Attached files
| file | filename |
|---|---|
| EX-32.1 - EXHIBIT 32.1 - NORTHWEST BIOTHERAPEUTICS INC | v464066_ex32-1.htm |
| EX-31.1 - EXHIBIT 31.1 - NORTHWEST BIOTHERAPEUTICS INC | v464066_ex31-1.htm |
| EX-23.1 - EXHIBIT 23.1 - NORTHWEST BIOTHERAPEUTICS INC | v464066_ex23-1.htm |
| EX-21.1 - EXHIBIT 21.1 - NORTHWEST BIOTHERAPEUTICS INC | v464066_ex21-1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| x | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2016
| ¨ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______to _______
Commission File Number: 001-35737
NORTHWEST BIOTHERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
| Delaware (State or Other Jurisdiction of Incorporation or Organization) |
94-3306718 (I.R.S. Employer Identification No.) |
4800 Montgomery Lane, Suite 800, Bethesda, MD 20814
(Address of principal executive offices) (Zip Code)
(240) 497-9024
(Registrant's telephone number)
N/A
(Former Name, Former Address and Former Fiscal Year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: common stock, par value $0.001 per share
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 (the "Exchange Act") 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ¨ | Accelerated filer | ¨ |
| Non-accelerated filer | x (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
| Emerging growth company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $32,379,666 on June 30, 2016. As of April 14, 2017 the registrant had 186,061,822 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
NORTHWEST BIOTHERAPEUTICS, INC.
FORM 10-K
TABLE OF CONTENTS
This Report on Form 10-K for Northwest Biotherapeutics, Inc. may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements are characterized by future or conditional verbs such as "may," "will," "expect," "intend," "anticipate," believe," "estimate" and "continue" or similar words. You should read statements that contain these words carefully because they discuss future expectations and plans, which contain projections of future results of operations or financial condition or state other forward-looking information. Such statements are only predictions and our actual results may differ materially from those anticipated in these forward-looking statements. We believe that it is important to communicate future expectations to investors. However, there may be events in the future that we are not able to accurately predict or control. Factors that may cause such differences include, but are not limited to, those discussed under Item 1A. Risk Factors and elsewhere in this Form 10-K for the year ended December 31, 2016, as filed with the Securities and Exchange Commission, including the uncertainties associated with product development, the risk that products that appeared promising in early clinical trials do not demonstrate safety and efficacy in larger-scale clinical trials, the risk that we will not obtain approval to market our products, the risks associated with dependence upon key personnel and the need for additional financing. We do not assume any obligation to update forward-looking statements as circumstances change.
Unless the context otherwise requires, “Northwest Biotherapeutics,” the “Company,” “we,” “us,” “our” and similar names refer to Northwest Biotherapeutics, Inc. DCVax® is a registered trademark of the Company.
| ITEM 1. | BUSINESS. |
Overview
We are a biotechnology company focused on developing personalized immune therapies for cancer. We have developed a platform technology, DCVax, which uses activated dendritic cells to mobilize a patient's own immune system to attack their cancer.
Our lead product, DCVax®-L, is designed to treat solid tumor cancers in which the tumor can be surgically removed. This product in an ongoing Phase III trial for newly diagnosed Glioblastome multiforme (GBM). 331 patients have been enrolled in the trial, and enrollment is closed. The Company is also working on preparations for Phase II trials of DCVax-L for other indications.
Our second product, DCVax®-Direct, is designed to treat inoperable solid tumors. A 40-patient Phase I trial has been completed, and included treatment of a diverse range of cancers. The Company is working on preparations for Phase II trials of DCVax-Direct.
The DCVax Technology
Our platform technology, DCVax, is a personalized immune therapy which consists of a therapeutic vaccine that uses a patient's own dendritic cells, or DCs, the master cells of the immune system, as the therapeutic agent. The patient’s DCs are obtained through a blood draw, or leukapheresis. The DCs are then activated and loaded with biomarkers (“antigens”) from the patient’s own tumor. For DCVax-L, the antigen loading process takes place during the manufacturing of the product. For DCVax-Direct, the antigen loading process takes place in situ after the product is directly injected into the patient’s inoperable tumors. The loading of antigens into the DCs “educates” the DCs about what the immune system needs to target.
Clinical Trials and Early Access Programs
DCVax-L for Operable Solid Tumors: GBM Brain Cancer
Our lead product candidate is DCVax-L for Glioblastoma multiforme (GBM): the most aggressive and lethal type of brain cancer. With standard of care treatment for GBM today, including surgery, radiation and chemotherapy, the median time to tumor recurrence is about 7 months, and the median survival is about 15 months. There is an urgent need for new and better treatments.
| 4 |
DCVax-L is currently in a 331-patient Phase III trial. Enrollment has closed. Patients in the trial are continuing to be treated, and “events” of tumor recurrence and patient deaths are accumulating and being tracked. The trial includes a crossover option, under which patients who were originally assigned to the placebo arm of the trial have an opportunity, when their tumor recurs, to cross over and start receiving DCVax-L. Patients who were originally assigned to the treatment arm may also continue receiving the DCVax-L treatment after their tumor recurs.
The trial was on partial clinical hold for screening of new patients for enrollment; however, the patients already in the trial continued to be treated in accordance with the trial protocol, without interruption. In December 2016, the Company announced that to date the regulators had not agreed to remove the partial hold, and the Company had determined that it would not enroll the last 17 of the planned 348 patients. Thereafter, in February 2017, the FDA lifted its hold. The Company had self-imposed a hold on screening in countries outside the US, this remains in place in agreement with the regulators, and the Company will not enroll the last 17 patients as announced in December 2016.
The Company plans to conduct Phase II trials of DCVax-L in combination with other agents, such as checkpoint inhibitors, as resources permit. Such combination trials may include DCVax-L and Pembrolizumab (Keytruda) for colorectal cancer, as the Company has previously reported. Certain preparatory work will be required and regulatory approvals will have to be obtained for these trials.
“Information Arm” Outside the Phase III Trial
In parallel with the Phase III trial of DCVax-L for GBM, we accepted a total of 55 patients into an “Information Arm” outside of the trial, who failed to meet the eligibility requirements for the trial. Most of these patients were actual or potential “rapid progressors” (patients in whom the brain cancer is already appearing to re-grow by the time the patient finishes the 6 weeks of daily radiotherapy and daily chemotherapy following surgical removal of the tumor). These patients were generally treated with the same DCVax-L product as in the Phase III trial, on the same treatment schedule, at the same medical centers, in the same time period, and the data were collected and maintained by the same Contract Research Organization (CRO) as is managing the trial. Among these patients, about 20 of them apparently met the “progression” (tumor re-growth) criteria at two time points, both at the end of the 6 weeks of daily radiation and chemotherapy and 8 weeks later, and about 25 of the patients apparently met the “progression” criteria at one of the two time points. We plan to continue following the patients, and report on further results.
DCVax-L Early Access Programs
In March 2014, we received approval from the German regulatory authority of a “Hospital Exemption” for DCVax-L for glioma brain cancers under Section 4b of the German Drug Law outside of our Phase III trial. Since then, we have undertaken program development and preparation activities, including an annual filing for a potential reimbursement score. We undertook treatment of 9 patients under the Hospital Exemption. We did not undertake new Hospital Exemption patients while the Phase III trial enrollment was on partial hold. We do not plan to undertake new Hospital Exemption patients while we complete the accumulation of data events, and analysis and reporting of the data, for the Phase III trial.
As previously reported, we have also treated a substantial number of compassionate use patients, under an Expanded Access Protocol in the US. We have also been exploring other early access program opportunities outside the US.
DCVax-Direct for Inoperable Solid Tumor Cancers
Our DCVax-Direct product offers a potential new treatment option for inoperable tumors. This can potentially apply to a wide range of clinical situations: for example, situations in which patients' tumors are considered inoperable because the patient has multiple tumors, or their tumor cannot be completely removed, or the surgery would cause undue damage to the patient and impair their quality of life.
A large number of patients with a variety of cancer types are faced with this situation, because their tumors are already locally advanced or have begun to metastasize by the time symptoms develop and the patients seek diagnosis and treatment. For these patients, the outlook today is bleak and survival remains quite limited.
DCVax-Direct is administered by direct injection into a patient's tumors. It can potentially be injected into any number of tumors, enabling patients with locally advanced disease or with metastases to be treated. With image guidance, DCVax-Direct can also be injected into tumors in virtually any location in the body.
| 5 |
We conducted a 40-patient Phase I trial of DCVax-Direct at MD Anderson Cancer Center and at Orlando Health, mainly during 2013-2015, and we are still following patients from this trial. The patients enrolled in this trial had failed other treatments, and had multiple tumors and actively progressing disease. In spite of this heavy disease burden, the treatment regimen in this first clinical trial was very conservative: only one tumor was injected in each patient, and most of the patients received only 3 treatments over the course of 2 weeks, with some receiving a 4th treatment at week 8 and beyond.
Despite these challenging circumstances, clinical effects seen in various patients include examples of tumor necrosis (i.e., cell death) in the injected tumors, shrinkage or stabilization in some non-injected tumors, stabilization of disease and survival times beyond what was expected. We are continuing to collect follow-up data, and anticipate continuing to report on it.
This Phase I trial was designed to be very informative: we treated numerous diverse types of cancers (sarcoma, pancreatic, colorectal, lung, melanoma and others); we tested three different dose levels and various methods of image-guided administration; we collected both imaging and biopsy data, and correlated them with clinical effects in patients; we evaluated both local effects in the injected tumors and systemic effects in the non-injected tumors; we evaluated potential endpoints for future trials; and most importantly, we evaluated safety.
In the Phase I stage of the DCVax-Direct Phase I/II trial, the safety profile was excellent (as has also been the case over the years with DCVax-L). Typically patients develop a fever after the injections, to a limited extent and for a limited duration, and they do not generally experience any significant toxicities.
Based upon the data and experience to date, we are planning to proceed with at least two Phase II trials of DCVax-Direct in different cancers, if resources permit. In the Phase II trials, we plan to inject multiple tumors, rather than just one tumor, and we plan to administer more treatments than in the Phase I trial.
Target Markets for DCVax Products
Since our DCVax-L product is potentially applicable to all types of operable solid tumors, and our DCVax-Direct product is potentially applicable to all types of inoperable solid tumors, we believe that the potential markets for DCVax products are particularly large. According to the American Cancer Society, 1 in 2 men, and 1 in 3 women in the U.S. will develop some form of cancer in their lifetime. There are nearly 1.5 million new cases of cancer per year in the U.S., and nearly 600,000 deaths from cancer. The statistics are similar in Europe and elsewhere..
Brain cancer
Brain cancers fall into two broad categories: primary (meaning the cancer first originates in the brain) and metastatic (meaning the cancer first appears elsewhere in the body, but subsequently metastasizes or spreads to the brain). In the U.S. alone, on an annual basis, there are some 40,000 new cases of primary brain cancer (including about 12,000 cases of GBM, the most severe grade of primary brain cancer), and 160,000 new cases of metastatic brain cancer. The numbers are similar in Europe and elsewhere.
In addition, brain cancer is a serious medical problem in children 18 years and under. It is the second most frequent type of childhood cancers (after leukemias) and, following progress in reducing death rates from leukemias, it is now a leading cause of childhood cancer deaths.
Very little has changed in the last 30 years in the treatment and clinical outcomes for GBM. With typical standard of care treatment today - surgery, radiation and chemotherapy - patients still generally die within a median of about 15 months from diagnosis. There is an urgent need for new treatment options.
Manufacturing of DCVax
We use a batch manufacturing technology for our DCVax products, and we believe this manufacturing approach is a key part of the practicality of our product and its economic feasibility. Generally, we are able to produce enough doses for the patient’s treatment regimen through just one manufacturing process. When a batch of DCVax product has been made, we then cryopreserve it.
| 6 |
Both of these technologies, the personalized batch manufacturing for each patient and the cryopreservation, are essential elements of our manufacturing model and product economics. Together, they enable us to usually incur the high costs of manufacturing just one time for each patient, and then store the multi-year or multi-dose quantity of product, frozen, in single doses. This makes DCVax effectively an “off the shelf” product for the patient after the initial manufacturing, even though it is personalized, and we anticipate that this will enable the pricing of DCVax to be in line with other new cancer drugs. We also believe that both economies of scale and automation will further enhance the product economics. The manufacturing process today is also rapid: about 8 days for DCVax-L, and 7 days for DCVax-Direct, followed by quality control and release testing.
We contract out the manufacturing of our DCVax products to Cognate BioServices. Although there are many contract manufacturers for small molecule drugs and for biologics, there are very few companies who specialize in manufacturing living cell products. Manufacturing of cellular products is fundamentally different than production of small molecules or biologics, and the regulatory requirements are very difficult to meet. Cognate BioServices has long specialized in the production of cellular products, and has a leading track record with such products.
Our DCVax programs require a large amount of capacity in these specialized manufacturing facilities, and generally require that the large capacity be dedicated exclusively to our programs. Most medical products, including other types of cellular products, are made in batches on a pre-scheduled basis. In contrast, our products are fully personalized and can only be made in individual personalized batches, not large-scale batches of standardized products, and our products are made on demand, on an ongoing basis. So, the manufacturing suites generally must be dedicated entirely to NW Bio’s products.
Cognate BioServices’ manufacturing facility for clinical-grade cell products is located in Memphis, Tennessee. Cognate BioServices' facility is approximately 80,000 square feet and contains substantial buildout expansion space in addition to the portions currently built out and in use. The current manufacturing facilities are sufficient to produce DCVax for at least several thousand patients per year. The expansion space will allow us to procure significantly increasing capacity when needed for commercial readiness. We are also developing a facility for manufacturing in the U.K. for the European market. It is necessary for us to have manufacturing operations in Europe to meet the logistical requirements for European patients relating to the collection, delivery and processing of the patient’s blood draw containing the immune cells (for which the time window is too limited to reach the US manufacturing facility).
Intellectual Property and Orphan Drug Designation
We have an integrated strategy for protection of our technology through both patents and other mechanisms, such as Orphan Drug status. As of December 31, 2017, we have over 160 issued patents and more than 70 pending patent applications worldwide, grouped into 12 patent families. Of these, 144 issued patents and 61pending patent applications relate to our DCVax products. In the United States and Europe, some of our patents and applications relate to the composition and use of products, while other patents and applications relate to other aspects such as manufacturing and quality control. For example, in the United States, we have four issued and seven pending patent applications that relate to the composition and/or use of our DCVax products. We also have other U.S patents and applications that cover, among other things, quality control for DCVax and an automated system which we believe will help enable the scale-up of production for large numbers of patients on a cost-effective basis. Similarly, in Europe, we have five patents issued by and five pending patent applications with the European Patent Office ("EPO") that cover our DCVax products, and other patents and applications that cover aspects such as manufacturing and quality control, and the automated system. In Japan, we have six issued patents and three pending patent applications relating to our DCVax products, as well as manufacturing related patents. Patents have been granted and are pending in other foreign jurisdictions which may be potential future markets for our DCVax products.
During 2016, nine new patents were issued to us as part of our worldwide patent portfolio (including a European patent validated into 25 patents in various European countries, a second European patent validated into 20 patents in various European countries and 7 other foreign patents). The newly issued patents cover a variety of subject matter, such as the machine and system to manufacture DCVax-Direct in Europe and India, and certain other processes and methods for manufacturing and for enhancing the potency of dendritic cells.
The expiration dates of the issued U.S. patents involved in our current business range from 2022 to 2028. The expiration dates of the issued European patents involved in our current business range from 2022 to 2028. For some of the earlier dates, we plan to seek extensions of the patent life, and believe we have reasonable grounds for doing so.
| 7 |
In addition to our patent portfolio, we have obtained Orphan Drug designation for our lead product, DCVax-L for glioma brain cancers. Such designation brings with it a variety of benefits, including potential market exclusivity for seven years in the U.S. and ten years in Europe if our product is the first of its type to reach the market.
This market exclusivity applies regardless of patents, (i.e., even if the company that developed it has no patent coverage on the product). In addition, the time period for such market exclusivity does not begin to run until product sales begin. In contrast, the time period of a patent begins when the patent is filed and runs down during the years while the product is going through development and clinical trials.
Competition
The biotechnology and biopharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. A large and growing number of companies are actively involved in the research and development of immune therapies or cell-based therapies for cancer (including Juno, Kite, Bellicum, Argos, Agenus, Asterias and many others). In addition, many big pharma companies (including BMS, Merck, Pfizer, Astra Zeneca, Roche and others) are rapidly developing, and have begun obtaining accelerated approvals for, a new class of checkpoint inhibitor drugs to “take the brakes off” patients’ immune responses to cancer. Other novel technologies for cancer are also under development or have recently been approved, such as the Optune electro-therapy device of NovoCure. Additionally, many companies are actively involved in the research and development of monoclonal antibody-based and bi-specific antibody based cancer therapies. Currently, a substantial number of antibody-based drugs are approved for commercial sale for cancer therapy, and a large number of additional ones are under development. Many other third parties compete with us in developing alternative therapies to treat cancer, including: biopharmaceutical companies; biotechnology companies; pharmaceutical companies; academic institutions; and other research organizations, as well as some medical device companies.
We face extensive competition from companies developing new treatments for brain cancer. These include a variety of immune therapies, as mentioned above, as well as a variety of small molecule drugs and biologics. There are also a number of existing drugs used for the treatment of brain cancer that may compete with our product, including, Avastin® (Roche Holding AG), Gliadel® (Eisai Co. Ltd.), and Temodar® (Merck & Co., Inc.), as well as the Optune electro-therapy device (Novocure). Both checkpoint inhibitor drugs and T cell based therapies are pursuing clinical trials for solid tumors, including brain cancer, as well.
Most of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, pre-clinical testing, conducting clinical trials, obtaining regulatory approvals and marketing and sales than we do. Smaller or early-stage companies may also prove to be significant competitors, particularly if they enter into collaborative arrangements with large and established companies. These third parties compete with us in recruiting and retaining qualified scientific and management personnel and collaborators, as well as in acquiring technologies complementary to our programs, and in obtaining sites for our clinical trials and enrolling patients.
Corporate Information
We were formed in 1996 and incorporated in Delaware in July 1998. Our principal executive offices are located in Bethesda, Maryland, and our telephone number is (240) 497-9024. Our website address is www.nwbio.com. The information on our website is not part of this report. We have included our website address as a factual reference and do not intend it to be an active link to our website.
Available Information
Our website address is www.nwbio.com. We make available, free of charge through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as is reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”), but other information on our website is not incorporated into this report. The SEC maintains an Internet site that contains these reports at www.sec.gov. Additionally, these reports may be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549, on official business days during the hours of 10 a.m. and 3 p.m. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
| 8 |
Employees and Contractors
As of December 31, 2016, we had 10 full-time and 1 part-time employee in the US, and 5 full-time employees in Europe. We believe our employee relations are positive.
In addition to our full-time employees, a substantial number of contractors provide various services for our corporate operations. We have contract management of our clinical trials and contract manufacturing of our products.
| ITEM 1A. | RISK FACTORS |
Our business, financial condition, operating results and prospects are subject to the following material risks. Additional risks and uncertainties not presently foreseeable to us may also impair our business operations. If any of the following risks actually occurs, our business, financial condition or operating results could be materially adversely affected. In such case, the trading price of our common stock could decline, and our stockholders may lose all or part of their investment in the shares of our common stock.
Risks Related to our Operations
We will need to raise substantial funds, on an ongoing basis, for general corporate purposes and operations, including our clinical trials. Such funding may not be available or may not be available on acceptable terms.
We will need substantial additional funding, on an ongoing basis, in order to continue execution of our clinical trials, to move our product candidates towards commercialization, to continue prosecution and maintenance of our large patent portfolio, to continue development and optimization of our manufacturing and distribution arrangements, and for other corporate purposes. Any financing, if available, may include restrictive covenants and provisions that could limit our ability to take certain actions, preference provisions for the investors, and/or discounts, warrants, anti-dilution rights, the provision of collateral, or other incentives. Any financing will involve issuance of equity and/or debt, and such issuances will be dilutive to existing shareholders. There can be no assurance that we will be able to complete any of the financings, or that the terms for such financings will be acceptable. If we are unable to obtain additional funds on a timely basis or on acceptable terms, we may be required to curtail or cease some or all of our operations at any time.
We are likely to continue to incur substantial losses, and may never achieve profitability.
As of December 31, 2016, we had net cash outflows flows from operations, since inception. We may never achieve or sustain profitability.
Our auditors have issued a “going concern” audit opinion.
Our independent auditors have indicated in their report on our December 31, 2016 financial statements that there is substantial doubt about our ability to continue as a going concern. A “going concern” opinion indicates that the financial statements have been prepared assuming we 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 if we do not continue as a going concern. Therefore, you should not rely on our consolidated balance sheet as an indication of the amount of proceeds that would be available to satisfy claims of creditors, and potentially be available for distribution to stockholders, in the event of liquidation.
Our management and our independent auditors have identified certain internal control deficiencies, which our management and our independent auditor believe constitute material weaknesses although they did not result in any adjustments.
