SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For The Quarterly Period Ended June 30, 2004
OR
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 0-26825
NORTHWEST BIOTHERAPEUTICS, INC.
| DELAWARE | 94-3306718 | |
| (State or Other Jurisdiction of | (I.R.S. Employer Identification | |
| Incorporation or Organization) | No.) |
Canyon Park Building 8, 22322 20th Avenue S.E., Suite 150, Bothell, Wa. 98021
(Address of Principal Executive Offices, Including Zip Code)
(425) 608-3000
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of August 13, 2004, the registrant had outstanding 19,028,779 shares of common stock, $0.001 par value.
TABLE OF CONTENTS
NORTHWEST BIOTHERAPEUTICS, INC.
TABLE OF CONTENTS
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| EXHIBIT 31.1 | ||||||||
| EXHIBIT 31.2 | ||||||||
| EXHIBIT 32.1 | ||||||||
| EXHIBIT 32.2 | ||||||||
2
Part I — Financial Information
Item 1. Financial Statements
NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company)
BALANCE SHEETS
(in thousands)
(Unaudited)
| December 31, | June 30, | |||||||
| 2003 |
2004 |
|||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 255 | $ | 329 | ||||
Accounts receivable |
8 | 7 | ||||||
Prepaid expenses and other current assets |
85 | 47 | ||||||
Total current assets |
348 | 383 | ||||||
Property and equipment: |
||||||||
Leasehold improvements |
69 | 69 | ||||||
Laboratory equipment |
551 | 551 | ||||||
Office furniture and other equipment |
128 | 128 | ||||||
| 748 | 748 | |||||||
Less accumulated depreciation and amortization |
(375 | ) | (449 | ) | ||||
Property and equipment, net |
373 | 299 | ||||||
Restricted cash |
105 | 30 | ||||||
Deposit and other non-current assets |
45 | 45 | ||||||
| $ | 871 | $ | 757 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) |
||||||||
Current liabilities: |
||||||||
Notes payable to related parties, net of discount |
$ | 44 | $ | 337 | ||||
Current portion of capital lease obligations |
42 | 42 | ||||||
Accounts payable |
128 | 334 | ||||||
Accrued expenses |
34 | 65 | ||||||
Accrued expenses, tax liability |
492 | 492 | ||||||
Deferred grant revenue |
— | 105 | ||||||
Total current liabilities |
740 | 1,375 | ||||||
Long-term liabilities: |
||||||||
Capital lease obligations, less current portion |
49 | 28 | ||||||
Deferred rent |
66 | 59 | ||||||
Total liabilities |
$ | 855 | $ | 1,462 | ||||
Stockholders’ equity (deficit): |
||||||||
Preferred stock, $0.001 par value, 15,000,000
shares authorized, no shares issued or outstanding
at December 31, 2003 and June 30, 2004,
respectively |
— | — | ||||||
Common stock, $0.001 par value, 125,000,000 shares
authorized, 19,027,779 and 19,028,779 shares issued
and outstanding at December 31, 2003 and June 30,
2004, respectively |
19 | 19 | ||||||
Additional paid-in capital |
64,294 | 65,394 | ||||||
Deferred compensation |
(53 | ) | (27 | ) | ||||
Deficit accumulated during the development stage |
(64,244 | ) | (66,091 | ) | ||||
Total stockholders’ equity (deficit) |
16 | (705 | ) | |||||
Commitments, contingencies and subsequent events |
||||||||
Total
liabilities and stockholders’ equity (deficit) |
$ | 871 | $ | 757 | ||||
See accompanying notes to financial statements.
