than the adjustments forexpected volatility. Prior to the adoption of SFAS. No. 123R, we utilized the preceding 12 month period historical stock prices indetermining the expected volatility. With the adoption of SFAS No. 123R, we use the historical volatilities based on stock prices since theinception of the stock plans in determining the expected volatility. Forfeiture rates are estimated based on historical activities since theinception of the stock plans. There have been no changes in the normal terms of share-based payment agreements. For grants awardedprior to January 1, 2006, we accounted for compensation cost using a graded method. For grants awarded on or after January 1, 2006,we accounted for compensation cost using a straight-line method. As of December 31, 2007, the aggregate fair value of the remainingcompensation cost of unvested options, as determined using a Black-Scholes option valuation model, was approximately $2,438,000 (netof estimated forfeitures). This remaining compensation cost is expected to be recognized over a weighted average period of 1.6 years. TheCompany recorded compensation costs in the Consolidated Statements of Operations associated with SFAS No. 123 as follows: Years EndedDecember 31, 2007 2006 (In thousands) Cost of products sold (which includes idle capacity) $35 $48 Research and development 573 561 General and administrative 737 1,167 Total effect of adopting SFAS No. 123R $1,345 $1,776 31 Research and DevelopmentResearch and development costs are expensed as incurred. Such costs include internal research and development expenditures (suchas salaries and benefits, raw materials and supplies) and contracted services (such as sponsored research, consulting and testingservices) of proprietary research and development activities and similar expenses associated with collaborative research agreements.Income TaxesThe Company’s income taxes are accounted for using the liability method. Under the liability method, deferred income taxes arerecognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts ofexisting assets and liabilities and their respective tax basis and operating loss carry forward. Deferred tax assets and liabilities aremeasured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to berecovered or settled.The effect of changes in tax rates on deferred tax assets and liabilities is recognized in operations in the period that includes theenactment date. A valuation allowance is established when necessary to reduce net deferred tax assets to the amount expected to be realized.The Company has provided a full valuation allowance against its net deferred tax assets as of December 31, 2007 and 2006.Goodwill and Intangible AssetsGoodwill originally results from business acquisitions. Assets acquired and liabilities assumed are recorded at their fair values; theexcess of the purchase price over the identifiable net assets acquired is recorded as goodwill. Other intangible assets are a result of productacquisitions, non-compete arrangements and internally discovered patents. In accordance with SFAS No. 142, Goodwill and OtherIntangible Assets (“SFAS No. 142”) goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject toimpairment tests annually, or more frequently should indicators of impairment arise. The Company utilizes a discounted cash flowanalysis that includes profitability information, estimated future operating results, trends and other information in assessing whether thevalue of the indefinite-lived intangible assets can be recovered. Under SFAS No. 142, goodwill impairment is deemed to exist if thecarrying value of a reporting unit exceeds its estimated fair value. In accordance with the requirements of SFAS No. 142, the Companyinitially tested its goodwill for impairment as of January 1, 2002 and determined that no impairment was present. The Companythereafter performed the required annual impairment test as of December 31 of each year on the carrying amount of its goodwill.Disposal of Long-Lived Assets/Discontinued OperationsWe account for the impairment of long-lived assets and long-lived assets to be disposed of in accordance with Statement of FinancialAccounting Standard No. 144, Accounting for the Impairment or Disposal (“SFAS No. 144”). SFAS No. 144 requires a periodicevaluation of the recoverability of the carrying value of long-lived assets and identifiable intangibles and whenever events or changes incircumstances indicate that the carrying value of the asset may not be recoverable. Examples of events or changes in circumstances thatindicate that the recoverability of the carrying value of an asset should be assessed include, but are not limited to, the following: asignificant decrease in the market value of an asset, a significant change in the extent or manner in which an asset is used, a significantphysical change in an asset, a significant adverse change in legal factors or in the business climate that could affect the value of an asset,an adverse action or assessment by a regulator, an accumulation of costs significantly in excess of the amount originally expected toacquire or construct an asset, a current period operating or cash flow loss combined with a history of operating or cash flow losses,and/or a projection or forecast that demonstrates continuing losses associated with an asset used for the purpose of producing revenue. Weconsider historical performance and anticipated future results in its evaluation of potential impairment. Accordingly, when indicators ofimpairment are present, we evaluate the carrying value of these assets in relation to the operating performance of the business and futureundiscounted cash flows expected to result from the use of these assets. Impairment losses are recognized when the sum of expected futurecash flows is less than the assets’ carrying value. SFAS No. 144 also provides accounting and reporting provisions for components of anentity that are classified as discontinued operations. We recorded an impairment loss in connection with the discontinued operations of itsPhiladelphia,32 Pennsylvania manufacturing facility for the year ended December 31, 2007 (See Note 11 — Discontinued Operations).Recent Accounting PronouncementsOther than the adoption of FASB interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) there have been nomaterial changes in our critical accounting policies or critical accounting estimates since December 31, 2006, nor have we adopted anyaccounting policy that has or will have a material impact on our consolidated financial statements. For further discussion of ouraccounting policies see Note 2 “Summary of Significant Accounting Policies” in the Notes to the Consolidated Financial Statementsincluded herewith.FIN 48In July 2006, the FASB issued Interpretation No. 48, (“FIN 48”), Accounting for Uncertainty in Income Taxes, to address thenoncomparability in reporting tax assets and liabilities resulting from a lack of specific guidance in SFAS No. 109, Accounting forIncome Taxes, on the uncertainty in income taxes recognized in an enterprise’s financial statements. Specifically, FIN 48 prescribes (a) aconsistent recognition threshold and (b) a measurement attribute for the financial statement recognition and measurement of a tax positiontaken or expected to be taken in a tax return, and provides related guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure, and transition. FIN 48 applies to fiscal years beginning after December 15, 2006.We adopted the provisions of FIN 48 on January 1, 2007. As a result of the adoption of FIN 48, we recorded $3.8 million inuncertain tax positions. The $3.8 million of unrecognized tax benefits was accounted for as a $3.8 million reduction to the January 1,2007 balance of deferred tax assets and a corresponding $3.8 million dollar reduction of the valuation allowances. Therefore, we did notrecord any adjustment to the beginning balance of retained earnings in our consolidated balance sheet. To the extent these unrecognized taxbenefits are ultimately recognized it would affect our annual effective income tax rate. We and our subsidiary file income tax returns in theUnited States federal jurisdiction and in various states. We had tax net operating loss and credit carryforwards that are subject toexamination for a number of years beyond the year in which they are utilized for tax purposes. Since a portion of these carryforwardsmay be utilized in the future, many of these attribute carryforwards may remain subject to examination.Our policy is to recognize interest and penalties related to income tax matters in income tax expense. As of January 1, andDecember 31, 2007, we had no accruals for interest or penalties related to income tax matters.SFAS No. 157In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157, FairValue Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 applies under otheraccounting pronouncements that require or permit fair value measurements, but does not require any new fair value measurements.SFAS No. 157 became effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periodswithin those fiscal years. We are currently evaluating what impact, if any, SFAS No. 157 will have on our financial condition, results ofoperations or liquidity.SFAS No. 159In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 — The Fair Value Option forFinancial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 provides companies an option to report certain financialassets and liabilities at fair value. The intent of SFAS No. 159 is to reduce the complexity in accounting for financial instruments and thevolatility in earnings caused by measuring related assets and liabilities differently. SFAS No. 159 is effective for financial statementsissued for fiscal years after November 15, 2007. We are evaluating the impact this new standard will have on our financial condition,results of operations, and liquidity.33 EITF Issue No. 07-1In December 2007, the FASB issued EITF Issue No. 07-1, Accounting for Collaborative Arrangements, which is effective forcalendar year companies on January 1, 2009. The Task Force clarified the manner in which costs, revenues and sharing payments madeto, or received by a partner in a collaborative arrangements should be presented in the income statement and set for the certain disclosuresthat should be required in the partners’ financial statements. We are currently assessing the potential impact of implementing thisstandard on our financial position and results of operations.SAB 110In December 2007, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 110 (“SAB 110”), whichpermits, under certain circumstances, the continued use of the “simplified” method of estimating the expected term of plan options asdiscussed in SAB No. 107 and in accordance with SFAS 123R. The guidance in this release is effective January 1, 2008. The impact ofthis standard on the consolidated financial statements is not expected to be material on our financial condition, results of operations, orliquidity.SFAS No. 141RIn December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations. (“SFAS No. 141R”) For calendar yearcompanies, the standard is applicable to new business combinations occurring on or after January 1, 2009. SFAS No. 141R requires anacquiring entity to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limitedexceptions. Most significantly, SFAS No. 141R will require that acquisition costs generally be expensed as incurred, certain acquiredcontingent liabilities will be recorded at fair value, and acquired in-process research and development will be recorded at fair value as anindefinite-lived intangible asset at the acquisition date. We do not expect the adoption of SFAS No. 141R to have a material impact on ourfinancial condition, results of operations or liquidity.SFAS No. 160In December 2007, the FASB also issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — AnAmendment of ARB No. 51, which is effective for fiscal years, and interim periods within those fiscal years, beginning on or afterDecember 15, 2008. The standard establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary andfor the deconsolidation of subsidiary. We do not expect the adoption of SFAS No. 160 to have a material impact on our financialcondition, results of operations or liquidity.Results of Operations for Fiscal Years 2007, 2006 and 2005 (In thousands, except percentage changes and share and per shareinformation)The following is a discussion of the historical consolidated financial condition and results of operations of Novavax, Inc. and itswholly owned subsidiary and should be read in conjunction with the consolidated financial statements and notes thereto set forth in thisAnnual Report on Form 10-K. Additional information concerning factors that could cause actual results to differ materially from those inthe Company’s forward-looking statements is contained from time to time in the Company’s SEC filings. 2007 2006 Change from Change from Revenues: 2006 2005 2005 Total net product sales $(58) $(699) (109)% $641 $(1,863) 74% $2,504 Contract research and development 1,388 320 30% 1,068 (730) (41)% 1,798 Royalties, milestone and licensing fees 125 96 331% 29 (1,012) (97)% 1,041 Total revenues $1,455 $(283) (16)% $1,738 $(3,605) (67)% $5,343 Revenues for 2007 consisted of product sales of negative $58,000, compared to $641,000 in 2006, contract research revenues of$1.4 million compared to $1.1 million in 2006 and royalties and milestone fees from licensed products of $125,000 compared to$29,000 in 2006. For the year ended December 31, 2007, total revenues were $1.4 million as compared to $1.7 million for the year endedDecember 31, 2006, a decrease of $0.3 million or 16%.34 The decrease in revenues during 2007 as compared to 2006 was principally due to the discontinued sale of Gynodiol in 2007 which afterreserves for sale returns netted total revenue of negative $58,000. Net product sales in 2006 were $0.6 million consisting primarily ofGynodiol. The increase in contract research revenues in 2007 as compared to 2006 was primarily due to higher governmentreimbursement for projects and milestones achieved in 2007. The increase in royalties and milestone payments in 2007 of $96,000 ascompared to 2006 was primarily due to additional fees in 2007 of $50,000 for a development project and additional royalties from a priorsales agreement.Revenues for 2006 consisted of product sales of $0.6 million compared to $2.5 million in 2005; contract research and developmentrevenues of $1.1 million in 2006 compared to $1.8 million in 2005; and royalties, milestone and licensing fees of $29,000 in 2006compared to $1.0 million in 2005. Total revenues for 2006 were $1.7 million as compared to $5.3 million for 2005, a decrease of$3.6 million or 67%. The primary reason for this decrease in revenues was the divestiture of assets related to AVC Cream andSuppositories, NovaNatal and NovaStart products to Pharmelle, LLC in September 2005.Contract research and development revenues for 2006 totaled $1.1 million as compared to 2005 contract research and developmentrevenues of $1.8 million. Revenues in 2006 were recognized under a National Institutes of Health (“NIH”) grant to develop a secondgeneration HIV/AIDS vaccine, three manufacturing contracts and one additional government contract.Royalties, milestone and licensing fees for 2006 of $29,000 was principally due to fees from a development project. This representsa $1.0 million decrease from $1.0 million in royalties, milestones and license fees for 2005 which consisted of a $1.0 million renewal feereceived from IGI, Inc. (“IGI”) in December 2005 in accordance with an option in a licensing agreement signed between the Company andIGI in December 1995. This payment gave IGI a ten-year renewal on licensed technologies in specific fields.Operating Costs and Expenses: 2007 2006 Change from Change from Operating Costs and Expenses: 2006 2005 2005 Cost of products sold $163 $(74) (31)% $237 $(173) (42)% $410 Research and development 17,600 6,271 55% 11,329 6,254 123% 5,075 Selling, general and administrative 13,963 2,675 24% 11,288 (3,746) (25)% 15,034 Facility exit costs — — — — (105) (100)% 105 Gain on sales of product assets — — — — 10,965 100% (10,965) $31,726 $8,872 39% $22,854 $13,195 37% $9,659 Cost of Products SoldCost of products sold decreased to $163,000 in 2007, compared to $237,000 in 2006. The decrease was entirely due to lower grosssales of Gynodiol due to the discontinued sale of the product during the third quarter of 2007.Cost of products sold decreased to $237,000 in 2006 compared to $410,000 in 2005. The decrease was due to the divestiture ofassets related to AVC Cream and Suppositories, NovaNatal and NovaStart products to Pharmelle, LLC in September 2005, and lowerGynodiol sales in 2006 when compared to the prior year.Research and Development ExpensesResearch and development costs increased from $11.3 million in 2006 to $17.6 million in 2007, an increase of $6.3 million, or55%. Research and development expenses were significantly higher in 2007 due to increases in personnel, facility and outside-testingcosts (including sponsored research and consulting agreements) associated with expanded preclinical testing and process development,manufacturing and quality-related programs, license fees paid to Wyeth Holdings Corporation and the initiation of human clinical trialsnecessary to advance our influenza vaccine candidates in clinical development.35 Research and development costs increased from $5.1 million in 2005 to $11.3 million in 2006, an increase of $6.3 million or123%. This increase was due primarily to higher research and development spending to support our strategic focus on creatingdifferentiated, value-added vaccines that leverage the Company’s proprietary VLP technology. Research and development expenses weresignificantly higher in 2006 due to increases in personnel, facility and outside testing costs (including sponsored research and consultingagreements) associated with expanded preclinical testing and process development, manufacturing and quality-related programs necessaryto move the Company’s influenza vaccine candidates into pre-clinical testing. Also contributing to this increase was the recognition of$0.5 million of non-cash compensation costs resulting from the implementation of SFAS No. 123R in 2006, using the modifiedprospective method, while no costs were recorded in 2005 utilizing the accounting recognition methods under APB No. 25.Estimated Cost and Time to Complete Major ProjectsThe expenditures that will be necessary to execute our business plan are subject to numerous uncertainties, which may adverselyaffect our liquidity and capital resources. As of December 31, 2007, our proprietary product and vaccine candidates were in early stagesof development. Due to the inherent nature of product development, future market demand for products and factors outside of our control,such as clinical results and regulatory approvals, we are unable to estimate the completion dates and the estimated total costs for thoseproduct candidates. The duration and the cost of clinical trials may vary significantly over the life of a project as a result of differencesarising during clinical trial protocol, including, but not limited to, the following: • number of patients that ultimately participate in the trial; • duration of the patient follow-up that seems appropriate in view of the results; • number of clinical sites included in the trials; and • length of time required to enroll suitable patient subjects.In addition, we test our potential products and vaccines in numerous preclinical studies to evaluate potential immune response,safety and toxicology in animals. We may conduct multiple human clinical trials to cover multiple indications for each product candidate.As we obtain results for our trials we may elect to discontinue clinical trials for certain product candidates or indications. We furtherbelieve that it is not possible to predict the length of regulatory approval time. Factors that are outside our control could significantly delaythe approval and marketability of our product candidates.As a result of the uncertainties discussed above and other risks and uncertainties, the duration and completion costs of our researchand development projects are difficult to estimate and are subject to numerous variations. Our inability to complete our research anddevelopment projects in a timely manner could significantly increase our capital requirements and could adversely impact our liquidity.These uncertainties could force us to seek external sources of financing from time to time in order to continue pursuing our businessstrategy. For more discussion of the risks and uncertainties and our liquidity, see Item 1A “Risk Factors” and see “Liquidity and CapitalResources”.Selling, General and AdministrativeSelling, general and administrative costs were $14.0 million in 2007 compared to $11.3 million in 2006. The increase of$2.7 million was primarily due to increased facility costs of approximately $1.2 million for the Company’s new facility in Rockville,Maryland which was leased in the fourth quarter of 2006; $0.9 million increase for reserves for loans to former Board of Directors basedon the value of the common stock of Novavax held for collateral and increased employee and related costs of $0.6 million.Selling, general and administrative costs were $11.3 million in 2006 compared to $15.0 million in 2005. The decrease in theseexpenses of $3.7 million was due to the discontinuation of the sales force in 2005, resulting from the sale of Estrasorb to Esprit Pharmain late 2005, and a corresponding reduction of $6.8 million in selling expenses. The savings in selling expenses was partially offset by anincrease of $1.2 million of non-cash compensation costs resulting from the implementation of SFAS No. 123R in 2006, using themodified prospective method, while no costs were recorded in 2005 utilizing the accounting recognition methods under APB No. 25. In36 addition, other factors contributing to partial offset were higher personnel, legal and consulting costs related to the Company’s VLP-basedvaccine development programs. The Company took steps to strengthen its intellectual property portfolio and initiate business developmentand commercial assessment activities related to its new vaccine development strategy.Also included in 2006 is a $167,000 reserve against a note receivable and its corresponding accrued interest due from a formerdirector of the Company. This reserve represents the difference between the book value of the receivables less the market value of thepledged shares of common stock of the Company as of December 31, 2006.Additionally, in 2005 general and administrative expenses included a $400,000 offset for Opportunity Grant funds received from theCommonwealth of Pennsylvania for the reimbursement of certain costs incurred with the move of our corporate headquarters and productdevelopment activities from Maryland to Pennsylvania. As a result of the Company’s decision to relocate its corporate headquarters andvaccine development activities back to Maryland, the Commonwealth of Pennsylvania requested repayment of the $400,000 OpportunityGrant received in 2005. The Company recorded a liability in 2006 reflecting its obligation to repay this amount.Other Operating Costs and ExpensesIn 2005, we recorded gains on sales of product assets totaling $11.0 million, which consisted of a $10.1 million gain from thelicensing of exclusive rights to market Estrasorb in North America to Allergan in October 2005 and a $0.9 million gain from thedivestiture of assets related to AVC Cream and Suppositories, NovaNatal and NovaStart products to Pharmelle, LLC in September 2005.We made an adjustment in 2005 of $0.1 million for additional contract termination costs incurred in connection with the relocationof our corporate headquarters. 