In connection with the preparation of our financial statements for the year ended December 31, 2016, and prior years, our management and our independent auditor identified certain internal control deficiencies that, in the aggregate, represent material weaknesses, including the following:
| · | Lack of controls in place, including those surrounding related party transactions, to ensure that all material transactions and developments impacting the financial statements are reflected and properly recorded. |
| 9 |
| · | Design deficiencies that do not meet stated control objectives that elevate the level of risk of a material misstatement to our financial statements. |
| · | Policies and procedures with respect to the review, supervision and monitoring of our accounting operations throughout the organization were either not designed and in place or not operating effectively. |
Our ability to retain or attract qualified individuals to serve on our Board and to take on key management or other roles within our Company is also uncertain. Our failure to successfully complete the remediation of the existing weaknesses could lead to heightened risk for financial reporting mistakes and irregularities, and/or lead to a loss of public confidence in our internal controls that could have a negative effect on the market price of our common stock.
As a company with a novel technology and unproven business strategy, an evaluation of our business and prospects is difficult
We are still in the process of developing our product candidates through clinical trials. Our technology is novel and involves mobilizing the immune system to fight a patient’s cancer. Immune therapies have been pursued by many parties for decades, and have experienced many failures. In addition, our technology involves personalized treatment products, a new approach to medical products that involves new product economics and business strategies, which have not yet been shown to be commercially feasible or successful. We have not yet gone through scale-up of our operations to commercial scale. The novelty of our technology, product economics, and business strategy, and the limited scale of our operations to date, makes it difficult to assess our prospects for generating revenues commercially in the future.
We will need to expand our management and technical personnel as our operations progress, and we may not be able to recruit such additional personnel and/or retain existing personnel.
As of December 31, 2016, we had 10 full time and 1 part-time employees in the US, plus 5 full-time employees in Europe. The rest of our personnel are retained on a consulting or contractor basis. Many biotech companies would typically have a larger number of employees by the time they reach late stage clinical trials. Such trials and other programs require extensive management capabilities, activities and skill sets, including scientific, medical, regulatory (for FDA and foreign regulatory counterparts), manufacturing, distribution and logistics, site management, reimbursement, business, financial, legal, public relations outreach to both the patient community and physician community, intellectual property, administrative, regulatory (SEC), investor relations and other.
In order to fully perform all these diverse functions, with trials and programs under way at many sites across the U.S. and in Europe, we may need to expand our management, technical and other personnel. However, with respect to management and technical personal, the pool of such personnel with expertise and experience with living cell products, such as our DCVax immune cell product, is very limited. In addition, we are a small company with limited resources, our business prospects are uncertain and our stock price is volatile. For some or all of such reasons, we may not be able to recruit all the management, technical and other personnel we need, and/or we may not be able to retain all of our existing personnel. In such event, we may have to continue our operations with a small team of personnel, and our business and financial results may suffer.
We rely at present on third-party contract manufacturers. As a result, we may be at risk for capacity limitations and/or supply disruptions.
We currently rely upon Cognate BioServices, Inc., or Cognate, to produce all of our DCVax product candidates in the U.S., and to supervise the production of our DCVax product candidates outside the U.S. Cognate BioServices is owned by Toucan Capital Fund III, L.P., one of our stockholders who is an affiliate. We have an agreement in place with Cognate BioServices pursuant to which Cognate BioServices has agreed to provide manufacturing and other services for the clinical trials and initial potential commercialization, in connection with our Phase III clinical trial of DCVax-L in brain cancer, and other programs. The agreement requires us to make certain minimum monthly payments to Cognate BioServices in order to have dedicated manufacturing capacity available for our products, irrespective of whether we actually order any DCVax products. The agreement also specifies the amounts we must pay for Cognate BioServices’ manufacturing of DCVax products for patients.
| 10 |
Due to the large expansion of our Phase III trial with DCVax-L for brain cancer, and initiation of the trial in Europe, as well as initiation of our DCVax-Direct program, and certain advanced product development work, additional services that are required for logistics, distribution and tracking, and other pending programs, and the need for expanded manufacturing capacity, we entered into four new agreements with Cognate BioServices in January, 2014, for our DCVax-L and DCVax-Direct programs, Ancillary Services and Manufacturing Expansion Services. However, there can be no assurance that these expanded agreements will be sufficient. The agreements involved substantial upfront payments and provided for payment of at least half of all invoices to be paid in common stock and warrants of the Company for a limited period of time, and the remainder of the invoice amounts to be paid in cash. The stock and warrants were subject to a lock-up period, and were originally subject to most favored nation treatment with respect to terms provided to other investors or creditors (including with respect to any warrants), however, the most favored nation provisions were removed and the remaining lock-up was terminated in 2016. The agreements may cover commercial as well as clinical activities, and will only be terminable early by either party for uncured material breach by the other party, although we can also suspend or stop our program at any time, and pay a fee under the agreements. We have been in breach of these agreements in numerous occasions, including as of December 31, 2016, primarily for non-payment.
We have entered into an agreement with King’s College London to manufacture DCVax for our clinical trial and our compassionate use cases. Cognate BioServices will manage and supervise the processing in London. In addition, our partner in Germany, the Fraunhofer IZI Institute, has received approval and certification from the regional and national regulatory agencies in Germany for the manufacture of DCVax for GBM. Fraunhofer IZI also received the necessary regulatory approvals to supply DCVax-L products to the U.K. for our clinical trial there. We anticipate that the manufacturing facilities in the U.K. will eventually obtain the necessary approvals, and that the German and U.K. facilities will be able to supply DCVax products for clinical trials anywhere in Europe; however, this may not turn out to be feasible, for regulatory, operational and/or logistical reasons.
Problems with the manufacturing facilities, processes or operations of Cognate BioServices, or of our partners in the U.K. and/or Germany, could result in a failure to produce, or a delay in producing adequate supplies of our DCVax product candidates. A number of factors could cause interruptions or delays, including the inability of a supplier to provide raw materials, equipment malfunctions or failures, damage to a facility due to natural disasters or otherwise, changes in FDA or European regulatory requirements or standards that require modifications to our manufacturing processes, action by the FDA or European regulators, or by us that results in the halting or slowdown of production of components or finished products due to regulatory issues, our manufacturers going out of business or failing to produce product as contractually required, and/or other similar factors. Because manufacturing processes for our DCVax product candidates are highly complex, require specialized facilities (dedicated exclusively to DCVax production) and personnel that are not widely available in the industry, involve equipment and training with long lead times, and are subject to lengthy regulatory approval processes, alternative qualified production capacity may not be available on a timely basis or at all. Also, Cognate could choose to terminate its agreements with us if we are in breach, or if we undergo a change of control. Difficulties, delays or interruptions in the manufacturing and supply and delivery of our DCVax product candidates could require us to stop enrolling new patients into our trials, and/or require us to stop the trials or other programs, stop the treatment of patients in the trials or other programs, increase our costs, damage our reputation and, if our product candidates are approved for sale, cause us to lose revenue or market share if our manufacturers are unable to timely meet market demands.
The manufacturing of our product candidates will have to be greatly scaled up for commercialization, and neither we nor other parties in the industry have experience with such scale-up.
As is the case with any clinical trial, our Phase III clinical trial of DCVax-L for GBM involves a number of patients that is a small fraction of the number of potential patients for whom DCVax-L may be applicable in the commercial market. The same will be true of our other clinical programs with our other DCVax product candidates. If our DCVax-L, and/or other DCVax product candidates, are approved for commercial sale, it will be necessary to greatly scale up the volume of manufacturing, far above the level needed for the trials. Neither we nor our contract manufacturers have experience with such scale-up. In addition, there are very few consultants or advisors in the industry who have such experience and can provide guidance or assistance, because active immune therapies such as DCVax are a fundamentally new category of product in two major ways: these active immune therapy products consist of living cells, not chemical or biologic compounds, and the products are personalized. To our knowledge, no such products have successfully completed the necessary scale-up for commercialization without material difficulties. For example, Dendreon Corporation has encountered substantial difficulties trying to scale up the manufacturing of its Provenge® product for commercialization.
| 11 |
The necessary specialized facilities, equipment and personnel may not be available or obtainable for the scale-up of manufacturing of our product candidates.
The manufacture of living cells requires specialized facilities, equipment and personnel which are entirely different than what is required for the manufacturing of chemical or biologic compounds. Scaling up the manufacturing of living cell products to volume levels required for commercialization will require enormous amounts of these specialized facilities, equipment and personnel - especially where, as in the case of our DCVax product candidates, the product is personalized and must be made for each patient individually. Since living cell products are so new, and have barely begun to reach commercialization, the supply of the specialized facilities, equipment and personnel needed for them has not yet developed. It may not be possible for us or our manufacturers to obtain all of the specialized facilities, equipment and personnel needed for commercialization of our DCVax product candidates. This could delay or halt our commercialization.
Our technology is novel, involves complex immune system elements, and may not prove to be effective.
Data already obtained, or in the future obtained, from pre-clinical studies and clinical trials do not necessarily predict the results that will be obtained from later pre-clinical studies and clinical trials. Over the course of several decades, there have been many different immune therapy product designs - and many product failures and company failures. To our knowledge, to date, only one active immune therapy, Provenge, has been approved by the FDA. The human immune system is complex, with many diverse elements, and the state of scientific understanding of the immune system is still limited. Some immune therapies previously developed by other parties showed surprising and unexpected toxicity in clinical trials. Other immune therapies developed by other parties delivered promising results in early clinical trials, but failed in later stage clinical trials.
To date, we have only completed early stage trials with our first product (DCVax-L) in limited numbers of patients. Although we believe the results of those trials were quite positive, those results may not be achieved in our later stage clinical trials, such as the 331-patient Phase III trial we are now conducting for GBM, and our product candidates may not ultimately be found to be effective. Further, although the safety profile of our DCVax-L product was excellent in the early stage clinical trials, toxicity may be seen as we treat larger numbers of patients in late stage clinical trials. If such toxicity occurs, it could limit, delay or stop further clinical development or commercialization of our DCVax-L product.
We have only conducted the Phase I portion of our first-in-man Phase I/II clinical trial with our DCVax Direct product, after prior early stage trials with DCVax-L and DCVax-Prostate. Although the early results have not indicated any significant toxicity, we do not yet know what efficacy or toxicity DCVax-Direct may show in a larger sample of human patients. This product may not ultimately be found to be effective, and/or it may be found to be toxic, which could limit, delay or stop clinical development or commercialization of DCVax-Direct.
Clinical trials for our product candidates are expensive and time consuming, and their outcome is uncertain.
The process of obtaining and maintaining regulatory approvals for new therapeutic products is expensive, lengthy and uncertain. Costs and timing of clinical trials may vary significantly over the life of a project owing to any or all of the following non-exclusive reasons:
| • | the duration of the clinical trial; |
| • | the number of sites included in the trials; |
| • | the countries in which the trial is conducted; |
| • | the length of time required and ability to enroll eligible patients; |
| • | the number of patients that participate in the trials; |
| • | the number of doses that patients receive; |
| • | the drop-out or discontinuation rates of patients; |
| • | per patient trial costs; |
| • | third party contractors failing to comply with regulatory requirements or meet their contractual obligations to us in a timely manner; |
| • | our final product candidates having different properties in humans than in laboratory testing; |
| • | the need to suspend or terminate our clinical trials; |
| • | insufficient or inadequate supply or quality of necessary materials to conduct our trials; |
| • | potential additional safety monitoring, or other conditions required by the FDA or comparable foreign regulatory authorities regarding the scope or design of our clinical trials, or other studies requested by regulatory agencies; |
| • | problems engaging independent review Boards, or IRBs, to oversee trials or in obtaining and maintaining IRB approval of studies; |
| • | the duration of patient follow-up; |
| 12 |
| • | the efficacy and safety profile of a product candidate; |
| • | the costs and timing of obtaining regulatory approvals; and |
| • | the costs involved in enforcing or defending patent claims or other intellectual property rights. |
Late stage clinical trials, such as our Phase III clinical trial for GBM patients, are especially expensive, typically requiring tens of millions of dollars, and take years to reach their outcomes. Such outcomes often fail to reproduce the results of earlier trials. It is often necessary to conduct multiple late stage trials (including multiple Phase III trials) in order to obtain sufficient results to support product approval, which further increases the expense. Sometimes trials are further complicated by changes in requirements while the trials are under way (for example, when the standard of care changes for the disease that is being studied in the trial). For example, while the Company’s lead program, the Phase III clinical trial of DCVax-L for brain cancer, has been under way, there has been a very large proliferation of new treatments in various stages of development, as well as some new product approvals, for brain cancer. Any of our current or future product candidates could take a significantly longer time to gain regulatory approval than we expect, or may never gain approval, either of which could delay or stop the commercialization of our DCVax product candidates.
We may be required to suspend or discontinue clinical trials due to unexpected side effects or other safety risks that could preclude approval of our product candidates.
Our clinical trials may be suspended at any time for a number of reasons. For example, we may voluntarily suspend or terminate our clinical trials if at any time we believe that they present an unacceptable risk to the clinical trial patients. In addition, the FDA or other regulatory agencies may order the temporary or permanent discontinuation of our clinical trials at any time if they believe that the clinical trials are not being conducted in accordance with applicable regulatory requirements or that they present an unacceptable safety risk to the clinical trial patients.
Administering any product candidate to humans may produce undesirable side effects. These side effects could interrupt, delay or halt clinical trials of our product candidates and could result in the FDA or other regulatory authorities denying further development or approval of our product candidates for any or all targeted indications. Ultimately, some or all of our product candidates may prove to be unsafe for human use. Moreover, we could be subject to significant liability if any volunteer or patient suffers, or appears to suffer, adverse health effects as a result of participating in our clinical trials.
We have limited experience in conducting and managing clinical trial, and we rely on third parties to assist with these services.
We rely on third parties to assist us, on a contract services basis, in managing and monitoring all of our clinical trials. We do not have experience conducting late stage clinical trials by ourselves without third party service firms, nor do we have experience in supervising such third parties in managing late stage, multi-hundred patient clinical trials, other than our current Phase III trial for GBM. Our lack of experience and/or our reliance on these third party service firms may result in delays or failure to complete these trials successfully and on time. If the third parties fail to perform, we may not be able to find sufficient alternative suppliers of those services in a reasonable time period, or on commercially reasonable terms, if at all. If we were unable to obtain alternative suppliers of such services, we might be forced to delay, suspend or stop our Phase III trial for GBM.
We may fail to comply with regulatory requirements.
Our success will be dependent upon our ability, and our collaborative partners’ abilities, to maintain compliance with regulatory requirements in multiple countries, including current good manufacturing practices, or cGMP, and safety reporting obligations. The failure to comply with applicable regulatory requirements can result in, among other things, fines, injunctions, civil penalties, total or partial suspension of regulatory approvals, refusal to approve pending applications, recalls or seizures of products, operating and production restrictions and criminal prosecutions.
Regulatory approval of our product candidates may be withdrawn at any time.
After any regulatory approval has been obtained for medicinal products (including any early approval such as our Hospital Exemption approval in Germany and/or our reimbursement eligibility determination in Germany), the product and the manufacturer are subject to continual review, including the review of adverse experiences and clinical results that are reported after our products are made available to patients, and there can be no assurance that such approval will not be withdrawn or restricted. Regulators may also subject approvals to restrictions or conditions, or impose post-approval obligations on the holders of these approvals, and the regulatory status of such products may be jeopardized if such obligations are not fulfilled. If post-approval studies are required, such studies may involve significant time and expense.
| 13 |
The manufacturer and manufacturing facilities we use to make any of our products will also be subject to periodic review and inspection by the FDA or EMA, as applicable. The discovery of any new or previously unknown problems with the product, manufacturer or facility may result in restrictions on the product or manufacturer or facility, including withdrawal of the product from the market. We will continue to be subject to the FDA or the European Medicines Agency, or EMA, requirements, as applicable, governing the labeling, packaging, storage, advertising, promotion, recordkeeping, and submission of safety and other post-market information for all of our product candidates, even those that the FDA or EMA, as applicable, had approved. If we fail to comply with applicable continuing regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approval, product recalls and seizures, operating restrictions and other adverse consequences.
Our Operations under early access programs such as the hospital exemption in Germany may not be successful
There is not much accumulated or available experience, information or precedents in regard to early access programs such hospital exemption programs and/or similar programs, especially for new types of treatments such as immune therapies. Our DCVax-L product for glioma brain cancers is one of the first products to receive a Hospital Exemption approval in Germany. Establishing operations under this Hospital Exemption will require us to establish and implement new operational, contractual, financial and other arrangements with physicians, hospitals, patients and others. We may not be successful in establishing and implementing such arrangements, and/or such arrangements may not be financially satisfactory or viable.
We may not be successful in negotiating reimbursement
The reimbursement eligibility determination that we have received in Germany for our DCVax-L product for brain cancer allows us to negotiate reimbursement arrangements on a case by case basis, but does not ensure a positive outcome. We must negotiate with hospitals and Sickness Funds on a patient by patient basis. Reimbursement prior to commercial approval (the current stage of our DCVax-L programs) is rare, and we do not have substantial precedents to refer to. Our DCVax-L product involves a different cost structure than traditional drugs and may require different reimbursement arrangements. The reimbursement arrangements also may be applied on a patient by patient basis. We may not be successful in negotiating or obtaining reimbursement, or obtaining it on acceptable or viable terms.
Our product candidates will require a different distribution model than conventional therapeutic products, and this may impede commercialization of our product candidates.
Our DCVax product candidates consist of living human immune cells. Such products are entirely different from chemical or biologic drugs, and require different handling, distribution and delivery than chemical or biologic drugs. One crucial difference is that the biomaterial ingredients (immune cells and tumor tissue) from which we make DCVax products and the finished DCVax products themselves are subject to time constraints in the shipping and handling. The biomaterial ingredients come from the medical centers to the manufacturing facility fresh and unfrozen, and must arrive within a certain time and in usable condition. Performance failures by the medical center or the courier company can result in biomaterials that are not usable, in which case it may not be possible to make DCVax product for the patient involved. The finished DCVax products are frozen, and must remain frozen throughout the process of distribution and delivery to the medical center or physician’s office, until the time of administration to the patient, and cannot be handled at room temperature until then. In addition, our DCVax product candidates are personalized and they involve ongoing treatment cycles over several years for each patient. Each product shipment for each patient must be tracked and managed individually. For all of these reasons, among others, we will not be able to simply use the distribution networks and processes that already exist for conventional drugs. It may take time for shipping companies, hospitals, pharmacies and physicians to adapt to the requirements for handling, distribution and delivery of these products, which may adversely affect our commercialization.
| 14 |
Our product candidates will require different marketing and sales methods and personnel than conventional therapeutic products. Also, we lack sales and marketing experience. These factors may result in significant difficulties in commercializing our product candidates.
The commercial success of any of our product candidates will depend upon the strength of our sales and marketing efforts. We do not have a marketing or sales force and have no experience in marketing or sales of products like our lead product, DCVax-L for GBM. To fully commercialize our product candidates, we will need to recruit and train marketing staff and a sales force with technical expertise and ability to manage the distribution of our DCVax-L for GBM. As an alternative, we could seek assistance from a corporate partner or a third party services firm with a large distribution system and a large direct sales force. However, since our DCVax products are living cell, immune therapy products, and these are a fundamentally new and different type of product than are on the market today, we would still have to train such partner’s or such services firm’s personnel about our products, and would have to make changes in their distribution processes and systems to handle our products. We may be unable to recruit and train effective sales and marketing forces or our own, or of a partner or a services firm, and/or doing so may be more costly and difficult than anticipated. Such factors may result in significant difficulties in commercializing our product candidates, and we may be unable to generate significant revenues.
The availability and amount of potential reimbursement for our product candidates by government and private payers is uncertain and may be delayed and/or inadequate.
The availability and extent of reimbursement by governmental and/or private payers is essential for most patients to be able to afford expensive treatments, such as cancer treatments. In the United States, the principal decisions about reimbursement for new medicines are typically made by the Centers for Medicare & Medicaid Services, or CMS, an agency within the U.S. Department of Health and Human Services, as CMS decides whether and to what extent a new medicine will be covered and reimbursed under Medicare. Private payers tend to follow CMS to a substantial degree. It is difficult to predict what CMS will decide with respect to reimbursement for fundamentally novel products such as ours, as there is no body of established practices and precedents for these new products. To date, we are aware of only one active immune therapy that has reached the stage of a reimbursement decision (Provenge). Although CMS approved coverage and reimbursement for Provenge, and private payers followed suit, there remain substantial questions and concerns about reimbursement for Provenge, and such questions and concerns appear to be impeding sales.
Reimbursement agencies in Europe can be even more conservative than CMS in the U.S. A number of cancer drugs which have been approved for reimbursement in the U.S. have not been approved for reimbursement in certain European countries, and/or the level of reimbursement approved in Europe is lower than in the U.S.
Various factors could increase the difficulties for our DCVax products to obtain reimbursement. Costs and/or difficulties associated with the reimbursement of Provenge could create an adverse environment for reimbursement of other immune therapies, such as our DCVax products. Approval of other competing products (drugs and/or devices) for the same disease indications could make the need for our products and the cost-benefit balance seem less compelling. The cost structure of our product is not a typical cost structure for medical products, as the majority of our costs are incurred up front, when the manufacturing of the personalized product is done. Our atypical cost structure may not be accommodated in any reimbursement for our products. If we are unable to obtain adequate levels of reimbursement, our ability to successfully market and sell our product candidates will be adversely affected.
