Item 7. Management’s Discussion and Analysis
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Any statements in the discussion below and elsewhere in this Annual Report on Form 10-K about expectations, beliefs, plans, objectives, assumptions, or future events or performance of Novavax, Inc. (“Novavax,” together with its wholly owned subsidiaries, the “Company,” “we,” or “us”) are not historical facts and are forward-looking statements. Such forward-looking statements include, without limitation, statements about our capabilities, goals, expectations regarding future revenue and expense levels, and capital raising activities; our operating plans and prospects, including our ability to continue as a going concern through one year from the date of Novavax’ audited financial statements for the year ended December 31, 2022; potential market sizes and demand for our product candidates; the efficacy, safety, and intended utilization of our product candidates; the development of our clinical-stage product candidates and our recombinant vaccine and adjuvant technologies; the development of our preclinical product candidates; our expectations related to enrollment in our clinical trials; the conduct, timing, and potential results from clinical trials and other preclinical studies; plans for and potential timing of regulatory filings; our expectation of manufacturing capacity, timing, production, distribution, and delivery for NVX-CoV2373 by us and our partners; our estimate of the number of individuals who may potentially be reached by NVX-CoV2373; our expectations with respect to the anticipated ongoing development and commercialization or licensure of NVX-CoV2373, ongoing development of COVID-19 variant strain-containing monovalent or bivalent formulation, efforts to expand the NVX-CoV2373 label worldwide as a booster, and to various age groups and geographic locations, and our seasonal quadrivalent influenza vaccine, previously known as NanoFlu; the expected timing, content, and outcomes of regulatory actions; funding from the U.S. government partnership formerly known as Operation Warp Speed under the USG Agreement, the U.S. Department of Defense (“DoD”), and CEPI; funding under our APAs and supply agreements and amendments to, termination of, or legal disputes relating to any such agreement; our available cash resources and usage and the availability of financing generally; plans regarding partnering activities and business development initiatives; and other matters referenced herein. Generally, forward-looking statements can be identified through the use of words or phrases such as “believe,” “may,” “could,” “will,” “would,” “possible,” “can,” “estimate,” “continue,” “ongoing,” “consider,” “anticipate,” “intend,” “seek,” “plan,” “project,” “expect,” “should,” “would,” “aim,” or “assume,” the negative of these terms, or other comparable terminology, although not all forward-looking statements contain these words.
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs and expectations about the future of our business, future plans and strategies, projections, anticipated events and trends, the economy, and other future conditions. Forward-looking statements involve estimates, assumptions, risks, and uncertainties that could cause actual results or outcomes to differ materially from those expressed or implied in any forward-looking statements, and, therefore, you should not place considerable reliance on any such forward-looking statements. Such risks and uncertainties include, without limitation, challenges satisfying, alone or together with partners, various safety, efficacy, and product characterization requirements, including those related to process qualification and assay validation, necessary to satisfy applicable regulatory authorities, such as the FDA, the WHO, United Kingdom (“UK”) Medicines and Healthcare Products Regulatory Agency, the European Medicines Agency, the Republic of Korea’s Ministry of Food and Drug Safety, or Japan’s Ministry of Health, Labour and Welfare; unanticipated challenges or delays in conducting clinical trials; difficulty obtaining scarce raw materials and supplies; resource constraints, including human capital and manufacturing
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capacity, constraints on the ability of Novavax to pursue planned regulatory pathways, alone or with partners, in multiple jurisdictions simultaneously, leading to staggering of regulatory filings, and potential regulatory actions; challenges meeting contractual requirements under agreements with multiple commercial, governmental, and other entities; and other risks and uncertainties identified in Part I, Item 1A “Risk Factors” of this Annual Report on Form 10-K, which may be detailed and modified or updated in other documents filed with the SEC from time to time, and are available at www.sec.gov and at www.novavax.com. You are encouraged to read these filings as they are made.
We cannot guarantee future results, events, level of activity, performance, or achievement. Any or all of our forward-looking statements in this Annual Report on Form 10-K may turn out to be inaccurate or materially different from actual results. Further, any forward-looking statement speaks only as of the date when it is made, and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, unless required by law. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Information in this Annual Report on Form 10-K, includes a financial measure that was not prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), which we refer to as adjusted cost of sales. We are presenting this non-GAAP financial measure to assist an understanding of our business and its performance. Adjusted cost of sales includes an estimate of standard manufacturing costs that were previously expensed to research and development prior to regulatory approvals for NVX-CoV2373 that would otherwise have been capitalized to inventory. Any non-GAAP financial measures presented are not, and should not be viewed as, substitutes for financial measures required by GAAP, have no standardized meaning prescribed by GAAP, and may not be comparable to the calculation of similar measures of other companies.
Overview
We are a biotechnology company that promotes improved health globally through the discovery, development, and commercialization of innovative vaccines to prevent serious infectious diseases. Our proprietary recombinant technology platform harnesses the power and speed of genetic engineering to efficiently produce highly immunogenic nanoparticle vaccines designed to address urgent global health needs.
Our vaccine candidates are genetically engineered nanostructures of conformationally correct recombinant proteins that mimic those found on natural pathogens. This technology enables the immune system to recognize the right target proteins from different angles and develop protective antibodies. We believe that our vaccine technology may lead to the induction of a differentiated immune response that may be more efficacious than naturally occurring immunity or other vaccine approaches. Our vaccine candidates also incorporate our proprietary saponin-based Matrix-M™ adjuvant to enhance the immune response and stimulate higher levels of functional antibodies and induce a cellular immune response.