2007 2006 Change from Change from 2006 2005 2005 Interest income (expense) Interest income $3,287 $20 1% $3,267 $2,937 890% $330 Interest expense (1,606) 121 (7)% (1,727) (606) (26)% (2,333) $1,681 $141 9% $1,540 $2,331 117% $(2,003)Interest income was $3.3 million in 2007, an increase of $20,000 from interest income recorded in 2006. Interest income wasrelatively unchanged, despite lower cash and cash equivalent balances in 2007, due to offsetting higher interest rates earned oninvestments in 2007 as compared to 2006. Interest expense decreased in 2007 as compared to 2006 by $121,000 to $1.6 million in 2007.The decrease in interest expense in 2007 from 2006 was principally due to conversion of $7.0 million face amount of the convertible notesinto equity in March 2006 partially offset by the amortization of debt discount of $221,000 related to the amendments to convertible notesmade in 2007. In connection with amendments to the convertible notes in 2007, we recorded a debt discount of $852,000 and increasedadditional paid-in capital accordingly. The debt discount is being amortized over the remaining term of the convertible notes.Interest income increased to $3.3 million in 2006 from $0.3 million in 2005. The increase of $3.0 million was due primarily tosignificantly higher investment balances resulting from the net proceeds from two equity-financing transactions during the first quarter of2006 which totaled $73.0 million as well as higher interest rates. Interest expense was $1.7 million in 2006 and $2.3 million in 2005 adecrease of $0.6 million. Interest expense related primarily to the 4.75% senior convertible notes totaling $35.0 million. In October 2005,certain holders of $6.0 million face amount of the convertible notes exercised their optional right to convert their notes plus accrued interestinto 1,070,635 shares of Novavax common stock. This reduced the aggregate principal amount of the convertible notes outstanding to$29.0 million as of December 31, 2005. In March 2006, certain holders of $7.0 million face amount of the convertible notes exercisedtheir optional right to convert their notes plus accrued interest into 1,294,564 shares of Novavax common stock. This further reduced theaggregate principal amount of the convertible notes outstanding to a face amount of $22.0 million as of December 31, 2006. Included ininterest expense for 2005 and 2006 is a $0.3 million and a $0.3 million write-off of deferred financing costs that corresponds37 to the conversion of $6.0 million in convertible debt in 2005 and $7.0 million in convertible debt in 2006. Also included in interestexpense for 2006 and 2005 is $0.3 million and $0.4 million, respectively, of amortization of deferred financing costs that corresponds tothe issuance of the 4.75% senior convertible notes in 2004.Discontinued OperationsIn October 2007, we entered into agreements to terminate our supply agreements with Allergan, successor-in-interest to Esprit. Inconnection with the termination, we decided to wind down operations at our manufacturing facility in Philadelphia, Pennsylvania. Theresults of operations for the manufacturing facility are being reported as discontinued operations. 2007 2006 2005 Change from Change from 2006 2005 Revenues $1,913 $(1,032) (35)% $2,945 $900 44.0% $2,045 Costs of products sold 6,758 2,071 44.2% 4,687 (694) (12.9)% 5,381 Excess inventory costs over market 1,267 (282) (18.2)% 1,549 30 2.0% 1,519 Research and development 63 (137) (68.5)% 200 200 N/A — General and administrative — — — — — — — Total operating expenses 8,088 1,652 25.7% 6,436 (464) (6.7)% 6,900 Net loss $(6,175) $(2,684) 76.9% $(3,491) $1,364 (28.1)% $(4,855)We recorded a loss from discontinued operations of $3.5 million for the year ended December 31, 2006 compared to $6.2 millionfor the year ended December 31, 2007, an increase of $2.7 million or 77%. The increase resulted from a decrease in revenue and anincrease in operating expenses. Revenue from discontinued operations decreased to $1.9 million for 2007 from $2.9 million for 2006, adecrease of $1.0 million. The decrease resulted from lower Estrasorb shipments due to adjustments in inventory levels made by Allerganto reflect sales volume activity. Revenue also decreased as a result of decreased contract research revenue associated with the Allerganagreement.Costs of products sold, which includes fixed idle capacity costs increased from $4.7 million to $6.8 million, an increase of$2.1 million, or 44%. Of the $6.8 million cost of products sold in 2007, $3.1 million represented idle plant capacity costs at ourmanufacturing facility. The remaining $3.7 million represented $1.5 million related to the cost of Estrasorb sales to Allergan and a$2.2 million impairment charge related to the fixed assets at our manufacturing facility. Of the $4.7 million cost of products sold in2006, $2.5 million represents idle plant capacity costs and the balance of $2.2 million represent the costs of Estrasorb sales to Allergan.We were required to complete the manufacture of the remaining orders of Estrasorb in accordance with our agreement with Allergan inOctober 2007 to terminate the Allergan Supply Agreement.In accordance with the Supply Agreement with Allergan, during 2006 and 2007, we were required to sell Estrasorb at a price that islower than our manufacturing costs. These excess costs over the product cost totaled $1.3 million for 2007 and $1.5 million for 2006.Research and development costs from discontinued operations decreased to $63,000 in 2007 from $200,000 in 2006, primarily as aresult of the termination of our agreements with Allergan.We recorded a loss from discontinued operations of $3.5 million for the year ended December 31, 2006 compared to $4.9 million forthe year ended December 31, 2005, a decrease of $1.4 million or 28%. The decrease in the loss resulted from an increase in revenue and adecrease in operating expenses. Revenues from discontinued operations increased to $2.9 million for 2006 from $2.0 million for 2005, anincrease of $0.9 million. The increase primarily resulted from $0.8 million of contract research revenue during 2006, royalties recordedon the sales of Estrasorb to Allergan, partially offset by a decrease in Estrasorb product sales to Allergan due to reduced inventoryrequirements. In October 2005, we licensed the exclusive rights to market Estrasorb in North America to Allergan. Pursuant to the LicenseAgreement with Allergan, we recorded $0.3 million of royalty revenue in 2006. Under the terms of the License and Supply Agreementswith Allergan, we agreed to manufacture and supply38 Estrasorb to Allergan for a lower price than what we previously sold Estrasorb to our distributors. Estrasorb product revenue in 2005includes sales to our distributors through the date of the License and Supply Agreements with Allergan. Product revenue for all periodsafter the date of the Agreements represents sales to Allergan.Costs of products sold, which includes fixed idle capacity costs decreased to $4.7 million in 2006 from $5.4 million in 2005, adecrease of $0.7 million, or 13%. Of the $4.7 million cost of products sold in 2006, $2.5 million represents idle plant capacity costs atour manufacturing facility. The remaining $2.2 million represents the cost of Estrasorb sales to Allergan. Of the $5.4 million cost ofproducts sold in 2005, $3.2 million represents idle plant capacity costs and the balance of $2.2 million represents the costs of Estrasorbsales.As discussed above, in accordance with the Supply Agreement with Allergan, during 2005 and 2006, we were required to sellEstrasorb at a price that is lower than our manufacturing costs. These excess costs over the product cost totaled $1.5 million for both2006 and 2005.We recorded research and development costs from discontinued operations in 2006 of $200,000 related to costs incurred for contractresearch performed in our manufacturing facility. We did not have any research and development costs in 2005.Net Loss 2007 2006 Change from Change from 2006 2005 2005 Net Loss $(34,765) $(11,697) (51)% $(23,068) $(11,894) (97)% $(11,714)Net loss per share $(0.57) $(0.17) (44)% $(0.39) $(0.13) (50)% $(0.26)Weighted shares outstanding 61,101,747 58,664,365 42,758,302 Our net loss for 2007 totaled $34.8 million or $(0.57) loss per share, which was an increase $11.7 million, or $0.18 per share thanthe net loss for 2006 of $23.1 million, or $(0.39) per share. The increase in the net loss in 2007 was principally due to increases inresearch and development expenses of $6.0 million, increases in net losses from discontinued operations of $2.7 million, the cost of ournew facility in Rockville, Maryland of $1.2 million, and an increase in reserves for two former Board members note receivables of$0.9 million.Our net loss for 2006 was $23.1 million or $(0.39) per share, as compared to $11.2 million or $(0.26) per share for 2005, anincrease of $11.9 million. The increase in the net loss in 2006 from 2005 was principally due to the gain on sales and product assets of$11.0 recorded in 2005. In addition, decreases in net revenues of $3.6 million were partially offset by decreased operating expenses of$2.1 million and a decreased net loss for discontinued operations of $1.2 million.Weighted shares outstanding increased in 2007 to 61.1 million shares from 58.7 million in 2006. The increase in weighted shares in2007 was principally due to vesting of restricted stock and exercising of stock options.Weighted shares outstanding increased from 42.8 million shares in 2005 to 58.7 million shares in 2006 due primarily to the equityfinancing transactions in the first quarter of 2006 coupled with the conversion of $7.0 million of senior convertible notes into shares ofNovavax common stock during this same period. In addition, exercises of stock options and issuance of restricted stock as compensationalso contributed to this increase in weighted shares outstanding.Liquidity Matters and Capital ResourcesOur future capital requirements depend on numerous factors including but not limited to, the commitments and progress of ourresearch and development programs, the progress of preclinical and clinical testing, the time and costs involved in obtaining regulatoryapprovals, the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, competingtechnological and market developments, and manufacturing costs related to Estrasorb. We plan to continue to have multiple vaccines andproducts in various stages of39 development and we believe our research and development as well as general and administrative expenses and capital requirements willcontinue to exceed our revenues. Future activities, particularly vaccine and product development, are subject to our ability to raise fundsthrough debt or equity financing, or collaborative arrangements with industry partners and government agencies. Year Ended December 31, Summary of Cash Flows: 2007 (In thousands) Net cash (used in) provided by: Operating activities $(26,742)Investing activities 24,651 Financing activities (720)Net decrease in cash and cash equivalents (2,811)Cash and cash equivalents at beginning of year 7,161 Cash and cash equivalents at end of year $4,350 In addition to revenues of $8.5 million from continuing operations, during the three-year period ended December 31, 2007, we havefunded our operations primarily from the following activities:Net proceeds (In millions) 2005 2006 2007 Total Sales of common stock in public offerings, net $20.7 $56.0 $— $76.7 Sales of product assets 12.7 — — 12.7 License payments received 1.0 2.5 — 3.5 Exercise of stock options and warrants 0.4 1.7 0.1 2.2 $34.8 $60.2 $0.1 $95.1 As of December 31, 2007, we held $46.5 million in cash and investments as compared to $73.6 million at December 31, 2006. The$27.1 million decrease in cash and investments during 2007, was due to the operating loss from continued operations of $28.6 million,cash used from discontinued operations of $1.0 million, and principal payments on debt of $0.8 million, partially offset by non-cashexpenses of $4.6 million and net balance sheet changes (favorable) of $0.6 million. In addition, capital expenses totaled $2.0 million in2007, primarily for equipment for vaccine development and the initial investment in the build out of a new GMP facility in our corporateheadquarters.As of December 31, 2007, our working capital was $42.8 million compared to $72.0 million as of December 31, 2006. This$29.2 million decrease includes $28.0 million in operating and capital expense activities plus $0.8 million in principal payments on ouroutstanding debt obligations.We intend to use the proceeds from our equity financing transactions for general corporate purposes, including but not limited to ourinternal research and development programs, such as preclinical and clinical testing and studies for our vaccine and other productcandidates, the development of new technologies, capital improvements and general working capital. In the first quarter of 2007, weentered into sponsored research and licensing arrangements with two academic institutions to conduct early stage research in the vaccinearea. These and similar arrangements that we may enter into may aggregate to a material amount of research and development spendingthat will accelerate the use of such proceeds. We will continue to fund our operations through product licensing, co-developmentarrangements on new products, or the public or private sale of securities of the Company. There can be no assurance that we will be ableto obtain additional capital or, if such capital is available, that the terms of any financing will be satisfactory to the Company.As of December 31, 2007, we had $22 million of senior convertible notes outstanding (the “Notes”). The Notes carry a 4.75%coupon; are currently convertible into shares of Novavax common stock at $4.00 per share; and mature on July 19, 2009. We mayrequire that the Notes be converted into Company common stock if the weighted average price of the our common stock is greater than$7.00 in any 15 out of 30 consecutive trading days after July 19, 2007.40 In February 2008, we sold our assets related to Estrasorb® in the United States, Canada and Mexico to Graceway Pharmaceuticals,LLC (“Graceway”). The assets sold include certain patents related to the micellar nanoparticle technology (the “MNP Technology”),trademarks, manufacturing equipment, customer and supplier relations and goodwill. Novavax and Graceway also entered into a supplyagreement, pursuant to which Novavax has agreed to manufacture additional units of Estrasorb with final delivery expected in mid 2008.Graceway will pay a preset transfer price per unit of Estrasorb for the supply of this product. The net cash proceeds from this transactionare estimated to exceed $2 million. The license and supply agreements with Allergan, Inc., successor-in-interest to Esprit Pharma, Inc.,were terminated in February 2008 and October 2007, respectively.Based on our assessment of the availability of capital and our business operations as currently contemplated, including our clinicaldevelopment plans, in the absence of new financings, any potential redemption of Notes, licensing arrangements or partnershipagreements, we believe we will have adequate capital resources through the first quarter of 2009. If we are unable to obtain additionalcapital, we will continue to assess our capital resources and we may be required to delay, reduce the scope of, or eliminate one or more ofour product research and development programs, downsize our organization, or reduce general and administrative infrastructure.Contractual Obligations and CommitmentsWe utilize different financing instruments, such as debt and operating leases, to finance various equipment and facility needs. Thefollowing table summarizes our current financing obligations and commitments (in thousands) as of December 31, 2007: Less than 1 - 3 4 5 More than Commitments & Obligations Total 1 Year Years Years 5 Years Convertible notes $22,000 $— $22,000 $— — Operating leases 8,241 2,412 3,187 2,584 $58 Notes payable 1,354 855 392 — — Total principal payments 31,595 3,267 25,579 2,691 58 Less: Subleases (869) (506) (363) — — Net principal payments 30,726 2,761 25,216 2,691 58 Interest 2,120 1,072 1,048 — — Total commitments & obligations $32,846 $3,833 $26,264 $2,691 $58 Off-Balance Sheet ArrangementsWe are not involved in any off-balance sheet agreements that have or are reasonably likely to have a material future effect on itsfinancial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capitalresources.Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKThe primary objective of our investment activities is to preserve our capital until it is required to fund operations while at the sametime maximizing the income we receive from our investments without significantly increasing risk. As of December 31, 2007, we hadcash and cash equivalents and short-term investments of $46.5 million as follows:Cash and cash equivalents $4.4 million Short-term investments classified as held to maturity $32.9 million Short-term investments classified as available for sale $9.2 million Our exposure to market risk is confined to our investment portfolio. Our short-term investments are classified as either held tomaturity or available for sale. Short term investment held to maturity are comprised of certificates of deposit, corporate bonds, andgovernment agency bonds. These investments are held at amortized cost. We do not believe that a change in the market rates of interestwould have any significant impact on the realizable value of our41 investment portfolio. Changes in interest rates may affect the investment income we earn on our investments and, therefore, could impactour cash flows and results of operations. Our investment in auction rate securities is classified as short-term investments available forsale on our consolidated balance sheet and is comprised of taxable municipal bonds. Auction rate securities are variable rate bonds tied toshort-term interest rates with maturities on the face of the securities between 2022 and 2042. These auction rate securities have interest rateresets through a modified Dutch auction, at predetermined short-term intervals. Interest paid during a given period is based upon theinterest rate determined during the prior auction. As a result of current negative conditions in the credit markets, auctions for thesesecurities may fail to settle on their respective settlement dates. The current market for the auction rate securities is uncertain and we willcontinue to monitor and evaluate the market for these securities to determine if impairment of the carrying value of the securities hasoccurred. To our knowledge, there have been no auction rate failures related to auction rate securities held by the Company.We are headquartered in the United States where we conduct the vast majority of our business activities. Accordingly, we have nothad any material exposure to foreign currency rate fluctuations.On June 15, 2007, we entered into amendment agreements (the “Amendments”) with each of the holders of the outstanding Notes toamend the terms of the Notes. As of December 31, 2007, $22.0 million aggregate principal amount remained outstanding under the Notes.The Amendments (i) lowered the conversion price from $5.46 to $4.00 per share, (ii) eliminated the holders’ right to require the Companyto redeem the Notes if the weighted average price of the Company’s common stock is less than the conversion price on 30 of the 40consecutive trading days preceding July 19, 2007 or July 19, 2008 and (iii) mandated that the Notes be converted into Companycommon stock if the weighted average price of the Company’s common stock is greater than $7.00 (a decrease from $9.56) in any 15out of 30 consecutive trading days after July 19, 2007. In connection with the Amendments, the Company recorded a debt discount of$852,000 and increased additional paid-in capital accordingly. The debt discount will be amortized over the remaining term of the Notes.Interest expense included $221,000 for the year ended December 31, 2007 related to the amortization of the debt discount.At December 31, 2007, we had a total debt of $22.7 million, most of which bears interest at fixed interest rates. We do not believethat it is exposed to any material interest rate risk as a result of our borrowing activities.Information required under this section is also contained in Part I, Item IA of this report and in Item 8 of this report, and isincorporated herein by reference.Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAThe information required by this item is set forth on pages F-1 to F-38.Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSUREOn April 17, 2006, Novavax, Inc. dismissed Ernst & Young LLP as its independent registered public accounting firm. The reportof Ernst & Young LLP on the consolidated financial statements for the fiscal year ended December 31, 2005 contained no adverse opinionor disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. The report of Ernst &Young LLP on the consolidated financial statements for the fiscal year ended December 31, 2004 contained no adverse opinion ordisclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles, except that the opinioncontained a “going concern” explanatory paragraph. The Company’s Audit Committee participated in and approved the decision to changeindependent registered public accounting firms.In connection with its audits for the two most recent fiscal years and through April 17, 2006, there have been no disagreements withErnst & Young LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure,which disagreements if not resolved to the satisfaction of Ernst & Young LLP would have caused them to make reference thereto in theirreport on the consolidated financial statements for such years. During the two fiscal years ended December 31, 2005 and 2004 andthrough April 17, 2006, there were no reportable events (as defined in Regulation S-K Item 304 (a)(1)(v)). The Registrant requested thatErnst & Young42 LLP furnish it with a letter addressed to the SEC stating whether or not it agrees with the above statements. A copy of such letter, datedApril 20, 2006 is filed as Exhibit 16 to the Form 8-K filed on April 21, 2006.On April 20, 2006, the Company engaged Grant Thornton LLP to act as the Company’s independent registered public accountingfirm. Grant Thornton LLP replaced Ernst & Young LLP. Prior to the engagement of Grant Thornton, neither the Company nor anyone onbehalf of the Company consulted with Grant Thornton during the Company’s two most recent fiscal years and through April 20, 2006,in any manner regarding: (A) either the application of accounting principles to a specified transaction, either completed or proposed, or thetype of audit opinion that might be rendered on the Company’s financial statements, and neither was a written report provided to theCompany nor was oral advice provided that Grant Thornton concluded was an important factor considered by the Company in reachinga decision as to the accounting, auditing, or financial reporting issue, or (B) the subject of either a disagreement or a reportable event, asdefined in Item 304 (a)(1)(iv), respectively, of Regulation S-K.Item 9A. CONTROLS AND PROCEDURESEvaluation of Disclosure Controls and ProceduresThe Company’s chief executive officer and chief financial officer have reviewed and evaluated the effectiveness of the Company’sdisclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended)as of the end of the period covered by this annual report. Based on that review and evaluation, which included the participation ofmanagement and certain other employees of the Company, the chief executive officer and chief financial officer have concluded that theCompany’s current disclosure controls and procedures, as designed and implemented, are effective.Changes in Internal Control over Financial ReportingThe Company’s management, including our principal executive officer and principal financial officer, has evaluated any changes inthe Company’s internal control over financial reporting that occurred during the year ended December 31, 2007, and has concluded thatthere was no change that occurred during the year ended December 31, 2007 that has materially affected, or is reasonably likely tomaterially affect, the Company’s internal control over financial reporting.Management’s Annual Report on Internal Control over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting as defined inRules 13a-15(f) and 15d-15(f) under the Exchange Act. Because of its inherent limitations, internal control over financial reporting maynot prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controlsmay become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2007. In making thisassessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)in Internal Control-Integrated Framework. Based on this assessment, management believes that, as of December 31, 2007, our internalcontrol over financial reporting is effective.The effectiveness of our internal control over financial reporting as of December 31, 2007, has been audited by Grant ThorntonLLP, an independent registered public accounting firm, as stated in their report which is included in Item 8 – Financial Statements.Item 9B. OTHER INFORMATIONNone.43 PART IIIItem 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEWe incorporate herein by reference the information concerning our directors, officers and corporate governance to be included in ourdefinitive Proxy Statement for our 2008 Annual Meeting of Stockholders to be held on June 18, 2008 (the “2008 Proxy Statement”). Weexpect to file the 2008 Proxy Statement within 120 days after the close of the fiscal year ended December 31, 2007.Item 11. EXECUTIVE COMPENSATIONWe incorporate herein by reference the information concerning executive compensation to be contained in the 2008 Proxy Statement.Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERSWe incorporate herein by reference the information concerning security ownership of certain beneficial owners and management andrelated stockholder matters to be contained in the 2008 Proxy Statement.The following table provides the Company’s equity compensation plan information as of December 31, 2007. Under these plans, theCompany’s common stock may be issued upon the exercise of options. See also the information regarding stock options of the Companyin Note 9, “Stock Options” to the Consolidated Financial Statements included herewith.Equity Compensation Plan Information Number of Securities Remaining Available Number of Securities Weighted-Average for Future Issuance to be Issued Exercise Price of Under Equity Upon Exercise of Outstanding Options, Compensation Plans Outstanding Options, Warrants and Rights (Excluding Securities Plan Category Warrants and Rights (a) (b) Reflected in Column(a)(c) Equity compensation plans approved by securityholders(1) 6,290,520 $4.50 4,122,704 Equity compensation plans not approved bysecurity holders N/A N/A N/A (1)Includes the Company’s 2005 Stock Incentive Plan, 1995 Stock Option Plan and 1995 Director Stock Option Plan.Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEWe incorporate herein by reference the information concerning certain related party transactions set forth in Note 14 to ourConsolidated Financial Statements included herewith. We incorporate herein by reference the information concerning certain otherrelationships and related transactions and director independence to be contained in the 2008 Proxy Statement.Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICESWe incorporate herein by reference the information concerning principal accountant fees and services to be contained in the 2008Proxy Statement.44 PART IVItem 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES(a) The following documents are filed as part of the Annual Report:(1) Index to Consolidated Financial StatementsReports of Independent Registered Public Accounting Firms F- 2 Consolidated Balance Sheets as of December 31, 2007 and 2006 F- 5 Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005 F- 6 Consolidated Statements of Stockholders’ Equity for years ended December 31, 2007, 2006 and 2005 F- 7 Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005 F- 8 Notes to Consolidated Financial Statements F- 9 (2) Financial Statement SchedulesAll financial statement schedules are omitted because they are not applicable, not required under the instructions or all theinformation required is set forth in the financial statements or notes thereto.(3) ExhibitsExhibits marked with a single asterisk (*) are filed herewith.Exhibits marked with a double plus sign (††) refer to management contracts, compensatory plans or arrangements.Confidential treatment has been requested for portions of exhibits marked with a double asterisk (**) and granted for portions ofexhibits marked with a triple asterisk (***).All other exhibits listed have previously been filed with the Commission and are incorporated herein by reference. 3.1 Amended and Restated Certificate of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 to theCompany’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996, filed March 21, 1997 (the“1996 Form 10-K”)), as amended by the Certificate of Amendment dated December 18, 2000 (Incorporated by referenceto Exhibit 3.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, filedMarch 29, 2001 (the “2000 Form 10-K”)), as further amended by the Certificate of Amendment dated July 8, 2004(Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,2004, filed August 9, 2004 (the “2004 2Q Form 10-Q”)) 3.2 Amended and Restated By-Laws of the Company (Incorporated by reference to Exhibit 3.2 to the Company’s CurrentReport on Form 8-K, filed August 8, 2007), as amended on August 2, 2007 4.1 Specimen stock certificate for shares of common stock, par value $.01 per share (Incorporated by reference to Exhibit 4.1to the Company’s Registration Statement on Form 10, File No. 0-26770, filed September 14, 1995 (the “Form 10”)) 4.2 Rights Agreement, dated as of August 8, 2002, by and between the Company and Equiserve Trust Company, whichincludes the Form of Summary of Rights to Purchase Series D Junior Participating Preferred Stock as Exhibit A, the Formof Right Certificate as Exhibit B and the Form of Certificate of Designation of Series D Junior Participating PreferredStock as Exhibit C. (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filedAugust 9, 2002) 4.3 Registration Rights Agreement, dated as of July 16, 2004, by and between the Company and the Buyers identified therein.(Incorporated by reference to Exhibit 4.7 to the Registration Statement on Form S-3, File No. 333-118210, filed August 13,2004) 10.1†† Novavax, Inc. 1995 Stock Option Plan, as amended (Incorporated by reference to Appendix A of the Company’sDefinitive Proxy Statement filed March 31, 2003 in connection with the Annual Meeting held on May 7, 2003) 10.2†† Novavax, Inc. 1995 Director Stock Option Plan (Incorporated by reference to Exhibit 10.5 to the Form 10)45 10.3†† Novavax, Inc. 2005 Stock Incentive Plan, as amended (Incorporated by reference to Exhibit A of the Company’sDefinitive Proxy Statement filed April 30, 2007 in connection with the Annual Meeting held on June 20, 2007) 10.4†† Amended and Restated Employment Agreement, dated as of August 2, 2007, originally effective November 9, 2005, byand between the Company and Rahul Singhvi (Incorporated by reference to Exhibit 10.2 to the Company’s QuarterlyReport on Form 10-Q for the quarter ended June 30, 2007, filed August 9, 2007) 10.5†† Amended and Restated Employment Agreement, dated as of August 2, 2007, originally effective November 9, 2005, byand between the Company and Raymond J. Hage, Jr. (Incorporated by reference to Exhibit 10.4 to the Company’sQuarterly Report on Form 10-Q for the quarter ended June 30, 2007, filed August 9, 2007) 10.6†† Amended and Restated Employment Agreement, dated as of August 2, 2007, originally effective July 2, 2007, by andbetween the Company and Len Stigliano (Incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2007, filed August 9, 2007) 10.7†† Consulting Agreement, dated as of April 27, 2007, effective as of March 7, 2007, between the Company and JohnLambert (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2007, filed May 10, 2007) 10.8†† Amended and Restated Change in Control Severance Benefit Plan, as adopted July 26, 2006 (Incorporated by reference toExhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, filedNovember 14, 2006) 10.9†† Form of Indemnity Agreement, as authorized August 10, 2005 (Incorporated by reference to Exhibit 99.2 to theCompany’s Current Report on Form 8-K, filed August 16, 2005) 10.10 Facilities Reservation Agreement, dated as of February 11, 2002, by and between the Company and PackagingCoordinators, Inc. (Incorporated by reference to Exhibit 10.13 to the 2001 Form 10-K) 10.11 Letter Agreement by and between Novavax, Inc. and Catalent Pharma Solutions, Inc., dated February 12, 2008 andeffective February 19, 2008 amending the Facilities Reservation Agreement dated February 11, 2002 (Incorporated byreference to Exhibit 10.4 to the Company’s Current Report on Form 8-K, filed February 25, 2007) 10.12 Lease Agreement, dated as of July 15, 2004, between Liberty Property Limited Partnership and the Company(Incorporated by reference to Exhibit 10.1 to the 2004 2Q Form 10-Q) 10.13 Sublease Agreement, dated April 28, 2006, by and between the Company and Sterilox Technologies, Inc. (Incorporated byreference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, filedAugust 14, 2006) 10.14 Amendment dated as of October 25, 2006 to the Sublease Agreement, dated April 28, 2006, by and between theCompany and Sterilox Technologies, Inc. (Incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2006, filed November 14, 2006) 10.15 Lease, commencing April 1, 2005, by and between United Health Care Services, Inc. and the Company (Incorporated byreference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, filedAugust 9, 2005) 10.16 Sublease Agreement by and between Human Genome Sciences, Inc., and the Company dated October 6, 2006(Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed December 13, 2006) 10.17 License Agreement between IGEN, Inc. and the Company (Incorporated by reference to Exhibit 10.3 to the Company’sAnnual Report on Form 10-K for the fiscal year ended December 31, 1995, filed April 1, 1996) 10.18 HIV Vaccine Design and Development Agreement, effective September 26, 2003, by and between the Company and theNational Institute of Allergy and Infectious Diseases, a component of the National Institutes of Health, an agency of theDepartment of Health and Human Services (Incorporated by reference to Exhibit 10.33 to the Company’s Annual Report onForm 10-K (as amended) for the fiscal year ended December 31, 2004, filed March 15, 2005) 10.19 Form of Senior Convertible Note (Incorporated by reference to Exhibits 99.4 to the Company’s Current Report onForm 8-K, filed July 19, 2004)46 10.20 Amendment Agreement by and between Novavax, Inc. and Smithfield Fiduciary LLC, dated June 15, 2007(Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed June 18, 2007) 10.21 Amendment Agreement by and between Novavax, Inc. and SF Capital Partner Ltd., dated June 15, 2007 (Incorporatedby reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K, filed June 18, 2007) 10.22 Amendment Agreement by and between Novavax, Inc. and Portside Growth and Opportunity Fund, dated June 15,2007 (Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K, filed June 18, 2007) 10.23 Exchange Agreement, dated July 16, 2004, between the Company, King Pharmaceuticals, Inc. and ParkedalePharmaceuticals, Inc. (Incorporated by reference to Exhibit 99.5 to the Company’s Current Report on Form 8-K, filedJuly 19, 2004) 10.24 Termination Agreement, dated as of July 16, 2004 among King Pharmaceuticals, Inc., Parkedale Pharmaceuticals, Inc.and the Company (Incorporated by reference to Exhibit 99.6 to the Company’s Current Report on Form 8-K, filedJuly 19, 2004) 10.25 Asset Purchase Agreement, dated and entered into as of September 22, 2005, by and among the Company, FieldingPharmaceutical Company and Pharmelle, LLC (Incorporated by reference to Exhibit 10.1 to the Company’s CurrentReport on Form 8-K, filed September 28, 2005) 10.26 Amendment dated and entered into as of July 5, 2006, to Asset Purchase Agreement, dated and entered into as ofSeptember 22, 2005, by and among the Company, Fielding Pharmaceutical Company and Pharmelle, LLC(Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter-endedSeptember 30, 2006, filed November 14, 2006) 10.27*** Exclusive License Agreement, dated February 26, 2007, between the Company and the University of Massachusetts(Incorporated by reference to Exhibit 10.34 to the Company’s Annual Report on Form 10-K for the fiscal year endedDecember 31, 2006, filed March 14, 2007) 10.28*** License Agreement, dated July 5, 2007, between the Company and Wyeth Holdings Corporation (Incorporated byreference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, filedAugust 9, 2007) 10.29** Asset Purchase Agreement by and between Novavax, Inc. and Graceway Pharmaceuticals, LLC, dated February 19,2008 (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed February 25,2007) 10.30** Supply Agreement by and between Novavax, Inc. and Graceway Pharmaceuticals, LLC, dated February 19, 2008(Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed February 25, 2007) 10.31** License Agreement by and between Novavax, Inc. and Graceway Pharmaceuticals, LLC, dated February 19, 2008(Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed February 25, 2007) 14 Code of Business Conduct and Ethics (Incorporated by reference to Exhibit 14 to the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2003, filed March 15, 2004) 23.1 Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm* 23.2 Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm* 31.1 Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* 31.2 Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* 32.1 Certification Pursuant to 18 UNITED STATESC. 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 UNITED STATESC. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Len Stigliano, Vice President, Chief Financial Officer and Treasurer of the Company*47 SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto duly authorized.NOVAVAX, INC. By: /s/ Rahul SinghviPresident and Chief Executive Officerand DirectorDate: March 17, 2007Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons onbehalf of the Registrant and in the capacities and on the dates indicated:Name Title Date /s/ RAHUL SINGHVIRahul Singhvi President and Chief Executive Officer and Director(Principal Executive Officer) March 17, 2008 /s/ LEN STIGLIANOLen Stigliano Vice President, Chief Financial Officer, Treasurerand Corporate Secretary (Principal Financial andAccounting Officer) March 17, 2008 /s/ JOHN LAMBERTJohn Lambert Chairman of the Board of Directors March 17, 2008 /s/ GARY C. EVANSGary C. Evans Lead Director March 17, 2008 /s/ JOHN O. MARSH, JR.John O. Marsh, Jr. Director March 17, 2008 /s/ MICHAEL A. MCMANUSMichael A. McManus Director March 17, 2008 /s/ THOMAS P. MONATHThomas P. Monath Director March 17, 2008 /s/ JAMES B. TANANBAUMJames B. Tananbaum Director March 17, 200848 INDEX TO CONSOLIDATED FINANCIAL STATEMENTSYears ended December 31, 2007, 2006 and 2005ContentsReports of Independent Registered Public Accounting Firms F-2 Consolidated Balance Sheets as of December 31, 2007 and 2006 F-5 Consolidated Statements of Operations for each of the three years in the period ended December 31, 2007 F-6 Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended December 31, 2007 F-7 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2007 F-8 Notes to Consolidated Financial Statements F-9 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and ShareholdersNovavax, Inc.We have audited the accompanying consolidated balance sheets of Novavax, Inc. (a Delaware corporation) and subsidiary as ofDecember 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of thetwo years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position ofNovavax, Inc. and subsidiary as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of thetwo years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States ofAmerica.As described in footnote 2 to the financial statements, Novavax, Inc. and subsidiary adopted Financial Accounting Standards BoardInterpretation No. 48 “Accounting for Uncertainty in Income Taxes” as of January 1, 2007 and Statement of Financial AccountingStandard No. 123(R) “Share Based Payments” as of January 1, 2006.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Novavax,Inc.’s and subsidiary’s internal control over financial reporting as of December 31, 2007, based on criteria established in InternalControl — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) andour report dated March 17, 2008 expressed an unqualified opinion thereon./s/ Grant Thornton LLPPhiladelphia, PennsylvaniaMarch 17, 2008F-2 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and ShareholdersNovavax, Inc.We have audited Novavax, Inc. (a Delaware Corporation) and subsidiary’s internal control over financial reporting as of December 31,2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizationsof the Treadway Commission (COSO). Novavax’s management is responsible for maintaining effective internal control over financialreporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanyingManagement’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on Novavax’sinternal control over financial reporting based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financialreporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financialreporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internalcontrol based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believethat our audit provides a reasonable basis for our opinion.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenanceof records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordancewith generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financialstatements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections ofany evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes inconditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Novavax Inc. and subsidiarymaintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteriaestablished in Internal Control — Integrated Framework issued by COSO.