3
NORTHWEST
BIOTHERAPEUTICS, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||||||
| June 30, |
June 30, |
Period from | ||||||||||||||||||
| March 18, 1996 | ||||||||||||||||||||
| (inception) to | ||||||||||||||||||||
| 2003 |
2004 |
2003 |
2004 |
June 30, 2004 |
||||||||||||||||
Revenues: |
||||||||||||||||||||
Research material sales |
$ | 7 | $ | 10 | $ | 7 | $ | 34 | $ | 394 | ||||||||||
Contract research and development
from related parties |
— | — | — | — | 1,128 | |||||||||||||||
Research grants |
180 | 106 | 249 | 209 | 846 | |||||||||||||||
Total revenues |
187 | 116 | 256 | 243 | 2,368 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Cost of research material sales |
40 | 6 | 40 | 31 | 361 | |||||||||||||||
Research and development |
500 | 142 | 1,008 | 371 | 24,345 | |||||||||||||||
General and administrative |
1,437 | 706 | 2,503 | 1,263 | 27,107 | |||||||||||||||
Depreciation and amortization |
50 | 37 | 137 | 74 | 2,145 | |||||||||||||||
Accrued loss on facility sublease |
174 | — | 174 | — | 895 | |||||||||||||||
Asset impairment loss |
904 | — | 904 | — | 1,936 | |||||||||||||||
Total operating expenses |
3,105 | 891 | 4,766 | 1,739 | 56,789 | |||||||||||||||
Loss from operations |
(2,918 | ) | (775 | ) | (4,510 | ) | (1,496 | ) | (54,421 | ) | ||||||||||
Other income (expense): |
||||||||||||||||||||
Gain on sale of intellectual rights |
816 | — | 816 | — | 3,656 | |||||||||||||||
Interest expense |
(8 | ) | (245 | ) | (19 | ) | (352 | ) | (8,207 | ) | ||||||||||
Interest income |
8 | 1 | 20 | 1 | 729 | |||||||||||||||
Net loss |
(2,102 | ) | (1,019 | ) | (3,693 | ) | (1,847 | ) | (58,243 | ) | ||||||||||
Accretion of Series A preferred stock mandatory
redemption obligation |
— | — | — | — | (1,872 | ) | ||||||||||||||
Series A preferred stock redemption fee |
— | — | — | — | (1,700 | ) | ||||||||||||||
Beneficial conversion feature of Series D
preferred stock |
— | — | — | — | (4,274 | ) | ||||||||||||||
Net loss applicable to common stockholders |
$ | (2,102 | ) | $ | (1,019 | ) | $ | (3,693 | ) | $ | (1,847 | ) | $ | (66,089 | ) | |||||
Net loss per share applicable to common
stockholders — basic and diluted |
$ | (0.11 | ) | $ | (0.05 | ) | $ | (0.20 | ) | $ | (0.10 | ) | ||||||||
Weighted average shares used in computing basic
and diluted loss per share |
18,933 | 19,027 | 18,296 | 19,026 | ||||||||||||||||
See accompanying notes to condensed financial statements.
4
NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
| Period from | ||||||||||||
| March 18, 1996 | ||||||||||||
| June 30, |
(Inception) to June 30, |
|||||||||||
| 2003 |
2004 |
2004 |
||||||||||
Cash Flows from Operating Activities: |
||||||||||||
Net Loss |
$ | (3,693 | ) | $ | (1,847 | ) | $ | (58,243 | ) | |||
Reconciliation of net loss to net cash used in operating activities: |
||||||||||||
Depreciation and amortization |
137 | 74 | 2,144 | |||||||||
Amortization of deferred financing costs |
— | — | 320 | |||||||||
Amortization of debt discount |
— | 319 | 6,110 | |||||||||
Accrued interest converted to preferred stock |
— | — | 260 | |||||||||
Accreted interest on convertible promissory note |
— | 26 | 28 | |||||||||
Stock-based compensation costs |
169 | 26 | 1,068 | |||||||||
Loss on sale and disposal of property and equipment |
904 | — | 482 | |||||||||
Gain on sale of intellectual property and royalty rights |
(816 | ) | — | (3,656 | ) | |||||||
Gain on sale of property and equipment |
— | (36 | ) | (131 | ) | |||||||
Asset impairment loss |
— | — | 1,936 | |||||||||
Loss on facility sublease |
174 | — | 895 | |||||||||
Increase (decrease) in cash resulting from changes in assets and liabilities: |
||||||||||||
Accounts receivable |
(85 | ) | 1 | (7 | ) | |||||||
Prepaid expenses and other current assets |
426 | 38 | 419 | |||||||||
Accounts payable and accrued expenses |
(197 | ) | 237 | 1,290 | ||||||||
Accrued loss on sublease |
(266 | ) | — | (266 | ) | |||||||