The manner and level at which reimbursement is provided for services related to our product candidates (e.g., for administration of our product to patients) are also important. If the reimbursement for such services is inadequate, that may lead to physician resistance and adversely affect our ability to market or sell our products.
The methodology under which CMS makes coverage and reimbursement determinations is subject to change, particularly because of budgetary pressures facing the Medicare program. For example, the Medicare Prescription Drug, Improvement, and Modernization Act, or Medicare Modernization Act, enacted in 2003, provided for a change in reimbursement methodology that has reduced the Medicare reimbursement rates for many drugs, including oncology therapeutics. The Affordable Care Act may also result in changes in reimbursement arrangements that adversely affect the prospects for reimbursement of our products.
In markets outside the U.S., the prices of medical products are subject to direct price controls and/or to reimbursement with varying price control mechanisms, as part of national health systems. In general, the prices of medicines under such systems are substantially lower than in the U.S. Some jurisdictions operate positive and/or negative list systems under which products may only be marketed once a reimbursement price has been agreed. Other countries allow companies to fix their own prices for medicines, but monitor and control company profits. The downward pressure on health care costs in general, particularly prescription drugs, has become very intense. As a result, increasingly high barriers are being erected to the entry of new products. Accordingly, in markets outside the U.S., the reimbursement for our products may be reduced compared with the U.S. and may be insufficient to generate commercially reasonable revenues and profits.
| 15 |
Competition in the biotechnology and biopharmaceutical industry is intense, rapidly expanding and most of our competitors have substantially greater resources than we do.
The biotechnology and biopharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. Several companies, such as Juno, Kite Bellicum, Argos, Agenus, Asterias, and a rapidly expanding number of other companies are actively involved in the research and development of immune therapies or cell-based therapies for cancer. In addition, other novel technologies for cancer are under development or commercialization, such as checkpoint inhibitor drugs (which are being rapidly developed by numerous big pharma companies including BMS, Merck, Pfizer, Astra Zeneca, Roche and others) and various T cell based therapies (which are also being rapidly developed by numerous companies with extraordinary resource backing), as well as the electro-therapy device of NovoCure. Additionally, many companies are actively involved in the research and development of monoclonal antibody-based cancer therapies. Currently, a substantial number of antibody-based products are approved for commercial sale for cancer therapy, and a large number of additional ones are under development, including late stage trials. Many other third parties compete with us in developing alternative therapies to treat cancer, including: biopharmaceutical companies; biotechnology companies; pharmaceutical companies; academic institutions; and other research organizations, as well as some medical device companies (e.g., NovoCure and MagForce Nano Technologies AG).
We face extensive competition from companies developing new treatments for brain cancer. These include a variety of immune therapies, as mentioned above (including T cell based therapies and checkpoint inhibitor drugs), as well as a variety of small molecule drugs and biologics drugs. There are also a number of existing drugs used for the treatment of brain cancer that may compete with our product, including, Avastin® (Roche Holding AG), Gliadel® (Eisai Co. Ltd.), and Temodar® (Merck& Co., Inc.), as well as NovoCure’s electrotherapy device.
Most of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, pre-clinical testing, conducting clinical trials, obtaining regulatory approvals and marketing and sales than we do. Smaller or early-stage companies may also prove to be significant competitors, particularly if they enter into collaborative arrangements with large and established companies.
These third parties compete with us in recruiting and retaining qualified scientific and management personnel and collaborators, as well as in acquiring technologies complementary to our programs, and in obtaining sites for our clinical trials and enrolling patients.
Our competitors may complete their clinical development more rapidly than we and our products do, may develop more effective or affordable products, or may achieve earlier or longer patent protection or earlier product marketing and sales. Any products developed by us may be rendered obsolete and non-competitive.
Competing generic medicinal products may be approved.
In the E.U., there exists a process for approval of generic biological medicinal products once patent protection and other forms of data and market exclusivity have expired. Arrangements for approval of generic biologics products exist in the U.S. as well, and the FDA has begun approving bio-similar products. Other jurisdictions may approve generic biologic medicinal products as well. If generic biologic medicinal products are approved, competition from such products may substantially reduce sales of our products.
We may be exposed to potential product liability claims, and our existing insurance may not cover these claims, in whole or in part. In addition, insurance against such claims may not be available to us on reasonable terms in the future, if at all.
Our business exposes us to potential product liability risks that are inherent in the testing, manufacturing, marketing, sale and use of therapeutic products. We have insurance coverage but this insurance may not cover any claims made. In the future, insurance coverage may not be available to us on commercially reasonable terms (including acceptable cost), if at all. Insurance that we obtain may not be adequate to cover claims against us. Regardless of whether they have any merit or not, and regardless of their eventual outcome, product liability claims may result in substantially decreased demand for our product candidates, injury to our reputation, withdrawal of clinical trial participants or physicians, and/or loss of revenues. Thus, whether or not we are insured, a product liability claim or product recall may result in losses that could be material.
| 16 |
We may be subject to environmental regulatory requirements, and could fail to meet such requirements, and we do not carry insurance against environmental damage or injury claims.
We may need to store, handle, use and dispose of controlled hazardous, radioactive and biological materials in our business. Our development activities may result in our becoming subject to regulatory requirements, and if we fail to comply with applicable requirements we could be subject to substantial fines and other sanctions, delays in research and production, and increased operating costs. In addition, if regulated materials were improperly released at our current or former facilities or at locations to which we send materials for disposal, we could be liable for substantial damages and costs, including cleanup costs and personal injury or property damages, and we could incur delays in research and production and increased operating costs.
Insurance covering certain types of claims of environmental damage or injury resulting from the use of these materials is available but can be expensive and is limited in its coverage. We have no insurance specifically covering environmental risks or personal injury from the use of these materials and if such use results in liability, our business may be seriously harmed.
Collaborations play an important role in our business, and could be vulnerable to competition or termination.
We work with scientists and medical professionals at a variety of academic and other institutions, some of whom have conducted research for us or have assisted in developing our research and development strategy. These scientists and medical professionals are collaborators, not our employees. They may have commitments to, or contracts with, other institutions or businesses (including competitors) that limit the amount of time they have available to work with us. We have little control over these individuals. We can only expect that they devote time to us and our programs as required by any license, consulting or sponsored research agreements we may have with them. In addition, these individuals may have arrangements with other companies to assist in developing technologies that may compete with our products. If these individuals do not devote sufficient time and resources to our programs, or if they provide substantial assistance to our competitors, our business could be seriously harmed.
The success of our business strategy may partially depend upon our ability to develop and maintain our collaborations and to manage them effectively. Due to concerns regarding our ability to continue our operations or the commercial feasibility of our personalized DCVax product candidates, these third parties may decide not to conduct business with us or may conduct business with us on terms that are less favorable than those customarily extended by them. If either of these events occurs, our business could suffer significantly.
We may have disputes with our collaborators, which could be costly and time consuming. Failure to successfully defend our rights could seriously harm our business, financial condition and operating results. We intend to continue to enter into collaborations in the future. However, we may be unable to successfully negotiate any additional collaboration and any of these relationships, if established, may not be scientifically or commercially successful.
Our business could be adversely affected by new legislation and/or product related issues.
Changes in applicable legislation and/or regulatory policies or discovery of problems with the product, production process, site or manufacturer may result in delays in bringing products to market, the imposition of restrictions on the product’s sale or manufacture, including the possible withdrawal of the product from the market, or may otherwise have an adverse effect on our business.
Our business could be adversely affected by animal rights activists.
Our business activities have involved animal testing and could involve further such testing, as such testing is required before new medical products can be tested in clinical trials in human patients. Animal testing has been the subject of controversy and adverse publicity. Some organizations and individuals have attempted to stop animal testing by pressing for legislation and regulation in these areas. To the extent that the activities of such groups are successful, our business could be adversely affected. Negative publicity about us, our pre-clinical trials and our product candidates could also adversely affect our business.
| 17 |
Multiple late stage clinical trials of DCVax-L for GBM, our lead product, may be required before we can obtain regulatory approval.
Typically, companies conduct multiple late stage clinical trials of their product candidates before seeking product approval. Our current Phase III 331-patient clinical trial of DCVax-L for GBM is our first late stage trial. We may be required to conduct additional late stage trials with DCVax-L for GBM before we can obtain product approval. This would substantially delay our commercialization. In addition, our Phase III trial of DCVax-L was placed on a partial clinical hold for new screening for enrollment in 2015. Although the FDA lifted its hold in February 2017 as previously reported by the Company, the Company had already closed enrollment with 331 of the planned 348 patients. Since we did not enroll the last 17 of the planned 348 patients, this could adversely affect the statistical and other analyses of our Phase III trial results, and could make it more difficult to seek product approval or more likely that further trials could be required. In addition, a rapidly growing number of products are under development for brain cancer, including immunotherapies such as checkpoint inhibitor drugs and T cell based therapies, and some (e.g., NovoCure’s device) have been approved in the U.S. It is possible that the standard of care for brain cancer could change while our Phase III trial is still under way. This could necessitate further clinical trials with our DCVax-L product candidate for brain cancer.
Changes in manufacturing methods for DCVax-L could require us to conduct equivalency studies and/or additional clinical trials.
With biologics products, “the process is the product”: i.e., the manufacturing process is considered to be as integral to the product as is the composition of the product itself. If any changes are made in the manufacturing process, and such changes are considered material by the regulatory authorities, the company sponsor may be required to conduct equivalency studies to show that the product is equivalent under the changed manufacturing processes as under the original manufacturing processes, and/or the company sponsor may be required to conduct additional clinical trials. In addition, if there are multiple manufacturing locations, equivalency studies may be required to show that the products produced in the respective facilities are substantially the same. Our manufacturing processes have undergone some changes during the early clinical trials, and we have multiple manufacturing locations. Accordingly, we may be required to conduct equivalency studies, and/or additional clinical trials, before we can obtain product approval, unless the regulatory authorities are satisfied that the changes in processes do not affect the quality, efficacy or safety of the product, and satisfied that the products made in each manufacturing location are substantially the same.
We may not receive regulatory approvals for our product candidates or there may be a delay in obtaining such approvals.
Our products and our ongoing development activities are subject to regulation by regulatory authorities in the countries in which we and our collaborators and distributors wish to test, manufacture or market our products. For instance, the FDA will regulate the product in the U.S. and equivalent authorities, such as the EMA will regulate in Europe. Regulatory approval by these authorities will be subject to the evaluation of data relating to the quality, efficacy and safety of the product for its proposed use, and there can be no assurance that the regulatory authorities will find our data sufficient to support product approval of DCVax-L or DCVax-Direct. In addition, the endpoint against which the data is measured must be acceptable to the regulatory authorities. The primary endpoint of our Phase III trial of DCVax-L is progression free survival. Sometimes regulators have accepted this endpoint, and sometimes not. There can be no assurance that the regulatory authorities will find this to be an approvable endpoint for Glioblastoma multiforme cancer.
The time period required to obtain regulatory approval varies between countries. In the U.S., for products without “Fast Track” status, it can take up to 18 months after submission of an application for product approval to receive the FDA's decision. Even with Fast Track status, FDA review and decision can take up to 12 months. At present, we do not have Fast Track status for our lead product, DCVax-L for GBM. We plan to apply for Fast Track status, but there can be no assurance that FDA will grant us such status for DCVax-L.
Different regulators may impose their own requirements and may refuse to grant, or may require additional data before granting, an approval, notwithstanding that regulatory approval may have been granted by other regulators. Regulatory approval may be delayed, limited or denied for a number of reasons, including insufficient clinical data, the product not meeting safety or efficacy requirements or any relevant manufacturing processes or facilities not meeting applicable requirements as well as case load at the regulatory agency at the time.
| 18 |
We may not obtain or maintain the benefits associated with orphan drug status, including market exclusivity.
Although our lead product, DCVax-L for GBM, has been granted orphan drug status in both the U.S. and the E.U., we may not receive the benefits associated with orphan drug designation (including the benefit providing for market exclusivity for a number of years). This may result from a failure to maintain orphan drug status, or result from a competing product reaching the market that has an orphan designation for the same disease indication. Under U.S. and E.U. rules for orphan drugs, if such a competing product reaches the market before ours does, the competing product could potentially obtain a scope of market exclusivity that limits or precludes our product from being sold in the U.S. for seven years or from being sold in the E.U. for ten years. Also, in the E.U., even after orphan status has been granted, that status is re-examined shortly prior to the product receiving any regulatory approval. The EMA must be satisfied that there is evidence that the product offers a significant benefit relative to existing therapies, in order for the therapeutic product to maintain its orphan drug status. Accordingly, our product candidates will have to re-qualify for orphan drug status prior to any potential product approval in the E.U.
Our intellectual property rights may be overturned, narrowed or blocked, and may not provide sufficient commercial protection for our product candidates, or third parties may infringe upon our intellectual property.
The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions and has in recent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain. Patent laws afford only limited protection and may not protect our rights to the extent necessary to sustain any competitive advantage we may have. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and we may encounter significant problems in protecting our proprietary rights in those countries. Moreover patents and patent applications relating to living cell products are relatively new, involve complex factual and legal issues, and are largely untested in litigation - and as a result, are uncertain. Our pending and future patent applications may not result in patents being issued which adequately protect our technology or products or which effectively prevent others from commercializing the same or competitive technologies and products. As a result, we may not be able to obtain meaningful patent protection for our commercial products, and our business may suffer as a result. Third parties may challenge our existing patents, and such challenges could result in overturning or narrowing some of our patents. Even if our patents are not challenged, third parties could assert that their patents block our use of technology covered by some or all of our patents
As of December 31, 2016, we had 144 issued patents and 61 pending patent applications worldwide relating to our product candidates and related matters such as manufacturing processes. The issued patents expire at various dates from 2022 to 2028. Our issued patents may be challenged, and such challenges may result in reductions in scope, cancellations or invalidations. Our pending patent applications may not result in issued patents. Moreover, our patents and patent applications may not be sufficiently broad to prevent others from using substantially similar technologies or from developing competing products. We also face the risk that others may independently develop similar or alternative technologies, or design around our patented technologies. As a result, no assurance can be given that any of our pending or future patent applications will be granted, that the scope of any patent protection currently granted or that may be granted in the future will exclude competitors or provide us with competitive advantages, that any of the patents that have been or may be issued to us will be held valid if subsequently challenged, or that other parties will not claim rights to or ownership of our patents or other proprietary rights that we hold.
We have taken security measures (including execution of confidentiality agreements) to protect our proprietary information, especially proprietary information that is not covered by patents or patent applications. These measures, however, may not provide adequate protection for our trade secrets or other proprietary information. In addition, others may independently develop substantially equivalent proprietary information or techniques or otherwise gain access to our trade secrets.
We may be exposed to claims or lawsuits that our products infringe patents or other proprietary rights of other parties.
Our commercial success depends upon our ability and the ability of our collaborators to develop, manufacture, market and sell our product candidates and use our proprietary technologies without infringing the proprietary rights of third parties. We have not conducted a comprehensive freedom-to-operate review to determine whether our proposed business activities or use of certain of the technology covered by patent rights owned by us would infringe patents issued to third parties.
| 19 |
There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and biopharmaceutical industries generally. The patent landscape is especially uncertain in regard to cell therapy products, as it involves complex legal and factual questions for which important legal principles remain unresolved. We may become party to, or be threatened with, future adversarial proceedings or litigation regarding intellectual property rights with respect to our products and technology, including interference proceedings, Inter Partes Reexamination, or Post Grant Review before the U.S. Patent and Trademark Office. Third parties may assert infringement claims against us based on existing patents or patents that may be granted in the future. If we are found to infringe a third party’s intellectual property rights, we could be required to obtain a license from such third party to continue developing and marketing our products and technology. However, we may not be able to obtain any required license on commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. We could be forced, including by court order, to cease commercializing the infringing technology or product. In addition, we could be found liable for monetary damages. If the infringement is found to be willful, we could be liable for treble damages. A finding of infringement could prevent us from commercializing our product candidates or force us to cease some of our business operations, which could materially harm our business. Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business.
We have already been exposed to one patent lawsuit by a large company, which we vigorously defended. Our defense resulted in the plaintiff withdrawing nearly all of the claims it filed, and in settlement of the last claims without our paying the plaintiff anything. However, the litigation was expensive and time consuming. We have recently also been exposed to claims (without a lawsuit) by a competitor asserting or implying (and commentaries by third parties based on the claims by our competitor) that a patent issued to our competitor covers our products. We believe these claims to be without merit. However, if a lawsuit for infringement were brought against us, there can be no assurance that a judge or jury would agree with our position, and in any event such litigation would be expensive and time consuming. In the future, we may again be exposed to claims by third parties - with or without merit - that our products infringe their intellectual property rights.
Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.
DCVax is our only technology in clinical development.
Unlike many pharmaceutical companies that have a number of products in development and which utilize many different technologies, we are dependent on the success of our DCVax platform technology. While the DCVax technology has a wide scope of potential use, and is embodied in several different product lines for different clinical situations, if the core DCVax technology is not effective or is toxic or is not commercially viable, our business could fail. We do not currently have other technologies that could provide alternative support for us.
Risks Related to our Common Stock
The market price of our common stock is volatile and can be adversely affected by several factors.
The share prices of publicly traded biotechnology and emerging pharmaceutical companies, particularly companies without consistent product revenues and earnings, can be highly volatile and are likely to remain highly volatile in the future. The price which investors may realize in sales of their shares of our common stock may be materially different than the price at which our common stock is quoted, and will be influenced by a large number of factors, some specific to us and our operations, and some unrelated to our operations. Such factors may cause the price of our stock to fluctuate frequently and substantially. Such factors may include large purchases or sales of our common stock, shorting of our stock, positive or negative events, commentaries or publicity relating to our company, management or products, or other companies, management or products, including other immune therapies for cancer or immune therapies or cancer therapies generally, positive or negative events relating to healthcare and the overall pharmaceutical and biotech sector, the publication of research by securities analysts and changes in recommendations of securities analysts, legislative or regulatory changes, and/or general economic conditions. In the past, shareholder litigation, including class action litigation, has been brought against other companies that experienced volatility in the market price of their shares and/or unexpected or adverse developments in their business. Whether or not meritorious, litigation brought against a company following such developments can result in substantial costs, divert management’s attention and resources, and harm the company’s financial condition and results of operations.
| 20 |
Our Common Stock is considered a “penny stock” and may be difficult to sell.
The Commission has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to specific exemptions. Historically, the price of our Common Stock has fluctuated greatly. As of the date of this filing, the market price of our common stock is less than $5.00 per share, and therefore is a “penny stock” according to Commission rules. The “penny stock” rules impose additional sales practice requirements on broker-dealers who sell securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of securities and have received the purchaser’s written consent to the transaction before the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the broker-dealer must deliver, before the transaction, a disclosure schedule prescribed by the Commission relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information on the limited market in penny stocks. These additional burdens imposed on broker-dealers may restrict the ability or decrease the willingness of broker-dealers to sell our common stock, and may result in decreased liquidity for our common stock and increased transaction costs for sales and purchases of our common stock as compared to other securities.
Toucan Capital and its affiliates, including Linda Powers and Cognate BioServices, are the principal holders of our shares of common stock, and this concentration of ownership may have a negative effect on the market price of our common stock.
As of December 31, 2016, Toucan Capital and its affiliates (including Cognate BioServices, Toucan Partners and Linda Powers, who also serves as our Chief Executive Officer and Chairperson of the Board of Directors), collectively, beneficially owned a significant percentage of our outstanding common stock on that date. This concentration of ownership could involve conflicts of interest, and may adversely affect the trading price of our common stock because investors may perceive disadvantages in owning stock of companies with controlling stockholders, including controlling stockholders who could have conflicts of interest. Toucan Capital and its affiliates, including Linda Powers and Cognate BioServices, have the ability to exert substantial influence over all matters requiring approval by our stockholders, including the election and removal of directors and any proposed merger, consolidation or sale of all or substantially all of our assets, as well as over our business plans, strategies or operations. This influence could have the effect of delaying, deferring or preventing a change in control, or impeding a merger or consolidation, takeover or other business combination or action that could be favorable to investors.
The requirements of the Sarbanes-Oxley Act of 2002 and other U.S. securities laws impose substantial costs, and may drain our resources and distract our management.
We are subject to certain of the requirements of the Sarbanes-Oxley Act of 2002 in the U.S., as well as the reporting requirements under the Exchange Act. The Exchange Act requires, among other things, filing of annual reports on Form 10-K, quarterly reports on Form 10-Q and periodic reports on Form 8-K following the happening of certain material events, with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls over financial reporting. We have identified a number of material weaknesses in our internal controls, as described above under “Our management and our independent auditors have identified certain internal control deficiencies, which our management and our auditors believe constitute material weaknesses although they did not result in any adjustments.” Meeting the requirements of the Exchange Act and the Sarbanes-Oxley Act may strain our resources and may divert management's attention from other business concerns, both of which may have a material adverse effect on our business.
| 21 |
We do not intend to pay any cash dividends in the foreseeable future and, therefore, any return on your investment in our common stock must come from increases in the market price of our common stock.
We have not paid any cash dividends on our common stock to date in our history, and we do not intend to pay cash dividends on our common stock in the foreseeable future. We intend to retain future earnings, if any, for reinvestment in the development and expansion of our business. Also, any credit agreements which we may enter into with institutional lenders may restrict our ability to pay dividends. Therefore, any return on your investment in our capital stock must come from increases in the fair market value and trading price of our common stock. Such increases in the trading price of our stock may not occur.