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), theconsolidated balance sheet of Novavax, Inc. and subsidiary as of December 31, 2007 and 2006 and the related consolidated statements ofoperations, stockholder’s equity, and cash flows for the two years in the period ended December 31, 2007 and, our report datedMarch 17, 2008 expressed an unqualified opinion./s/ Grant Thornton LLPPhiladelphia, PennsylvaniaMarch 17, 2008F-3 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of Directors and ShareholdersNovavax, Inc.We have audited the accompanying consolidated balance sheet of Novavax, Inc. as of December 31, 2005, and the relatedconsolidated statements of operations, stockholders’ equity and cash flows for the year ended December 31, 2005. These financialstatements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statementsbased on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are freeof material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the financial statements referred to above, present fairly, in all material respects, the consolidated financial positionof Novavax, Inc. at December 31, 2005, and the consolidated results of its operations and its cash flows for the year ended December 31,2005, in conformity with United States generally accepted accounting principles./s/ Ernst & Young LLPPhiladelphia, PennsylvaniaMarch 3, 2006F-4 NOVAVAX, INC.CONSOLIDATED BALANCE SHEETS December 31, 2007 2006 (In thousands, except shareand per share information) ASSETSCurrent assets: Cash and cash equivalents $4,350 $7,161 Short-term investments classified as available for sale 9,200 — Short-term investments classified as held to maturity 32,939 66,434 Accounts and other receivables, net of allowance for doubtful accounts of $168 and $117 as of December 31, 2007and 2006, respectively 667 545 Inventory 25 115 Prepaid expenses and other current assets 1,304 1,693 Current assets of discontinued operations 531 1,394 Total current assets 49,016 77,342 Property and equipment, net 5,721 9,861 Goodwill 33,141 33,141 Assets held for sale 899 — Other intangible assets, net — 978 Non-current assets of discontinued operations 1,634 — Other non-current assets 880 555 Total assets $91,291 $121,877 LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent liabilities: Accounts payable $1,490 $1,329 Accrued expenses and other current liabilities 2,980 2,750 Current liabilities of discontinued operations 616 529 Current portion of notes payable 1,120 731 Total current liabilities 6,206 5,339 Convertible notes, net of discount 21,369 22,000 Deferred rent 391 79 Non-current portion of notes payable 260 458 Total liabilities 28,226 27,876 Commitments and contingences (see Note 13) Stockholders’ equity: Preferred stock, $.01 par value, 2,000,000 shares authorized; no shares issued and outstanding — — Common stock, $.01 par value, 100,000,000 shares authorized; 62,356,977 shares issued and 61,949,881outstanding at December 31, 2007, and 62,139,851 issued and 61,791,089 outstanding at December 31, 2006 624 622 Additional paid-in capital 264,618 261,822 Note receivable from director — (1,031)Accumulated deficit (199,727) (164,962)Treasury stock, 407,096 shares at December 31, 2007 and 348,762 shares at December, 31, 2006, cost basis (2,450) (2,450)Total stockholders’ equity 63,065 94,001 Total liabilities and stockholders’ equity $91,291 $121,877 The accompanying notes are an integral part of these consolidated financial statements.F-5 NOVAVAX, INC.CONSOLIDATED STATEMENTS OF OPERATIONS For the Years ended December 31, 2007 2006 2005 (In thousands, except share and per share information) Revenues: Net product sales $(58) $641 $2,504 Contract research and development 1,388 1,068 1,798 Royalties and milestone fees 125 29 1,041 Total revenues 1,455 1,738 5,343 Operating costs and expenses: Cost of products sold 163 237 410 Research and development 17,600 11,329 5,075 Selling, general and administrative 13,963 11,288 15,034 Facility exit costs — — 105 Gains on sales of product assets — — (10,965)Total operating costs and expenses 31,726 22,854 9,659 Loss from continuing operations before interest (30,271) (21,116) (4,316)Other income (expense): Interest income 3,287 3,267 330 Interest expense (1,606) (1,728) (2,333)Loss from continuing operations (28,590) (19,577) (6,319)Loss from discontinued operations (6,175) (3,491) (4,855)Net loss $(34,765) $(23,068) $(11,174)Basic and diluted weighted average number of common shares outstanding 61,101,474 58,664,365 42,758,302 Basic and diluted loss per share: Loss per share from continuing operations $(0.47) $(0.33) $(0.15)Loss per share from discontinued operations (0.10) (0.06) (0.11)Net loss per share $(0.57) $(0.39) $(0.26)The accompanying notes are an integral part of these consolidated financial statements.F-6 NOVAVAX, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYFor the Years Ended December 31, 2007, 2006 and 2005 Note Additional Receivable Total Common Stock Paid-in Unearned From Accumulated Treasury Stockholders’ Shares Amount Capital Compensation Director Deficit Stock Total (In thousands, except share information) Balance, January 1, 2005 39,807,724 $398 $167,496 $— $(1,480) $(130,720) $(2,413) $33,281 Exercise of stock options 342,654 3 392 — — — — 395 Issuance of common stock for prior services 300,000 3 252 — — — — 255 Restricted stock issued as compensation 552,434 6 570 (425) — — — 151 Conversion of convertible debt 1,070,635 11 6,070 — — — — 6,081 Sales of common stock 8,186,047 82 21,918 — — — — 22,000 Financing costs allocated to raising additional capital — — (1,337) — — — — (1,337)Net loss — — — — — (11,174) — (11,174)Balance, December 31, 2005 50,259,494 503 195,361 (425) (1,480) (141,894) (2,413) 49,652 Unearned compensation against costs for stockoptions in accordance with SFAS No. 123 — — (425) 425 — — — — Non-cash compensation costs for stock options — — 1,776 — — — 1,776 Exercise of stock options 497,613 5 1,713 — — — — 1,718 Conversion of convertible debt 1,294,564 13 7,055 — — — — 7,068 Restricted stock issued as compensation 285,000 3 (3) — — — — — Amortization of restricted stock for compensation — — 491 — — — — 491 Treasury stock issued in lieu of payment ofservices rendered — — (32) — — — 57 25 Sales of common stock 9,803,180 98 57,902 — — — — 58,000 Financing costs allocated to raising additional capital — — (2,016) — — — — (2,016)Reclassification due to change in status of a director — — — — 449 — — 449 Repurchase of common stock — — — — — (94) (94)Net loss — — — — — (23,068) — (23,068)Balance, December 31, 2006 62,139,851 622 261,822 — (1,031) (164,962) (2,450) 94,001 Non-cash compensation costs for-stock options — — 1,345 — — — — 1,345 Exercise of stock options 57,126 — 89 — — — — 89 Restricted stock issued as compensation 160,000 2 (2) — — — — — Amortization of restricted stock for compensation — — 512 — — — — 512 Reclassification due to change in status of a director — — — — 1,031 — — 1,031 Debt discount from modification of convertible debt — — 852 — — — — 852 Net loss — — — — (34,765) — (34,765)Balance, December 31, 2007 62,356,977 $624 $264,618 — $— $(199,727) $(2,450) $63,065 The accompanying notes are an integral part of these consolidated financial statements.F-7 NOVAVAX, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years ended December 31, 2007 2006 2005 (In thousands) Operating Activities: Loss from continuing operations: $(28,590) $(19,577) $(6,319)Reconciliation of net loss from continuing operations to net cash used in operating activities: Amortization of intangible assets 132 132 681 Depreciation and amortization 702 577 446 Amortization of deferred financing costs 259 797 662 Amortization of debt discount 221 — — Provision for bad debts 176 111 4 Retirement of capital assets 100 321 39 Amortization of net discounts on short-term investments (2,320) (1,135) — Reserve for notes receivable and accrued interest 875 167 — Deferred rent 312 12 60 Non-cash expense for services 57 25 — Non-cash stock compensation 1,800 2,267 406 Non-cash facility exit costs — — 105 Gain on sales of product assets — — (10,965)Net proceeds from sales of product assets — — 12,733 Changes in operating assets and liabilities: Accounts and other receivables (298) 2,684 (17)Inventory 90 (96) (23)Prepaid expenses and other current assets 129 281 1,032 Accounts payable and accrued expenses 206 444 (3,618)Facility exit costs — — (168)Other non-current assets 432 (435) 198 Net cash used in operating activities from continuing operations (25,717) (13,425) (4,744)Net cash used in operating activities from discontinued operations (1,025) (1,385) (1,065)Net cash used in operating activities (26,742) (14,810) (5,809)Investing Activities: Capital expenditures (1,961) (1,406) (110)Proceeds from disposal of property and equipment — — 68 Purchases of short-term investments (94,993) (121,546) — Proceeds from maturities of short-term investments 121,608 56,247 — Net cash provided by (used in) investing activities from continuing operations 24,654 (66,705) (42)Net cash used in investing activities from discontinued operations (3) (110) (120)Net cash provided by (used in) investing activities 24,651 (66,815) (162)Financing Activities: Principal payments of notes payable (809) (715) (1,070)Net proceeds from sales of common stock — 55,984 20,663 Proceeds from the exercise of stock options 89 1,718 395 Purchase of treasury stock — (94) — Net cash (used in) provided by financing activities (720) 56,893 19,988 Net (decrease) increase in cash and cash equivalents (2,811) (24,732) 14,017 Cash and cash equivalents at beginning of year 7,161 31,893 17,876 Cash and cash equivalents at end of year $4,350 $7,161 31,893 Supplemental disclosure of non-cash activities: Conversion of convertible debt and accrued interest to common stock $— $7,068 $6,081 Debt discount from modification of convertible debt $852 $— $— Equipment purchases included in accounts payable $624 $59 $139 Financed insurance premiums $600 $511 $501 Supplemental disclosure of cash flow information: Cash interest payments $1,073 $1,233 $1,719 The accompanying notes are an integral part of these consolidated financial statements.F-8 NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2007, 2006 and 20051. OrganizationNovavax, Inc., a Delaware corporation (“Novavax” or the “Company”), was incorporated in 1987, and is a clinical-stagepharmaceutical company focused on creating differentiated, value-added vaccines that leverage the Company’s proprietary virus-likeparticle (“VLP”) technology. VLPs imitate the three-dimensional structures of viruses but are composed of recombinant proteins andtherefore, are believed incapable of causing infection and disease. Our proprietary production technology uses insect cells rather thanchicken eggs or mammalian cells. The Company’s current product targets include vaccines against the H5N1, H9N2 and other subtypesof avian influenza with pandemic potential, human seasonal influenza, Varicella Zoster, which causes shingles, and a fourth undiscloseddisease target.On July 31, 2007, the Company began Phase I/IIa clinical trials for its H5N1 pandemic influenza vaccine. In December 2007, theCompany announced favorable interim results for its pandemic influenza vaccine that demonstrated immunogenicity and safety. TheCompany plans to begin patient enrollment in the second portion of the Phase I/IIa trial before March 31, 2008 to gather additional patientimmunogenicity and safety data, as well as determining a final dose through completion of this clinical trial. It is anticipated that initialimmunogenicity and safety data will be available early in the third quarter of 2008 with study completion by the end of 2008 to includeongoing safety collection.The Company also has a drug delivery platform based on its micellar nanoparticle (“MNP”) technology, proprietary oil and waternano emulsions used for the topical delivery of drugs. The MNP technology was the basis for the development of the Company’s firstFood and Drug Administration (“FDA”) approved estrogen replacement product, Estrasorb®. In February 2008, the Company sold theassets related to Estrasorb® in the United States, Canada and Mexico to Graceway Pharmaceuticals, LLC (“Graceway”). Additionally,the Company is seeking to divest its other non-vaccine MNP technology through sales and licenses.The Company’s vaccine products currently under development or in clinical trials will require significant additional research anddevelopment efforts, including extensive pre-clinical and clinical testing and regulatory approval, prior to commercial use. There can beno assurance that the Company’s research and development efforts will be successful or that any potential products will prove to be safeand effective in clinical trials. Even if developed, these vaccine products may not receive regulatory approval or be successfullyintroduced and marketed at prices that would permit the Company to operate profitably. The commercial launch of any vaccine productis subject to certain risks including, but not limited to, manufacturing scale-up, market acceptance and competition. No assurance can begiven that the Company can generate sufficient product revenue to become profitable or generate positive cash flow from operations at allor on a sustained basis. The Company’s efforts to divest the non-vaccine MNP technology, discussed above may not be successfulbecause the Company may not be able to identify a potential licensee or buyer, and, even if the Company does identify a licensee orbuyer, the price and terms may not be acceptable to the Company.2. Summary of Significant Accounting PoliciesBasis of PresentationThe accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary(Fielding Pharmaceutical Company). All significant intercompany accounts and transactions have been eliminated in consolidation.Liquidity MattersThe Company has incurred losses since its inception and as of December 31, 2007 has an accumulated deficit of $199,727,000.The Company does not expect to generate revenue in the near future. Based on the Company’s assessment of the availability of capital andits business operations as currently contemplated, including theF-9 NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Company’s clinical development plans, in the absence of new financings, any potential redemption of Notes, licensing arrangements orpartnership agreements, the Company believes it will have adequate capital resources through the first quarter of 2009. If the Company isunable to obtain additional capital, it will continue to assess its capital resources and the Company may be required to delay, reduce thescope of, or eliminate one or more of its product research and development programs, downsize its organization, or reduce general andadministrative infrastructure.Use of EstimatesThe preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the UnitedStates requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ materially from those estimates.ReclassificationsCertain amounts appearing in the consolidated financial statements for the year ended December 31, 2006 and 2005 have beenreclassified to conform to the current year’s presentation. As discussed in Note 11, the results of operations and the assets and liabilitiesrelated to the Philadelphia manufacturing facility have been accounted for as discontinued operations.Cash Equivalents and Short-Term InvestmentsCash equivalents consist of highly liquid investments with original maturities of three months or less from the date of purchase.Short-term investments are diversified, primarily consisting of investment grade securities that either mature within the next twelvemonths or have other characteristics of short-term investments, such as auction dates within at least six months of the prior auction dateor being available to be used for operations. All auction rate securities are classified as short-term investments.For short-term investments classified as held to maturity securities, the Company has the positive intent and ability to hold themuntil maturity. These investments are recorded at face value less any premiums or discounts. Income related to these securities is reportedas a component of interest income. These premiums or discounts are then amortized over the remaining maturity periods of theinvestments using the straight-line method. Included in net interest income on the consolidated statement of operations for the year endedDecember 31, 2007 and 2006 is $2,320,000 and $1,135,000 of amortization of premiums/discounts related to these short-terminvestments. As of December 31, 2007, short-term investments classified as held to maturity have original maturity dates of less than oneyear and were comprised of $1,997,000 of certificates of deposit, $22,057,000 of corporate bonds, and $8,884,000 of governmentagency bonds. As of December 31, 2006, short-term investments classified as available for sale were comprised of $55,760,000 ofcommercial paper, $1,628,000 of asset-backed securities and $9,046,000 of corporate obligations.Short-term investments classified as available for sale are carried at fair value. Fair value is based on quoted market price. AtDecember 31, 2007, the Company held $9,200,000 of high-grade, interest-bearing auction rate securities which were comprised of taxablemunicipal bonds. The Company has classified these auction rate securities as short-term investments available for sale on itsconsolidated balance sheets. Auction rate securities are variable rate bonds tied to short-term interest rates with maturities on the face of thesecurities between 2002 and 2042. The Company did not record any unrealized gains or losses for its available for sale securities, as costapproximates market for these securities. These auction rate securities have interest rate resets through a modified Dutch auction, atpredetermined short-term intervals. Interest paid during a given period is based upon the interest rate determined during the prior auction.Auctions for these investments may fail to settle on their respectiveF-10 NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)settlement dates. The Company did not hold any auction rate securities as of December 31, 2006.Financial Instruments and Concentration of Credit RiskFinancial instruments, which possibly expose the Company to concentration of credit risk, consist primarily of cash and cashequivalents, short-term investments, accounts receivable and convertible notes payable. The Company has invested its cash in assetbacked securities, high-grade corporate debt securities and money market instruments. The Company’s investment policy limitsinvestments to certain types of instruments, places restrictions on maturities and concentrations in certain industries and requires theCompany to maintain a certain level of liquidity. The Company has not experienced any losses on such accounts and managementbelieves the risk of loss to be minimal. The carrying value of cash and cash equivalents, short-term investments and accounts receivableapproximates their fair value based on their short-term maturities at December 31, 2007 and 2006. The Company has certain debtinstruments at fixed rates, with lower interest rates than the prevailing market rates. The Company has obtained favorable rates throughJanuary 2010. The fair values of convertible notes approximate their carrying value as of December 31, 2007 and 2006 based on ratescurrently available to the Company for debt with similar terms and remaining maturities.Accounts and Other ReceivablesAccounts receivables are reported in the consolidated balance sheets as outstanding principal less any charge-offs and allowance fordoubtful accounts. The Company charges off uncollectible receivables when the likelihood of collection is remote. Generally, theCompany considers receivables past due 30 days subsequent to the billing date. The Company performs ongoing credit evaluations of itscustomers and generally extends credit without requiring collateral. The Company maintains an allowance for doubtful accounts that isdetermined based on historical experience and management’s expectations of future losses. Accounts deemed uncollectible are charged tothe allowance based on specific identification. Provisions for bad debts and recoveries on accounts previously provisioned for are addedto the allowance. As of December 31, 2007 and 2006, the Company had an allowance for doubtful accounts of approximately $168,000and $117,000, respectively.InventoriesInventories consist of raw materials, work-in-process and finished goods, and are priced at the lower of cost or market using thefirst-in-first-out method and consist of the following at December 31: 2007 2006 (In thousands) Raw materials $226 $263 Work-in-process — 86 Finished goods 140 251 Reserve for inventory (52) — 314 600 Less: inventory reclassified to current assets of discontinued operations (289) (485) $25 $115 In accordance with Statement of Financial Accounting Standard No. 151, Inventory Costs — an amendment of ARB No. 43,Chapter 4 (“SFAS No. 151”), the Company allocates fixed production overhead costs to inventories based on the anticipated normalcapacity of its manufacturing facility at the time. Included in cost of products sold for the year ended December 31, 2007, 2006 and 2005is $3.1 million, $2.5 million and $3.2 million, respectively, of idle capacity costs which represents the excess of fixed productionoverhead over that allocated to inventories.F-11 NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)During the years ended December 31, 2007, 2006 and 2005, $1.3 million, $1.5 million and $1.5 million, respectively of inventorycosts in excess of market value were included in the accompanying consolidated statement of operations related to the Supply Agreementwith Allergan (see Note 3 — Summary of Significant Transactions). Under the terms of this Supply Agreement, the Company soldEstrasorb at a price below its manufacturing costs during the fourth quarter of 2005 and the years ended December 31, 2006 and 2007.In June 2007, the Company decided to discontinue the sale of Gynodiol. In connection with its decision, the Company recorded aninventory reserve totaling $52,000.Based on the termination of the Supply Agreement with Allergan, the Company had planned to close Philadelphia, Pennsylvaniamanufacturing facility at the end of 2007 and transfer production to a third party. However, in February 2008, the Company entered intoan agreement with Graceway Pharmaceuticals, LLC (“Graceway”) to sell its manufacturing equipment and other assets related toEstrasorb in the United States, Canada and Mexico. In addition to the sale of assets, the Company agreed to produce additional lots ofEstrasorb on behalf of Graceway which is anticipated to be completed by July 2008, at which time the Company will close down thisoperation.Property and EquipmentProperty and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of theassets, generally three to ten years. Amortization of leasehold improvements is provided over the shorter of the estimated useful lives of theimprovements or the term of the lease. Repairs and maintenance costs are expensed as incurred.Property and equipment is comprised of the following at December 31: 2007 2006 (In thousands) Construction in progress $1,601 $— Machinery and equipment 4,124 12,193 Leasehold improvements 7,759 6,248 Computer software and hardware 346 396 13,830 18,837 Less accumulated depreciation and amortization (8,109) (8,976) $5,721 $9,861 Construction in progress is related to costs incurred in the construction of the Company’s GMP pilot manufacturing facility whichstarted during the third quarter of 2007.Depreciation expense was approximately $2,797,000, $2,921,000 and $2,794,000 for the years ended December 31, 2007, 2006and 2005, respectively.Goodwill and Intangible AssetsGoodwill originally results from business acquisitions. Assets acquired and liabilities assumed are recorded at their fair values; theexcess of the purchase price over the identifiable net assets acquired is recorded as goodwill. Other intangible assets are a result ofinternally discovered patents. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”), goodwilland intangible assets deemed to have indefinite lives are not amortized but are subject to impairment tests annually, or more frequentlyshould 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 berecovered. Under SFAS No. 142, goodwill impairment is deemed to exist if the carrying value of a reportingF-12 NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)unit exceeds its estimated fair value. In accordance with the requirements of SFAS No. 142, the Company initially tested its goodwill forimpairment as of January 1, 2002 and determined that no impairment was present. The Company thereafter performed the requiredannual impairment test as of December 31 of each year as to the carrying amount of its goodwill, which indicated the Company’sestimated fair value exceeded its carrying value of goodwill. Therefore, no impairment was identified as of December 31, 2007 or 2006.Goodwill consists of the following at December 31: 2007 2006 Gross Amortization Net Gross Amortization Net (In thousands) Goodwill Goodwill-Company acquisition $33,141 $— $33,141 $33,141 $— $33,141 A roll-forward of the Company intangible assets is as follows: Estrasorb AVC Product Total Accumulated Patents Rights Acquisition Intangibles Amortization Net (In thousands) Balance, January 1, 2005 $2,525 $2,514 $3,332 $8,371 $(3,323) $5,048 Amortization Expense — — — — (681) (681)Esprit Licensing Agreement — (2,514) (2,514) 339 (2,175)Pharmelle transaction — — (3,332) (3,332) 2,250 (1,082)Balance, December 31, 2005 2,525 — — 2,525 (1,415) 1,110 Amortization Expense — — — — (132) (132)Balance, December 31, 2006 2,525 — — 2,525 (1,547) 978 Amortization Expense — — — — (132) (132)Transfer to assets held for sale (2,525) — — (2,525) 1,679 (846)Balance, December 31, 2007 $— $— $— $— $— $— Intangible assets were amortized on a straight-line basis over their estimated useful lives, ranging from five to 17 years. Amortizationexpense was $132,000, $132,000 and $681,000 for the years ended December 31, 2007, 2006 and 2005, respectively.During the third quarter of 2007, the Company began efforts to divest its MNP technology, which included the patent technologyincluded as intangible assets on the Company’s consolidated balance sheet. In connection with the planned divestiture, the Companyevaluated the recoverability of the carrying value of the patents and reclassified $846,000 into assets held for sale. The Company hasdetermined that the estimated fair value of the patents exceeds their carrying value, and accordingly no impairment charge is included inthe consolidated statement of operations for the year ended December 31, 2007.Disposal of Long-Lived Assets/Discontinued OperationsThe Company accounts for the impairment of long-lived assets and long-lived assets to be disposed of in accordance with Statementof Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal (“SFAS No. 144”). SFAS No. 144 requires aperiodic evaluation of the recoverability of the carrying value of long-lived assets and identifiable intangibles whenever events or changesin circumstances indicate that the carrying value of the asset may not be recoverable. Examples of events or changes in circumstances thatindicate that the recoverability of the carrying value of an asset should be assessed include, but are not limited to, the following: asignificant decrease in the market value of an asset, a significant change in the extent or manner in which an asset is used, a significantphysical change in an asset, a significant adverse change in legal factors or in the business climateF-13 NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)that could affect the value of an asset, an adverse action or assessment by a regulator, an accumulation of costs significantly in excess ofthe amount originally expected to acquire or construct an asset, a current period operating or cash flow loss combined with a history ofoperating or cash flow losses, and/or a projection or forecast that demonstrates continuing losses associated with an asset used for thepurpose of producing revenue. The Company considers historical performance and anticipated future results in its evaluation of potentialimpairment. Accordingly, when indicators of impairment are present, the Company evaluates the carrying value of these assets in relationto the operating performance of the business and future undiscounted cash flows expected to result from the use of these assets.Impairment losses are recognized when the sum of expected future cash flows is less than the assets’ carrying value. SFAS No. 144 alsoprovides accounting and reporting provisions for components of an entity that are classified as discontinued operations. The Companyrecorded an impairment loss in connection with the discontinued operations of its Philadelphia, Pennsylvania manufacturing facility forthe year ended December 31, 2007 (See Note 11 — Discontinued Operations).Revenue Recognition and AllowancesDuring 2005, Novavax began to transition from a specialty pharmaceutical company, which included the sale and marketing ofproducts serving the women’s health space, to an innovative, biopharmaceutical company focused on the development of vaccines. Forthe years ended December 31, 2007, 2006 and 2005, products revenues primarily from the sale of Estrasorb, the Company’s Food andDrug Administration approved estrogen replacement product. As discussed in Note 3 — Summary of Significant Agreements, theCompany entered into agreements with Graceway Pharmaceuticals, Inc. in February 2008, pursuant to which Novavax will produce unitsof Estrasorb with final delivery expected in July 2008.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 anarrangement 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 and rebates. Through December 31, 2007, a large part of theCompany’s product sales were to Allergan or to distributors who resold the products to their customers. The Company provides rebates tomembers of certain buying groups who purchased from the Company’s distributors, to distributors that sold to their customers at pricesdetermined under a contract between the Company and the customer, and to state agencies that administer various programs such as thefederal Medicaid and Medicare programs. Rebate amounts were usually based upon the volume of purchases or by reference to a specificprice for a product. The Company estimated the amount of the rebate that would be paid, and recorded the liability as a reduction ofrevenue when the Company records our sale of the products. Settlement of the rebate generally occurred from three to 12 months after sale.The Company regularly analyzed the historical rebate trends and made adjustments to recorded reserves for changes in trends and termsof rebate programs. In a similar manner, the Company estimates amounts for returns based on historical trends, distributor inventorylevels, product prescription data and generic competition and made adjustments to the recorded reserves based on such information.Under the terms of the Asset Purchase Agreement with Pharmelle, LLC (see Note 3 Summary of Significant Transactions) theCompany no longer has responsibility for rebates or returns related to AVCtm Cream and Suppositories, NovaNatal and NovaStart as ofthe date of the sale of such assets. Under the License and Supply Agreements with Allergan (see Note 3 — Summary of SignificantTransactions) the Company no longer has responsibility for rebates related to Estrasorb or for returns related to Estrasorb sales madesubsequent to entering into the License Agreement on October 19, 2005.For upfront payments and licensing fees related to contract research or technology, the Company follows the provisions ofSAB No. 104 in determining if these payments and fees represent the culmination of a separate earnings process or if they should bedeferred and recognized as revenue as earned over the life of the related agreement. Milestone payments are recognized as revenue uponachievement of contract-specified events and when there are no remaining performance obligations.F-14 NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Revenue earned under research contracts is recognized in accordance with the terms and conditions of such contracts forreimbursement of costs incurred and defined milestones. In 2005, revenue earned under a drug development contract was recognizedbased on the proportional performance method, whereby revenue was recognized in proportion to the estimated cost-to-complete thecontract. In 2005, revenue earned under the renewal of the IGI, Inc. agreement was recognized completely upon receipt of payment becausethe Company had no further performance obligations. Also in 2005, revenue earned under the License Agreement with Allergan wasrecognized at the time of the agreement since the Company had no further performance obligations related to the license agreement (seeNote 3 — Summary of Significant Transactions).Stock-Based CompensationEffective January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial AccountingStandard No. 123 (revised), Accounting for Share-based Payment (“SFAS No. 123R”) using the modified prospective method. Thisstandard requires the Company to measure the cost of employee services received in exchange for equity share options granted based onthe grant-date fair value of options. The cost is recognized as compensation expense over the vesting period of the options. Under themodified prospective method, compensation cost is included in operating expenses for the years ended December 31, 2007 and 2006 andincludes both the compensation cost of stock options granted prior to but not yet vested as of January 1, 2006 and compensation cost forall options granted subsequent to December 31, 2005.Prior to adopting SFAS No. 123R on January 1, 2006, the Company’s equity-based employee compensation cost under its variousstock 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 StandardsNo. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”). Under the modified prospective method, results for priorperiods have not been restated to reflect the effects of implementing SFAS No. 123R. Therefore, for the year ended December 31, 2005, nooption based employee compensation cost is reflected in the Company’s net loss, because all options granted had an exercise price equal tothe underlying common stock price on the date of grant. The following table which is presented for comparative purposes only, providesthe pro forma information as required by Statement of Financial Accounting Standard No 148, Accounting for Stock-BasedCompensation — Transition and Disclosure, an amendment of SFAS No. 123 (“SFAS No. 148”), and illustrates the effect on net lossand loss per share for the year ended December 31, 2005 presented as if the Company had applied the fair value recognition provisions ofSFAS No. 123 to stock based employee compensation prior to January 1, 2006. Year Ended December 31, 2005 (In thousands, except per share data) Net loss, as reported $(11,174)Deduct: Total stock-based employee compensation expense determined under fair value-based method for allawards(1) (Revised) (1,999)Pro forma net loss (Revised) $(13,173)Net loss per share: Basic and diluted — as reported $(0.26)Basic and diluted — pro forma (Revised) $(0.31)(1)Does not include restricted stock compensation expense of $405,000 which is reported in the consolidated statements of operations.F-15 NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)These pro forma amounts are not necessarily indicative of future effects of applying the fair value-based method due to, among otherthings, the vesting period of the stock options and the fair value of additional stock options issued in future years.The weighted average fair value of stock options on the date of grant and the assumptions used to estimate the fair value of stockoptions issued during the year ended December 31, 2005, using the Black-Scholes options valuation model were as follows: 2005 Weighted average fair value of options granted $3.17 Expected life (years) 4.4 Expected volatility 129%Risk free interest rate 4.0%Expected dividend 0.0%Expected forfeiture 0.0%The expected life of options granted was based on the Company’s historical share option exercise experience using the historicalexpected term from the vesting date. The expected volatility of the options granted for the year ended December 31, 2005 was determinedusing historical volatilities based on stock prices since the inception of the plans. The expected volatility of the options granted for the yearended December 31, 2005. The risk-free interest rate was determined using the yield available for zero-coupon United States governmentissues with a remaining term equal to the expected life of the options. The forfeiture rate for the year ended December 31, 2005 wasdetermined using historical rates since the inception of the plans. The Company has never paid a dividend, and as such the dividendyield is zero.Compensation cost for grants issued prior to January 1, 2006 was accounted for using a graded method. Compensation cost forgrants on or after January 1, 2006 was accounted for using a straight-lined method. Non-cash compensation expense related to allrestricted stock issued has been recorded as compensation cost in accordance with SFAS No. 123R using the straight-line method ofamortization.For restricted stock issued prior to January 1, 2006, non-cash compensation cost was recorded using the straight-line method ofamortization and unearned compensation was increased accordingly. The initial issuance of restricted stock increased common stock andadditional paid-in capital and was offset by unearned compensation, which was included in the stockholders’ equity section of theconsolidated balance sheet. The balance as of December 31, 2005 for the unearned compensation account was $425,000 and inaccordance with SFAS No. 123R was netted against additional paid-in capital as of January 1, 2006.Advertising and Promotion CostsAll costs associated with advertising and promotions are expensed as incurred. Advertising and promotion expense was $1,730,000in 2005. There were no advertising and promotion costs in 2007 and 2006 as the Company licensed the rights to market Estrasorb toAllergan in 2005.Research and Development CostsResearch and development costs are expensed as incurred. Such costs include internal research and development expenditures (suchas salaries and benefits, raw materials and supplies) and contracted services (such as sponsored research, consulting and testingservices) of proprietary research and development activities and similar expenses associated with collaborative research agreements.The Company is part of a consortium that received a National Institutes of Health (“NIH”) project program grant to develop HIVvaccine candidates. The Company expects to earn approximately $1.1 million through theF-16 NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)current contract period ending February 2008. As of December 31, 2007, the Company earned $937,000 against this research contract.Income TaxesThe Company’s income taxes are accounted for using the liability method. Under the liability method, deferred income taxes arerecognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax basis and operating loss carryforward. Deferred tax assets and liabilities are measured using enactedtax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled.The effect of changes in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes theenactment date. A valuation allowance is established when necessary to reduce net deferred tax assets to the amount expected to be realized.The Company has provided a full valuation allowance against its net deferred tax assets as of December 31, 2007 and 2006.Net Loss per ShareBasic loss per share is computed by dividing the net loss available to common shareholders (the numerator) by the weighted averagenumber of common shares outstanding (the denominator) during the period. Shares issued during the period and shares reacquired duringthe period are weighted for the portion of the period that they were outstanding. The computation of diluted loss per share is similar to thecomputation of basic loss per share except that the denominator is increased to include the number of additional common shares thatwould have been outstanding if the dilutive potential common shares had been issued (e.g. upon exercise of stock options). Potentiallydilutive common shares are not included in the computation of diluted earnings per share if they are anti-dilutive. Net loss per share asreported was not adjusted for potential common shares, as they are anti-dilutive.Comprehensive LossUnder SFAS No. 130, Reporting Comprehensive Income, the Company is required to display comprehensive loss and itscomponents as part of its consolidated financial statements. Comprehensive loss is comprised of the net loss and other comprehensiveincome (loss), which includes certain changes in equity that are excluded from the net loss. Comprehensive loss for the Company was thesame as net loss for the years ended December 31, 2007, 2006 and 2005.Segment InformationThe Company currently operates in one business segment, which is the research, development and commercialization of proprietaryproducts utilizing its proprietary drug delivery and biological technologies. The Company is managed and operated as one business. Asingle management team that reports to the Chief Executive Officer comprehensively manages the entire business. The Company does notoperate separate lines of business with respect to its products or product candidates. Accordingly, the Company does not have separatelyreportable segments as defined by Statement of Financial Accounting Standards No. 131, Disclosure about Segments of an Enterpriseand Related Information.Recent Accounting PronouncementsOther than the adoption of FASB interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) there have been nomaterial changes in the Company’s critical accounting policies or critical accounting estimates since December 31, 2006, nor has theCompany adopted any accounting policy that has or will have a material impact on its consolidated financial statements. For furtherdiscussion of the Company’s accounting policies see Note 2 “Summary of Significant Accounting Policies-FIN 48” below.F-17 NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)FIN 48In July 2006, the FASB issued Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, to address thenoncomparability in reporting tax assets and liabilities resulting from a lack of specific guidance in SFAS No. 109, Accounting forIncome Taxes, on the uncertainty in income taxes recognized in an enterprise’s financial statements. Specifically, FIN 48 prescribes (a) aconsistent recognition threshold and (b) a measurement attribute for the financial statement recognition and measurement of a tax positiontaken or expected to be taken in a tax return, and provides related guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure, and transition. FIN 48 applies to fiscal years beginning after December 15, 2006.The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the adoption of FIN 48, the Company recorded$3.8 million in uncertain tax positions. The $3.8 million of unrecognized tax benefits was accounted for as a $3.8 million reduction to theJanuary 1, 2007 balance of deferred tax assets and a corresponding $3.8 million dollar reduction of the valuation allowances. Therefore,the Company did not record any adjustment to the beginning balance of retained earnings in its consolidated balance sheet. To the extentthese unrecognized tax benefits are ultimately recognized it would affect the annual effective income tax rate. The Company and itssubsidiary file income tax returns in the United States federal jurisdiction and in various states. The Company has tax net operating lossand credit carryforwards that are subject to examination for a number of years beyond the year in which they are utilized for tax purposes.Since a portion of these carryforwards may be utilized in the future, many of these attribute carryforwards may