Deferred grant revenue |
— | 105 | 105 | |||||||||
Deferred rent |
44 | (7 | ) | 469 | ||||||||
Net Cash
used in Operating Activities |
(3,203 | ) | (1,064 | ) | (46,777 | ) | ||||||
Cash Flows from Investing Activities: |
||||||||||||
Purchase of property and equipment, net |
(134 | ) | — | (4,537 | ) | |||||||
Proceeds from sale of property and equipment |
44 | 36 | 131 | |||||||||
Proceeds from sale of intellectual property |
— | — | 1,816 | |||||||||
Proceeds from sale of marketable securities |
1,828 | — | 2,000 | |||||||||
Payment of security deposit |
— | — | (45 | ) | ||||||||
Transfer of restricted cash |
75 | (1,034 | ) | |||||||||
Net Cash
provided by (used in) Investing Activities |
1,738 | 111 | (1,669 | ) | ||||||||
Cash Flows from Financing Activities: |
||||||||||||
Proceeds from issuance of note payable to stockholder |
— | — | 1,650 | |||||||||
Repayment of note payable to stockholder |
— | — | (1,650 | ) | ||||||||
Proceeds from issuance of convertible promissory note and warrants, net of
issuance costs |
— | 1,100 | 6,499 | |||||||||
Repayment of convertible promissory note |
— | (52 | ) | (52 | ) | |||||||
Borrowing under line of credit, Northwest Hospital |
— | — | 2,834 | |||||||||
Repayment of line of credit to Northwest Hospital |
— | — | (2,834 | ) | ||||||||
Payment on capital lease obligations |
(50 | ) | (21 | ) | (253 | ) | ||||||
Payment on note payable |
(315 | ) | — | (420 | ) | |||||||
Proceeds from issuance of preferred stock, net |
— | — | 27,432 | |||||||||
5
| Period from | ||||||||||||
| March 18, 1996 | ||||||||||||
| June 30, |
(Inception) to June 30, |
|||||||||||
| 2003 |
2004 |
2004 |
||||||||||
Proceeds from exercise of stock options and warrants |
— | — | 220 | |||||||||
Proceeds from issuance of common stock, net |
— | — | 17,369 | |||||||||
Series A preferred stock redemption fee |
— | — | (1,700 | ) | ||||||||
Deferred financing costs |
— | — | (320 | ) | ||||||||
Net Cash (used in) provided by Financing Activities |
(365 | ) | 1,027 | 48,775 | ||||||||
Net increase (decrease) in cash and cash equivalents |
(1,830 | ) | 74 | 329 | ||||||||
Cash and cash equivalents at beginning of period |
2,539 | 255 | — | |||||||||
Cash and cash equivalents at end of period |
709 | 329 | 329 | |||||||||
Supplemental disclosure of cash flow information — cash paid during the period
for interest |
18 | 7 | 1,384 | |||||||||
Supplemental schedule of non-cash financing activities |
||||||||||||
Equipment acquired
through capital leases |
— | — | 285 | |||||||||
Accretion of Series A preferred stock mandatory redemption obligation |
— | — | 1,872 | |||||||||
Beneficial conversion feature of convertible promissory notes |
— | — | 1,026 | |||||||||
Conversion of convertible promissory notes and accrued interest to Series D
preferred stock |
— | — | 5,324 | |||||||||
Issuance of Series C preferred stock warrants in connection with lease agreement |
— | — | 43 | |||||||||
Issuance of common stock for license rights |
— | — | 4 | |||||||||
Liability for and issuance of common stock and warrants to Medarex |
280 | — | 840 | |||||||||
Deferred compensation on issuance of stock options and restricted stock grants |
— | — | 711 | |||||||||
Cancellation of options and restricted stock |
— | — | 844 | |||||||||
Financing of prepaid insurance through note payable |
— | — | 420 | |||||||||
Stock subscription receivable |
$ | — | $ | — | $ | 480 | ||||||
See accompanying notes to financial statements.
6
Northwest Biotherapeutics, Inc.
(A Development Stage Company)
Notes to Condensed Financial Statements
(unaudited)
1. Basis of Presentation
The accompanying unaudited financial statements for Northwest Biotherapeutics, Inc. (the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.
For further information, refer to the financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, as filed with the Securities and Exchange Commission.