Our certificate of incorporation and bylaws and Delaware law, have provisions that could discourage, delay or prevent a change in control.
Our certificate of incorporation and bylaws and Delaware law contain provisions which could make it more difficult for a third party to acquire us, even if closing such a transaction would be beneficial to our stockholders. We are authorized to issue up to 40,000,000 shares of preferred stock. This preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by our Board of Directors without further action by stockholders. The terms of any series of preferred stock may include voting rights (including the right to vote as a series on particular matters), preferences as to dividend, liquidation, conversion and redemption rights and sinking fund provisions. No preferred stock is currently outstanding. The issuance of any preferred stock could materially adversely affect the rights of the holders of our common stock, and therefore, reduce the value of our common stock. In particular, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell our assets to, a third party and thereby preserve control by the present management.
Provisions of our certificate of incorporation and bylaws and Delaware law also could have the effect of discouraging potential acquisition proposals or tender offers or delaying or preventing a change in control, including changes a stockholder might consider favorable. Such provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. In particular, the certificate of incorporation and bylaws and Delaware law, as applicable, among other things:
| • | provide the Board of Directors with the ability to alter the bylaws without stockholder approval; |
| • | establish staggered terms for board members; |
| • | place limitations on the removal of directors; and |
| • | provide that vacancies on the Board of Directors may be filled by a majority of directors in office, although less than a quorum. |
We are also subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits “business combinations” between a publicly-held Delaware corporation and an “interested stockholder,” which is generally defined as a stockholder who becomes a beneficial owner of 15% or more of a Delaware corporation’s voting stock for a three-year period following the date that such stockholder became an interested stockholder.
A substantial number of shares of common stock may be sold in the market, which may depress the market price for our common stock.
Sales of a substantial number of shares of our common stock in the public market could cause the market price of our common stock to decline. A substantial majority of the outstanding shares of our common stock are freely tradable without restriction or further registration under the Securities Act. In addition, as of December 31, 2016, 58,278,000 shares of our common stock are issuable upon exercise of outstanding warrants and 1,551,000 shares of our common stock are issuable upon exercise of outstanding options.
We may have claims and lawsuits against us that may result in adverse outcomes.
From time to time, we may be subject to a variety of claims and lawsuits. As described more fully in “Item 3. Legal Proceedings,” of Part I of this Form 10-K, we are engaged in responding to a shareholder demand for access to certain corporate books and records, and we are also engaged in shareholder litigation, including a class action securities lawsuit that was filed in the U.S. District Court for the District of Maryland, a shareholder derivative action pending in the U.S. District Court for the District of Maryland, and a lawsuit asserting both derivative and direct class action claims pending in the Delaware Court of Chancery. We believe that the claims are without merit. However, litigation and claims are subject to inherent uncertainties, and adverse rulings or outcomes could occur, and/or could lead to further claims or litigation. Adverse outcomes or further litigation could result in significant monetary damages or injunctive relief that could adversely affect our business. A material adverse impact on our financial statements also could occur for the period in which an unfavorable final outcome becomes probable and its effect becomes reasonably estimable. In addition, litigation and claims may divert material amounts of management time and attention from our business, and/or involve significant legal costs and expenses.
| 22 |
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
Not applicable.
| ITEM 2. | PROPERTIES |
Operating Lease
On July 31, 2012, we entered into a non-cancelable operating lease for 7,097 square feet of office space in Bethesda, Maryland, which expires in March 2018. On October 28, 2013, we entered into a non-cancelable operating lease for 4,251 square feet of office space in Germany, which expires in December 2017. On March 26, 2016, we entered into a non-cancelable operating lease for 505 square feet of office space in London, which was set to expire on March 20, 2017. On December 19, 2016, we entered a renewal agreement to extend the office lease for additional 1 year until March 20, 2018. As of December 31, 2016, obligations for future minimum lease payments under these leases, in aggregate over the rest of the lease term, total approximately $0.7 million.
U.K. Facility
On August 19, 2014, we completed the acquisition of a facility and property in the U.K (“UK Facility”). The purchase price was £13 million ($20.8 million at the then current exchange rate, excluding professional fees of $1.5 million associated with the purchase of the U.K Facility). The facility is an existing building of approximately 65,000 square feet. We plan to re-purpose the facility and have it built out as part of the expansion of manufacturing capacity, potentially doubling the building’s square footage. Such re-purposing requires approval of the applicable Planning Commission. If re-purposing is approved, then the specific design and engineering of the proposed build out will also have to be approved. In addition to the facility, the acquisition included about 25 acres of potentially developable land (as well as non-developable land). Any future development for business use will require removal of certain existing structures, permission from the Planning Commission for the intended purpose, and then permission from the Planning Commission for the specific designs and engineering. In addition, future use for manufacturing of DCVax products will require regulatory approval from the MHRA (the U.K. regulatory authority).
| ITEM 3. | LEGAL PROCEEDINGS |
Derivative and Class Action Litigation
On June 19, 2015, two purported shareholders filed a lawsuit in the Delaware Court of Chancery, captioned Tharp, et al. v. Cognate, et al., C.A. 11179-VCG (Del. Ch. filed June 19, 2015), purportedly suing on behalf of a class of similarly situated shareholders and derivatively on behalf of the Company. The lawsuit names Cognate BioServices, Inc., Toucan Partners, Toucan Capital Fund III, our CEO Linda Powers and the individuals who then served on the Company’s Board of Directors as defendants, and names the Company as a “nominal defendant” with respect to the derivative claims. The complaint generally challenges certain transactions between the Company and Cognate and the Toucan entities, in which Cognate and the Toucan entities provided services and financing to the Company, or agreed to the conversion of debts owed to them by the Company into equity. The complaint seeks unspecified monetary relief for the Company and the plaintiffs, and various forms of equitable relief, including disgorgement of allegedly improper benefits, rescission of the challenged transactions, and an order forbidding similar transactions in the future. The plaintiffs filed an amended complaint on November 6, 2015. The Company and the other named defendants filed motions to dismiss the amended complaint on January 19, 2016, which are now fully briefed.
On November 19, 2015, a third purported shareholder filed a lawsuit in the U.S. District Court for the District of Maryland, captioned Yonemura v. Powers, et al., No. 15-03526 (D. Md. filed Nov. 19, 2015), claiming to sue derivatively on behalf of the Company. The complaint names the individuals who then served on the Company’s Board of Directors, Toucan Capital Fund III, L.P., Toucan General II, LLC, Toucan Partners, LLC, and Cognate as defendants, and names the Company as a nominal defendant. The complaint generally challenges the same transactions disputed in the Delaware case, claiming that the Company purportedly overcompensated Cognate and Toucan for certain services and loans in payments of stock, and that the Company’s CEO, Ms. Powers, benefited from these transactions with Cognate and Toucan, which she allegedly owns or controls. The complaint asserts that the alleged overpayments unjustly enriched Ms. Powers, Toucan, and Cognate; that the Company’s directors breached their fiduciary duties of loyalty and good faith to the Company by authorizing the payments to Cognate; and that Ms. Powers, Cognate, and Toucan aided and abetted the directors’ breaches of fiduciary duties. The plaintiff seeks an award of unspecified damages to the Company and seeks equitable remedies, including disgorgement by Ms. Powers, Toucan, and Cognate of the allegedly improper benefits received as a result of the disputed transactions. The plaintiff also seeks costs and disbursements associated with bringing suit, including attorneys' fees and expert fees. The case is currently stayed pending the parties’ progress toward an acceptable resolution of the litigation.
| 23 |
On November 28, 2016, a purported shareholder filed a lawsuit in the Circuit Court for Montgomery County, Maryland, captioned Wells v. Powers, et al., Case No. 427353-V (Md. Cir. Ct., Mont. Cnty. filed Nov. 28, 2016), claiming to sue derivatively on behalf of the Company. The complaint names six current and former members of the Company’s Board of Directors, Toucan Partners, LLC, Toucan Capital Fund III, L.P., Toucan Partners, LP (a non-existent entity), Toucan General II, LLC, and Cognate as defendants, and names the Company as a nominal defendant. The complaint largely challenges the same transactions disputed in the two cases discussed above, claiming that the Company overcompensated Cognate and Toucan for certain services and loans. It asserts that, by authorization those transactions, the individual defendants breached their fiduciary duties to the Company, abused their ability to control and influence the Company, and engaged in gross mismanagement of the Company’s business and assets. In addition, the complaint claims that the individual defendants are liable to the Company for misleading its investors and financiers. The complaint claims that the individual defendants were unjustly enriched by receiving compensation while the Company’s stock price was allegedly artificially inflated; that Ms. Powers, Toucan, and Cognate are “controlling” stockholders of the Company who breached their fiduciary duties to minority stockholders; that Ms. Powers, Toucan, and Cognate, benefited from these transactions due to their alleged “control”; that the alleged overpayments unjustly enriched Ms. Powers, Toucan, and Cognate; and that Toucan and Cognate aided and abetted the individual defendants in breaching their fiduciary duties. The complaint seeks the award of unspecified damages to the Company; an order from the court directing the Company to reform its corporate governance and internal procedures; and equitable remedies, including restitution and disgorgement from defendants. The plaintiff also seeks the costs and disbursements associated with bringing suit, including attorneys’ fees, costs, and expenses. The plaintiff filed an amended complaint on March 1, 2017. The Company intends to vigorously defend the case.
Class Action Securities Litigation
On August 26, 2015, a purported shareholder of the Company filed a putative class action lawsuit in the U.S. District Court for the District of Maryland, captioned Lerner v. Northwest Biotherapeutics, Inc., et al., No. 15-02532 (D. Md. filed Aug. 26, 2015). The lawsuit named the Company and Ms. Powers as defendants. On December 14, 2015, the court appointed two lead plaintiffs. The Lead Plaintiffs filed an amended complaint on February 12, 2016, purportedly on behalf of all of those who purchased common stock in NW Bio between January 13, 2014 and August 21, 2015. The amended complaint generally claimed that the defendants violated Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934 by making misleading statements and/or omissions on a variety of subjects, including the status and results of the Company’s DCVax trials. The amended complaint sought unspecified damages, attorneys’ fees, and costs. The Company and Ms. Powers filed a motion to dismiss the amended complaint. On March 31, 2017, the court entered an order dismissing the case, and on April 12, 2017, the Lead Plaintiffs submitted a letter advising the court that they do not intend to file an amended complaint.
Shareholder Books and Record Demand
On December 7, 2015, the Company received a letter on behalf of shareholders demanding to inspect certain corporate books and records pursuant to Section 220 of the Delaware General Corporation Law. The demand letter claimed that its purpose was to investigate: (1) allegedly improper transactions, misconduct, and mismanagement by directors and an officer of the Company; (2) the possible breach of fiduciary duty by certain directors and officers of the Company; and (3) the independence and disinterestedness of the Company’s board, to determine whether a pre-suit demand would be necessary before commencing any derivative action on behalf of the Company.
U.S. Securities and Exchange Commission
As previously reported, on December 13, 2016, the Company received a formal information request (subpoena) from the SEC regarding several broad topics that have been previously disclosed, including the Company’s membership on Nasdaq and delisting, related party matters, internal controls and the Company’s Special Litigation Committee. The period covered is January 1, 2013 to the present. The investigation is ongoing and the Company is cooperating fully.
| 24 |
Special Litigation Committee
As previously reported, the Company appointed a Special Litigation Committee, and the Committee has undertaken an inquiry into the allegations of various lawsuits filed against the Company, and an anonymous internet report raising criticisms of the Company and its Board and management, including with respect to the reasonableness of the transactions with Cognate. The Committee has retained experts to help analyze some of these issues.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not Applicable.
| ITEM 5. | MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUERS PURCHASES OF EQUITY SECURITIES |
Market for Common Equity and Related Stockholder Matters
Our common stock and certain warrants trade on OTCQB under the trading symbols “NWBO” and “NWBOW” effective December 19, 2016. The table below sets forth the high and low prices for our common stock for the last two fiscal years. Quotations reflect inter-dealer prices, without retail mark-up, mark-down commission, and may not represent actual transactions. No assurance can be given that an active market will exist for our common stock.
| High | Low | |||||||
| Year end December 31, 2016 | ||||||||
| First Quarter | $ | 3.06 | $ | 1.31 | ||||
| Second Quarter | 1.72 | 0.56 | ||||||
| Third Quarter | 0.70 | 0.32 | ||||||
| Fourth Quarter | 0.83 | 0.35 | ||||||
| Year end December 31, 2015 | ||||||||
| First Quarter | $ | 8.76 | $ | 5.25 | ||||
| Second Quarter | 10.79 | 7.05 | ||||||
| Third Quarter | 12.55 | 5.85 | ||||||
| Fourth Quarter | 6.62 | 3.12 | ||||||
As of March 28, 2017, there were approximately 163 holders of record of our common stock. Such holders may include any broker or clearing agencies as holders of record, and in such cases exclude the individual stockholders whose shares are held by such brokers or clearing agencies.
Dividend Policy
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all future earnings, if any, to fund the ongoing development and growth of our business. We do not currently anticipate paying any cash dividends in the foreseeable future.
Stock Performance Graph
Not Applicable
Recent Sales of Unregistered Securities
On September 15, 2016, in connection with the exercise of warrants to purchase 3,486,814 shares of Common Stock for gross proceeds of approximately $1.2 million, the Company issued Series G Common Stock Purchase Warrants to purchase up to 3,486,814 shares of Common Stock at an exercise price of $0.52 per share.
| 25 |
On September 9, 2016, in connection with the exercise of warrants to purchase 3,700,000 shares of Common Stock for gross proceeds of approximately $1.3 million, the Company issued Series F Common Stock Purchase Warrants to purchase up to 3,700,000 shares of Common Stock at an exercise price of $0.41 per share.
On August 23, 2016, in connection with the exercise of warrants to purchase 3,656,817 shares of Common Stock for gross proceeds of approximately $1.3 million, the Company issued Series E Common Stock Purchase Warrants to purchase up to 3,656,817 shares of Common Stock at an exercise price of $0.41 per share.
On May 15, 2016, in connection with the exercise of warrants to purchase 4,411,764 shares of Common Stock for gross proceeds of approximately $4.2 million, the Company issued Series D Common Stock Purchase Warrants to purchase up to 2,205,882 shares of Common Stock at an exercise price of $1.00 per share.
On February 29, 2016, in connection with a registered direct offering, the Company issued Series C Warrants to purchase up to 2,941,177 shares of Common Stock at an exercise price of $4.00 per share.
During the quarter ended September 30, 2016, the Company issued a total of 2,572,216 shares of Common stock at $0.36 per share to several angel investors for aggregate proceeds of $0.9 million. The Company also issued 1,286,111 warrants at an exercise price of $0.42 per share, with an exercise period of 5 years.
All of the securities set forth above were issued by the Company pursuant to Section 4(2) of the Securities Act of 1933, as amended, or the provisions of Rule 504 of Regulation D promulgated under the Securities Act. All such shares issued contained a restrictive legend and the holders confirmed that they were acquiring the shares for investment and without intent to distribute the shares. All of the purchasers were friends or business associates of the Company’s management and all were experienced in making speculative investments, understood the risks associated with investments, and could afford a loss of the entire investment. The Company did not utilize an underwriter or a placement agent for any of these offerings of its securities.
| ITEM 6. | SELECTED CONSOLIDATED FINANCIAL DATA |
Not Applicable
| ITEM 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
You should read this discussion together with the Financial Statements, related Notes and other financial information included elsewhere in this Form 10-K. The following discussion contains assumptions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under “Risk Factors,” and elsewhere in this Form 10-K. These risks could cause our actual results to differ materially from those anticipated in these forward-looking statements
Overview
The Company is focused on developing personalized immune therapies for cancer. We have developed a platform technology, DCVax, which uses activated dendritic cells to mobilize a patient's own immune system to attack their cancer.
The Company’s lead product, DCVax®-L, is designed to treat solid tumor cancers in which the tumor can be surgically removed. This product in an ongoing Phase III trial for newly diagnosed Glioblastome multiforme (GBM). 331 patients have been enrolled in the trial, and enrollment is closed. The Company is also working on preparations for Phase II trials of DCVax-L for other indications.
The Company’s second product, DCVax®-Direct, is designed to treat inoperable solid tumors. A 40-patient Phase I trial has been completed, and included treatment of a diverse range of cancers. The Company is working on preparations for Phase II trials of DCVax-Direct.
| 26 |
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenues and expenses.
On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and stock-based compensation. We based our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the reported amounts of revenues and expenses that are not readily apparent from other sources. Actual results may differ from these estimates.
Warrant Liability
The Company accounts for its common stock warrants issued in accordance with the guidance contained in ASC 815-40-15-7D, "Contracts in Entity's Own Equity" whereby under that provision they do not meet the criteria for equity treatment and must be recorded as a liability. Accordingly, the Company classifies the warrant instrument as a liability at its fair value and adjusts the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company's statements of operations. The fair value of the warrants issued by the Company in connection with the Conversion Transaction has been estimated using a Monte Carlo simulation.
Fair Value Measurements
Fair value is defined as the price that would be received for sale of an asset or paid for transfer of a liability, in an orderly transaction between market participants at the measurement date. U.S. GAAP establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:
| · | Level 1 - defined as observable inputs such as quoted prices for identical instruments in active markets; |
| · | Level 2 - quoted prices for similar assets and liabilities in active markets or inputs that are observable |
| · | Level 3 - inputs that are unobservable (for example, cash flow modeling inputs based on assumptions) |
Impairment of Long-Lived Assets
The Company assesses its long-lived assets for impairment whenever facts and circumstances indicate that the carrying amounts may not be fully recoverable. To analyze recoverability, the Company projects undiscounted net future cash flows over the remaining lives of such assets. If these projected cash flows are less than the carrying amounts, an impairment loss would be recognized, resulting in a write-down of the assets with a corresponding charge to earnings. The impairment loss is measured based upon the difference between the carrying amounts and the fair values of the assets. Assets to be disposed of are reported at the lower of the carrying amounts or fair value less cost to sell. Management determines fair value using the discounted cash flow method or other accepted valuation techniques.
As of December 31, 2016, the undiscounted net future cash flows of the UK property were greater than the carrying value. Therefore, no impairment loss was considered necessary.
Environmental Remediation Liabilities
We record environmental remediation liabilities for properties acquired. The environmental remediation liabilities are initially recorded at fair value. The liability is reduced for actual costs incurred in connection with the clean-up activities for each property. Upon completion of the clean-up, the environmental remediation liability is adjusted to equal the fair value of the remaining operation, maintenance and monitoring activities to be performed for the property. The reduction in the liability resulting from the completion of the clean-up is included in other income. As of December 31, 2016, we estimate that the total environmental remediation costs associated with the purchase of the UK Facility will be approximately $6.2 million. Contamination clean-up costs that improve the property from its original acquisition state are capitalized as part of the property’s overall development costs. We engaged a third party specialist to conduct certain surveys of the condition of the property which included, among other things, a preliminary analysis of potential environmental remediation exposures. We determined, based on information contained in the specialist’s report, that we would be required to estimate the fair value of an unconditional obligation to remediate specific ground contamination at an estimated fair value of approximately $6.2 million. We computed its preliminary estimate of the fair value of this obligation using a probability weighted approach that measures the likelihood of the following two potential outcomes: (i) a higher probability requirement of erecting a protective barrier around the affected area at an estimated cost of approximately $4.5 million, and (ii) a lower probability requirement of having to excavate the affected area at an estimated cost of approximately $32 million. Our estimate is preliminary and therefore subject to change as further studies are conducted, and as additional facts come to our attention. Environmental remediation efforts are complex, technical and subject to various uncertainties. Accordingly, it is at least reasonably possible that any changes in our estimate could materially differ from the management’s preliminary discussed herein.
| 27 |
Stock-based Compensation
Compensation expense for all stock-based awards is measured at the grant date based on the fair value of the award and is recognized as an expense, on a straight-line basis, over the employee's requisite service period (generally the vesting period of the equity award). The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model. Stock-based compensation expense is recognized only for those awards that are expected to vest using an estimated forfeiture rate. Estimates of pre-vesting forfeiture are periodically revised in subsequent periods if actual forfeitures differ from those estimates. To the extent that actual results differ from our estimates, such amounts will be recorded as cumulative adjustments in the period the estimates are revised.
Adoption of Recent Accounting Pronouncements
Going Concern
In August 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-15, “Presentation of Financial Statements - Going Concern”, which provide guidance about management's responsibility in evaluating whether there is substantial doubt relating to an entity’s ability to continue as a going concern and to provide related footnote disclosures as applicable. ASU 2014-15 is effective for the interim and annual periods ending after December 15, 2016 and the Company adopted the provisions of ASU 2014-15 as of December 31, 2016. There was no impact from adoption of this guidance on the Company's consolidated financial statements.
Interest - Imputation of Interest
In August 2015, the FASB issued ASU No. 2015-15, “Interest - Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements”, which clarifies the treatment of debt issuance costs from line-of-credit arrangements after the adoption of ASU No. 2015-03, “Interest - Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs”. In particular, ASU No. 2015-15 clarifies that the SEC staff would not object to an entity deferring and presenting debt issuance costs related to a line-of-credit arrangement as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of such arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company adopted ASU No. 2015-15 during the first quarter of fiscal 2016, and its adoption did not have a material impact on its consolidated financial statements.