We have developed a COVID-19 vaccine NVX-CoV2373 (“Nuvaxovid™,” “Covovax™,” “Novavax COVID-19 Vaccine, Adjuvanted”) and are developing an influenza vaccine candidate, a COVID-19-Influenza Combination (“CIC”) vaccine candidate, and additional vaccine candidates, including a COVID-19 variant strain-containing monovalent or bivalent formulation. NVX-CoV2373 has received approval, interim authorization, provisional approval, conditional marketing authorization (“CMA”), and emergency use authorization (“EUA”) from multiple regulatory authorities globally for both adult and adolescent populations as a primary series and for both homologous and heterologous booster indications. In addition to COVID-19 and seasonal influenza, our other areas of focus include respiratory syncytial virus (“RSV”) and malaria.
Business Highlights
Fourth Quarter 2022 and Recent Highlights
COVID-19 Vaccine Orders and Plans for the 2023 Fall Vaccination Season
• Delivered over 100 million doses of Nuvaxovid, Novavax’s COVID-19 vaccine, globally to date
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• Modified agreement with the U.S. government for up to 1.5 million additional doses of Novavax’s COVID-19 vaccine for delivery in 2023
◦ Agreement maintains the U.S. public’s access to Novavax’s COVID-19 vaccine and supports the development of smaller dose vials, strain selection in line with U.S. Food and Drug Administration (FDA) recommendations and a smooth transition to the commercial market
• Reaffirmed intent to deliver an updated mono- or bivalent strain vaccine for the 2023 fall vaccination season, consistent with public health recommendations
• Secured European Medicines Agency (EMA) and FDA approval of Nuvaxovid five-dose vial variation and EMA approval of the Company’s Czech Republic facility to manufacture antigen and supply Nuvaxovid to the E.U.
COVID-19 Vaccine Clinical Development Program and Expanded Authorizations
• Presented data to the U.S. FDA Vaccine and Related Biological Products Advisory Committee demonstrating that when used as a booster, Novavax’s COVID-19 vaccine induces broad functional immune responses, including for contemporary variants
• Announced topline results from Phase 3 COVID-19 Omicron BA.1 vaccine candidate, achieving the primary strain-change endpoint
◦ Part 2 to evaluate our prototype vaccine compared to an Omicron BA.5 vaccine, as well as a bivalent containing prototype and Omicron BA.5 vaccine
• Expanded Nuvaxovid label in adult booster and adolescent primary series to enable broader uptake in the long-term commercial market
COVID-19-Influenza Combination (CIC) Vaccine Candidate Clinical Development
• Initiated Phase 2 dose-confirming trial to evaluate safety and immunogenicity of different formulations of CIC and influenza stand-alone vaccine candidates in adults aged 50 to 80 years, with topline results expected by mid-year 2023
• CIC Phase 2 trial includes additional study arms exploring alternate influenza stand-alone formulations
Financing Transactions
In December 2022, we completed a public offering of 7,475,000 shares of our common stock, including 975,000 shares of common stock that were issued upon the exercise in full of the option to purchase additional shares granted to the underwriters, at a price of $10.00 per share, resulting in net proceeds of $69.8 million. Concurrently with this public offering, we issued $175.3 million aggregate principal amount of 5.00% convertible senior unsecured notes due 2027 (the “2027 Notes”), including $25.3 million that was issued upon the exercise of the full option to purchase additional notes in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The 2027 Notes will mature on December 15, 2027, unless earlier converted, redeemed, or repurchased. We received $166.4 million in net proceeds from the issuance of the 2027 Notes after deducting the initial purchasers’ fees and our offering expenses. See Note 11 to our consolidated financial statements in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K for additional information related to the 2027 Notes.
In June 2021, we entered into an At Market Issuance Sales Agreement (the “June 2021 Sales Agreement”), which allows us to issue and sell up to $500 million in gross proceeds of shares of our common stock, and terminated our then-existing At Market Issuance Sales Agreement. As of December 31, 2022, the remaining balance under the June 2021 Sales Agreement was approximately $318 million. During the years ended December 31, 2022 and 2021, we sold 2.2 million and 2.6 million, respectively, of shares of our common stock resulting in net proceeds of approximately $179 million and $565 million, respectively, under our various At Market Issuance Sales Agreements.
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Critical Accounting Policies and Use of Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our consolidated financial statements requires us to make estimates, assumptions, and judgments that affect the reported amounts of assets, liabilities, and equity and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. These estimates, particularly estimates relating to accounting for grant revenue, lease accounting, pre-launch inventory, inventory valuation, and research and development expenses have a material impact on our consolidated financial statements and are discussed in detail throughout our analysis of the results of operations discussed below. We base our estimates on historical experience and various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets, liabilities, and equity that are not readily apparent from other sources. Actual results and outcomes could differ from these estimates and assumptions.