remain subject toexamination.The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. As of January 1,2007 and December 31, 2007, the Company had no accruals for interest or penalties related to income tax matters.SFAS No. 157In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157, FairValue Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 applies under otheraccounting pronouncements that require or permit fair value measurements, but does not require any new fair value measurements.SFAS No. 157 will become effective for financial statements issued for fiscal years beginning after November 15, 2007, and interimperiods within those fiscal years. The Company is currently evaluating what impact, if any, SFAS No. 157 will have on its financialcondition, results of operations or liquidity.SFAS No. 159In February 2007, the FASB issued a Statement of Financial Accounting Standards No. 159 — The Fair Value Option forFinancial Assets and Financial Liabilities (“SFAS No. 159”), which provides companies an option to report certain financial assetsand liabilities at fair value. The intent of SFAS No. 159 is to reduce the complexity in accounting for financial instruments and thevolatility in earnings caused by measuring related assets and liabilities differently. SFAS No. 159 is effective for financial statementsissued for fiscal years after November 15, 2007. The Company is evaluating the impact this new standard will have on its financialcondition, results of operations, and liquidity.EITF Issue No. 07-1In December 2007, the FASB issued EITF Issue No. 07-1, “Accounting for Collaborative Arrangements,” which is effective forcalendar year companies on January 1, 2009. The Task Force clarified the manner in which costs, revenues and sharing payments madeto, or received by a partner in a collaborative arrangements should be presented in the income statement and set for the certain disclosuresthat should be required in the partners’F-18 NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)financial statements. Novavax is currently assessing the potential impact of implementing this standard on its financial condition resultsof operations or liquidity.SAB 110In December 2007, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 110 (“SAB 110”), whichpermits, under certain circumstances, to continue to use the “simplified” method of estimating the expected term of plain options asdiscussed in SAB No. 107 and in accordance with SFAS 123R. The guidance in this release is effective January 1, 2008. The impact ofthis standard on the consolidated financial statements is not expected to be material.SFAS No. 141 RIn December 2007, the FASB issued SFAS No. 141 (revised 007), “Business Combinations.” (“SFAS No. 141R”) For calendaryear companies, the standard is applicable to new business combinations occurring on or after January 1, 2009. SFAS No. 141Rrequires an acquiring entity to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair valuewith limited exceptions. Most significantly, SFAS No. 141R will require that acquisition costs generally be expensed as incurred, certainacquired contingent liabilities will be recorded at fair value, and acquired in-process research and development will be recorded at fairvalue as an indefinite-lived intangible asset at the acquisition date. The Company does not expect the adoption of SFAS No. 142R to havea material impact on its financial condition, results of operations or liquidity.SFAS No. 160In December 2007, the FASB also issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — AnAmendment of ARB No. 51,” which is effective for fiscal years, and interim periods within those fiscal years, beginning on or afterDecember 15, 2008. The standard establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary andfor the deconsolidation of subsidiary. The Company does not expect the adoption of SFAS No. 160 to have a material impact on itsfinancial condition, results of operations or liquidity.3. Summary of Significant TransactionsGraceway AgreementsIn February 2008, the Company entered into an asset purchase agreement with Graceway Pharmaceuticals, LLC (“Graceway”),pursuant to which Novavax sold to Graceway its assets related to Estrasorb® in the United States, Canada and Mexico. The assets soldinclude certain patents related to the micellar nanoparticle technology (the “MNP Technology”), trademarks, know-how, manufacturingequipment, customer and supplier relations, goodwill and other assets. Novavax retained the rights to commercialize Estrasorb® outsideof the United States, Canada and Mexico.In February 2008, Novavax and Graceway also entered into a supply agreement, pursuant to which Novavax has agreed tomanufacture additional units of Estrasorb with final delivery expected in mid 2008. Graceway will pay a preset transfer price per unit ofEstrasorb for the supply of this product. Once Novavax has delivered the required quantity of Estrasorb, Novavax must clean themanufacturing equipment and prepare the equipment for transport. Graceway will remove the equipment from the manufacturing facilityand Novavax will then exit the facility.In February 2008, Novavax and Graceway also entered into a license agreement, pursuant to which Graceway granted Novavax anexclusive, non-transferable (except for certain allowed assignments and sublicenses), royalty-free, limited license to the patents and know-how that Novavax sold to Graceway pursuant to the asset purchaseF-19 NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)agreement. The licensed grant allows Novavax to make, use and sell licensed products and services in certain, limited fields.The net cash proceeds from these transactions is expected to be in excess of $2.0 million. The license and supply agreements withAllergan, were terminated October 2007.License Agreement with University of Massachusetts Medical SchoolEffective February 26, 2007, the Company entered into a worldwide agreement to exclusively license a VLP technology from theUniversity of Massachusetts Medical School (“UMMS”). Under the agreement, the Company has the right to use this technology todevelop VLP vaccines for the prevention of any viral diseases in humans . The Company made an upfront cash payment to UMMS. Inaddition, the Company will make certain payments based on development milestones as well as future royalties on any sales of productsthat may be developed using the technology.License Agreement with Wyeth Holdings CorporationOn July 5, 2007, the Company entered into a License Agreement with Wyeth Holdings Corporation, a subsidiary of Wyeth(“Wyeth”). The license is a non-exclusive, worldwide license to a family of patent applications covering virus-like particle (VLP)technology for use in human vaccines in certain fields of use. The agreement provides for an upfront payment, annual license fees,milestone payments and royalties on any product sales. Payments under the agreement to Wyeth could aggregate $6.5 million in fiscal2008, depending on achievement of certain clinical development milestones. The agreement will remain effective as long as at least oneclaim of the licensed patent rights cover the manufacture, sale or use of any products; unless terminated sooner at the Company’s optionor by Wyeth for an uncured breach by Novavax.License and Supply Agreements with AllerganIn October 2005, the Company entered into License and Supply agreements for Estrasorb with Allergan, Inc. (“Allergan”),successor-in-interest to Esprit Pharma, Inc. (“Esprit”). Under the License Agreement, Allergan obtained exclusive rights to marketEstrasorb in North America and under the Supply Agreement the Company will continue to manufacture Estrasorb.In consideration for the rights granted, Allergan paid the Company a minimum cash consideration of $12,500,000: $2,000,000 ofwhich was paid at closing, $8,000,000 of which was paid in December 2005, and the remaining $2,500,000 which was paid in October2006 in accordance with the License Agreement. The Company receives royalties on all net sales of Estrasorb as well as milestonepayments based on specific pre-determined net sales levels of Estrasorb. The Company wrote off $2,175,000, the remaining net balanceof its intangible asset for Estrasorb rights at the date of the transaction. As part of the Supply Agreement, Allergan paid the Company$273,000 for inventory and sales and promotional materials for which the Company had a book value of $437,000. The Companyincurred $200,000 of fees related to this transaction and recorded a gain of $10,125,000, which is included in gain on sales of productassets on the accompanying consolidated statement of operations for the year ended December 31, 2005.In February 2008, in connection with the sale of the Estrasorb assets to Graceway, Novavax terminated the Estrasorb licenseagreement with Allergan.In April 2006, the Company entered into a second License and Supply Agreement with Allergan to co-develop, supply andcommercialize our MNP testosterone medicine for the treatment of female hypoactive sexual desire disorder. Under the terms of the Licenseand Development Agreement, Esprit was granted exclusive rights to market the products in North America. In October 2007, Allerganpurchased Esprit and subsequently entered into an agreement with Novavax, which among other things, terminated the license andsupply agreement for testosterone and the supply agreement for Estrasorb.F-20 NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Asset Purchase Agreement with Pharmelle, LLC (the “Pharmelle Transaction”)In September 2005, the Company entered into an Asset Purchase Agreement with Pharmelle, LLC for the sale of assets related to theAVC Cream and Suppositories, NovaNatal and NovaStart products, as well as assets relating to certain formerly marketed productsVitelle, Nestabs, Gerimed, Irospan and Nessentials. The assets sold included, but were not limited to, intellectual property, the New DrugApplication for AVC products, inventory and sales and promotional materials. In connection with the sale, Pharmelle agreed to assumethose liabilities and obligations arising after the closing date of the transaction in connection with the performance by Pharmelle of certainassumed contracts, those liabilities and obligations arising after the closing date in connection with products sold by Pharmelle after theclosing date or the operation of the business relating to such products or the assets after such date (including any product liability claimsassociated with such products), and all liability and responsibility for returns of the products made after the closing date, regardless ofwhen such products were produced, manufactured or sold.In consideration for the sale of these assets, Pharmelle paid the Company $2,500,000 in cash and assumed the liabilities notedabove. In addition, the Company is entitled to royalties on AVC for a five-year period if net sales exceed certain levels. The Companywrote off $1,082,000, the net balance of its intangible assets related to the AVC product acquisition and $289,000 of inventory, recordeda $289,000 liability for future obligations and recorded a gain on the transaction of $840,000. This gain is included in gain on sales ofproduct assets on the accompanying consolidated statement of operations for the year ended December 31, 2005.In July 2006, the Company entered into an amendment to the Asset Purchase Agreement with Pharmelle to revise the royalty formula.The Company is now entitled to royalties on AVC products for a five-year period based on a percentage of gross margin if net sales exceedcertain levels.Restructuring of the Sales ForceFrom March through August 2005, the Company implemented measures to reduce costs associated with its commercial operationsby downsizing its sales force to correspond with the Company’s strategy of transitioning from a commercial business model to that of onefocused on the Company’s core competency of new product development. The March restructuring reduced the Company’s sales forcenumbers significantly while the August restructuring eliminated the remaining sales force. Included in sales and marketing expenses inthe accompanying consolidated statement of operations for the year ended December 31, 2005 is $444,000 related to these tworestructurings. Included in this amount are (i) one-time termination benefits of $305,000, all of which were paid as of December 31, 2005,(ii) auto lease contract termination costs of approximately $125,000, of which $2,000 was included in accrued expenses as ofDecember 31, 2005, and (iii) $14,000 of other associated costs, all of which were paid as of December 31, 2005.Opportunity Grant FundsIn July 2005, the Company received a $400,000 Opportunity Grant from the Commonwealth of Pennsylvania for the reimbursementof certain costs incurred in connection with the move of the Company’s corporate headquarters and product development activities toMalvern, Pennsylvania. These funds were included as an offset to general and administrative expenses included in the ConsolidatedStatement of Operations for the year ended December 31, 2005. The Opportunity Grant had the following conditions: (i) the Companywould create 95 full time jobs at the Malvern facility within three years; (ii) the Company would invest at least $9.4 million in capitalimprovements and fixtures and equipment at the Malvern facility within three years; and, (iii) the Company would operate at the Malvernfacility for a minimum of five years. If the Company failed to meet these conditions, it would be liable for a penalty equal to the fullamount of the grant.In line with its business strategy, the Company announced in December 2006, that it had signed a long-term lease for its newcorporate headquarters and research and development facility in Rockville, Maryland, where its vaccine operations were currently located.As a result of the Company’s failure to comply with the conditions of theF-21 NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)grant, the Department of Community & Economic Development (“DCED”) of the Commonwealth of Pennsylvania requested that theCompany repay the full amount of the Opportunity Grant. The Company recorded a current liability of $400,000 in the accompanyingConsolidated Balance Sheet as of December 31, 2006 and a corresponding expense in general and administrative expenses in theConsolidated Statement of Operations for the year ended December 31, 2006.In April, 2007, the Company entered into a Settlement and Release Agreement with the Commonwealth of Pennsylvania, acting byand through DCED, whereby the Company agreed to repay the sum of the original grant in 60 monthly installments starting on May 1,2007. The loan was reclassified to notes payable. The terms of the agreement stipulate the amount of the monthly repayment to be $6,667for 60 months. Interest does not accrue on the outstanding balance. During the year ended December 31, 2007, the Company madepayments totaling $60,000. The balance of the loan is included in notes payable at December 31, 2007.License Agreement Renewal with IGI, Inc.In December 2005, the Company received a $1,000,000 payment from IGI, Inc. (“IGI”) in accordance with an option in a licensingagreement signed between the Company and IGI in December 1995. This payment gives IGI a ten-year renewal on licensed technologies inspecific fields and was included in royalties, milestone and licensing fees on the accompanying consolidated statement of operations forthe year ended December 31, 2005.4. Long-term Leases and Accounting for Facility Exit CostsIn July 2004, the Company entered into a lease agreement for a 32,900 square foot facility in Malvern, Pennsylvania for theconsolidation and expansion of its corporate headquarters and product development activities. The lease, with a commencement date ofSeptember 15, 2004, has an initial term of ten years with two five-year renewal options and an early option to terminate after the first fiveyears of the lease. Standard annual escalation rental rates were in effect during the initial lease term. In April 2006 the Company enteredinto a sublease agreement with Sterilox Technologies, Inc., now known as PuriCore, Inc., to sublease 20,469 square feet of the Malverncorporate headquarters at premium price per square foot. The sublease had a commencement date of July 1, 2006 and expires onSeptember 30, 2009. Consistent with its strategic focus, the Company increased its presence in Rockville, Maryland, where its vaccineoperations are currently located.On October 6, 2006, the Company and Human Genome Sciences, Inc. executed a sublease agreement (the “HGS sublease”) forapproximately 51,000 square feet of office, laboratory and administrative space in Rockville, MD. The office space is being used as theCompany’s corporate headquarters. The term of the HGS sublease commenced on December 12, 2006 or the date on which a certainportion of the leased space was delivered to the Company and expires on the last day of the month which is six years following the date ofdelivery. The Company has the option to renew the HGS sublease for two additional periods of three years each and a third option torenew the HGS sublease until March 30, 2021.In October 2006, the Company entered into an Amendment to the Sublease Agreement with PuriCore, Inc. to sublease an additional7,500 square feet of the Malvern corporate headquarters at a premium price per square foot. This amendment has a commencement dateof October 25, 2006 and expires on September 30, 2009. As a result of the premium price received on these sublease agreements, therewere no facility exit costs associated with this transaction.F-22 NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)For the years ended December 31, 2005 and 2006, the Company applied the principles of SFAS No. 146, Accounting for CostsAssociated with Exit or Disposal Activities, in accounting for lease termination and other associated costs that were incurred under theoperating lease which expired on October 31, 2006 related to the Company’s former corporate offices located in Columbia, Maryland.A roll-forward of the facility exit cost liability is as follows: Current Non-Current (In thousands) Balance as of January 1, 2005 $151 $101 Lease payments applied to the liability (58) (161)Adjustment to original estimate 45 60 Balance as of December 31, 2005 138 — Lease payments applied to the liability (142) — Adjustment to original estimate 4 — Balance as of December 31, 2006 and 2007 $— $— 5. Supplemental Financial DataAllowance for Doubtful AccountsA roll-forward of the allowance for doubtful accounts is as follows: (In thousands) Balance, January 1, 2005 $752 Provision for bad debts 4 Other adjustments (327)Balance, December 31, 2005 429 Provision for bad debts 111 Write off bad debts (423)Balance, December 31, 2006 $117 Provision for bad debts 176 Write off bad debts (125)Balance, December 31, 2007 $168 F-23 NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Prepaid Expenses and Other Current AssetsPrepaid expenses and other current assets consist of the following at December 31: 2007 2006 (In thousands) Prepaid insurance $568 $720 Current portion of deferred financing costs 259 259 Notes receivable from former director, net of reserve 202 281 Interest receivable on directors’ notes 132 359 Other current assets 51 53 Interest receivable 229 201 1,441 1,873 Less: Prepaid expenses and other current assets reclassified to current assets of discontinued operations (137) (180) $1,304 $1,693 Accrued Expenses and Other LiabilitiesAccrued expenses consist of the following at December 31: 2007 2006 (In thousands) Sales return allowance $354 $238 Sales rebate allowance 17 14 Employee benefits and compensation 1,581 822 Operating expenses 994 1,529 Interest expense 75 475 3,421 3,078 Less: accrued expense and other liabilities reclassified to current liabilities of discontinued operations (441) (328) $2,980 $2,750 F-24 NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Sales Return AllowanceA roll-forward of the sales return allowance is as follows: (In thousands) Balance, January 1, 2005 $1,274 Provision for 2005 sales 95 Additional provision for 2004 sales 98 Additional provision for 2003 sales 341 Returns received from 2003 sales (926)Returns received from 2004 sales (600)Balance, December 31, 2005 282 Provision for 2006 sales 218 Additional provision for 2005 sales 41 Returns received from 2004 sales (129)Returns received from 2005 sales (174)Balance, December 31, 2006 238 Provision for returns for 2007 sales 44 Additional provision for planned discontinuation of Gynodiol 158 Returns for 2004 sales (48)Returns for 2006 sales (38)Balance, December 31, 2007 $354 In June 2007, the Company decided to discontinue the sale of Gynodiol. In connection with its decision, the Company recorded anadditional adjustment to the sales return allowance of $158,000.F-25 NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)6. Long-term debtNotes PayableNotes payable consist of the following at December 31: 2007 2006 (In thousands) Note payable; bears interest at 3.00% per annum; principal and interest due in monthly installments of $6,600through December 2009 $135 $215 Note payable; bears interest at 2.850% per annum; principal and interest due in monthly installments of$6,573 through January 2010 153 233 Note payable; bears interest at 2.38% per annum; principal and interest due in monthly installments of $6,468through January 2010 152 231 Note payable; insurance financing; bears interest at 6.00% per annum; principal and interest due in monthlyinstallments of $51,385 through November 2008 600 — Note payable; insurance financing; bears interest at 5.43% per annum; principal and interest due in monthlyinstallments of $58,097 through September 2007 — 510 Notes payable; non-interest bearing; principle only payments due in monthly installments of $6,666 throughMay 2012 340 — Total 1,380 1,189 Less current portion (1,120) (731)Long-term portion $260 $458 The notes payable (except for the notes payable for financing insurance premiums and the non-interest bearing note payable) weresecured by $2.4 million of the Company’s machinery and equipment located at its