The auditor’s report on the foregoing financial statements of the Company for the fiscal year ended December 31, 2003 states that because of recurring operating losses, a working capital deficit, and a deficit accumulated during the development stage, there is substantial doubt about the Company’s ability to continue as a going concern. A “going concern” opinion indicates that the financial statements have been prepared assuming the Company will continue as a going concern and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
Stock-Based Compensation
The Company accounts for its stock option plans for employees in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense related to employee stock options is recorded if, on the date of grant, the fair value of the underlying stock exceeds the exercise price. The Company applies the disclosure-only requirements of SFAS No. 123, Accounting for Stock-Based Compensation, which allows entities to continue to apply the provisions of APB Opinion No. 25 for transactions with employees, and to provide pro-forma results of operations disclosures for employee stock option grants as if the fair-value-based method of accounting in SFAS No. 123 had been applied to those transactions.
Stock compensation costs related to fixed employee awards with pro rata vesting are recognized on a straight-line basis over the period of benefit, generally the vesting period of the options. For options and warrants issued to non-employees, the Company recognizes stock compensation costs utilizing the fair value methodology prescribed in SFAS No. 123 over the related period of benefit.
Had the Company recognized the compensation cost of employee stock options based on the fair value of the options on the date of grant as prescribed by SFAS No. 123, the pro-forma net loss applicable to common stockholders and related loss per share would have been adjusted to the pro-forma amounts indicated below:
7
| Three months ended June 30, |
Six months ended June 30, |
|||||||||||||||
| 2003 |
2004 |
2003 |
2004 |
|||||||||||||
Net loss applicable to common
stockholders |
||||||||||||||||
As reported |
(2,102 | ) | (1,019 | ) | (3,693 | ) | (1,847 | ) | ||||||||
Add: Stock-based
employee
compensation
expense included in
reported net loss,
net |
84 | 7 | 169 | 26 | ||||||||||||
Deduct: Stock-based
employee
compensation
determined under
fair value based
method for all
awards |
(100 | ) | (67 | ) | (226 | ) | (152 | ) | ||||||||
Pro forma |
(2118 | ) | (1,079 | ) | (3,750 | ) | (1,973 | ) | ||||||||
Net loss per share-basic and
diluted: |
||||||||||||||||
As reported |
(0.11 | ) | (0.05 | ) | (0.20 | ) | (0.10 | ) | ||||||||
Pro forma |
(0.11 | ) | (0.06 | ) | (0.20 | ) | (0.10 | ) | ||||||||
There were no stock options granted during the six months ended June 30, 2004. The per share weighted average fair value of stock options granted during the three months ended June 30, 2003 was $0.02. The per share weighted average fair values of stock options granted during the six months ended June 30, 2003 was $0.09. These weighted average fair values were determined on the dates of grants using the following weighted average assumptions:
| Three months ended June 30, 2003 |
Six months ended June 30, 2003 |
|||||||
Risk-free interest rate |
3.11 | % | 3.11 | % | ||||
Expected life |
5 years | 5 years | ||||||
Expected volatility |
207 | % | 207 | % | ||||
Dividend yield |
0 | 0 | ||||||
2. Liquidity
Since the beginning of 2002, the Company’s management and Board of Directors recognized that the Company did not have sufficient working capital to fund its operations for more than 12 months and needed to raise additional capital from third parties in order to continue its clinical and research programs. In April 2002 the Company retained an investment bank to assist it in raising capital. Due to the economic climate in 2002 and declining stock prices of biotechnology companies, including the Company’s stock price, the Company was unable to raise additional capital. In July 2002 the Company retained an additional investment banking firm to assist it in exploring various strategic options including raising additional capital, licensing our technology to a third party, or merger with another company. The Company contacted over 50 biotechnology companies and over 20 large pharmaceutical companies in an attempt to explore these options without success. With Board approval, and in order to conserve cash, from September of 2002 through April of 2003 we reduced our staff from 67 to 8 employees, shut down the Phase III clinical trial for hormone refractory prostate cancer, our Phase I trial for non-small cell lung cancer and inactivated our Phase II clinical trial for brain cancer which currently remains open with the Food and Drug Administration.