Restricted Cash
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which clarifies the presentation of restricted cash in the statements of cash flows. Under ASU 2016-18, restricted cash is included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows. We adopted ASU 2016-18 during the three months ended December 31, 2016 on a retrospective basis. As a result, net cash provided by operating activities increased by $1.1 million in the year ended December 31, 2015. Beginning-of-period cash and restricted cash increased by $1.2 million in 2016. The following is a summary of our cash and restricted cash total as presented in the consolidated statements of cash flows for the years ended December 31, 2016 and 2015 (in thousands):
| December 31, 2016 | December 31, 2015 | |||||||
| Cash and cash equivalents | $ | 6,186 | $ | 21,813 | ||||
| Restricted cash | 685 | 1,235 | ||||||
| Total cash and restricted cash | $ | 6,871 | $ | 23,048 | ||||
| 28 |
Recent Accounting Pronouncements
Statement of Cash Flows
In August 2016, the FASB issued ASU No. 2016-15 Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments, which addresses specific cash flow classification issues where there is currently diversity in practice including debt prepayment and proceeds from the settlement of insurance claims. ASU 2016-15 is effective for annual periods beginning after December 15, 2017, with early adoption permitted. The Company is currently assessing the impact that ASU No. 2016-09 will have on its consolidated financial statements.
Compensation-Stock Compensation
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting. Under ASU No. 2016-09, companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement and the APIC pools will be eliminated. In addition, ASU No. 2016-09 eliminates the requirement that excess tax benefits be realized before companies can recognize them. ASU No. 2016-09 also requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. Furthermore, ASU No. 2016-09 will increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. An employer with a statutory income tax withholding obligation will now be allowed to withhold shares with a fair value up to the amount of taxes owed using the maximum statutory tax rate in the employee’s applicable jurisdiction(s). ASU No. 2016-09 requires a company to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on the statement of cash flows. Under current U.S. GAAP, it was not specified how these cash flows should be classified. In addition, companies will now have to elect whether to account for forfeitures on share-based payments by (1) recognizing forfeitures of awards as they occur or (2) estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, as is currently required. The amendments of this ASU are effective for reporting periods beginning after December 15, 2016, with early adoption permitted but all of the guidance must be adopted in the same period. The Company will adopt this guidance as of and for the three months ended March 31, 2017. The Company does not expect the adoption of ASU 2016-09 to have a material impact on its consolidated financial statements and related disclosures.
Revenue from Contracts with Customer
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, an updated standard on revenue recognition. ASU No. 2014-09 provides enhancements to the quality and consistency of how revenue is reported by companies while also improving comparability in the financial statements of companies reporting using International Financial Reporting Standards or U.S. GAAP. The main purpose of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively and improve guidance for multiple-element arrangements. In July 2015, the FASB voted to approve a one-year deferral of the effective date of ASU No. 2014-09, which will be effective for the Company in the first quarter of fiscal year 2018 and may be applied on a full retrospective or modified retrospective approach. The Company is currently evaluating the pending adoption of ASU 2014-09 and its impact on the Company's consolidated financial statements and has not yet identified which transition method will be applied upon adoption.
In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customer. The new guidance is an update to ASC 606 and provides clarity on: identifying performance obligations and licensing implementation. For public companies, ASU No. 2016-10 is effective for annual periods including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently evaluating the impact of this guidance on its consolidated financial position, results of operations and cash flows.
| 29 |
Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements; and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU 2016-01 will be effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the impact that ASU 2016-01 will have on its consolidated financial statements and related disclosures.
Leases
In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842) which supersedes FASB ASC Topic 840, Leases (Topic 840) and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases. The standard will be effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. The Company is currently evaluating the impact that ASU 2016-02 will have on its consolidated financial statements and related disclosures.
Results of Operations
Operating costs:
Operating costs and expenses consist primarily of research and development expenses, including clinical trial expenses which increase when we are actively participating in clinical trials and especially when we are in a large ongoing international phase III trial. The associated administrative expenses also increase as such operating activities grow.
In addition to clinical trial related costs, our operating costs may include ongoing work relating to our DCVax products, including R&D, product characterization, and related matters. Going forward, we will also have to undertake process validation work.
Our operating costs also include the costs of preparations for the launch of new or expanded clinical trial programs, such as our planned Phase II clinical trials. The preparation costs include payments to regulatory consultants, lawyers, statisticians, sites and others, evaluation of potential investigators, the clinical trial sites and the CROs managing the trials and other service providers, and expenses related to institutional approvals, clinical trial agreements (business contracts with sites), training of medical and other site personnel, trial supplies and other. Additional substantial costs relate to the maintenance of manufacturing capacity, in both the US and Europe.
Our operating costs also include significant legal and accounting costs in operating the Company.
Research and development:
Discovery and preclinical research and development expenses include costs for substantial external scientific personnel, technical and regulatory advisers, and others, costs of laboratory supplies used in our internal research and development projects, travel, regulatory compliance, and expenditures for preclinical and clinical trial operation and management when we are actively engaged in clinical trials.
| 30 |
Because we are pre-revenue company, we do not allocate research and development costs on a project basis. We adopted this policy, in part, due to the unreasonable cost burden associated with accounting at such a level of detail and our limited number of financial and personnel resources.
General and administrative:
General and administrative expenses include administrative personnel related salary and benefit expenses, cost of facilities, insurance, travel, legal support, property and equipment and amortization of stock options and warrants.
For the Years Ended December 31, 2016 and 2015
We recognized a net loss of $80.2 million and $114.7 million for the years ended December 31, 2016 and 2015, respectively. Net cash used in operations were $55.7 million and $79.7 million for the years ended December 31, 2016 and 2015, respectively.
Research and development expense
Research and development expense was $60.1 million and $103.1 million for the years ended December 31, 2016 and 2015, respectively. Included in research and development expense was $56.4 million and $57.9 million, respectively, related to clinical trial expenses such as CRO fees and site fees.
For the years ended December 31, 2016 and 2015, we made cash payments of approximately $14.2 million and $34.6 million, respectively, to Cognate BioServices. At December 31, 2016 and 2015, we owed Cognate BioServices $23.4 million and $5.5 million, respectively, for unpaid invoices. The Company has been in discussions with Cognate BioServices to negotiate a reduction of the amounts owed. The discussions are ongoing and the terms have not yet been finalized.
During the years ended December 31, 2016 and 2015, we incurred equity based compensation (restricted common stock and warrants) related to Cognate BioServices which would be valued at $13.7 million and $40.8 million, respectively, if the equity value were determined at the market price for unrestricted tradable shares. However, the shares issued to Cognate were unregistered, non-tradable shares subject to multiple restrictions, including affiliate restrictions, 3-year vesting and a 3-year lock-up covering shares that vested. The actual value was reduced accordingly. This equity compensation primarily involved one-time initiation payments of shares and warrants relating to the four new agreements we entered into with Cognate in January, 2014. The equity compensation also included lock-up warrants (for the lock-up of Cognate shares) and originally included most favored nation shares and warrants but those most favored nation shares and warrants were returned and cancelled (and other most favored nation shares and warrants were cancelled and never issued) during 2016 as part of a remediation agreement with Nasdaq.
We incurred research and development costs related to Cognate BioServices of $48.3 million, and $78.5 million for the years ended December 31, 2016 and 2015, respectively, in connection with our clinical programs, R&D and facilities development.
General and administrative expense and legal expenses
General and administrative expense and legal expense was $19.8 million and $24.9 million for the years ended December 31, 2016, and 2015, respectively. The decrease in 2016 was primarily due to substantial reductions in the use of external consultants and other costs, partially offset by increases in legal costs. We incurred legal expenses of $8.9 million and $6.6 million for the years ended December 31, 2016 and 2015, respectively.
Change in fair value of derivatives
During the years ended December 31, 2016 and 2015, we recognized gain on derivative liabilities of $17.9 million and $15.7 million, respectively. The gain was primarily due to the change in fair value of warrants issued to Cognate BioServices for research and development, and warrants issued in connection with our Cognate BioServices service agreements entered in July 2013 and January 2014.
| 31 |
Inducement loss
During the years ended December 31, 2016 and 2015, we recognized an inducement loss of $1.5 million and $0, respectively in regard to certain unrelated third parties. The inducement expense for the year ended December 31, 2016 was related to the extinguishment and modification on warrant liabilities issued to such third parties.
Interest expense
During the years ended December 31, 2016 and 2015, we recorded interest expense of $3.8 million and $4.2 million, respectively. Interest expense decreased in 2016 as compared to 2015 primarily due to the strengthening of the U.S. dollar relative to the British pound sterling, which caused lower interest expenses on outstanding mortgage loans in the U.K.
Liquidity and Capital Resources
We have experienced recurring losses from operations since inception. During the year ended December 31, 2016, net cash outflows from operations were $55.6 million for all of the Company’s ongoing programs (including the 331-patient Phase III trial of DCVax-L in the US, Europe and Canada, the Phase I/II DCVax-Direct clinical program, and early access programs) as well as preparations for new clinical programs and for manufacturing capacity in Europe.
Our consolidated financial statements indicate there is substantial doubt about our ability to continue as a going concern as we are dependent on our ability to obtain short term financing and ultimately to generate sufficient cash flow to meet our obligations on a timely basis, as well as successfully obtain financing on favorable terms to fund our long term plans. We can give no assurance that our plans and efforts to achieve the above steps will be successful.
At December 31, 2016, current assets totaled $7.9 million, compared to $24.5 million at December 31, 2015. Current assets less current liabilities produced a working capital deficit in the amount of $68.5 million and $40.8 million at December 31, 2016 and 2015, respectively. The increase of our working capital deficit in 2016 was primarily due to an increase in current convertible notes, an increase in accounts payable to Cognate BioServices, and a decrease in our cash balance. Derivative adjustments, primarily attributable to warrants, accounted for $4.9 million of the $68.5 million deficit at December 31, 2016 and $28.0 million of the $40.8 million deficit at December 31, 2015.
We engaged a third party specialist to conduct certain surveys of the condition of the property in the U.K. (“UK Facility”) which included, among other things, a preliminary analysis of potential environmental remediation exposures. We determined, based on information contained in the specialists’ report, that we would be required to estimate the fair value of an unconditional obligation to remediate specific ground contamination at an estimated fair value of approximately $6.2 million. We computed our preliminary estimate of the fair value of this obligation using a probability approach that measures likelihood of the following two potential outcomes: (i) a higher probability (>95%) requirement of erecting a protective barrier around the affected area at an estimated cost of approximately $4.5 million, or (ii) lower probability (<5%) requirement of having to excavate the affected area at an estimated cost of approximately $32 million. Our estimate is preliminary and therefore subject to change as further studies are conducted, and as additional facts come to our attention. Environmental remediation obligations are complex and technical. Accordingly, it is at least reasonably possible that any changes in our estimates could materially differ from management’s preliminary estimates.
| 32 |
Contingent Contractual Payment
The following table summarizes our contractual obligations as of December 31, 2016 (amount in thousands):
| Payments due by period | ||||||||||||
| Less than | 1 to 2 | |||||||||||
| Total | 1 year | years | ||||||||||
| Note payable and interest to related party (1) | $ | 350 | $ | 350 | $ | - | ||||||
| 8% notes payable and interest (2) | 4,263 | 2,132 | 2,131 | |||||||||
| 10% notes payable and interest (3) | 2,695 | 2,695 | - | |||||||||
| 2014 Senior convertible notes and interest (4) | 11,585 | 11,585 | - | |||||||||
| Mortgage loan and interest (5) | 11,085 | 11,085 | - | |||||||||
| Share settled debt at fair value (6) | 5,400 | 5,400 | - | |||||||||
| Operating leases (7) | 635 | 525 | 110 | |||||||||
| Purchase obligations (8) | ||||||||||||
| Total | $ | 36,013 | $ | 33,772 | $ | 2,241 | ||||||
(1) Relates to two demand notes to Leslie J. Goldman with an aggregate principal of $310,000 and accrued interest of $40,000.
(2) We entered into a promissory note agreement (the “Note”) with a third party for principal of $3,310,000 on December 30, 2016. The Note bore an 8% annual interest rate and due will be due in 18 months. Beginning on June 30, 2017 and each month thereafter, the note holder shall have the right to redeem up to 1/12 of the principal and accrued interest of the Note (the “Monthly Redemption Amount”). We will pay the Monthly Redemption Amount plus a 15% premium upon receipt of any redemption notice from the lender.
(3) We entered into three promissory notes agreement (“the Notes”) with an individual investor for an aggregate amount of $2.45 million on November 4, 2016. The Notes bore annual interest rate at 10% with 1 year term.
(4) The 5% Senior convertible notes had a remaining principal balance of $11.0 million and approximately $0.6 million of interest payments held in an escrow account. The note will be due in August 2017.
(5) The mortgage loan contains approximately $9.6 million principal, $0.6 million renewal fee and exit fee which will be due at end of the loan term, and $0.9 million of remaining interest payments.
(6) On October 13, 2016, we entered an Assignment and Assumption Agreement (the “Agreement”) with Cognate to assume certain Secured Full Recourse Redeemable Notes (the “Notes”) of $5.7 million owed by Cognate. The Notes were currently in default and bore a default interest rate of 18% per annum. During 2016, we issued 1,000,000 shares of common stock to convert $480,000 of the Notes. We had an approximate $5.2 million principal balance as of December 31, 2016.
(7) On July 31, 2012, we entered into a non-cancelable operating lease for 7,097 square feet of office space in Bethesda, Maryland, which expires in March 2018. On October 28, 2013, we entered into a non-cancelable operating lease for 4,251 square feet of office space in Germany, which expires in December 2017. On March 26, 2016, we entered into a non-cancelable operating lease for 505 square feet of office space in London, which was due to expire on March 20, 2017. On December 19, 2016, we entered a renewal agreement to extend the London office lease for an additional 1 year until March 20, 2018. As of December 31, 2016, obligations for future minimum lease payments under these leases, in aggregate over the rest of the lease term, total approximately $0.7 million.
(8) We have open purchase orders related the obligation to pay certain fees to Cognate BioServices (in addition to any other remedies) if we shut down or suspend its DCVax-L program or DCVax-Direct program. These obligations are not reflected in the accompanying balance sheets. For a shut down or suspension of the DCVax-L program, the fees will be as follows:
| · | Prior to the last dose of the last patient enrolled in the Phase III trial for DCVax®-L or After the last dose of the last patient enrolled in the Phase III clinical trial for DCVax®-L but before any submission for product approval in any jurisdiction or after the submission of any application for market authorization but prior to receiving a marketing authorization approval: in any of these cases, the fee shall be $3 million. |
| 33 |
| · | At any time after receiving the equivalent of a marketing authorization for DCVax®-L in any jurisdiction, the fee shall be $5 million. |
For a shut down or suspension of the DCVax-Direct program, the fees will be as follows:
| · | Prior to the last dose of the last patient enrolled in the Phase I/II trial for DCVax®-Direct, the fee shall be $1.5 million. |
| · | After the last dose of the last patient enrolled in the Phase I/II clinical trial for DCVax®-Direct but before the initiation of a Phase III trial the fee shall be $2.0 million. |
| · | After initiation of a phase III trial but before submission of an application for market authorization in any jurisdiction or after the submission of an application for market authorization but prior to receiving a market authorization approval: in each of these cases, the fee shall be $3.0 million. |
| · | At any time after receiving the equivalent of a marketing authorization for DCVax®-Direct in any jurisdiction the fee shall be $5.0 million. |
While our DCVax programs are ongoing, we are required to pay certain fees for dedicated production suites or capacity reserved exclusively for DCVax production, and pay for a certain minimum number of patients, whether or not we fully utilize the dedicated capacity and number of patients.
Operating Activities
We used $55.6 million and $79.7 million in cash for operating activities during the years ended December 31, 2016 and 2015, respectively. The decrease in cash used in operating activities was primarily attributable to the decrease in the levels of activity in our ongoing clinical programs, as well as limited funding availability.
As of December 31, 2016, our Phase III clinical trial was ongoing in the US, Europe and Canada. 331 patients had been enrolled in the trial, and enrollment was closed.
Financing Activities
2016 Equity Financing
On February 29, 2016, we entered into a Securities Purchase Agreement (the “Agreement”) with certain institutional investors, for a registered direct offering (the “Offering”) of 5,882,353 shares of the Company’s Common Stock at the purchase price of $1.70 per share, and Series A Warrants to purchase an additional 2,941,177 shares of Common Stock at an exercise price of $2.25 per share. In connection with the Offering, we agreed to pay the Placement Agent a cash placement fee equal to 7% of the aggregate purchase price for the common stock sold in the Offering.
On May 15, 2016, we received approximately $4.2 million cash from certain investors’ exercising 4.4 million existing warrants at $0.96.
On July 6, 2016, we issued 7,400,000 shares of common stock at $0.50 per share, and warrants to purchase an additional 3,700,000 shares of common stock at an exercise price of $0.60 per share with five years term through a registered direct offering. We received net proceeds of approximately $3.4 million, after deducting aggregate placement agent fees and attorneys’ fees of approximately $0.3 million.
In August 2016 and September 2016, we entered into multiple agreements with certain holders (the “Holders”) of the Company’s existing warrants, pursuant to which the Holders agreed to exercise all of the Holders’ warrants to purchase 10,945,694 shares of common stock. In consideration, the Company agreed to reduce the exercise price of the warrants to $0.35 per share, for net proceeds of approximately $3.4 million, after deducting aggregate placement agent fees, attorneys’ fees and bank clearing fees of approximately $454,000, and agreed to issue new common stock purchase warrants to purchase up to 10,945,694 shares of common stock at a weighted average exercise price of $0.44 per share, with an exercise period of 5 years, commencing 6 months after issuance. In connection with the registered direct offering, the Company granted 263,122 warrants at an exercise price of $0.44 to the placement agents. The placement agent warrants are exercisable 6 months following issuance and terminate on February 22, 2022.
| 34 |
In August 2016 and September 2016, we issued a total of 2,572,216 shares of Common stock at $0.36 per share to several angel investors for aggregate proceeds of $0.9 million. We also issued 1,286,111 warrants at an exercise price of $0.42 per share, with an exercise period of 5 years.
In October 2016 and November 2016, we issued a total of 2,518,687 shares of Common stock at a weighted average price of $0.53 per share to several angel investors for aggregate proceeds of $1.3 million. We also issued 1,259,345 warrants at a weighted average exercise price of $0.51 per share, with an exercise period of 5 years.
On December 22, 2016, we entered into a Securities Purchase Agreement (the “Agreement”) with certain institutional investors, for a registered direct offering (the “Offering”) of 28,575,000 shares of our Common Stock at the purchase price of $0.35 per share, and warrants to purchase an additional 14,287,500 shares of Common Stock at an exercise price of $0.35 per share with a five year term. The Company received net proceeds of approximately $9.2 million, after deducting aggregate placement agent fees and attorneys’ fees of approximately $0.8 million.
On December 22, 2016, we issued 1,285,714 shares of common stock at $0.35 to Jerry Jasinowski for gross proceeds of $450,000. We also issued Mr. Jasinowski warrants to purchase an additional 642,857 shares of Common Stock at an exercise price of $0.35 per share with five years term.
2016 Debt Financing
On November 28, 2016, Leslie J. Goldman loaned us $260,000 pursuant to a Demand Promissory Note (the “Goldman Note”). The Goldman Note bore interest at 12% per annum, and is payable upon demand, with 5 days’ prior written notice by Mr. Goldman to us.
On November 4, 2016, we entered into three promissory notes agreements (“the Notes”) with an individual investor for an aggregate amount of $2.45 million. The Notes bore interest at the rate of 10% with a 1-year term.
On December 30, 2016, we entered into a note purchase agreement (the “Note”) with an individual investor for an aggregate principal amount of $3,310,000. The Note bore interest at 8% per annum with an 18-month term. The Note carries an original issue discount of $300,000 and $10,000 legal cost that was reimbursable to the investor.
In order to continue with our DCVax®-L and DCVax-Direct programs, we will have to obtain substantial amounts of further funding, as described in the Risk Factors. Our on-going funding requirements will depend on many factors, including the extent of costs associated with completing the quality control checking of the Phase III trial data, and unblinding and analyzing the data, and the extent to which we proceed with any of the Phase II trials for which we have been making preparations, as well as costs relating to manufacturing arrangements in Europe. The extent of resources available to us will determine the pace at which we can move forward with our programs.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
None
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The full text of our audited consolidated financial statements as of December 31, 2016 and 2015 and for the fiscal years ended December 31, 2016 and 2015, begins on page F-1 of this Annual Report on Form 10-K.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| 35 |
| ITEM 9A. | CONTROLS AND PROCEDURES |
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive, financial and accounting officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive, financial and accounting officer concluded that, as of December 31, 2016, in light of the material weaknesses described below, our disclosure controls and procedures were improving but were not yet effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to management, including our chief executive officer, financial and accounting officer, to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods prescribed by the SEC.
Management's Report on Internal Controls Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal controls over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive, financial and accounting officer, we conducted an evaluation of the effectiveness of our internal controls over financial reporting as of December 31, 2016. This evaluation was based on the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO").
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.