For an in-depth discussion of each of our significant accounting policies, including our critical accounting policies and further information regarding estimates and assumptions involved in their application, see Note 2 to the accompanying consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
Grant Revenue Recognition
Our grant revenue primarily consists of funding under U.S. government contracts including the USG Agreement and the DoD Contract and was $382.9 million in 2022. We measure progress toward satisfaction of our grant performance obligations using an Estimate-at-Completion (“EAC”) process, which is a cost-based input method that reviews and monitors the progress towards the completion of our performance obligation. Under this process, we consider the costs that have been incurred to-date, as well as projections to completion using various inputs and assumptions, including, but not limited to, progress towards completion, labor costs and level of effort, material and subcontractor costs, indirect administrative costs, and other identified risks. Estimating the total allowable cost at completion of our performance obligation under a contract is subjective and requires us to make assumptions about future activity and cost drivers. Changes in these estimates can occur for a variety of reasons and, if significant, may impact the timing of revenue and fee recognition on our contracts. For our cost-reimbursable-plus-fixed-fee contracts, we recognize the fixed fee based on the proportion of reimbursable contract costs incurred to total estimated allowable contract costs expected to be incurred on completion of the underlying performance obligation as determined under the EAC process. Changes in estimates related to the EAC process are recognized in the period when such changes are made on a cumulative catch-up basis. We have not experienced any material difference as a result of change in estimate arising from the EAC process.
Lease Accounting
We enter into manufacturing supply agreements with CMOs and contract development and manufacturing organizations (“CDMOs”) to manufacture our vaccine candidates. Certain of these manufacturing supply agreements include the use of identified manufacturing facilities and equipment that are controlled by us and for which we obtain substantially all the output and may qualify as an embedded lease. The evaluation of leases that are embedded in our CMO and CDMO agreements is complex and requires judgment in determining whether the contract, either explicitly or implicitly, is for the use of an identified asset, which generally is the use of a portion of the manufacturing facility; whether we have the right to direct the use of, and obtain substantially all of the benefit from, the identified asset; the term of the lease; and the fixed lease payments under the contract. Determining the lease commencement date may require judgment because the lease commencement date may be different than the inception date of the contract. We determine the non-cancellable lease term of our embedded leases based on the impact of certain expected milestones on our option to terminate the lease where we are reasonably certain to not exercise that option. For leases that have a lease term of more than 12 months at the lease commencement date, we recognize lease liabilities and corresponding right-of-use (“ROU”) assets based on the present value of the fixed future payments over the lease term. We calculate the present value of future payments using the discount rate implicit in the lease, if available, or our incremental borrowing rate. In determining the lease period, we evaluate facts and circumstances that could affect the period over which we are reasonably certain to use the underlying asset while taking into consideration the non-cancelable period over which we have the right to use the underlying asset and any option period to extend or terminate the lease if we are reasonably certain to exercise the option. We use significant assumptions and judgment in evaluating our lease contracts and other agreements under ASC 842, including the determination of whether an agreement is or contains a lease, whether a change in the terms and conditions of a lease contract represent a new or modified lease, whether
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a lease represents an operating or finance lease, the discount rate used to determine the present value of lease obligations, and the term of embedded leases in our manufacturing supply agreements. As of December 31, 2022, we had total noncurrent ROU assets of $106.2 million, current lease liabilities of $44.1 million, and noncurrent lease liabilities of $81.3 million.
Pre-Launch Inventory
We capitalize raw materials and production costs as inventory when we determine that commercialization of a product is probable and have a present right to the economic benefit associated with the product. Our estimate of when commercialization is probable is based primarily on our experience with obtaining regulatory approval of comparable products. We began to capitalize inventory in 2022 and, as of December 31, 2022, we had approximately $30.6 million of commercial inventory that was expensed prior to approval.
Inventory Realizability
We periodically analyze our inventories for excess amounts or obsolescence and write down obsolete or otherwise unmarketable inventory to its estimated net realizable value. We estimate excess or obsolete inventory and losses on firm purchase commitments of inventory quarterly based on multiple factors, including assumptions about expected future demand and market conditions, current sales orders, and product expiry dates. Our assumptions about expected future demand are inherently uncertain and if we were to change any of these judgments or estimates, it could cause a material increase or decrease in the amount of inventory write down that we report in a particular period. We began to capitalize inventory in 2022. Subsequently, we recorded inventory write-downs of $447.6 million and losses on firm purchase commitments of inventory of $155.9 million to the extent the cost cannot be recovered based on estimates about future demand.
Accounting for Research and Development Expenses
We estimate our prepaid and accrued expenses related to our research and development activities using a process that involves reviewing contracts and purchase orders, communicating with our project managers and service providers to identify services that have been performed on our behalf, and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or for which we have been invoiced in advance of the service. This estimation process includes a review of:
• expenses incurred under agreements with contract research organizations (“CROs”) that conduct our clinical trials and third party consultants; and
• the cost of developing and manufacturing vaccine components under third-party CMOs and CDMOs agreements, including expenses incurred for the procurement of raw materials, laboratory supplies and equipment.
We base our expenses on our estimates of the services provided and efforts expended pursuant to contracts, statements of work and related change orders with the service provider, and discussion with internal personnel and external service providers as to the progress of the services and the agreed-upon fee to be paid for such services. The financial terms of these agreements are based on negotiated terms, vary from contract to contract, and may result in an uneven level of activity over time. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. Additionally, invoicing from third-party service providers may not coincide with actual work performed and can result in a prepaid or an accrual position at the end of the period. The estimation process requires us to make significant judgments and estimates in determining the services incurred as of the balance sheet date, which may result in either a prepaid or an accrual balance. As actual costs become known, we adjust our estimates. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed may vary from the related estimates and could result in us reporting amounts that are too high or too low in a particular period. Our prepaid and accrued expenses are dependent, in part, upon the receipt of timely and accurate reporting from CROs, CMOs, CDMOs, and third-party service providers. Due to the nature of the estimation process, there may be a difference between estimated costs and actual costs incurred. Historically, we have not experienced any material differences in prior periods.