manufacturing facility in Philadelphia, Pennsylvania.In February 2008, in connection with the execution of the asset purchase agreement with Graceway, the Company repaid the outstandingbalance on the 3.00%, 2.850% and 2.38% notes payable and received a release for the equipment which served as collateral.Convertible NotesIn July 2004, the Company entered into definitive agreements for the private placement of $35,000,000 aggregate principal amount ofsenior convertible notes to a group of institutional investors. The notes carry a 4.75% coupon, payable semi-annually, mature in fiveyears and are convertible into shares of common stock, originally at $5.46 per share. On June 15, 2007, the Company entered intoamendment agreements (the “Amendments”) with each of the holders of the outstanding Notes to amend the terms of the Notes. TheAmendments (i) lowered the conversion price from $5.46 to $4.00 per share, (ii) eliminated the holders’ right to require the Company toredeem the Notes if the weighted average price of the Company’s common stock is less than the conversion price on 30 of the 40consecutive trading days preceding July 19, 2007 or July 19, 2008 and (iii) mandated that the Notes be converted into Companycommon stock if the weighted average price of the Company’s common stock is greater than $7.00 (a decrease from $9.56) in any 15out of 30 consecutive trading days after July 19, 2007. The Notes are also redeemable upon the occurrence of specified events of defaultas well as a “change of control” (as that term is defined in the Notes) of Novavax. At December 31, 2007 and 2006, the Company hadaccrued interest of $475,260 relating to these notes.In October 2005, certain holders of $6,000,000 face amount of the Company’s senior convertible notes exercised their optionalconversion right to convert their notes plus accrued interest of $81,000 into 1,070,635 sharesF-26 NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)of Novavax common stock, at the per share conversion price then in effect of $5.68. This reduced the aggregate principal amount ofsuch notes outstanding from $35,000,000 to $29,000,000.In March 2006, certain holders of $7,000,000 face amount of the Company’s senior convertible notes exercised their optionalconversion right to convert their notes plus accrued interest of $68,000 into 1,294,564 shares of Novavax common stock, at the pershare conversion of $5.46. This reduced the aggregate principal amount of such notes outstanding from $29,000,000 to $22,000,000.As a result of the financing and a product related transaction, the Company incurred $3,355,000 of transaction expenses, whichincreased the intangible asset for Estrasorb rights by $1,010,000 (included in the total intangible asset for Estrasorb rights of$2,514,000), decreased additional paid-in capital by $288,000, and increased deferred financing costs by $2,057,000. The deferredfinancing costs are being amortized over the life of the convertible notes. During the years ended December 31, 2007, 2006 and 2005,$259,000, $279,000 and $400,000, respectively, of deferred financing costs amortization were included in interest expense on theaccompanying consolidated statements of operations. Concurrent with the conversions of $6,000,000 and $7,000,000 of seniorconvertible debt (mentioned above), the Company wrote off in 2006 and 2005, $267,000 and $262,000, respectively, of deferredfinancing costs. These write offs are included in interest expense on the accompanying consolidated statements of operations for the yearsended December 31, 2006 and 2005.In connection with the Amendments, the Company recorded a debt discount of $852,000 and increased additional paid-in capitalaccordingly. The debt discount is being amortized over the remaining term of the Notes. Interest expense includes $221,000, related to theamortization of the debt discount for the year ended December 31, 2007.Convertible notes consist of the following on December 31 (in thousands): 2007 2006 Note payable; 4.75% senior convertible, issued July 19, 2004, due July 15, 2009, currently convertible into4,029,304 shares of Novavax common stock at $4.00 per share $22,000 $22,000 Less: Discount (631) — Note payable, net $21,369 $22,000 Aggregate future minimum principal payments on debt at December 31, 2007 are as follows:Year Amount (In thousands) 2008 $881 2009 22,299 2010 93 2011 80 2012 27 $23,380 Total cash interest payments for the three years ended December 31, 2007, 2006 and 2005 were $1,073,000, $1,233,000 and$1,719,000, respectively.7. Sale of Common StockIn July 2005, the Company completed an agent-led offering of 4,000,000 shares of common stock at $1.00 per share for grossproceeds of $4,000,000. The stock was issued pursuant to an existing shelf registration statement.F-27 NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Net proceeds after deducting underwriter, legal, accounting and other miscellaneous fees were approximately $3,631,000.In August 2005, the Company issued 250,000 shares of common stock in a private placement to its former Chief Executive Officerfor prior services, which had a fair market value of $215,000 at the time of issuance.In August 2005, the Company approved the issuance of 50,000 shares of common stock to a director in a private placement forprior services and for his agreement to pledge such shares to a brokerage firm to secure the debt guarantee by the Company (see Note 13Related Party Transactions). The fair value at the time of the approval of these shares was $37,000 and they were issued in December2005.In November 2005, the Company completed an offering of 4,186,047 shares of common stock at $4.30 per share. The stock wasoffered and sold pursuant to an existing shelf registration statement. Net proceeds after deducting underwriter fees, legal and othermiscellaneous fees were approximately $17,032,000.In February 2006, the Company completed an offering of 4,597,700 shares of common stock at $4.35 per share for gross proceedsof $20 million. The stock was offered and sold pursuant to an existing shelf registration statement. Net proceeds were approximately$19.9 million.In March 2006, the Company completed an agent-led offering of 5,205,480 shares of common stock at $7.30 per share, for grossproceeds of $38.0 million. The stock was offered and sold pursuant to an existing shelf registration statement. Net proceeds wereapproximately $36.1 million.During 2006, the Company received net proceeds of $1,718,000 for the exercise of 497,613 common stock options at a range of$0.74 to $5.81 per share.During 2007, the Company received net proceeds of $89,000 from the exercise of 57,126 shares of common stock options at arange of $1.34 to $2.21 per share.8. Stockholders’ EquityOn August 7, 2002, the Company adopted a Shareholder Rights Plan which provides for the issuance of rights to purchase sharesof Series D Junior Participating Preferred Stock, par value $0.01 per share (the “Preferred Shares”), of the Company. Under theShareholder Rights Plan, the Company distributed one preferred share purchase right (a “Right”) for each outstanding share of commonstock, par value $.01 (the “Common Shares”), of the Company. The Rights were distributed to stockholders of record on August 16,2002.Each Right entitles the holder to purchase from the Company one-thousandth of a Preferred Share at a price of $40, subject toadjustment. The Rights become exercisable, with certain exceptions, 10 business days after any party, without prior approval of theBoard of Directors, acquires or announces an offer to acquire beneficial ownership of 15% or more of the Company’s Common Shares.In the event that any party acquires 15% or more of the Company’s common stock, the Company enters into a merger or other businesscombination, or if a substantial amount of the Company’s assets are sold after the time that the Rights become exercisable, the Rightsprovide that the holder will receive, upon exercise, shares of the common stock of the surviving or acquiring company, as applicable,having a market value of twice the exercise price of the Right.The Rights expire August 7, 2012, and are redeemable by the Company at a price of $0.00025 per Right at any time prior to the timethat any party acquires 15% or more of the Company’s Common Shares. Until the earlier of the time that the Rights become exercisable,are redeemed or expire, the Company will issue one Right with each new Common Share issued.F-28 NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)9. Stock Options and Restricted Stock AwardsThe Company recorded compensation costs in the consolidated statement of operation associated with SFAS No. 123R as follows: Years EndedDecember 31, 2007 2006 (In thousands) Cost of products sold (which includes idle capacity) $35 $48 Research and development 573 561 General and administrative 737 1,167 Total SFAS No. 123R compensation costs $1,345 $1,776 The Company has granted stock option incentive awards under several plans. Under the 2005 Stock Incentive Plan (the “2005Plan”), approved in May 2005 and amended in June 2007 by the stockholders of the Company, options may be granted to officers,directors, employees, consultants and advisors to Novavax and any present or future subsidiary to purchase a maximum of5,000,000 shares of Novavax common stock and an additional 565,724 shares of common stock that had been held in reserve under theCompany’s 1995 Stock Option Plan (the “1995 Plan”), were unused and were transferred to the Company 2005 Plan. In addition, amaximum 5,746,468 shares of common stock subject to existing options under the 1995 Plan may revert to and become issuable underthe 2005 Plan if such existing options granted under the 1995 Plan should for any reason expire or otherwise terminate.Under the 2005 Plan, the 1995 Plan and the 1995 Director Stock Option Plan (the “1995 Director Plan”) incentive stock options,having a maximum term of 10 years, can be or were granted at no less than 100% of the fair market value of Novavax’s stock at the timeof grant and are generally exercisable in cumulative increments over several years from the date of grant. Both incentive and non-statutorystock options may be granted under these plans. There is no minimum exercise price for non-statutory stock options.The exercise price is the fair market value per share of the Company’s common stock on the date of grant. Options granted to eligibledirectors are exercisable in full beginning six months after the date of grant and expire 10 years from the grant date. All options availableunder the 1995 Director Plan have been granted. Such options cease to be exercisable at the earlier of their expiration or three years after aneligible director ceases to be a director for any reason. In the event that an eligible director ceases to be a director on account of his or herdeath, any outstanding options (whether exercisable or not on the date of death) may be exercised within three years after such date(subject to the condition that no such option may be exercised after the expiration of 10 years from its date of grant).F-29 NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Activity under the 2005 Plan, the 1995 Plan and the Director Plan for the years ended December 31, 2005, 2006, and 2007 was asfollows: 2005 Stock Option Plan 1995 Stock Option Plan 1995 Director Stock Option Plan Weighted Average Exercise Weighted Average Weighted Average Stock Options Price Stock Options Exercise Price Stock Options Exercise Price Balance, January 1, 2005 — — 5,061,968 $5.48 270,000 $4.03 Granted 2,192,775 $1.22 486,825 2.1 — — Exercised — — (312,654) 0.96 (30,000) 3.15 Expired or canceled (88,850) 1.46 (2,115,978) 5.64 (70,000) 4.61 Balance, December 31, 2005 2,103,925 1.21 3,120,161 5.3 170,000 3.95 Granted 1,409,500 4.50 — — — — Exercised (235,571) 3.21 (242,042) 3.69 (20,000) 3.44 Expired or canceled (241,916) 2.41 (352,150) 5.46 — — Balance, December 31, 2006 3,035,938 2.49 2,525,969 5.43 150,000 4.01 Granted 1,633,900 2.88 — — — — Exercised (42,125) 1.34 (15,001) 2.21 — — Expired or canceled (509,025) 3.74 (459,136) 4.98 (30,000) 5.00 Balance, December 31, 2007 4,118,688 $2.50 2,051,832 $5.55 120,000 $3.77 Shares exercisable at December 31,2005 354,165 $1.31 2,220,857 $5.71 170,000 $3.95 Shares exercisable at December 31,2006 1,104,121 $1.83 2,124,856 $5.70 150,000 $4.02 Shares exercisable at December 31,2007 1,678,770 $2.16 1,953,399 $5.69 120,000 $3.77 Available for grant atDecember 31, 2007 4,122,704 The fair value of the stock options granted for the years ended December 31, 2007 and 2006, was estimated at the date of grantusing the Black-Scholes option-pricing model with the following assumptions: 2007 2006Weighted average fair value of options granted $1.76 $2.75Risk-free interest rate 3.93% - 4.62% 4.28% - 5.10%Dividend yield 0.0% 0.0%Volatility 86.11% - 93.80% 85.0%Expected life (in years) 4.03 - 5.94 4.4Expected forfeiture rate 20.34% 20.37%F-30 NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The following table provides certain information with respect to stock options outstanding and exercisable at December 31, 2007: 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 — $ 1.17 635,000 7.6 $0.88 401,667 $0.87 $ 1.17 — $ 2.33 1,347,251 6.9 1.54 856,539 1.53 $ 2.33 — $ 3.50 1,585,500 8.6 2.86 362,500 2.97 $ 3.50 — $ 4.66 1,500,875 6.1 4.21 937,919 4.18 $ 4.66 — $ 5.83 148,000 4.2 5.65 139,750 5.65 $ 5.83 — $ 6.99 601,358 4.4 6.04 581,258 6.04 $ 6.99 — $ 8.16 75,000 0.4 8.00 75,000 8.00 $ 8.16 — $ 9.32 257,100 1.9 8.82 257,100 8.82 $ 9.32 — $10.49 118,436 2.4 9.45 118,436 9.45 $10.49 — $11.65 22,000 2.8 11.05 22,000 11.05 6,290,520 6.5 $3.52 3,752,169 $4.05 As of December 31, 2007, there was approximately $2,438,000 of total unrecognized compensation expense (net of estimateforfeitures) related to non vested options. This unrecognized compensation expense is expected to be recognized over a weighted averageperiod of 1.6 years. The aggregate intrinsic value of stock options outstanding and exercisable as of December 31, 2007 wasapproximately $0. The aggregate intrinsic value of stock options exercised during the years ended December 31, 2007 and 2006 was$138,000 and $929,000, respectively.During the year ended December 31, 2007, the Company granted 160,000 shares of restricted common stock under the 2005 StockIncentive Plan totaling $443,200 in value at the date of grant to an employee, an officer and a board member of the Company. During theyear ended December 31, 2007, the Company also redeemed 60,001 shares of restricted Common Stock, totaling $237,418 in value fromthe date of grant related to the termination of employees.During the year ended December 31 2006, the Company granted 285,500 shares of restricted Common Stock under the 2005 StockIncentive Plan totaling $1,453,199 in value at the date of grant to various employees, officers and a consultant to the Company. Duringthe year ended December 31, 2006, the Company also redeemed 81,532 shares of restricted Common Stock, totaling $83,666 in valuefrom the date of grant related to the termination of employees. In accordance with APB No. 25 and using the straight-line method ofamortization, for the year ended December 31, 2006, $490,205 of non-cash stock compensation expense was included in total operatingcosts and expenses related to this restricted stock and additional paid-in capital was increased accordingly.During the year ended December 31, 2005, the Company granted 552,434 shares of restricted Common Stock under the 2005Stock Incentive Plan totaling $576,000 in value at the date of grant to various employees, officers and a board member of the Company.In accordance with APB No. 25 and using the straight-line method of amortization, for the year ended December 31, 2005, $150,000 ofnon-cash stock compensation expense was included in total operating costs and expenses related to this restricted stock and additionalpaid-in capital was increased accordingly.Restricted stock grants vest over periods of up to three years or upon the achievement of certain milestones.F-31 NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)10. Employee BenefitsThe Company maintains a defined contribution 401(k) retirement plan, pursuant to which employees who have completed 90 daysof service may elect to contribute up to 15% of their compensation on a tax deferred basis up to the maximum amount permitted by theInternal Revenue Code of 1986, as amended.The Company currently matches 25% of the first 6% of the participants’ deferral. Contributions to the 401(k) plan vest equallyover a three-year period. The Company has expensed approximately $59,000, $47,000 and $77,000 in 2007, 2006 and 2005,respectively.11. Discontinued OperationsIn October 2007, the Company entered into agreements to terminate its supply agreements with Allergan. In connection with thetermination, the Company decided to wind down operations at its manufacturing facility in Philadelphia, Pennsylvania. The results ofoperations for the manufacturing facility are being reported as discontinued operations and the consolidated statements of operations forprior periods have been adjusted to reflect this presentation.The assets and liabilities related to the Company’s manufacturing facility in Philadelphia, Pennsylvania have identifiable cashflows that are largely independent of the cash flows of other groups of assets and liabilities and the Company will not have a significantcontinuing involvement beyond one year after the closing of the Graceway transaction.Therefore, in accordance with SFAS No. 144, the accompanying consolidated balance sheets report the assets and liabilities relatedto the Company’s Philadelphia manufacturing facility as discontinued operations in all periods presented, and the results of operationshave been classified as discontinued operations in the accompanying consolidated statements of operations for all periods presented.The following table presents summarized financial information for the Company’s discontinued manufacturing operations presentedin the consolidated statements of operations for the years ended December 31, 2007, 2006, and 2005: 2007 2006 2005 Revenues $1,913 $2,945 $2,045 Cost of products sold 6,758 4,687 5,381 Excess inventory costs over market 1,267 1,549 1,519 Research and development 63 200 — General and administrative — — — Total operating expenses 8,088 6,436 6,900 Net loss $(6,175) $(3,491) $(4,855)F-32 NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The following table presents major classes of assets and liabilities that have been presented as assets and liabilities of discontinuedoperations in the accompanying Consolidated Balance Sheets. 2007 2006 (In thousands) Accounts and other receivables, net $105 $729 Inventory 289 485 Prepaid expenses and other current assets 137 180 Current assets of discontinued operations $531 $1,394 Non-Current assets held for sale $1,634 $— Accounts payable $175 $201 Accrued expenses and other liabilities 441 328 Current liabilities of discontinued operations $616 $529 Assets related to discontinued operations are recorded at their estimated net realizable value of $1,634,000 and are included in non-current assets of discontinued operations in the Company’s consolidated balance sheet at December 31, 2007. The net loss fromdiscontinued operations includes $2,144,000 related to the impairment of these assets. These assets include equipment and furniture andfixtures and were being actively marketed as of December 31, 2007. In February 2008, the Company completed the sale of certain assetsused in the production of Estrasorb to Graceway (See Note 3).The Company accrued $137,000 of estimated severance costs in its December 31, 2007 financial statements, in accordance withSFAS 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS No. 146”). SFAS No. 146 requires that aliability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Cost of products sold fromdiscontinued operations includes $137,000 of estimated severance costs associated with the wind-down of operations at the Philadelphia,Pennsylvania manufacturing facility. The corresponding liability is included in accrued expenses and other liabilities of discontinuedoperations as of December 31, 2007. The severance payments cover eight employees who must continue to be employed until theiremployments is involuntarily terminated in order to receive the severance.12. Income TaxesFor the years ended December 31, 2007, 2006 and 2005, there is no current provision for income taxes and the deferred tax benefithas been entirely offset by valuation allowances. The difference between the amounts and income tax benefit that would result fromapplying domestic federal statutory income tax rates to the net loss and the net deferred tax assets is related to certain non deductibleexpenses, state income taxes, and the change in the valuation allowance.F-33 NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Deferred tax assets (liabilities) consist of the following at December 31: 2007 2006 (In thousands) Net operating losses $63,512 $54,919 Research tax credits 2,794 2,778 FAS 123R stock option compensation 584 351 Alternative-minimum tax credit 94 94 Intangibles from acquisition 119 135 Allowance for doubtful accounts 369 190 Accrued vacation pay 111 72 Accrued bonuses — 36 Deferred rent 153 31 Impairment of assets held for sale 929 — Restricted stock grants 122 107 Other 27 12 Total deferred tax assets 68,814 58,725 Convertible debt (246) — Deferred patent costs (335) (383)Depreciation (604) (850)Total deferred tax liabilities (1,186) (1,233)Net deferred tax assets 67,628 57,492 Less valuation allowance (67,628) (57,492)Deferred tax assets, net $— $— The significant deferred tax amounts which relate to discontinued operations include impairment of assets held for sale, deferredpatent costs, depreciation and net operating loss. The total amounts of the gross deferred assets related to discontinued operations andassets held for sale for 2007 and 2006 are $4,700,000 and $2,252,000, respectively. The valuation allowance offsets the deferred assetsso that the net deferred tax assets balances related to discontinued operations are $0 for both 2007 and 2006.The