Based on management's evaluation as of December 31, 2016, our management identified the following material weaknesses set forth below in our internal control over financial reporting:
| · | Lack of controls in place, including those surrounding related party transactions, to ensure that all material transactions and developments impacting the financial statements are reflected and properly recorded. |
| · | Design deficiencies that do not meet stated control objectives that elevate the level of risk of a material misstatement to our financial statements. |
| · | Policies and procedures with respect to the review, supervision and monitoring of our accounting operations throughout the organization were either not designed and in place or not operating effectively. |
Our company's management concluded that in light of the material weaknesses described above, our company did not maintain effective internal control over financial reporting as of December 31, 2016 based on the criteria set forth in Internal Control-Integrated Framework (2013) issued by the COSO.
Certain accounting and financial reporting functions are performed by an external firm on a contract services basis. This firm specializes in providing accounting and financial reporting functions for public and private companies, and the founders and senior managers are highly experienced alumnis of Big 4 accounting firms. The number and seniority of personnel in the external firm performing the accounting and financial reporting functions for the Company were increased during 2015. In addition, during 2015 the Company retained a full-time controller. During 2016 the Company engaged a second external firm: one that specializes in Sarbanes-Oxley matters and helping public companies improve their disclosure controls and procedures. Together with these two external firms and our controller, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended.
Management plans to continue undertaking improvements in due course; however, the timing of such steps is uncertain.
Changes in Internal Control over Financial Reporting
During the year ended December 31, 2016 and as of the date of this filing, the Company has completed remediation of four of the seven material weaknesses identified in the Company’s annual report on Form 10-K, filed in March 2016, and has made substantial progress towards remediation of the remaining three continuing material weaknesses identified above.
During the quarter ended June 30, 2016, we conducted a comprehensive entity-wide risk assessment to evaluate and ultimately report on risks to financial reporting throughout the organization. Following this assessment, we undertook an action plan to strengthen internal controls and procedures.
| 36 |
During the quarter ended June 30, 2016, we completed remediation of two material weaknesses identified in the Company’s 10-K for 2015 related to (1) insufficient segregation of duties, oversight of work performed and lack of compensating controls in the Company’s finance and accounting functions due to limited personnel and (2) the lack of an effective anti-fraud program designed to detect and prevent fraud relating to (i) an effective whistle-blower program or other comparable mechanism and (ii) an ongoing program to manage identified fraud risks.
During the quarter ended September 30, 2016, we thoroughly revised and upgraded our documentation of internal controls over financial reporting and continued testing key controls for operating effectiveness.
During the quarter ended September 30, 2016, we completed remediation of two additional material weaknesses identified in the Company’s 10-K for 2015 related to (1) documentation to support occurrences of review and approval procedures and (2) maintenance of an adequate risk oversight function to evaluate and report on risks to financial reporting throughout the organization, including completion of a comprehensive risk assessment to identify all potential risk areas and evaluate the adequacy of controls to mitigate identified risk.
We have made substantial progress on remediation of the three remaining material weaknesses identified above:
| · | We have further segregated duties within our finance and accounting functions, to ensure that incompatible duties are segregated. |
| · | We have implemented a new process in connection with the Company’s year-end financial close to more fully document the Company’s identification of related parties and related party transactions, to ensure that all material transactions and developments impacting the financial statements are reflected and properly recorded. |
| · | We have implemented a new process to more fully document the Company’s accounting operations throughout the organization, including the review, supervision and monitoring taking place. |
| · | We have expanded the personnel resources allocated to our Company’s internal controls over financial reporting, and the activities performed for our Company, by the two external firms referred to above. |
| · | We are seeking to recruit further personnel, to enable still further segregation of duties and increased oversight. |
We plan to continue taking steps to improve our internal control system and to address the remaining deficiencies, but the timing of such steps is uncertain and our ability to retain or attract qualified individuals to undertake these functions is also uncertain. Other than the changes described above, there were no changes in the Company's internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of the Exchange Act Rules 13a-15 or 15d15 that occurred during the quarter ended December 31, 2016 that materially affected, or were reasonably likely to materially affect, the Company's internal control over financial reporting.
| Item 9B. | Other Information. |
None.
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Directors
Our current directors are identified below.
| Name | Age | Position | ||
| Linda F. Powers | 61 | Class III Director, Chairperson, Chief Executive Officer and President | ||
| Dr. Alton L. Boynton | 72 | Class I Director, Chief Scientific Officer | ||
| Robert A. Farmer | 77 | Class II Director | ||
| Dr. Navid Malik | 48 | Class III Director | ||
| Jerry Jasinowski | 74 | Class II Director | ||
| J. Cofer Black | 67 | Class I Director |
| 37 |
Director Biographies
Linda F. Powers. Ms. Powers has served as the Chairperson of our Board of Directors since her appointment on May 17, 2007 and Chief Executive Officer and President since June 8, 2011. Ms. Powers served as a managing director of Toucan Capital Fund II from 2001 to 2010, and Toucan Capital Fund III thereafter. She also has over 15 years’ experience in corporate finance and restructurings, mergers and acquisitions, joint ventures and intellectual property licensing. Ms. Powers is a Board member of M2GEN (an affiliate of Moffitt Cancer Center), the Chinese Biopharmaceutical Association, and the Rosalind Franklin Society. She was the Chair of the Maryland Stem Cell Research Commission for the first two years of the state’s stem cell funding program, and has served an additional four years on the Commission. Ms. Powers served for several years on a Steering Committee of the National Academy of Sciences, evaluating government research funding, and has been appointed to three Governors’ commissions created to determine how to build the respective states’ biotech and other high-tech industries. For more than six years, Ms. Powers taught an annual internal course at the National Institutes of Health for the bench scientists and technology transfer personnel on the development and commercialization of medical products. Ms. Powers serves on the boards of several private biotechnology companies. Ms. Powers holds a B.A. from Princeton University, where she graduated magna cum laude and Phi Beta Kappa. She also earned a J.D., magna cum laude, from Harvard Law School. We believe Ms. Powers’ background and experience make her well qualified to serve as a Director.
Alton L. Boynton, Ph.D. Dr. Boynton co-founded our Company, has served as our Chief Scientific Officer and a Director since our inception in 1998, was appointed our Chief Operating Officer in August 2001, was appointed President in May 2003, and served as Chief Executive Officer from June 2007 to June 2011. Prior to founding our Company, Dr. Boynton headed the Molecular Oncology research lab at the Pacific Northwest Research Foundation (the original foundation of Bill Hutchinson, from which the Fred Hutchinson Cancer Center was spun off). Dr. Boynton also served as Director of the Department of Molecular Medicine of Northwest Hospital from 1995 to 2003 where he coordinated the establishment of a program centered on carcinogenesis. Prior to joining Northwest Hospital, Dr. Boynton was Associate Director of the Cancer Research Center of Hawaii, The University of Hawaii, where he also held the positions of Director of Molecular Oncology of the Cancer Research Center and Professor of Genetics and Molecular Biology. Dr. Boynton received his Ph.D. in Radiation Biology from the University of Iowa in 1972. We believe Dr. Boynton’s background and experience make him well qualified to serve as a Director.
Robert A. Farmer. Mr. Farmer was appointed to the Board of Directors in December 2009. Mr. Farmer served as the national treasurer of four presidential campaigns, including those for John Kerry, Bill Clinton, Michael Dukakis and John Glenn. In these roles he led fundraising of over $800 million. He served under Ron Brown as treasurer of the Democratic National Committee, and served for eight years as treasurer of the Democratic Governors Association. President Clinton appointed Mr. Farmer as the United States Consul General to Bermuda, where he served from 1994 to 1999. Mr. Farmer also had a successful career as an entrepreneur, including building his own publishing company, which he sold in 1983. Mr. Farmer currently serves on the boards of directors of International Data Group, Dale Carnegie Associates, Sober Steering Sensors, LLC, Charlesbridge Publishing, and Haute Living. Mr. Farmer is a graduate of Dartmouth College and Harvard Law School. We believe Mr. Farmer’s background and experience, as well as his service on other boards of directors, make him well qualified to serve as a Director.
Dr. Navid Malik. Dr. Malik was appointed to the Board of Directors in April 2012. Dr. Malik was previously the Head of Life Sciences Research at Cenkos Securities Plc. in the U.K., an institutional stockbroking securities firm. From September 2011 through January 2012, Dr. Malik was the Head of Life Sciences Research at Sanlam (Merchant Securities), a global financial services firm. Dr. Malik was Partner and Head of Life Sciences at Matrix Investment Banking Division, Matrix Group, a financial services firm in London, from December 2008 through September 2011. Dr. Malik was a Senior Pharmaceuticals and Biotechnology Analyst at Wimmer Financial LLP from September 2008 through December 2008, and was the Senior Life Sciences Analyst at Collins Stewart Plc from January 2005 through September 2008. In 2011, Dr. Malik was awarded two StarMine Awards (awarded each year by Thomson Reuters and the Financial Times): Number One Stock Picker in the European Pharmaceutical Sector, and Number Two Stock Picker in the U.K. and Ireland Healthcare Sector. Dr. Malik holds a Ph.D. in Drug Delivery within Pharmaceutical Sciences, as well as degrees in Biomedical Sciences Research (M.Sc.) and Biochemistry and Physiology (B.Sc., joint honors). Dr. Malik also holds an MBA in finance from the City University Business School, London. We believe that Dr. Malik’s extensive experience in the life sciences fields and investment banking sector make him well qualified to serve as a Director.
| 38 |
Jerry Jasinowski. Mr. Jasinowski was appointed to the Board of Directors in April 2012. Mr. Jasinowski currently serves on the Boards of Procurian and the Washington Tennis and Education Foundation and has held directorships in several other companies since 1990. From 2004 through 2007, Mr. Jasinowski served as the President of the Manufacturing Institute, an organization dedicated to improving and expanding manufacturing in the United States, of which he was a founder. Mr. Jasinowski was also the President and CEO of the National Association of Manufacturers, a trade association with 13,000 corporate members from 1990 to 2004. Mr. Jasinowski holds an A.B. in Economics from Indiana University and an M.A. in Economics from Columbia University. We believe that Mr. Jasinowski’s extensive experience across a wide range of manufacturing, technology, and financial firms, including Fortune 1000 and Fortune 500 companies, make him well qualified to serve as a Director.
J. Cofer Black. Ambassador Black was appointed to the Board of Directors in January 2016. Ambassador Black is an internationally renowned U.S. government leader and expert in cybersecurity, counterterrorism and national security. Since 2009, he has served as Vice President for Global Operations at Blackbird Raytheon Technologies, a division of Raytheon Company, a NYSE-listed security company. From 2004 until 2008, he provided strategic guidance and business development as Vice Chairman of Blackwater Worldwide and as Chairman of Total Intelligence Solutions. During 2002-2005, he was appointed by the President of the United States to serve as the Ambassador, Coordinator for Counterterrorism, reporting directly to the Secretary of State for developing, coordinating and implementing American counterterrorism policy. Prior to his role as Ambassador, he served a 28-year career in the Central Intelligence Agency, reaching Senior Intelligence Service (SIS-4) level as Director, Counterterrorist Center (D/CTC), where he managed 1,300 professional personnel and an annual operational budget of more than one billion dollars. Ambassador Black is experienced representing the United States at the Head of State level, managing media as a diplomatic spokesperson and in public speaking as keynote speaker both as a senior U.S. Government official and business leader. Ambassador Black has received numerous awards and recognitions throughout his career, including the Distinguished Intelligence Medal (the CIA’s highest award for achievement). Ambassador Black received a B.A. in International Affairs from the University of Southern California in 1973 and a M.A. in International Affairs for the University of Southern California in 1974. We believe Ambassador Black’s background and experience make him well qualified to serve as a Director.
Executive Officers
Our current executive officers are identified below.
| Name | Age | Position | ||
| Linda F. Powers | 61 | Chief Executive Officer and President | ||
| Alton L. Boynton, Ph.D. | 72 | Class I Director, Chief Scientific Officer | ||
| Leslie J. Goldman | 72 | Senior Vice President, Business Development | ||
| Marnix L. Bosch, Ph.D. | 58 | Chief Technical Officer |
Linda F. Powers. Please see “Director Biographies” above.
Alton L. Boynton, Ph.D. Please see “Director Biographies” above.
Leslie J. Goldman joined us in June 2011, and serves as Senior Vice President. In this capacity, Mr. Goldman has responsibility for legal matters, investor relations and financing activities. Prior to joining us, Mr. Goldman was a partner at the law firm of Skadden, Arps for over 30 years, specializing in a wide array of advanced technologies and their commercialization. Mr. Goldman also serves as an advisor to a number of other technology companies. In addition, for eight years, Mr. Goldman served as Chairman of the Board of a group of TV stations in four mid-size cities across the country. Mr. Goldman received a B.A. from the University of Michigan in 1967 and a J.D. from the University of Michigan in 1970.
Marnix L. Bosch joined us in 2000, and serves as our Chief Technical Officer. In this capacity, Dr. Bosch plays a key role in the preparation and submission of our regulatory applications, as well as ongoing development of our product lines, and ongoing development and/or acquisition of new technologies. Dr. Bosch led the process of designing the protocols, and managed the successful preparation and submission of our Investigational New Drug (IND) applications for FDA approval to conduct clinical trials for prostate cancer, brain cancer, ovarian cancer and multiple other cancers. He also led the processes for other regulatory submissions in both the U.S. and abroad (including the successful applications for orphan drug status in both the U.S. and Europe for DCVax-L for brain cancer). He spearheaded the development of our manufacturing and quality control processes, and is working with Cognate BioServices, Inc. on next-generation further development of these processes. Prior to joining us in 2000, Dr. Bosch worked at the Dutch National Institutes of Health (RIVM) as head of the Department of Molecular Biology, as well as in academia as a professor of Pathobiology. He has authored more than 40 peer-reviewed research publications in immunology and virology, and is an inventor on several patent applications on dendritic cell product manufacturing.
| 39 |
Corporate Governance
Director Independence
Our Board of Directors has determined that a majority of the Board consists of members who are currently “independent” as that term is defined within the meaning of Section 5605(a)(2) of the NASDAQ Marketplace Rules. The Board of Directors considers Messrs. Farmer, Malik and Jasinowski, and Ambassador Black to be independent, and also considered Ms. Susan Bayh to be independent while she was a member of our Board during 2016.
Audit Committee
The Audit Committee has responsibility for recommending the appointment of our independent accountants, supervising our finance function (which includes, among other matters, our investment activities), reviewing our internal accounting control policies and procedures, and providing the Board such additional information and materials as it may deem necessary to make the Board aware of significant financial matters which require the attention of the Board. The Audit Committee discusses the financial statements with management, approves filings made with the SEC, and maintains the necessary discussions with the Company’s independent accountants. The Audit Committee acts under a written charter.
The Audit Committee currently consists of Messrs. Farmer, Malik and Jasinowski. The Company considers the Audit Committee Chair, Jerry Jasinowski, to be a financial expert. Our Board of Directors has determined that Messrs. Farmer, Malik and Jasinowski are independent within the meaning of Section 5605(a)(2) of the NASDAQ Marketplace Rules as well as pursuant to the additional test for independence for audit committee members imposed by SEC regulation and Section 5605(c)(2)(A) of the NASDAQ Marketplace Rules. The Audit Committee is established in accordance with Section 3(a)(58)(A) of the Exchange Act.
Compensation Committee
The Compensation Committee is responsible for determining the overall compensation levels of our executive officers and administering our equity compensation plans. The Compensation Committee does not delegate its authority pursuant to its written charter. The Board has determined that all of the members are “independent” under the current listing standards of NASDAQ.
Nominations Committee
The Nominations Committee is responsible for assisting the Board of Directors in, among other things, effecting Board organization, membership and function, including: identifying qualified Board nominees; and effecting the organization, membership and function of Board committees, including composition and recommendation of qualified candidates. The Nominations Committee shall identify and evaluate the qualifications of all candidates for nomination for election as directors. Potential nominees are identified by the Board of Directors based on the criteria, skills and qualifications that have been recognized by the Nominations Committee. While our nomination policy does not prescribe specific diversity standards, the Nominations Committee and its independent members seek to identify nominees that have a variety of perspectives, professional experience, education, difference in viewpoints and skills, and personal qualities that will result in a well-rounded Board of Directors. The Committee operates under a written charter. Given the size and ownership of the company, it does it have a policy for consideration of director candidates recommended by shareholders.
The Nominations Committee currently consists of Messrs. Farmer, Malik and Jasinowski. The Board of Directors has determined that all of the members are “independent” under the current listing standards of NASDAQ.
Information Regarding Meetings of the Board and Committees
The business of our Company is under the general oversight of our Board, as provided by the laws of Delaware and our bylaws. During the fiscal year ended December 31, 2016, the Board met more than 24 times and also conducted business by written consent. There were at least 4 Audit Committee meetings, 2 compensation committee meetings, and 2 nominations committee meetings. Each person who was a director during 2016 attended at least 75% of the Board meetings. We do not have a formal written policy with respect to Board members’ attendance at our annual meeting of stockholders. Five of our directors attended the 2016 annual meeting.
Code of Business Conduct and Ethics
We have adopted a formal Code of Business Conduct and Ethics applicable to all Board members, executive officers and employees. A copy of our Code of Business Conduct and Ethics is posted on our website (www.nwbio.com) and will be provided free of charge upon request to Secretary, Northwest Biotherapeutics, Inc., 4800 Montgomery Lane, Suite 800, Bethesda, Maryland, 20814.
| 40 |
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, executive officers and persons who own more than 10% of our stock, or Reporting Persons, to file with the SEC initial reports of ownership and changes in ownership of our stock. Reporting Persons are required by SEC regulations to furnish us with copies of all Section 16(a) reports they file. To our knowledge, based solely on our review of the copies of such reports received, we believe that during our fiscal year ended December 31, 2016 all Reporting Persons timely complied with all applicable filing requirements. Cognate BioServices, Inc., an affiliate of the Company, did not timely file certain Form 4 filings in connection with its acquisition or disposition of our securities.
| ITEM 11. | EXECUTIVE COMPENSATION |
Compensation Discussion and Analysis
Executive Compensation Philosophy and Objectives
The Company’s compensation philosophy is to assure that the Company’s compensation and benefits policies attract and retain the key employees necessary to support the Company’s growth and success, both operationally and strategically, and to motivate the executives to achieve short- and long-term goals with the ultimate objective of creating sustainable improvements in stockholder value.
Elements of Compensation
Base Salary. All full time Named Executive Officers are paid a base salary. Base salaries for our executives are established based on the scope of their responsibilities, professional qualifications, academic background and the other elements of the executive’s compensation, including equity-based compensation. Base salaries are reviewed at least annually, and may be increased to align salaries with market levels after taking into account the subjective evaluation previously described.
Bonuses. All full time Named Executive Officers are eligible for bonuses from time to time, on a case by case basis, based on Company and/or individual performance considerations and/or on retention considerations.
Equity Incentive Compensation. We believe that long-term performance is achieved through an ownership culture participated in by our Named Executive Officers through the use of stock-based awards. The Company maintains an equity compensation plan for such awards. No awards have been granted recently under the plan, but such awards are expected to be made in due course. The Board of Directors does not have a pre-determined formula for deciding the equity awards to be made.
Determination of Compensation
The Company’s executive compensation program for the Named Executive Officers is administered by the Board of Directors’ Compensation Committee. As described above, the Compensation Committee consists of three independent directors, all of whom have considerable experience in executive compensation issues and management development.
The Compensation Committee’s guiding principle is to assure that the Company’s compensation and benefits policies attract and retain the key employees necessary to support the Company’s growth and success, both operationally and strategically, and to motivate the executives to achieve short- and long-term goals with the ultimate objective of creating sustainable improvements in stockholder value.
| 41 |
Director Compensation
The following table sets forth certain information concerning compensation paid or accrued to our non-executive directors for the year ended December 31, 2016.
| Name | Year | Fees Earned or Paid in Cash ($) | All Other Compensation ($) | Total ($) | ||||||||||
| Robert A. Farmer | 2016 | $ | 150,000 | $ | - | $ | 150,000 | |||||||
| Dr. Navid Malik | 2016 | $ | 150,000 | $ | - | $ | 150,000 | |||||||
| Jerry Jasinowski | 2016 | $ | 150,000 | $ | - | $ | 150,000 | * | ||||||
| Susan B. Bayh | 2016 | $ | 141,000 | $ | - | $ | 141,000 | |||||||
| J. Cofer Black | 2016 | $ | 141,000 | $ | - | $ | 141,000 | |||||||
* Mr Jasinowki received total $450,000 cash in 2016 for certain prior years director fees, which included $50,000, $100,000, $150,000 and $150,000 catch up fees for 2012, 2013, 2014 and 2015, respectively. Mr. Jasinowki has not yet received his director compensation for 2016, which will be $150,000 and will be paid in 2017.