Recent Accounting Pronouncements
See “Note 2―Summary of Significant Accounting Policies” included in our Notes to Consolidated Financial Statements (under the caption “ Recent Accounting Pronouncements ”).
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Results of Operations for Fiscal Years 2022 and 2021
The following is a discussion of our historical consolidated financial condition and results of operations, and should be read in conjunction with the consolidated financial statements and notes thereto set forth in this Annual Report on Form 10-K. Additional information concerning factors that could cause actual results to differ materially from those in our forward-looking statements is described under Part I, Item 1A, “Risk Factors” of this Annual Report on Form 10-K.
For our discussion of the year ended December 31, 2021, compared to the year ended December 31, 2020, please read Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations located in Annual Report on Form 10-K for the year ended December 31, 2021.
Revenue
2022 2021 Change
Revenue (in thousands):
Product sales $ 1,554,961 $ — $ 1,554,961
Grants 382,921 948,709 (565,788)
Royalties and other 43,990 197,581 (153,591)
Total revenue $ 1,981,872 $ 1,146,290 $ 835,582
Product sales
Product sales for 2022 were $1.6 billion as compared to no product sales for 2021. Product sales for 2022 related to revenue from commercial sales of NVX-CoV2373, which commenced in 2022. The geographic distribution of product sales in 2022 was as follows:
2022
North America
$ 194,480
Europe 823,542
Rest of the world
536,939
Total product revenue $ 1,554,961
Grants
We recognized grant revenue as follows:
2022 2021 Change
Grant Revenue (in thousands)
USG Agreement
$ 380,996 $ 788,953 $ (407,957)
U.S. DoD
1,925 21,683 (19,758)
CEPI
— 135,445 (135,445)
Other grant revenue
— 2,628 (2,628)
Total grant revenue $ 382,921 $ 948,709 $ (565,788)
Grant revenue for 2022 was $382.9 million compared to $948.7 million for 2021, a decrease of $565.8 million. Grant revenue for 2022 primarily comprised revenue for services performed under the USG Agreement and grant revenue for 2021 primarily comprised revenue for services performed under the USG Agreement and the CEPI funding agreement. The decrease in revenue was primarily due to decreased development activities under the USG Agreement and our funding agreement with CEPI.
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Royalties and Other
Royalties and other revenue for 2022 was $44.0 million as compared to $197.6 million for 2021, a decrease of $153.6 million. Royalties and other revenue primarily related to royalties under our licensing arrangements, and the decrease in revenue was due to lower sales-based royalties from our license partners.
Expenses:
2022 2021 Change
Expenses (in thousands):
Cost of sales $ 902,639 $ — $ 902,639
Research and development 1,235,278 2,534,508 (1,299,230)
Selling, general, and administrative 488,691 298,358 190,333
Total expenses $ 2,626,608 $ 2,832,866 $ (206,258)
Cost of Sales
Cost of sales was $902.6 million, or 58% of product sales, for 2022, including expense of $603.5 million related to excess or obsolete inventory and losses on firm purchase commitments. Prior to receiving regulatory approval, we expensed manufacturing costs as research and development expenses. After receiving regulatory approval, we capitalize the costs of production for a particular supply chain when we determine that we have a present right to the economic benefit associated with the product. While we tracked the quantities of our manufactured vaccine product and components, we did not track pre-approval manufacturing costs and therefore the manufacturing cost of our pre-launch inventory produced prior to approval is not reasonably determinable. However, based on our expectations for future manufacturing costs to produce our vaccine product and components inventory, we estimate at December 31, 2022 we had approximately $30.6 million of commercial inventory that was expensed prior to approval. We expect to utilize the majority of our reduced-cost inventory through 2023. If inventory and pre-launch inventory sold in 2022 was valued at expected standard cost, including expenses related to excess and obsolete inventory and losses on firm purchase commitments, adjusted cost of sales for the period would have been approximately $1,067.4 million, or 69% of product sales, an adjustment of $164.8 million as compared to cost of sales recognized. The cost of sales as a percentage of product sales may fluctuate in the future as a result of changes to our customer pricing mix or standard costs.
Research and Development Expenses
Research and development expenses decreased to approximately $1.2 billion for 2022 as compared to $2.5 billion for 2021, a decrease of $1.3 billion. The decrease was primarily due to a decrease in development activities relating to coronavirus vaccines, including NVX-CoV2373, an Omicron BA.1 vaccine candidate, bivalent formulations, and CIC, as summarized in the table below (in thousands):
2022 2021
Research and Development Expenses (in thousands):
Coronavirus vaccines $ 848,042 $ 2,245,935
Influenza vaccine 7,163 7,761
Other vaccine development programs 2,658 818
Total direct external research and development expense 857,863 2,254,514
Employee expenses 180,168 130,576
Stock-based compensation expense 66,565 86,928
Facility expenses 60,428 26,100
Other expenses 70,254 36,390
Total research and development expenses $ 1,235,278 $ 2,534,508
Research and development expenses for coronavirus vaccines for 2022 and 2021 included a benefit of $201.4 million, inclusive of a $98.3 million benefit pursuant to the Fujifilm Settlement Agreement (see Note 4 to our consolidated financial statements in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K), and an
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expense of $239.2 million, respectively, related to previously accelerated manufacturing costs for leases that we determined were embedded in multiple manufacturing supply agreements with CMOs and CDMOs.