In addition, the Company moved its corporate headquarters to a smaller facility and reduced lease payments by $75,000 per month. The Company’s management attempted to negotiate several bridge loans with various investment banks, but did not
8
consummate any of them because the Company’s Board of Directors did not consider the terms to be in the best interest of the Company or its stockholders. In October of 2003, the Company obtained bridge funding from management raising $335,000 which enabled the Company to continue operating into the first quarter of 2004. The Company retained another investment bank to help raise additional working capital, contacting several hundred prospective investors including numerous venture capital funds. After much discussion by our Board of Directors taking into consideration the Board’s and management’s comprehensive search of a viable option for the Company, including winding up our operations, the Board believed it in the best interest of the Company and its stockholders to enter into a bridge loan with Toucan Capital Fund, L.P. (“Toucan”). While the terms of the bridge loan imposed significant restraints on how the Company operated its business, obtaining the funding was the Company’s only viable option for continuing its operations and attempting to create future value for its stockholders. To date the Company has entered into several bridge loans beginning in February 2004 through July 2004, and an Amended and Restated Recapitalization Agreement, with the objective of potentially raising $40 million, provided a syndicate of investors could be identified. To date, the Company has accepted $3.1 million in loans from Toucan, using the proceeds to fund operations and to develop jointly, with Toucan, a new business strategy focusing on the Company’s strengths.
On April 26, 2004 we entered into a Recapitalization Agreement with Toucan Capital Fund II, L.P. (“Toucan”). On July 30, 2004, the Company and Toucan agreed to amend and restate the Recapitalization Agreement (the “Amended and Restated Recapitalization Agreement”). In connection with entering into the Amended and Restated Recapitalization Agreement, the Company received a $2.0 million loan from Toucan on July 30, 2004. The Amended and Restated Recapitalization Agreement contemplates a proposed equity financing that would provide for the potential issuance and sale of up to $40 million of convertible preferred stock (including any shares issuable upon conversion of bridge funding, but not including any shares issuable upon exercise of warrants, options, and similar instruments or obligations), in one or more closings over a period of 12 months from the first closing of the sale of convertible preferred stock. If issued, the convertible preferred stock will be issued at a price per share equal to the lesser of $0.10 (as adjusted for stock splits, stock dividends and the like) or a 35% discount to the average closing price of the Company’s common stock during the twenty trading days prior to the first closing of the proposed equity financing, but not less than $0.04 per share. The proposed equity financing is contingent upon the Company complying with covenants in the Amended and Restated Recapitalization Agreement and locating investors who are willing to invest in the Company on the terms proposed. If fully implemented, the proposed equity financing would result in Toucan and other investors potentially owning, on a combined basis, over 90% of the outstanding capital stock of the Company.
In connection with entering into the Amended and Restated Recapitalization Agreement, the Company received a $2.0 million loan from Toucan on July 30, 2004. The loan has (i) a 12 month term, (ii) accrues interest at 10% per annum on a 365 day basis compounded annually from the issue date, is (iii) secured by a first priority senior security interest in all of the Company’s assets, and (iv) warrant coverage equal to one hundred percent (100%) of the $2.0 million loan. The principal and interest is convertible into capital stock of the Company, generally at Toucan’s option, prior to repayment. The conversion price for any conversion of a note at the election of Toucan will be the lowest of (i) with certain exceptions, the lowest nominal or effective price per share paid by any investor of the Company at any time on or after one year prior to April 26, 2004, (ii) with certain exceptions, the lowest nominal or effective price at which any investor of the Company has a right to acquire shares of the Company pursuant to any security, instrument, or promise, undertaking, commitment, agreement or letter of intent outstanding on or after April 26, 2004 or granted, issued, extended or otherwise made available by the Company at any time on or after one year prior to April 26, 2004 and (iii) the lesser of $0.10 per share or 35% discount to the average closing price per share of the Company’s common stock during any 20 consecutive trading days (beginning with the 20 consecutive trading days prior to the effective date of the Recapitalization Agreement), but not less than $0.04 per share under this clause (iii). In addition to these conversion rights, the notes will automatically be converted into convertible preferred stock of the Company in the event the Company raises $15 million through the issuance of convertible preferred stock. In this event the conversion price would be the lowest nominal or effective price per share paid by investors other than Toucan who purchase shares of convertible preferred stock (excluding shares issuable upon exercise of the bridge warrants).