Executive Compensation
Summary Compensation Table
The following table sets forth certain information concerning compensation paid or accrued to our executive officers, referred to as our Named Executive Officers, during the years ended December 31, 2016 and 2015.
| Name and Principal Position | Year | Salary ($) | Bonus (S) | Option Awards ($) | Total ($) | |||||||||||||
| Linda F. Powers | 2016 | $ | 502,000 | $ | - | $ | - | $ | 502,000 | |||||||||
| Chairperson, President | 2015 | $ | 500,000 | $ | - | $ | - | $ | 500,000 | |||||||||
| & Chief Executive Officer | ||||||||||||||||||
| Alton L. Boynton, Ph.D. | 2016 | $ | 325,000 | $ | - | $ | - | $ | 325,000 | |||||||||
| Chief Scientific Officer and | 2015 | $ | 325,000 | $ | - | $ | - | $ | 325,000 | |||||||||
| Secretary | ||||||||||||||||||
| Leslie Goldman | 2016 | $ | 375,000 | $ | - | $ | - | $ | 375,000 | |||||||||
| Senior Vice President, | 2015 | $ | 375,000 | $ | - | $ | - | $ | 375,000 | |||||||||
| Business Development | ||||||||||||||||||
| Marnix L. Bosch, Ph.D. | 2016 | $ | 375,000 | $ | - | $ | - | $ | 375,000 | |||||||||
| Chief Technical Officer | 2015 | $ | 375,000 | $ | - | $ | - | $ | 375,000 | |||||||||
| Other | ||||||||||||||||||
| Susan Goldman * | 2016 | $ | 118,000 | $ | - | $ | - | $ | 118,000 | |||||||||
| 2015 | $ | 84,000 | $ | - | $ | - | $ | 84,000 | ||||||||||
* Susan Goldman is the wife of Leslie Goldman. She is a former nurse who serves as Director of Patient Affairs, handling compassionate use cases. Mrs. Goldman was paid $118,000 and $84,000 for the year ended December 31, 2016 and 2015, respectively, for services performed, respectively.
Grants of Plan-Based Awards
The Company has an equity compensation plan for employees, directors and others, the Amended and Restated 2007 Stock Plan, which was approved by shareholders at the Company’s 2013 Annual Meeting of Stockholders, and which amended and restated a prior equity compensation plan. The Company has not issued any recent awards under the amended plan, but such awards are expected to be made in due course.
| 42 |
Outstanding Equity Awards at Fiscal Year-End
The following table shows outstanding stock option awards classified as exercisable and un-exercisable as of December 31, 2016.
| Option Awards | Stock Awards | |||||||||||||||||||||||||||||||||
| Name | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | Option Exercise Price ($) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value of Shares or Units of Stock That Have Not Vested ($) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) | |||||||||||||||||||||||||
| Linda F. Powers | 592,500 | (1) | 296,250 | - | 10.56 | 6/21/2018 | - | - | - | - | ||||||||||||||||||||||||
| Chief Executive Officer and President | ||||||||||||||||||||||||||||||||||
| Alton Boynton | 93,750 | (2) | 55,000 | - | 10.56 | 6/21/2018 | - | - | - | - | ||||||||||||||||||||||||
| Chief Scientific Officer and Secretary | 89,428 | (3) | - | - | 8.80 | 8/20/2022 | - | - | - | - | ||||||||||||||||||||||||
| Leslie Goldman | 93,535 | (4) | 46,875 | - | 10.56 | 6/21/2018 | - | - | - | - | ||||||||||||||||||||||||
| Senior Vice President, Business Development | ||||||||||||||||||||||||||||||||||
| Marnix Bosch | 93,846 | (5) | 73,750 | - | 10.56 | 6/21/2018 | - | - | - | - | ||||||||||||||||||||||||
| Chief Technical Officer | 31,770 | (6) | 21,355 | - | 11.20 | 6/23/2022 | - | - | - | - | ||||||||||||||||||||||||
| 15,625 | (7) | - | - | 8.80 | 8/20/2022 | - | - | - | - | |||||||||||||||||||||||||
| (1) | In conjunction with the employment agreement entered into between us and Ms. Powers on June 8, 2011, and in recognition of Ms. Powers’ service to our Company while serving as Chair during the preceding four years, we granted Ms. Powers an option to purchase 870,637 shares of our stock with an exercise price of $10.56 per share. One-third of the options vested on the grant date, and upon vesting became subject to a lock-up which extended to the earlier of 18 months or our reaching the primary endpoint of our GBM brain cancer clinical trial. One-third of the options vested in equal monthly portions over the term of the employment agreement. The remaining one-third will vest in portions tied to material milestones in multiple programs, if and to the extent those milestones are achieved, or may vest in the Board’s discretion. |
| (2) | In conjunction with the employment agreement entered into between us and Dr. Boynton on June 8, 2011, we issued Dr. Boynton an option to purchase 145,162 shares of our stock with an exercise price of $10.56 per share. 86,035 options vested on the grant date. 7,500 options vested in equal monthly portions over the term of the employment agreement. The remaining 51,627 options will vest in portions tied to material milestones in multiple programs, if and to the extent those milestones are achieved, or may vest in the Board’s discretion. |
| (3) | This option was granted under the 2007 Stock Option Plan. The options were granted August 21, 2009 and vested over a one year period and are exercisable over a 10-year period from issuance at a price of $8.80 per share. |
| (4) | In conjunction with the employment agreement entered into between us and Mr. Goldman on June 8, 2011, we issued Mr. Goldman an option to purchase 137,750 shares of our stock with an exercise price of $10.56 per share. One-third of the options vested on the grant date, and upon vesting became subject to a lock-up which extended to the earlier of 18 months or our reaching the primary endpoint of our GBM brain cancer clinical trial. One-third vested in equal monthly portions over the term of the employment agreement. The remaining one-third will vest in portions tied to material milestones in multiple programs, if and to the extent those milestones are achieved, or may vest in the Board’s discretion. |
| 43 |
| (5) | In conjunction with the employment agreement entered into between us and Dr. Bosch on June 8, 2011, we issued Dr. Bosch an option to purchase 145,473 shares of our stock with an exercise price of $10.56 per share. 51,971 options vested on the grant date. 7,500 options vested in equal monthly portions over the term of the employment agreement. The remaining 51,627 options will vest in portions tied to material milestones in multiple programs, if and to the extent those milestones are achieved, or may vest in the Board’s discretion. |
| (6) | These options were granted under the 2007 Stock Option Plan. 1,250 options vested each month until May 31, 2013. In addition, 6,250 options vest upon each of Swiss Approval, full Enrollment in Phase II Glioblastoma Multiforme clinical study and FDA approval of NDA. |
| (7) | This option was granted under the 2007 Stock Option Plan. This option grant vested over the balance of 2009 with 7,813 vesting on the grant date and the remainder vesting on December 31, 2009. |
Pension Benefits
Our Named Executive Officers received no benefits in fiscal 2016 from the Company under defined pension or defined contribution plans.
Non-Qualified Deferred Compensation
Our Named Executive Officers received no benefits in fiscal 2016 from the Company under non-qualified deferred compensation plans.
Employment Agreements
The Company entered into employment agreements with its Named Executive Officers in 2011. Those agreements have expired and the Company intends to enter into new employment agreements with its executives.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS-EQUITY COMPENSATION PLAN INFORMATION |
Securities Authorized for Issuance under Equity Compensation Plan
We have an employee stock option plan (“2007 Stock Option Plan”) under which an aggregate of 31,406,000 shares had been reserved for issuance as of December 31, 2016, including an aggregate of 29,855,000 shares that are available for issuance. The following table shows information with respect this plan as of December 31, 2016 (options or shares in thousands).
Equity Compensation Plan Information
| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans | |||||||||
| Equity compensation plans approved by security holders | 1,551 | $ | 10.56 | 29,855 | ||||||||
| Equity compensation plans not approved by security holders | - | - | - | |||||||||
| Total | 1,551 | $ | 10.56 | 29,855 | ||||||||
| 44 |
Amended and Restated 2007 Stock Option Plan
Our Board of Directors and the holders of a majority of the voting power of our stockholders adopted the Amended and Restated 2007 Stock Option Plan, or the Plan. The plan provides that 20% of our total issued and outstanding shares are to be allocated to the Stock Option Plan, and that, on the effective date of any increase in our capitalization, the aggregate numbers of shares of common stock that are available for issuance shall automatically be increased by such number of shares as is equal to the number of shares sufficient to cause the option pool to remain equal to 20% of our issued and outstanding stock at such time. Pursuant to the Plan, if on the date of any increase in our capitalization 20% of our total issued and outstanding shares of stock is less than the number of shares of common stock available for issuance under the Plan, no change will be made to the aggregate number of shares of common stock issuable under the Plan for that year (such that the aggregate number of shares available for issuance under the Plan will never decrease).
The following table presents information regarding the beneficial ownership of our common stock as of March 31, 2017, by:
| • | each person, or group of affiliated persons, who is known by us to own beneficially 5% or more of any class of our equity securities; |
| • | our directors and nominees for director; |
| • | each of our named executive officers, as defined in Item 402(a)(3) of Regulation S-K; and |
| • | our directors and executive officers as a group. |
In order to determine the beneficial ownership by a given person as set forth in the table below, the fully diluted shares, options and warrants held by the person are deemed held by that person and counted in addition to their issued and outstanding shares. However, for all other persons, only the actual issued and outstanding shares they hold are counted.
Shares issuable pursuant to the exercise of stock options and warrants exercisable within 60 days of February 28, 2017, are deemed outstanding and held by the holder of such options or warrants, in addition to all issued and outstanding shares held by such person, for computing the percentage of outstanding common stock beneficially owned by such person, but are not deemed outstanding for computing the percentage of outstanding common stock beneficially owned by any other person.
Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and the entities named in the table have voting and investment power with respect to all shares of common stock that they beneficially own, subject to applicable community property laws, if any. The table below is based upon the information supplied by our executive officers, directors and principal stockholders and from Schedules 13D and 13G filed with the SEC.
Except as otherwise noted, the address of the individuals in the following table is c/o Northwest Biotherapeutics, Inc., 4800 Montgomery Lane, Suite 800, Bethesda, MD 20814.
| 45 |
| Name and Address of Beneficial Owner | Number of Shares Beneficially Owned | Percentage (1) | ||||||
| Officers and Directors | ||||||||
| Alton L. Boynton, Ph.D. (2) | 195,367 | * | % | |||||
| Marnix L. Bosch, Ph.D., M.B.A. (3) | 151,043 | * | % | |||||
| Linda F. Powers (4) | 34,731,161 | 20.02 | % | |||||
| Robert A. Farmer (5) | 174,139 | * | % | |||||
| Leslie Goldman (6) | 504,285 | * | % | |||||
| Dr. Navid Malik | 10,000 | * | % | |||||
| Jerry Jasinowski (7) | 2,063,144 | 1.31 | % | |||||
| All executive officers and directors as a group (7 persons) | 37,829,139 | 21.63 | % | |||||
| 5% Security Holders | ||||||||
| Cognate BioServices, Inc.(8) 4600 East Shelby Drive, Suite 108, Memphis, TN | 25,242,223 | 14.97 | % | |||||
| Woodford Investment Management LLP(9) 9400 Garsington Road Oxford OX4 2NH, UK | 24,815,028 | 15.80 | % | |||||
| Intracoastal Capital LLC.(10) 245 Palm Trail Delray Beach, FL | 9,238,300 | 5.71 | % | |||||
| CVI Investments, Inc.(11) P.O. Box 309GT Ugland House, South Church Street George Town, Grand Cayman, Cayman Islands | 8,237,545 | 5.25 | % | |||||
| * | Less than 1%. |
| (1) | Percentage represents beneficial ownership percentage of common stock calculated in accordance with SEC rules and does not equate to voting percentages. Based upon 157,028,270 shares of common stock issued and outstanding as of February 28, 2017. |
| (2) | Consists of (i) 12,189 shares held by Dr. Boynton and (ii) 183,178 shares of common stock underlying options that are currently exercisable. |
| (3) | Consists of (i) 9,802 shares held by Dr. Bosch and (ii) 141,241 shares of common stock underlying options that are currently exercisable. |
| (4) | Consists of (i) 1,572,200 shares held by Ms. Powers; (ii) 592,500 shares of common stock underlying currently exercisable options held by Ms. Powers; (iii) 804,145 shares of common stock held by Toucan Capital Fund III, L.P.; (iv) 1,732,246 shares of common stock underlying currently exercisable warrants held by Toucan Capital; (v) 2,211,784 shares of common stock held by Toucan Partners, LLC; (vi) 1,505,739 shares of common stock underlying currently exercisable warrants held by Toucan Partners; (vii) 11,557,929 shares of common stock underlying warrants held by Cognate Bioservices, Inc.; and (viii) 13,684,294 shares of common stock held by Cognate Bioservices, Inc. Ms. Powers has voting and dispositive power over the securities owned by the Toucan entities and Cognate Bioservices, Inc. |
| (5) | Consists of (i) 135,417 shares held by Mr. Farmer and (ii) 38,722 shares of common stock underlying currently exercisable warrants. |
| (6) | Consists of (i) 172,742 shares held by Mr. Goldman, (ii) 238,008 shares of common stock underlying currently exercisable warrants, and (iii) 93,535 shares of common stock underlying currently exercisable options. |
| (7) | Consists of (i) 1,365,031 shares held by Mr. Jasinowski and (ii) 698,113 shares of common stock underlying currently exercisable warrants. |
| (8) | Consists of (i) 13,684,294 shares of common stock and (ii) 11,557,929 shares of common stock underlying currently exercisable warrants. Linda Powers holds the voting and dispositive power over the shares held by Cognate BioServices, Inc. |
| (9) | Upon information and belief, Neil Woodford holds the voting and dispositive power over the shares held by Woodford Investment Management LLP. |
| 46 |
| (10) | Consists of (i) 4,475,800 shares of common stock held by Intracoastal Capital LLC and (ii) 4,762,500 shares of common stock underlying currently exercisable warrants. Upon information and belief, Intracoastal Capital LLC, Mitchell P. Kopin and Daniel B. Asher hold shared voting and dispositive power over the shares held by Intracoastal Capital LLC. |
| (11) | Upon information and belief, CVI Investments, Inc. and Heights Capital Management, Inc. hold shared voting and dispositive power over the shares held by CVI Investments, Inc. |
The information required by Item 12 appearing under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Executive Compensation-Equity Compensation Plan Information” of the Company’s Form 10-K/A is incorporated herein by reference. The Company intends to file its Form 10-K/A with the SEC not later than 120 days after December 31, 2016.
| ITEM 13. | CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
Cognate BioServices
Cognate BioServices, a contract manufacturer of our DCVax products, is a related party. Cognate BioServices is owned by Toucan Capital Fund III, L.P., an investment fund in which our Chairman and CEO, Linda Powers, has a material interest and operational control. Cognate affiliates in the U.K. (Cognate BioServices, Ltd.), Germany (Cognate BioServices GmbH) and Israel (Cognate Israel) are likewise related parties.
The Company’s agreements with Cognate, and payments and stock issuances to Cognate, as well as vesting, lock-up and other restrictions on the shares, accounts payable to Cognate, and loans made by Cognate to the Company are described Note 9 to the financial statements in this report on Form 10-K for the fiscal year ended December 31, 2016. The Company and Cognate BioServices, an affiliate of the Company, entered into a DCVax-L Manufacturing Services Agreement, a DCVax-Direct Manufacturing Services Agreement, an Ancillary Services Agreement and a Manufacturing Expansion Agreement, each effective as of January 17, 2014, and those agreements followed and superseded Manufacturing Services Agreements in 2011 and 2007.
Review, approval or ratification of transactions with related persons
With respect to reviewing and approving related-party transactions, the Board reviews related-party transactions for potential conflicts of interests or other improprieties as well as for reasonableness. Under SEC rules, related-party transactions are those transactions to which we are or may be a party in which the amount involved exceeds the lesser of $120,000 or one percent of the average of our total assets at year-end for the last two completed fiscal years, and in which any of our directors or executive officers or any other related person had or will have a direct or indirect material interest, excluding, among other things, compensation arrangements with respect to employment or board membership. Any transactions with officers, directors or 5% stockholders are on market-based terms, and are approved by a majority of our independent and disinterested directors.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Fees Paid to Marcum LLP
Marcum LLP was engaged in 2013 and served as our independent public accounting firm for the fiscal years ended December 31, 2016 and 2015.
Audit Fees
The aggregate fees billed and unbilled of the fiscal year ended December 31, 2016 and 2015 for professional services rendered by Marcum for the audit of our annual financial statements, the review of our financial statements included in our quarterly reports on Form 10-Q and consultations and consents were approximately $725,000 and $538,000, respectively.
Audit-Related Fees
There were no fees billed in the fiscal year ended December 31, 2016 and 2015 for assurance and related services rendered by Marcum related to the performance of the audit or review of our financial statements.
| 47 |
Tax and Other Fees
There were no fees billed in the fiscal year ended December 31, 2016 and 2015 for professional services rendered by Marcum for tax related services or other fees.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services
Consistent with SEC policies and guidelines regarding audit independence, the Audit Committee is responsible for the pre-approval of all audit and permissible non-audit services provided by our principal accountants on a case-by-case basis. Our Audit Committee has established a policy regarding approval of all audit and permissible non-audit services provided by our principal accountants. Our Audit Committee pre-approves these services by category and service. Our Audit Committee pre-approved all of the services provided by our principal accountants during the fiscal years ended December 31, 2016, 2015 and 2014.
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
The Exhibits listed below are identified by numbers corresponding to the Exhibit Table of Item 601 of Regulation S-K. The Exhibits designated by an asterisk (*) are management contracts or compensatory plans or arrangements required to be filed pursuant to Item 15.