We do not provide forward-looking estimates of costs and time to complete our research programs due to the many uncertainties associated with vaccine development. As we obtain data from preclinical studies and clinical trials, we may elect to discontinue or delay clinical trials in order to focus our resources on more promising vaccine candidates. Completion of clinical trials may take several years or more, but the length of time can vary substantially depending upon the phase, size of clinical trial, primary and secondary endpoints, and the intended use of the vaccine candidate. The cost of clinical trials may vary significantly over the life of a project as a result of a variety of factors, including:
• the number of participants who participate in the clinical trials;
• the number of sites included in the clinical trials;
• if clinical trial locations are domestic, international, or both;
• the time to enroll participants;
• the duration of treatment and follow-up;
• the safety and efficacy profile of the vaccine candidate; and
• the cost and timing of, and the ability to secure, regulatory approvals.
As a result of these uncertainties, we are unable to determine the duration and completion costs of our research and development projects or when, and to what extent, we will generate future cash flows from our research projects.
For 2023, we expect research and development expenses to decrease as compared to 2022 as we continue to assess our manufacturing needs and modify our global manufacturing footprint consistent with our contractual obligations to supply, and anticipated demand for, NVX-CoV2373 and as additional manufacturing activities that were previously recognized as research and development expenses begin to meet the criteria for capitalization as inventory. We are gating funding for our potential Phase 3 research and development expenses related to our influenza and CIC vaccine candidates based on the assessment of our Phase 2 clinical trial results anticipated for mid 2023.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased to $488.7 million for 2022 from $298.4 million for 2021, an increase of $190.3 million. The increase in selling, general, and administrative expenses is primarily due to a $149.5 million increase in expenses related to the commencement of our commercial sales operations.
For 2023, our expected selling, general, and administrative expenses levels may vary depending on our ability to successfully develop, manufacture, distribute, or market an updated monovalent or bivalent formulation of a vaccine candidate for COVID-19 for the fall 2023 COVID vaccine season. Due to this uncertainty, we have announced our intention to reduce and control our operating spend to focus on key priorities and we will continue to evaluate our level of investment as the year progresses.
Other Expense, Net:
2022 2021 Change
Other Expense, Net (in thousands):
Interest expense $ (19,880) $ (21,127) $ 1,247
Other income (expense) 10,969 (6,833) 17,802
Total other expense, net $ (8,911) $ (27,960) $ 19,049
We had total net other expense of $8.9 million for 2022 compared to total net other expense of $28.0 million for 2021, a decrease of $19.0 million. During 2022 and 2021, other income (expense) was primarily related to foreign exchange rate activity.
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Income Tax Expense:
During the years ended December 31, 2022 and 2021, we recognized $4.3 million and $29.2 million, respectively, of income tax expense related to federal and state income taxes and foreign withholding tax on royalties.
Net Loss:
2022 2021 Change
Net Loss (in thousands, except per share information):
Net loss $ (657,939) $ (1,743,751) $ 1,085,812
Net loss per share, basic and diluted $ (8.42) $ (23.44) $ 15.02
Weighted average shares outstanding, basic and diluted 78,183 74,400 3,783
Net loss for 2022 was $0.7 billion, or $8.42 per share, as compared to $1.7 billion, or $23.44 per share, for 2021, a decrease of $1.1 billion. The decrease in net loss was primarily due the commencement of commercial sales of NVX-CoV2373 in 2022 and a decrease in research and development expense, partially offset by the write-down of excess or obsolete inventory and losses on firm purchase commitments and decreased revenue under the USG Agreement.
The increase in weighted average shares outstanding for 2022 is primarily a result of sales of our common stock and common stock issued under our incentive programs.
Liquidity Matters and Capital Resources
Our future capital requirements depend on numerous factors including, but not limited to, revenue from our product sales and royalties under licensing arrangements with our strategic partners; funding and repayments under our grant agreements; our projected activities related to the development and commercial support of NVX-CoV2373 and variant candidates, including significant commitments under various CRO, CMO, and CDMO agreements; the progress of preclinical studies and clinical trials; the time and costs involved in obtaining regulatory approvals; the costs of filing, prosecuting, defending, and enforcing patent claims and other intellectual property rights; and other manufacturing, sales, and distribution costs. We plan to continue developing other vaccines and product candidates, such as our influenza vaccine candidate and potential combination vaccines candidates, which are in various stages of development.