differences between the U.S. federal statutory tax rate and the Company’s effective tax rate are as follows: 2007 2006 2005 Statutory federal tax rate (34)% (34)% (34)%State income taxes, net of federal benefit (7)% (5)% (5)%Research and development credit (0)% (0)% (0)%Other 1% 1% (1)%Change in valuation allowance 40% 38% 40% —% —% —%Realization of net deferred tax assets is dependent on the Company’s ability to generate future taxable income, which is uncertain.Accordingly, a full valuation allowance was recorded against these assets as of December 31, 2007 and 2006.F-34 NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Novavax has recorded no net benefit for income taxes in 2007, 2006 and 2005 in the accompanying consolidated financialstatements due to the uncertainty regarding ultimate realization of certain net operating losses and other tax credit carryforwards.Federal net operating losses per the company tax returns and tax credits available to the Company as of December 31, 2007 are asfollows: (In thousands) Federal net operating losses expiring through the year 2027 $162,775 State net operating losses expiring through the year 2027 $162,775 Research tax credits expiring through the year 2027 $2,794 Alternative-minimum tax credit (no expiration) $94 The Federal net operating losses above are net of the FIN 48 liability net operating losses of $8,127,000 and the $1,516,000 excessbenefits associated with equity-based compensation.Utilization of the net operating loss carryforwards and credit may be subject to a substantial annual limitation due to the ownershipchange limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The Company has notperformed a detailed analysis to determine whether an ownership change under Section 382 of the Internal Revenue Code occurred. Theeffect of an ownership change would be the imposition of an annual limitation on the use of net operating loss carryforwards attributableto periods before the change.Beginning in 2006, the windfall equity-based compensation deductions will be tracked off balance sheet in conformity withSFAS 123R, Footnote 82. During 2007 and 2006, the Company recorded $1,022,000 and $494,000 of windfall stock compensationdeductions that are being tracked off balance sheet. If and when realized, the tax benefit associated with those deductions of $1,022,000and $494,000 will be credited to Additional Paid-In Capital. These excess benefit deductions are included in the total Federal net operatinglosses disclosed above.Tabular Reconciliation of Unrecognized Tax Benefits (in thousands):Unrecognized tax benefits — as of January 1, 2007 $3,876 Gross increases — tax positions in prior period — Gross decreases — tax position in prior period (67)Gross increases — current-period tax positions 292 Increases (decreases) from settlements — Unrecognized tax benefits — as of December 31, 2007 $4,101 On January 1, 2007, the Company adopted the provisions of FIN 48, Accounting for Uncertainty in Income Taxes — anInterpretation of SFAS No. 109, Accounting for Income Taxes. Fin 48 seeks to clarify the accounting for uncertainty in income taxesrecognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income taxes, byprescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax positiontaken or expected to be taken in a tax return. Under Fin 48, the financial statement effects of a tax position should initially be recognizedwhen it is more-likely-than-not, based on the technical merits, that the position will be sustained upon examination. A tax position thatmeets the more-likely-than-not recognition threshold should initially and subsequently be measure as the largest amount of tax benefit thathas a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. As a result of the adoption of Fin 48,the Company recorded $3.8 million in uncertain tax positions. The $3.8 million of unrecognized tax benefits was accounted for as a$3.8 million reduction to the January 1, 2007 balance of deferred tax assets and a corresponding $3.8 million dollar reduction of thevaluation allowances. Therefore, we did not record any adjustment to the beginning balance of retained earnings in our balance sheet. Tothe extent these unrecognized tax benefits are ultimately recognized it would affect the annual effective income taxF-35 NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)rate. The company and its subsidiary file income tax returns in the U.S. federal jurisdiction and in various states. We had tax netoperating loss and credit carryforwards that are subject to examination for a number of years beyond the year in which they are utilizedfor tax purposes. Since a portion of these carryforwards will be utilized in the future, many of these attribute carryforwards may remainsubject to examination.Our policy is to recognize interest and penalties related to income tax matters in income tax expense. As of December 31, 2007 andDecember 31, 2006, we had no accruals for interest or penalties related to income tax matters.13. Commitments and ContingenciesLitigationThe Company is a defendant in a lawsuit filed by a former director alleging that the Company wrongfully terminated the formerdirector’s stock options. In April 2006, a directed verdict in favor of Novavax was issued and the case was dismissed. The plaintiff hasfiled an appeal with the court. On August 14, 2007, the directed verdict in favor of the Company and the dismissal of the case wasaffirmed. Management believes the lawsuit is without merit and the likelihood of an unfavorable outcome of such appeal is minimal.Accordingly, no liability related to this contingency has been accrued in the consolidated balance sheet as of December 31, 2007.Operating LeasesNovavax leases manufacturing, laboratory and office space and machinery and equipment under non-cancelable operating leaseagreements expiring at various dates through January 2013 and is subleasing one facility through September 2009. Several of these leasescontain renewal options at the Company’s option and standard annual escalation rental rates. Future minimum rental commitments undernon-cancelable leases as of December 31, 2007 are as follows (in thousands): Operating Net Operating Year Leases Sub-Leases Leases 2008 $2,412 $506 $1,906 2009 — 363 1,528 2010 — — 1,296 2011 — — 1,278 2012 1,306 — 1,306 Thereafter 58 — 58 Total minimum lease payments $8,241 $869 $7,372 Total rental expenses approximated $2,373,000, $1,144,769 and $2,307,000 in 2007, 2006 and 2005, respectively.14. Related Party TransactionsOn March 21, 2002, pursuant to the Novavax, Inc. 1995 Stock Option Plan, the Company approved the payment of the exerciseprice of options by two of its directors, through the delivery of full-recourse, interest-bearing promissory notes in the aggregate amount of$1,480,000. The borrowings accrue interest at 5.07% per annum and are secured by an aggregate of 261,667 shares of common stockowned by the directors. The notes were payable upon the earlier to occur of the following: (i) the date on which the director ceases for anyreason to be aF-36 NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)director of the Company, (ii) in whole, or in part, to the extent of net proceeds, upon the date on which the director sells all or any portionof 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 Companyapproved an extension of the former director’s $448,000 note to December 31, 2007 or earlier to the extent of the net proceeds of the pledgedshares. In connection with this extension, the former director executed a general release of all claims against the Company. Accordingly, thenote was reclassified out of stockholders’ equity. As of December 31, 2006, the note and the corresponding accrued interest receivabletotaling $556,000 was reclassified into other current assets in the accompanying consolidated balance sheet. The Company initiallyreserved $167,000 against this note receivable and the corresponding accrued interest receivable, which represented the difference betweenthe book value of the receivables less the market value of the 95,000 pledged shares as of December 31, 2006. During 2007, theCompany adjusted the reserve to $262,555. This reserve is included as an offset to other current assets in the accompanyingconsolidated balance sheet as of December 31, 2007 and 2006 and correspondingly, in general and administrative expenses in theaccompanying consolidated statement of operations for the years ended December 31, 2007 and 2006. This note has not yet been paid andthe Company and the former director are currently negotiating the terms of an extension.In March 2007, the second director resigned from the Board of Directors. As of March 31, 2007, the director owed the Company$1,294,808 related to his note payable and accrued interest. In an agreement dated May 7, 2007, the Board agreed to extend the note thatwas due March 21, 2007 to June 30, 2009 and secured additional collateral in the form of a lien on certain outstanding stock options.Also under the May 7, 2007 agreement, the Company has the right to exercise the stock options, sell the acquired shares and the othershares held as collateral and use the proceeds to pay the debt, if the share price exceeds $7.00 at any time during the period betweenMay 7, 2007 and June 30, 2009. As of December 31, 2007, the note and the corresponding accrued interest receivable totaling $1,334,117is classified in non-current other assets in the accompanying consolidated balance sheet. The note continues to accrue interest at 5.07%per annum and continues to be secured by 166,666 shares of common stock owned by the former director. A reserve of $862,000 wasestablished as of March 31, 2007 and decreased to $778,450 as of December 31, 2007, representing the amount of the loan balance due,less the value of the pledged common stock valued at December 31, 2007. This reserve is included as an offset to non-current other assetsin the accompanying consolidated balance sheet as of December 31, 2007. General and administrative expenses in the accompanyingconsolidated statement of operations included a credit of $83,550 for the year ended December 31, 2007.On April 27, 2007 and effective as of March 31, 2007, the Company entered into a consulting agreement with Mr. John Lambert, theChairman of the Company’s Board of Directors. The agreement terminates on March 8, 2010, unless terminated sooner by either partyupon 30 days written notice. Under the agreement, Mr. Lambert is expected to devote one-third of his time to the Company’s activities. Asa consultant, Mr. Lambert is required to work closely with the senior management of the Company on matters related to clinicaldevelopment of its vaccine products, including manufacturing issues, FDA approval strategy and commercialization strategy. His annualcompensation is $220,000 in consideration for his consulting services. Additionally, on March 7, 2007, the Company grantedMr. Lambert 100,000 shares of restricted common stock, under the 2005 Plan totaling $277,000 in value at the date of grant and 250,000stock options under the 2005 Plan with a fair value of approximately $420,000. Both the restricted stock and stock options vest upon theachievement of certain milestones. For year ended December 31, 2007, the Company recorded consulting expenses for Mr. Lambert of$180,000 in accordance with the consulting agreement. The Company did not record any consulting fees to Mr. Lambert for the yearended December 31, 2006.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 hewas not an officer, as reimbursement of his education costs. A previous employer had paid these costs on his behalf and upontermination of that previous employment, he had to repay the $54,000. If such officer were to have terminated his employment with theCompany before April 2007, this officer would haveF-37 NOVAVAX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)owed back a portion of the amount. The $54,000 was being amortized over a three-year period and was included in general andadministrative costs on the consolidated statements of operations. As of December 31, 2006 and 2005, the remaining cost that had notbeen expensed was $4,468 and $22,000, respectively, and is included in accounts and other receivables on the consolidated balancesheets.15. Quarterly Financial Information (Unaudited)The Company’s unaudited quarterly information is as follows: Quarter Ended March 31 June 30 September 30 December 31 Unaudited (In thousands, except per share data) 2007 Summary Statement of Operations: Revenues $461 $(216) $814 $396 Cost of products sold 50 101 12 — Research and developments 3,653 3,992 5,778 4,177 Selling, general and administrative 4,597 3,362 3,085 2,919 Interest (income), net (604) (531) (291) (255)Loss from continuing operations (7,235) (7,140) (7,770) (6,445)Loss from discontinued operations (1,153) (1,054) (1,196) (2,772)Net loss $(8,388) $(8,194) $(8,966) $(9,217)Basic and diluted net loss per share: Loss from continuing operations $(0.12) $(0.11) $(0.13) $(0.11)Loss from discontinued operations (0.02) (0.02) (0.02) (0.04)Net loss per share: $(0.14) $(0.13) $(0.15) $(0.15)2006 Summary Statement of Operations: Revenues $401 $364 $502 $471 Cost of products sold 24 110 53 50 Research and developments 2,157 3,316 2,776 3,080 Selling, general and administrative 2,758 2,638 2,550 3,342 Interest expense (income), net 460 (627) (680) (692)Loss from continuing operations (4,998) (5,073) (4,197) (5,309)Loss from discontinued operations (497) (1,338) (817) (839)Net loss $(5,495) $(6,411) $(5,014) $(6,148)Basic and diluted net loss per share: Loss from continuing operations $(0.10) $(0.08) $(0.07) $(0.09)Loss from discontinued operations (0.01) (0.02) (0.01) (0.01)Net loss per share: $(0.11) $(0.10) $(0.08) $(0.10)The net income (loss) per share was calculated for each three-month period on a stand-alone basis. As a result, the sum of the netincome (loss) per share for the four quarters does not equal the net income (loss) per share for the respective twelve-month period.F-38 Exhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe have issued our report dated March 17, 2008 (which report expresses an unqualified opinion and includes an explanatoryparagraph relating to the application of Statement of Financial Accounting Standards No. 123(R) as of December 31, 2007),accompanying the consolidated financial statements and management’s assessment of the effectiveness of internal control over financialreporting included in the Annual Report of Novavax, Inc. and Subsidiary on Form 10-K for the year ended December 31, 2007. Wehereby consent to the incorporation by reference of said report in the Registration Statements of Novavax, Inc. and Subsidiary onForms S-3 (File No. 333-138893, effective December 11, 2006; No. 333-130568 effective December 21, 2005; No. 333-118210 effectiveAugust 13, 2004; No. 333-118181 effective August 12, 2004; and No. 333-22685 effective March 4, 1997) and on Forms S-8 (FileNo. 333-145298, effective August 9, 2007; File No. 33-80277 effective December 11, 1995; No. 33-80279 effective December 11,1995; No. 333-130990 effective January 12, 2006; No. 333-110401 effective November 12, 2003; No. 333-97931 effective August 9,2002; No. 333-46000 effective September 18, 2000 and File No. 333-77611, effective May 3, 1999)./s/ Grant Thornton LLPPhiladelphia, PennsylvaniaMarch 17, 2008 Exhibit 23.2CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in this Annual Report (Form 10-K) of Novavax, Inc. of our report dated March 3, 2006,with respect to the consolidated financial statements of Novavax, Inc., included in the 2007 Annual Report to Shareholders of Novavax,Inc.We consent to the incorporation by reference in the following Registration Statements: (1) Registration Statement (Form S-3 No. 333-22685) of Novavax, Inc., and (2) Registration Statement (Form S-3 No. 333-118181) of Novavax, Inc., and (3) Registration Statement (Form S-3 No. 333-118210) of Novavax, Inc., and (4) Registration Statement (Form S-3 No. 333-130568) of Novavax, Inc., and (5) Registration Statement (Form S-3 No. 333-138893) of Novavax, Inc., and (6) Registration Statement (Form S-8 No. 33-80277) pertaining to the Employee Benefit Plans of Novavax, Inc., and (7) Registration Statement (Form S-8 No. 33-80279) pertaining to the Employee Benefit Plans of Novavax, Inc., and (8) Registration Statement (Form S-8 No. 333-77611) pertaining to the Employee Benefit Plans of Novavax, Inc., and (9) Registration Statement (Form S-8 No. 333-46000) pertaining to the Employee Benefit Plans of Novavax, Inc., and (10) Registration Statement (Form S-8 No. 333-97931) pertaining to the Employee Benefit Plans of Novavax, Inc., and (11) Registration Statement (Form S-8 No. 333-110401) pertaining to the Employee Benefit Plans of Novavax, Inc., and (12) Registration Statement (Form S-8 No. 333-130990) pertaining to the Employee Benefit Plans of Novavax, Inc.; and (13) Registration Statement (Form S-8 No. 333-145298) pertaining to Employee Benefit Plans of Novavax, Inc.of our report dated March 3, 2006, with respect to the consolidated financial statements of Novavax, Inc. incorporated herein by reference./s/ Ernst & Young LLPPhiladelphia, PennsylvaniaMarch 17, 2008 Exhibit 31.1CERTIFICATION OF CHIEF EXECUTIVE OFFICERI, Rahul Singhvi, certify that:1. I have reviewed this Annual Report on Form 10-K of Novavax, Inc;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material factnecessary to make the statements made, in light of the circumstances under which such statements were made, not misleading withrespect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in allmaterial respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in thisreport;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange ActRules 13a-15(f) and 15d-15(f)) for the registrant and we have:a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed underour supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made knownto us by others within those entities, particularly during the period in which this report is being prepared;b) designed such internal control over financial reporting, or caused such internal control over financial reporting to bedesigned under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles;c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluations; andd) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during theregistrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materiallyaffected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalentfunctions):a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reportingwhich are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financialinformation; andb) any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting. By: /s/ Rahul SinghviPresident and Chief Executive OfficerDate: March 17, 2008 Exhibit 31.2CERTIFICATION OF CHIEF FINANCIAL OFFICERI, Len Stigliano, certify that:1. I have reviewed this Annual Report on Form 10-K of Novavax, Inc;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material factnecessary to make the statements made, in light of the circumstances under which such statements were made, not misleading withrespect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in allmaterial respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in thisreport;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange ActRules 13a-15(f) and 15d-15(f)) for the registrant and we have:a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed underour supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made knownto us by others within those entities, particularly during the period in which this report is being prepared;b) designed such internal control over financial reporting, or caused such internal control over financial reporting to bedesigned under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles;c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluations; andd) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during theregistrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materiallyaffected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalentfunctions):a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reportingwhich are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financialinformation; andb) any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting. By: /s/ Len StiglianoVice President, Chief FinancialOfficer and TreasurerDate: March 17, 2008 Exhibit 32.1CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 UNITED STATES C. §1350(SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)In connection with the Annual Report of Novavax, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2007as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Rahul Singhvi, President and Chief ExecutiveOfficer of the Company, hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002, to the best of my knowledge, that:1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, asamended; and2) The information contained in the Report fairly presents, in all material respects, the financial condition and results ofoperations of the Company for the dates and periods covered by this Report. By: /s/ Rahul SinghviName: Rahul Singhvi Title: President and Chief ExecutiveOfficerDate: March 17, 2008 Exhibit 32.2CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO18 UNITED STATES C. §1350,(SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)In connection with the Annual Report of Novavax, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2007as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Len Stigliano, Vice President, Chief FinancialOfficer and Treasurer of the Company, hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002, to the best of my knowledge, that:1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, asamended; and2) The information contained in the Report fairly presents, in all material respects, the financial condition and results ofoperations of the Company for the dates and periods covered by this Report. By: Len StiglianoVice President, Chief FinancialOfficer and TreasurerDate: March 17, 2008

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