In connection with the July 30, 2004 $2.0 million loan from Toucan, the Company issued a warrant to Toucan which is exercisable immediately for up to 20 million shares of the Company’s Capital Stock. This warrant is exercisable for up to seven years. The exercise price of the warrant is the lesser of (i) $0.10 per share (subject to certain adjustments); or (ii) a 35% discount to the average closing price of the Company’s common stock during the twenty trading days prior to the first closing of the sale of convertible preferred stock of the Company, but not less than $0.04 per share. To date the Company has issued warrants to Toucan to purchase up to 86 million shares of the Company’s capital stock, including the July 2004 warrant and a warrant for 66 million shares originally issued on April 26, 004 and adjusted on June 11, 2004. This warrant was separated into two warrants (the “Prior Warrants”) on July 30, 2004. The Prior Warrants are now exercisable for 36 million shares and 30 million shares respectively. The Prior Warrants are exercisable for up to seven years and have an exercise price of one cent ($0.01) per share.
9
As of July 30, 2004, Toucan has the right to acquire up to 78 million shares of the Company’s outstanding capital stock upon conversion of outstanding principal of $3.1 million and interest of $24,000 under the bridge loans, and up to 86 million shares upon exercise of warrants. This represents a beneficial ownership of approximately 85% of the outstanding capital stock of the Company on a fully diluted basis. The Company does not currently have enough authorized shares to satisfy conversion of all outstanding convertible notes and warrants and the Company plans to request authorization of additional shares at its annual meeting to be held before the end of 2004.
As of August 2, 2004, after giving effect to aggregate borrowings from Toucan of $3.1 million, the Company had approximately $2 million in cash and cash equivalents. Of the $2 million in cash and cash equivalents, $1,177,801 was paid to Cognate Therapeutics, Inc. pursuant to a service agreement between the Company and Cognate dated July 30, 2004. The fees the Company paid to Cognate consist of a $750,000 non-refundable contract initiation fee and a $427,801 contract service fee for the month of August. The payments were made on August 4 and August 5, 2004, respectively.
Cognate is a Contract Research Organization, majority owned by Toucan and two of the principals of Toucan are board members of Cognate. The Company is committed to utilizing Cognate’s services for a two year period related primarily to manufacturing drugs, regulatory advice, research and development (R&D) preclinical activities and managing clinical trials. Monthly expenditures are expected to range between approximately $427,000 and $718,000. The contract with Cognate includes a penalty of $4.0 million if the Company cancels the contract within one year and $2.0 million if the Company cancels the contract after one year as well as payment for all services performed in winding down any ongoing activities. The Company entered into this contract after consultation with an independent expert in the field of Good Manufacturing Practices (GMP), regulatory affairs, and clinical trial activities. The Company believes entering into this agreement gives it an opportunity to restart its clinical and research programs much more efficiently and rapidly as opposed to rebuilding its infrastructure, internal cGMP facilities, regulatory, clinical and R&D expertise. In addition, if the Company did not enter into this contract with Cognate it is likely that Toucan would not have loaned it the additional $2.0 million on July 30, 2004 because of the significant delay in moving forward with rebuilding these capabilities within the Company, and the potential negative impact on formation of a syndicate of potential investors. Given these facts the Company believes it was in its best interest to enter into this agreement.
After the payments to Cognate, the Company believes that its remaining cash of approximately $822,000, based on recurring operating and associated financing costs, will be sufficient to fund its operations through approximately September 30, 2004.
After that date we will have to seek additional funds from Toucan, which Toucan is not obligated to provide to us. Under the terms of the Amended and Restated Recapitalization Agreement, if Toucan elects not to provide additional funding to us, we are prohibited from seeking funds from any party other than Toucan for up to ten business days after October 23, 2004.
Any additional financing with Toucan and any other third party is likely to be dilutive to stockholders, and debt financing, if available, may include additional restrictive covenants.
While the Company has attempted to obtain funding for working capital from multiple parties since 2002, Toucan is the only party, to date, that has invested a significant amount of capital in the Company. Therefore, if the Amended and Restated Recapitalization Agreement is not fully implemented, or if Toucan is unwilling to continue to fund the Company’s operations, it is unlikely the Company will obtain additional funding from any third parties and the Company will be required to cease operations and liquidate its assets.