We have entered into supply agreements, sometimes referred to as APAs, with the EC and various countries globally. We also have grant and license agreements. As of December 31, 2022, the aggregate amount of the transaction price allocated to performance obligations that were unsatisfied (or partially unsatisfied), excluding amounts related to sales-based royalties under the licensing agreements, was approximately $3 billion, which excludes amounts related to the Gavi APA and the reduction in doses related to the Amended and Restated UK Supply Agreement, as defined below. Failure to meet regulatory milestones, obtain timely supportive recommendations from governmental advisory committees, or achieve product volume or delivery timing obligations under our APAs may require us to refund portions of upfront payments or result in reduced future payments, which could adversely impact our ability to realize revenue from our unsatisfied performance obligations. The timing to fulfill performance obligations related to grant agreements will depend on the results of our research and development activities, including clinical trials, and delivery of doses. The timing to fulfill performance obligations related to supply agreements will depend on timing of product manufacturing, receipt of marketing authorizations for additional indications, delivery of doses based on customer demand, and the ability of the customer to request variant vaccine in place of the prototype NVX-CoV2373 vaccine under certain of our APAs. The supply agreements typically contain terms that include upfront payments intended to assist us in funding investments related to building out and operating our manufacturing and distribution network, among other expenses, in support of our global supply commitment, and are applied to billings upon delivery of NVX-CoV2373. Such upfront payments generally become non-refundable upon our achievement of certain development, regulatory, and commercial milestones.
In addition, we continue to assess our manufacturing needs and modify our global manufacturing footprint consistent with our contractual obligations to supply, and anticipated demand for, NVX-CoV2373, and, as a result, significant costs may be incurred. Pursuant to the Fujifilm Settlement Agreement (see Note 4 to our consolidated financial statements in Part II, Item 8, “Financial Statements and Supplementary Data,” of this this Annual Report on Form 10-K), we are responsible for a Settlement Payment of up to $185.0 million to Fujifilm in connection with cancellation of manufacturing activity at FDBT
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under the Fujifilm CSA, of which $47.8 million, constituting the initial reservation fee under the Fujifilm CSA, was credited against the Settlement Payment on September 30, 2022.
We have an APA with the EC, acting on behalf of various European Union member states to supply a minimum of 20 million and up to 100 million initial doses of NVX-CoV2373, with the option for the EC to purchase an additional 100 million doses up to a maximum aggregate of 200 million doses in one or more tranches through 2023. In 2022, we were notified by the EC that it was cancelling approximately 7 million doses of its prior commitment originally scheduled for delivery in the first and second quarters of 2022, in accordance with the APA, and reducing the order to approximately 63 million doses. In January 2023, we finalized a revised delivery schedule for the remaining 20 million committed doses under the APA that were originally scheduled for delivery during the first and second quarters of 2022 and are expected to be delivered in 2023.
In July 2022, we entered into an Amended and Restated SARS-CoV-2 Vaccine Supply Agreement (as amended on September 26, 2022, the “Amended and Restated UK Supply Agreement”) with The Secretary of State for Business, Energy and Industrial Strategy (as assigned to the UK Health Security Agency), acting on behalf of the government of the United Kingdom of Great Britain and Northern Ireland (the “Authority”), which amended and restated in its entirety the SARS-CoV-2 Vaccine Supply Agreement, dated October 22, 2020, between the parties (the “Original UK Supply Agreement”). Under the Original UK Supply Agreement, the Authority agreed to purchase 60 million doses of NVX-CoV2373 and made an upfront payment to us. Under the terms of the Amended and Restated UK Supply Agreement, the Authority agreed to purchase a minimum of 1 million doses and up to an additional 15 million doses (the “Conditional Doses”) of NVX-CoV2373, with the number of Conditional Doses contingent on, and subject to reduction based on, our timely achievement of supportive recommendations from the Joint Committee on Vaccination and Immunisation (the “JCVI”) that is approved by the UK Secretary of State for Health, with respect to use of the vaccine for (a) the general adult population as part of a SARS-CoV-2 vaccine booster campaign in the United Kingdom or (b) the general adolescent population as part of a SARS-CoV-2 vaccine booster campaign in the United Kingdom or as a primary series SARS-CoV-2 vaccination, excluding where that recommendation relates only to one or more population groups comprising less than one million members in the United Kingdom. If the Authority does not purchase the Conditional Doses or the number of such Conditional Doses is reduced below 15 million doses of NVX-CoV2373, we would have to repay up to $225.0 million related to the upfront payment previously received from the Authority under the Original UK Supply Agreement. Under the Amended and Restated UK Supply Agreement, the Authority also has the option to purchase up to an additional 44 million doses, in one or more tranches, through 2024.
As of November 30, 2022, the JCVI had not yet made a supportive recommendation with respect to NVX-CoV2373, thereby triggering, under the terms of the Amended and Restated UK Supply Agreement, (i) a reduction of the number of Conditional Doses from 15 million doses to 7.5 million doses, which reduced number of Conditional Doses are contingent on, and subject to further reduction based on, our timely achievement by November 30, 2023 of a supportive recommendation from JCVI that is approved by the UK Secretary of State for Health as described in the paragraph above, and (ii) an obligation for us to repay $112.5 million related to the upfront payment previously received from the Authority under the Original UK Supply Agreement, which is reflected in our consolidated balance sheet as Other current liabilities, with the remaining upfront payment balance of $112.5 million reflected in current Deferred revenue.
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Under the terms of the Gavi APA, we received an upfront payment of $350.0 million from Gavi in 2021 and an additional payment of $350.0 million in the first quarter of 2022 related to our achieving EUL for NVX-CoV2373 by the WHO (the “Advance Payment Amount”). On November 18, 2022, we delivered written notice to Gavi to terminate the Gavi APA on the basis of Gavi’s failure to procure the purchase of 350 million doses of NVX-CoV2373 from us as required by the Gavi APA. As of November 18, 2022, we had only received orders under the Gavi APA for approximately 2 million doses. On December 2, 2022, Gavi issued a written notice purporting to terminate the Gavi APA based on Gavi’s contention that the Company repudiated the agreement and, therefore, materially breached the Gavi APA. Gavi also contends that, based on its purported termination of the Gavi APA, it is entitled to a refund of the Advance Payment Amount less any amounts that have been credited against the purchase price for binding orders placed by a buyer participating in the COVAX Facility. As of December 31, 2022, the remaining Gavi Advance Payment Amount of $697.4 million, pending resolution of the dispute with Gavi related to a return of the remaining Advance Payment Amount, was reclassified from Deferred revenue to Other current liabilities in our consolidated balance sheet. On January 24, 2023, Gavi filed a demand for arbitration with the International Court of Arbitration based on the claims described above. Our response is currently due by March 2, 2023. Arbitration is inherently uncertain, and while we believe that we are entitled to retain the remaining Advance Payment Amount received from Gavi, it is possible that we could be required to refund all or a portion of the remaining Advance Payment Amount from Gavi.
In July 2022, we entered into a modification to the USG Agreement that amended the terms of such agreement to provide for (i) an initial delivery to the U.S. government of approximately 3 million doses of NVX-CoV2373 and (ii) any additional manufacture and delivery to the U.S. government up to an aggregate of 100 million doses of NVX-CoV2373 contemplated by the original USG Agreement (inclusive of the initial batch of approximately 3 million doses) dependent on U.S. government demand, FDA guidance on strain selection, agreement between the parties on the price of such doses, and available funding. Additionally, in July 2022, we entered into a modification to our existing agreement with the DoD that amended the terms of such agreement to provide for the initial delivery of 0.2 million doses of NVX-CoV2373 after receipt of EUA approval from the FDA, with delivery of the remaining 9.8 million doses of NVX-CoV2373 contemplated by the original agreement subject to DoD demand and available funding. In February 2023, in connection with the execution of Modification 17 to the USG Agreement, the U.S. government indicated to us that the award may not be extended past its current period of performance. If the USG Agreement is not amended, as we had previously expected, then we may not receive all of the remaining $416 million in funding we had previously anticipated pursuant to the USG Agreement.
Our funding agreements currently include funding from CEPI in the form of one or more forgivable no interest term loans (“CEPI Forgivable Loan Funding”). Payments received under the CEPI Forgivable Loan Funding are only repayable if NVX-CoV2373 manufactured by the CMO network funded by CEPI is sold to one or more third parties (which would have previously included, but is not limited to, any sales under our Gavi APA prior to its termination), and such sales cover our costs of manufacturing such vaccine, not including manufacturing costs funded by CEPI. The timing and amount of any loan repayments is currently uncertain.
As of December 31, 2022, we had $1.3 billion in cash and cash equivalents and restricted cash as compared to $1.5 billion as of December 31, 2021. On January 31, 2023, we funded the outstanding principal amount of $325.0 million on the 2023 Notes, due February 1, 2023.
We funded our operations in 2022 with cash and cash equivalents, upfront payments under APAs, revenue from product sales, royalties under licensing arrangements with our strategic partners, and proceeds from the sale of common stock, together with revenue under the USG Agreement that support our NVX-CoV2373 vaccine development activities. We anticipate our future operations to be funded primarily by revenue from product sales, revenue under our USG Agreement, our cash and cash equivalents, and other potential funding sources.
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The following table summarizes cash flows for 2022 and 2021:
2022 2021
Change
Net cash (used in) provided by:
Operating activities $ (415,937) $ 322,946 $ (738,883)
Investing activities (92,985) 100,154 (193,139)
Financing activities 324,988 461,713 (136,725)
Effect on exchange rate on cash, cash equivalents, and restricted cash 4,520 (5,292) 9,812
Net increase in cash, cash equivalents, and restricted cash (179,414) 879,521 (1,058,935)
Cash, cash equivalents, and restricted cash at beginning of year 1,528,259 648,738 879,521
Cash, cash equivalents, and restricted cash at end of year $ 1,348,845 $ 1,528,259 $ (179,414)
Net cash used in operating activities was $415.9 million for 2022, as compared to cash provided by operating activities of $322.9 million in 2021. The decrease in cash from operating activities is primarily due to a decrease in upfront payments received under our APAs, timing of payments to vendors, and an increase in inventory production, partially offset by a reduction in our net loss.
Our investing activities primarily consisted of capital expenditures and, in 2021, $159.8 million in proceeds from maturities and sale of marketable securities, net of purchases. Capital expenditures for the years ended December 31, 2022 and 2021 were $89.1 million and $54.5 million, respectively.
Our financing activities consisted primarily of sales of our common stock, issuance of our 2027 Notes, payments of finance lease liabilities, and exercises of stock-based awards. In 2022, we received net proceeds of approximately $179 million and $70 million from the sale of shares of common stock through our At Market Issuance Sales Agreements and a public offering at $10.00 per share, respectively. In addition, we received net proceeds of $166.4 million during 2022 through the issuance of our 2027 Notes (see Note 11 to the accompanying consolidated financial statements). In 2021, we received net proceeds of approximately $565 million from the sale of shares of common stock through our At Market Issuance Sales Agreements.