3. Net Loss Per Share Applicable to Common Stockholders
Basic and diluted net loss per share applicable to common stockholders has been computed using the weighted-average number of shares of common stock outstanding during the period, less, for the three months ended June 30, 2004, 2,000 issued and outstanding restricted shares of common stock that were subject to repurchase. Options to purchase 1.7 million shares of common stock and warrants to purchase 71.0 million shares of common and preferred stock were excluded from the calculation of diluted net loss per share for the three and six months ended June 30, 2004 as such securities were antidilutive. Options to purchase 1.7 million shares of common stock and warrants to purchase 1.4 million shares of common and preferred stock were excluded from the calculation of diluted net loss per share for the three and six months ended June 30, 2003 as such securities were antidilutive.
4. Notes Payable to Related Parties
The initial bridge funding period commenced on February 2, 2004 when we issued Toucan an unsecured convertible promissory note, in the amount of $50,000. On March 1, 2004, we issued Toucan a secured convertible promissory note, in the amount of $50,000. The notes were convertible at prices below the current price of our common stock at the date of issuance resulting in a beneficial conversion cost of approximately $100,000 which is being amortized over the 12-month term of the notes. Amortization of deferred debt discount of approximately $37,000 along with interest accretion on the note of approximately $4,000 was recorded during the six months ended June 30, 2004 for the February 2, and March 1, 2004 note balances.
The Recapitalization Agreement stipulated that the February and March 2004 notes for $50,000 each were to be cancelled and reissued effective April 26, 2004 as two separate notes for $50,000 each and conforming to the conditions of the note signed for the April 26, 2004 bridge loan for $500,000. As a result, the notes issued in February and March 2004, respectively, (i) have a 12 month term, (ii) accrue interest at 10% per annum on a 365 day basis compounded annually from their respective original issuance dates, (iii) are secured by a first priority senior security interest in all of the Company’s assets, and (iv) have warrants with coverage equal to three hundred percent (300%) of the amount due under the bridge notes.
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On April 26, 2004 we issued Toucan a senior secured convertible promissory note and warrants, in the amount of $500,000. Proceeds from the April 26, 2004 loan were allocated between the notes and warrants on a relative fair value basis. The value allocated to the warrants on the date of the grant was approximately $375,000. The fair value of the warrants was determined using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%, risk-free interest rate of 3.57%, volatility of 218%, and a contractual life of 7-years. The value of the warrants was recorded as a deferred debt discount against the $500,000 proceeds of the notes. In addition, a beneficial conversion feature related to the notes was determined to be approximately $375,000 but is capped at the remaining value originally allocated to the notes of approximately $125,000. As a result, the total discount on the notes equaled the face value of $500,000 which is being amortized over the twelve-month term of the notes. Amortization of deferred debt discount of approximately $89,000 along with interest accretion on the note of approximately $9,000 was recorded during the six months ended June 30, 2004 for the April 26, 2004 note balance.
On June 11, 2004 we issued Toucan a senior secured convertible promissory note and warrants, in the amount of $500,000. Proceeds from the June 11, 2004 loan were allocated between the notes and warrants on a relative fair value basis. The value allocated to the warrants on the date of the grant was approximately $353,000. The fair value of the warrants was determined using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%, risk-free interest rate of 3.70%, volatility of 219%, and an contractual life of 7-years. The value of the warrants was recorded as a deferred debt discount against the $500,000 proceeds of the notes. In addition, a beneficial conversion feature related to the notes was determined to be approximately $353,000 but is capped at the remaining value originally allocated to the notes of approximately $147,000. As a result, the total discount on the notes equaled the face value of $500,000 which is being amortized over the twelve-month term of the notes. Amortization of deferred debt discount of approximately $26,000 along with interest accretion on the note of approximately $3,000 was recorded during the six months ended June 30, 2004 for the June 11, 2004 note balance.
On July 30, 2004 we issued Toucan a senior secured convertible promissory note and warrants, in the amount of $2.0 million, pursuant to the Amended and Restated Recapitalization Agreement. Toucan has the option to loan additional amounts to the Company, on terms mutually acceptable to the Company and Toucan, but is not obligated to do so.
5. Contingency
Through abandoning the tenant improvements at our prior facility, on which use tax payments to the State of Washington had been qualified for tax deferral, including the disposal and impairment of previously qualifie