Going Concern
The accompanying consolidated financial statements in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K have been prepared assuming that we will continue as a going concern within one year after the date that the financial statements are issued. At December 31, 2022, we had $1.3 billion in cash and cash equivalents and restricted cash, of which $236.2 million was raised in December 2022 through concurrent sales of our common stock and issuance of our 2027 Notes. On January 31, 2023, the Company funded the outstanding principal amount of $325.0 million on the 2023 Notes. During 2022, we incurred a net loss of $657.9 million and had net cash flows used in operating activities of $415.9 million.
While our current cash flow forecast for the one-year going concern look forward period estimates that we have sufficient capital available to fund operations, this forecast is subject to significant uncertainty, including as it relates to 2023 revenue, funding from the U.S. government, and pending arbitration. Our 2023 revenue depends on our ability to successfully develop, manufacture, distribute, or market an updated monovalent or bivalent formulation of a vaccine candidate for COVID-19 for the fall 2023 COVID vaccine season, which is inherently uncertain and subject to a number of risks, including regulatory approval. See “Risk Factors—Risks Related to Product Development and Commercialization—The emergence and transmissibility of variants of the SARS-CoV-2 virus, and the demand for bivalent vaccines, may affect market acceptance or sales of NVX-CoV2373, and our strategy to develop versions of our COVID-19 vaccine to protect against certain variants may not be successful.” In February 2023, in connection with the execution of Modification 17 to the USG Agreement, the U.S. government indicated to us that the award may not be extended past its current period of performance, which may result in us not receiving all of the remaining $416 million in funding we had previously anticipated. See “Risk Factors—Risks Related to Our Financial Condition and Capital Requirements—Our existing funding and supply agreements do not assure success of our vaccine candidates or that we will be able to fully fund our vaccine candidates.” On January 24, 2023, Gavi filed a demand for arbitration with the International Court of Arbitration regarding an alleged material breach by us of the Gavi APA. The outcome of that arbitration is inherently uncertain, and it is possible we could be required to refund all or a portion of the remaining Advance payment Amount of $697.4 million. See Note 3 and Note 18 to our consolidated financial statements in Part II, Item 8,
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“Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K for additional information related to the arbitration with Gavi. Management believes that, given the significance of these uncertainties, substantial doubt exists regarding our ability to continue as a going concern through one year from the date that these financial statements are issued.
Our ability to fund Company operations is dependent upon revenue related to vaccine sales for our products and product candidates, if such product candidates receive marketing approval and are successfully commercialized; the resolution of certain matters, including whether, when, and how the dispute with Gavi is resolved; and management’s plans, which include resolving the dispute with Gavi and may include raising additional capital through a combination of equity and debt financing, collaborations, strategic alliances, and marketing, distribution, or licensing arrangements. New financings may not be available to us on commercially acceptable terms, or at all. Also, any collaborations, strategic alliances, and marketing, distribution, or licensing arrangements may require us to give up some or all of our rights to a product or technology, which in some cases may be at less than the full potential value of such rights. In addition, the regulatory and commercial success of NVX-CoV2373 and our other vaccine candidates, including an influenza vaccine candidate, CIC vaccine candidate, or a COVID-19 variant strain-containing monovalent or bivalent formulation, remains uncertain. If we are unable to obtain additional capital, we will assess our capital resources and may be required to delay, reduce the scope of, or eliminate some or all of our operations, or downsize our organization, any of which may have a material adverse effect on our business, financial condition, results of operations, and ability to operate as a going concern.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2022 (in thousands):
Contractual Obligations: Total Less than
One Year 1 – 3
Years 3 – 5
Years More than
5 Years
Operating leases $ 74,853 $ 18,182 $ 29,354 $ 14,791 $ 12,526
Finance leases obligation 74,837 29,153 5,680 5,968 34,036
Convertible notes (1)
500,250 325,000 — 175,250 —
Contractual obligations recognized as of December 31, 2022
649,940 372,335 35,034 196,009 46,562
Purchase commitments (2)
560,638 560,638 — — —
Facilities lease agreement (3)
56,109 3,397 7,050 7,407 38,255
Total contractual obligations $ 1,266,687 $ 936,370 $ 42,084 $ 203,416 $ 84,817
(1) We had $325.0 million of 3.75% convertible senior unsecured notes due February 1, 2023, which we repaid in full. In 2022, we issued $175.3 million of 5.00% convertible senior unsecured notes due in 2027. See “Note 11—Long-term Debt” included in our Notes to Consolidated Financial Statements for additional information related to our convertible notes.
(2) This amount primarily represents our non-cancelable fixed payment obligations under certain CMO, CDMO, and lab supply agreements that we are not contractually able to terminate for convenience. Certain agreements provide for termination rights subject to termination fees. Under such agreements, we are contractually obligated to make payments to vendors, mainly to reimburse them for their estimated unrecoverable expenses incurred. As of December 31, 2022, these agreements are active ongoing arrangements and we expect to receive value from these arrangements in the future. The amount of such obligations is dependent on the timing of termination and the terms of the relevant agreement, and cannot be reasonably estimated. Our current obligations under non-cancelable purchase agreements are reflected in our consolidated balance sheets.
(3) This relates to the lease of floor space at 700 Quince Orchard that had not commenced as of December 31, 2022 (see Note 10 to the consolidated financial statements).
In addition to the above obligations, we enter into a variety of agreements and financial commitments in the normal course of business. The terms generally allow us the option to cancel, reschedule, or adjust our requirements based on our business needs, prior to the delivery of goods or performance of services. It is not possible to predict the maximum potential amount of future payments under these agreements due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement.
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