EXHIBIT INDEX
| Exhibit Number |
Description | |
| 3.1 | Seventh Amended and Restated Certificate of Incorporation (incorporated by reference to exhibit 3.1 filed with the Registrant’s Amendment No. 1 to the Registration Statement on Form S-1(File No. 333-134320) on July 17, 2006) | |
| 3.2 | Third Amended and Restated Bylaws of the Company (incorporated by reference to exhibit 3.1 filed with the Registrant’s Current Report on Form 8-K on June 22, 2007) | |
| 3.3 | Amendment to Seventh Amended and Restated Certificate of Incorporation (incorporated by reference to exhibit 3.2 filed with the Registrant’s Current Report on Form 8-K on June 22, 2007) | |
| 3.5 | Amendment to Seventh Amended and Restated Certificate of Incorporation (incorporated by reference to exhibit 3.1 filed with the Registrant’s Quarterly Report on Form 10-Q on May 21, 2012) | |
| 3.6 | Amendment to Seventh Amended and Restated Certificate of Incorporation (incorporated by reference to exhibit 3.1 filed with the Registrant’s Current Report on Form 8-K on September 26, 2012). | |
| 3.7 | Amendment to Third Amended and Restated Bylaws of the Company (incorporated by reference to exhibit 3.1 filed with the Registrant’s Current Report on Form 8-K on December 11, 2012) | |
| 4.1 | Form of common stock certificate (incorporated by reference to exhibit 4.1 filed with the Registrant’s Amendment No. 3 to the Registration Statement on Form S-1 (Registration No. 333-67350) on November 14, 2001) | |
| 4.2 | Form of Warrant Agency Agreement by and between Northwest Biopharmaceuticals, Inc. and Computershare Trust Company, N.A. and Form of Warrant Certificate (incorporated by reference to Exhibit 4.2 filed with the Registrant’s Form S-1 on December 4, 2012). | |
| 10.4 | Form of Loan Agreement and 10% Convertible, Promissory Note between the Company and Toucan Partners, LLC (incorporated by reference to exhibit 10.4 filed with the Registrant’s Form 10-K on April 17, 2007) | |
| 10.5 | Second Amended and Restated Investor Rights Agreement dated June 22, 2007 between the Company and Toucan Capital Fund II, LLP (incorporated by reference to exhibit 10.3 filed with the Registrant’s Current Report on Form 8-K on June 22, 2007) | |
| 10.6 | Warrant to purchase securities of the Company dated July 26, 2005 issued to Toucan Capital Fund II, L.P (incorporated by reference to exhibit 10.3 filed with the Registrant’s Current Report on Form 8-K on August 1, 2005) | |
| 10.7 | Warrant to purchase securities of the Company dated September 7, 2005 issued to Toucan Capital Fund II, L.P (incorporated by reference to exhibit 10.3 filed with the Registrant’s Current Report on Form 8-K on September 9, 2005) |
| 48 |
| 10.8 | Amended Form of Warrant to purchase securities of the Company dated November 14, 2005 and April 17, 2006, as amended April 14, 2007, issued to Toucan Partners, LLC (incorporated by reference to exhibit 10.21 filed with the Registrant’s Form 10-K on April 17, 2007) | |
| 10.9 | Form of Warrant to purchase securities of the Company dated April 14, 2007 issued to Toucan Partners, LLC (incorporated by reference to exhibit 10.22 filed with the Registrant’s Form 10-K on April 17, 2007) | |
| 10.10 | Loan Agreement and 10% Convertible Promissory Note in the principal amount of $100,000 between the Company and Toucan Partners, LLC, dated April 27, 2007 (incorporated by reference to exhibit 10.1 filed with the Registrant’s Current Report on Form 8-K on May 3, 2007) | |
| 10.11 | Warrant to purchase securities of the Company issued to Toucan Partners, LLC, dated April 27, 2007 (incorporated by reference to exhibit 10.2 filed with the Registrant’s Current Report on Form 8-K on May 3, 2007) | |
| 10.12 | Form of Toucan Partners Loan Agreement and 10% Convertible Note, dated as of June 1, 2007 (incorporated by reference to exhibit 10.1 filed with the Registrant’s Current Report on Form 8-K on June 7, 2007) | |
| 10.13 | Form of Toucan Partners Warrant, dated as of June 1, 2007 (incorporated by reference to exhibit 10.2 filed with the Registrant’s Current Report on Form 8-K on June 7, 2007) | |
| 10.14 | Amended and Restated Warrant to purchase Series A Preferred Stock issued to Toucan Capital Fund II, L.P., dated as of June 1, 2007 (incorporated by reference to exhibit 10.3 filed with the Registrant’s Current Report on Form 8-K on June 7, 2007) | |
| 10.15 | Warrant to purchase Series A-1 Preferred Stock issued to Toucan Capital Fund II, L.P., dated as of June 1, 2007 (incorporated by reference to exhibit 10.4 filed with the Registrant’s Current Report on Form 8-K on June 7, 2007) | |
| 10.16 | Warrant to purchase Series A-1 Preferred Stock issued to Toucan Capital Fund II, L.P., dated as of June 1, 2007 (incorporated by reference to exhibit 10.5 filed with the Registrant’s Current Report on Form 8-K on June 7, 2007) | |
| 10.17 | Northwest Biotherapeutics, Inc. $225,000 Demand Note dated June 13, 2007 (incorporated by reference to exhibit 10.1 filed with the Registrant’s Current Report on Form 8-K on June 18, 2007) | |
| 10.18 | Conversion Agreement dated June 15, 2007 and effective June 22, 2007 between the Company and Toucan Capital Fund II, LLP (incorporated by reference to exhibit 10.1filed with the Registrant’s Current Report on Form 8-K on June 22, 2007) | |
| 10.19* | Services Agreement between Cognate BioServices, Inc. and Northwest Biotherapeutics dated April 1, 2011 (incorporated by reference to exhibit 10.19 filed with the Registrant’s Registration Statement on Form S-1 (Registration No. 333-182470 on June 29, 2012 ) | |
| 10.20 | 1998 Stock Option Plan (incorporated by reference to exhibit 10.15 filed with the Registrant’s Amendment No. 3 to the Registration Statement on Form S-1 (Registration No. 333-67350) on November 14, 2001) | |
| 10.21 | 1999 Executive Stock Option Plan (incorporated by reference to exhibit 10.16 filed with the Registrant’s Amendment No. 3 to the Registration Statement on Form S-1 (Registration No. 333-67350) on November 14, 2001) | |
| 10.22 | 2001 Stock Option Plan (incorporated by reference to exhibit 10.17 filed with the Registrant’s Amendment No. 3 to the Registration Statement on Form S-1 (Registration No. 333-67350) on November 14, 2001) | |
| 10.23 | 2001 Nonemployee Director Stock Incentive Plan (incorporated by reference to exhibit 10.18 filed with the Registrant’s Amendment No. 3 to the Registration Statement on Form S-1 (Registration No. 333-67350) on November 14, 2001) | |
| 10.24 | Employee Stock Purchase Plan (incorporated by reference to exhibit 10.19 filed with the Registrant’s Amendment No. 3 to the Registration Statement on Form S-1 (Registration No. 333-67350) on November 14, 2001) | |
| 10.25 | Form of Stock Option Agreement under the 2007 Stock Option Plan (incorporated by reference to exhibit 10.2 filed with the Registrant’s Registration Statement on Form S-8 on November 21, 2007) | |
| 10.26 | Loan Agreement and Promissory Note, dated May 6, 2008 between the Company and Al Rajhi Holdings WLL (incorporated by reference to exhibit 4.5 filed with the Registrant’s Current Report on Form 8-K on May 15, 2008) | |
| 10.27 | Loan Agreement and Promissory Note, dated August 19, 2008 between the Company and Toucan Partners LLC (incorporated by reference to exhibit 10.1 filed with the Registrant’s Quarterly Report on Form 10-Q on August 19, 2008) | |
| 10.28 | Loan Agreement and Promissory Note, dated October 1, 2008 between the Company and SDS Capital Group SPC, Ltd (incorporated by reference to exhibit 10.2 filed with the Registrant’s Quarterly Report on Form 10-Q on November 19, 2008) | |
| 10.29 | Warrant, dated October 1, 2008, between the Company and SDS Capital Group SPC, Ltd (incorporated by reference to exhibit 10.3 filed with the Registrant’s Quarterly Report on Form 10-Q on November 19, 2008) |
| 49 |
| 10.30 | Loan Agreement and Promissory Note, dated October 21, 2008, between the Company and SDS Capital Group SPC, Ltd (incorporated by reference to exhibit 10.4 filed with the Registrant’s Quarterly Report on Form 10-Q on November 19, 2008) | |
| 10.31 | Form of Loan Agreement and Promissory Note, between the Company and a Group of Private Investors (incorporated by reference to exhibit 10.5 filed with the Registrant’s Quarterly Report on Form 10-Q on November 19, 2008) | |
| 10.32 | Form of Warrant, between the Company and SDS Capital Group SPC. Ltd and a Group of Private Investors (incorporated by reference to exhibit 10.6 filed with the Registrant’s Quarterly Report on Form 10-Q on November 19, 2008) | |
| 10.33 | Loan Agreement and Promissory Note, dated December 22, 2008, between the Company and Toucan Partners LLC (incorporated by reference to exhibit 10.62 filed with the Registrant’s Form 10-K on April 15, 2009) | |
| 10.34 | Form of Warrant, dated December 22, 2008, between the Company and Toucan Partners LLC (incorporated by reference to exhibit 10.63 filed with the Registrant’s Form 10-K on April 15, 2009) | |
| 10.35 | Form of Securities Purchase Agreement, by and among the Company and Al Rajhi Holdings (incorporated by reference to exhibit 10.64 filed with the Registrant’s Form 10-K on April 15, 2009) | |
| 10.36 | Securities Purchase Agreement, by and among the Company and a Group of Equity Investors (incorporated by reference to exhibit 10.65 filed with the Registrant’s Form 10-K on April 15, 2009) | |
| 10.37 | Form of Warrant, between the Company and a Group of Equity Investors (incorporated by reference to exhibit 10.66 filed with the Registrant’s Form 10-K on April 15, 2009) | |
| 10.38 | Form of Loan Agreement and Promissory Note, dated March 27 2009, between the Company and a Group of Private Lenders (incorporated by reference to exhibit 10.67 filed with the Registrant’s Form 10-K on April 15, 2009) | |
| 10.39 | Amended and Restated Northwest Biotherapeutics, Inc. 2007 Stock Option Plan (incorporated by reference to Schedule 14A filed on December 3, 2013) | |
| 10.40 | DC Vax ®-L Manufacturing and Services Agreement between the Company and Cognate BioServices, Inc. dated January 17, 2014 (incorporated by reference to Exhibit 10.40 filed with the Company’s Quarterly Report on Form 10-Q on May 15, 2014). | |
| 10.41 | DC Vax ®-L Direct Manufacturing and Services Agreement between the Company and Cognate BioServices, Inc. dated January 17, 2014 (incorporated by reference to Exhibit 10.41 filed with the Company’s Quarterly Report on Form 10-Q on May 15, 2014). | |
| 10.42 | Ancillary Services Agreement between the Company and Cognate BioServices, Inc. dated January 17, 2014 (incorporated by reference to Exhibit 10.42 filed with the Company’s Quarterly Report on Form 10-Q on May 15, 2014). | |
| 10.43 | Manufacturing Expansion Service Agreement between the Company and Cognate BioServices, Inc. dated January 17, 2014 (incorporated by reference to Exhibit 10.43 filed with the Company’s Quarterly Report on Form 10-Q on May 15, 2014). | |
| 10.44 | Form of Warrant between the Company and H.C. Wainwright & Co., LLC dated April 9, 2014 (incorporated by reference to Exhibit 4.1 filed with the Company’s Quarterly Report on Form 10-Q on May 15, 2014). | |
| 10.45 | Securities Purchase Agreement between the Company and certain investors dated April 9, 2014 (incorporated by reference to Exhibit 10.1 filed with the Company’s Current Report on Form 8-K on April 14, 2014) | |
| 10.46 | Placement Agreement between the Company and H.C. Wainwright & Co., LLC (incorporated by reference as Exhibit 10.2 filed with the Company’s Current Report on Form 8-K on April 14, 2014) | |
| 10.47 | Form of Purchase Agreement for 5.00% Convertible Senior Notes between the Company and certain investors dated August 13, 2014 (incorporated by reference as Exhibit 1.1 filed with the Company’s Current Report on Form 8-K on August 19, 2014.) | |
| 10.48 | Form of Indenture between the Company and The Bank of New York Mellon, as Trustee, dated August 19, 2014 (incorporated by reference as Exhibit 4.1 filed with the Company’s Current Report on Form 8-K on August 25, 2014.) | |
| 10.49 | Pledge and Escrow between the Company and The Bank of New York Mellon, as Trustee, dated August 19, 2014 (incorporated by reference as Exhibit 10.1 filed with the Company’s Current Report on Form 8-K on August 25, 2014.) |
| 50 |
| Exhibit Number |
Description | |
| 10.50 | Form of Warrant between the Company and certain investors (incorporated by reference as Exhibit 4.1 filed with the Company’s Current Report on Form 8-K on October 10, 2014.) | |
| 10.51 | Stock Purchase, Amendment and Issuance Agreement dated October 6, 2014 (incorporated by reference as Exhibit 10.1 filed with the Company’s Current Report on Form 8-K on October 10, 2014.) | |
| 10.52 | Amendment to Engagement Letter between the Company H.C. Wainwright & Co., LLC dated October 6, 2014 (incorporated by reference as Exhibit 10.2 filed with the Company’s Current Report on Form 8-K on October 10, 2014.) | |
| 10.53 | Securities Purchase Agreement dated December 22, 2015 by and between Northwest Biotherapeutics, Inc. and certain purchasers (incorporated by reference as Exhibit 10.1 filed with the Company’s Current Report on Form 8-K on December 29, 2015.) | |
| 10.54 | Form of Warrant between the Company and certain investors (incorporated by reference as Exhibit 10.2 filed with the Company’s Current Report on Form 8-K on December 29, 2015). | |
| 10.55 | Engagement Agreement, dated November 16, 2015, by and between Northwest Biotherapeutics, Inc. and H.C. Wainwright & Co., as placement agent purchasers (incorporated by reference as Exhibit 10.3 filed with the Company’s Current Report on Form 8-K on December 29, 2015). | |
| 10.55 | Amendment to Engagement Agreement, dated December 22, 2015, by and between Northwest Biotherapeutics, Inc. and H.C. Wainwright & Co., as placement agent (incorporated by reference as Exhibit 10.4 filed with the Company’s Current Report on Form 8-K on December 29, 2015). | |
| 10.56 | Form of Securities Purchase Agreement dated February 29, 2016 by and between Northwest Biotherapeutics, Inc. and certain purchasers (incorporated by reference as Exhibit 10.1 filed with the Company’s Current Report on Form 8-K on March 3, 2016). | |
| 10.57 | Form of Warrant between the Company and certain investors (incorporated by reference as Exhibit 10.2 filed with the Company’s Current Report on Form 8-K on March 3, 2016). | |
| 10.58 | Engagement Agreement, dated February 29, 2016, by and between Northwest Biotherapeutics, Inc. and H.C. Wainwright & Co., LLC, as placement agent (incorporated by reference as Exhibit 10.3 filed with the Company’s Current Report on Form 8-K on March 3, 2016). | |
| 10.59 | Securities Purchase Agreement, dated July 4, 2016, by and between Northwest Biotherapeutics, Inc. and certain purchasers (incorporated by reference as Exhibit 10.1 filed with the Company’s Current Report on Form 8-K on July 11, 2016). | |
| 10.60 | Form of Common Stock Purchase Warrant by and between Northwest Biotherapeutics, Inc. and certain purchasers (incorporated by reference as Exhibit 10.1 filed with the Company’s Current Report on Form 8-K on July 11, 2016). | |
| 10.61 | Placement Agent Agreement, dated July 4, 2016, by and between Northwest Biotherapeutics, Inc. and Chardan Capital Markets LLC, as placement agent by and between Northwest Biotherapeutics, Inc. and certain purchasers (incorporated by reference as Exhibit 10.3 filed with the Company’s Current Report on Form 8-K on July 11, 2016) | |
| 10.62 | Exchange Agreement, dated as of August 29, 2016, between Cognate BioServices, Inc. and Northwest Biotherapeutics, Inc. (incorporated by reference as Exhibit 10.1 filed with the Company’s Current Report on Form 8-K on September 9, 2016). | |
| 10.63 | Form of Warrant to Purchase Common Stock to Cognate BioServices, Inc. to purchase 4,305,772 shares of Common Stock (incorporated by reference as Exhibit 99.1 filed with the Company’s Current Report on Form 8-K on September 9, 2016). | |
| 10.64 | Letter Agreement, dated August 23, 2016, by and between Northwest Biotherapeutics, Inc. and certain purchasers (incorporated by reference as Exhibit 10.1 filed with the Company’s Current Report on Form 8-K on September 16, 2016). | |
| 10.65 | Series E Common Stock Purchase Warrant (incorporated by reference as Exhibit 10.2 filed with the Company’s Current Report on Form 8-K on September 16, 2016). | |
| 10.66 | Registration Rights Agreement dated August 22, 2016 (incorporated by reference as Exhibit 10.3 filed with the Company’s Current Report on Form 8-K on September 16, 2016). | |
| 10.67 | Engagement Agreement, dated August 21, 2016, by and between Northwest Biotherapeutics, Inc. and H.C. Wainwright & Co., LLC, as placement agent 2016 (incorporated by reference as Exhibit 10.4 filed with the Company’s Current Report on Form 8-K on September 16, 2016). | |
| 10.68 | Agreement, dated as of October 13, 2016, between Cognate BioServices, Inc. and Northwest Biotherapeutics, Inc. (incorporated by reference as Exhibit 10.1 filed with the Company’s Current Report on Form 8-K on October 19, 2016). | |
| 10.69 | Omnibus Amendment Agreement dated as of September 22, 2016 between Cognate BioServices, Inc. and Northwest Biotherapeutics, Inc. . (incorporated by reference as Exhibit 10.2 filed with the Company’s Current Report on Form 8-K on October 19, 2016). | |
| 10.70 | Release Agreement dated as of October 13, 2016 between Cognate BioServices, Inc. and Northwest Biotherapeutics, Inc. . (incorporated by reference as Exhibit 10.3 filed with the Company’s Current Report on Form 8-K on October 19, 2016). | |
| 51 |
| 10.71 | Assignment and Assumption Agreement dated as of October 13, 2016 between Cognate BioServices, Inc. and Northwest Biotherapeutics, Inc. . (incorporated by reference as Exhibit 10.4 filed with the Company’s Current Report on Form 8-K on October 19, 2016). | |
| 10.72 | Form of Securities Purchase Agreement, dated March 17, 2017, by and between Northwest Biotherapeutics, Inc. and certain purchasers . (incorporated by reference as Exhibit 10.1 filed with the Company’s Current Report on Form 8-K on March 23, 2017). | |
| 10.73 | Form of Class A Common Stock Purchase Warrant (incorporated by reference as Exhibit 10.2 filed with the Company’s Current Report on Form 8-K on March 23, 2017). | |
| 10.74 | Form of Class B Common Stock Purchase Warrant(incorporated by reference as Exhibit 10.3 filed with the Company’s Current Report on Form 8-K on March 23, 2017). | |
| 10.75 | Form of Class C Common Stock Purchase Warrant (incorporated by reference as Exhibit 10.3 filed with the Company’s Current Report on Form 8-K on March 23, 2017). | |
| 10.76 | Engagement Agreement with Rodman & Renshaw, a unit of H.C. Wainwright & Co., LLC (incorporated by reference as Exhibit 10.4 filed with the Company’s Current Report on Form 8-K on March 23, 2017). | |
| 21.1 | Subsidiaries of the Registrant | |
| 23.1 | Independent Registered Public Accounting Firm’s Consent | |
| 31.1 | Certification of the Principal Executive and Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 | |
| 32.1 | Certification of the Principal Executive and Principal Financial and Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | XBRL Instance Document. | |
| 101.SCH | XBRL Schema Document. | |
| 101.CAL | XBRL Calculation Linkbase Document. | |
| 101.DEF | XBRL Definition Linkbase Document. | |
| 101.LAB | XBRL Label Linkbase Document. | |
| 101.PRE | XBRL Presentation Linkbase Document. | |
| * | Confidential information in this exhibit has been omitted and filed separately with the SEC pursuant to a confidential treatment request. |
| 52 |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
| NORTHWEST BIOTHERAPEUTICS, INC. (Registrant) | |||
| Date: April 17, 2017 | By: | /s/ Linda F. Powers | |
| Linda F. Powers, | |||
| Chief Executive Officer (Principal Executive Officer and Principal Financial and Accounting Officer) | |||
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Linda F. Powers | Chief Executive Officer (Principal | April 17, 2017 | ||
| Linda F. Powers | Executive Officer and Principal | |||
| Financial and Accounting Officer)) | ||||
| /s/ Alton L. Boynton | Director | April 17, 2017 | ||
| Alton L. Boynton | ||||
| /s/ Robert A. Farmer | Director | April 17, 2017 | ||
| Robert A. Farmer | ||||
| /s/ Navid Malik | Director | April 17, 2017 | ||
| Dr. Navid Malik | ||||
| /s/ Jerry Jasinowski | Director | April 17, 2017 | ||
| Jerry Jasinowski | ||||
| /s/ J. Cofer Black | Director | April 17, 2017 | ||
| J. Cofer Black |
| 53 |
| Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
NORTHWEST BIOTHERAPEUTICS, INC.
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of the
Board of Directors and Shareholders
of Northwest Biotherapeutics, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Northwest Biotherapeutics, Inc. and Subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity (deficit) and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility 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). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating 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 position of Northwest Biotherapeutics, Inc. and Subsidiaries as of December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered losses from operations and has negative working capital. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans concerning these matters are also discussed in Note 2 to the financial statements. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Marcum llp
New York, NY
April 17, 2017
| F-2 |
NORTHWEST BIOTHERAPEUTICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
| December 31, 2016 | December 31, 2015 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 6,186 | $ | 21,813 | ||||
| Restricted cash - interest payments held in escrow | 685 | 886 | ||||||
| Prepaid expenses and other current assets | 1,013 | 1,402 | ||||||
| Total current assets | 7,884 | 24,101 | ||||||
| Non-current assets: | ||||||||
| Property, plant and equipment, net | 315 | 476 | ||||||
| Restricted cash - interest payments held in escrow, net of current portion | - | 349 | ||||||
| Construction in progress (property in the United Kingdom) | 44,559 | 45,681 | ||||||
| Other assets | 148 | 190 | ||||||
| Total non-current assets | 45,022 | 46,696 | ||||||
| Total assets | $ | 52,906 | $ | 70,797 | ||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 12,378 | $ | 11,721 | ||||
| Accounts payable to related party | 23,353 | 5,455 | ||||||
| Accrued expenses (includes related party of $40 and $11 as of December 31, 2016 and 2015, respectively) | 901 | 1,309 | ||||||
| Convertible notes (net of deferred financing cost of $175 and $0 as of December 31, 2016 and 2015, respectively) | 10,960 | 135 | ||||||
| Share settled debt, at fair value (in default) | 5,200 | - | ||||||
| Notes payable (includes related party note of $310 and $50 as of December 31, 2016 and 2015, respectively | 2,760 | 50 | ||||||
| Note payable - in dispute | - | 934 | ||||||
| Mortgage loan (net of deferred financing cost of $365 and $468 as of December 31, 2016 and 2015, respectively) | 9,791 | 11,144 | ||||||
| Environmental remediation liability | 6,200 | 6,200 | ||||||
| Derivative liability | 4,862 | 27,982 | ||||||
| Total current liabilities | 76,405 | 64,930 | ||||||
| Non-current liabilities: | ||||||||
| Convertible note (net of deferred financing cost of $457 as of December 31, 2015) | - | 10,543 | ||||||
| Note payable, net of current portion (net of debt discount of $310 as of December 31, 2016) | 3,000 | - | ||||||
| Total non-current liabilities | 3,000 | 10,543 | ||||||
| Total liabilities | 79,405 | 75,473 | ||||||
| Commitments and Contingencies | ||||||||
| Stockholders' equity (deficit): | ||||||||
| Preferred stock ($0.001 par value); 40,000,000 shares authorized; 0 shares issued and outstanding as of December 31, 2016 and 2015, respectively | - | - | ||||||
| Common stock ($0.001 par value); 450,000,000 shares authorized; 157,028,270 and 95,858,087 shares issued and outstanding as of December 31, 2016 and 2015, respectively | 157 | 96 | ||||||
| Additional paid-in capital | 686,972 | 630,613 | ||||||
| Accumulated deficit | (715,476 | ) | (635,262 | ) | ||||
| Accumulated other comprehensive gain (loss) | 1,848 | (123 | ) | |||||
| Total stockholders' equity (deficit) | (26,499 | ) | (4,676 | ) | ||||
| Total liabilities and stockholders' equity (deficit) | $ | 52,906 | $ | 70,797 | ||||
See accompanying notes to the consolidated financial statements
| F-3 |
NORTHWEST BIOTHERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
| For the years ended | ||||||||
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| Revenues: | ||||||||
| Research and other | $ | 623 | $ | 1,739 | ||||
| Total revenues | 623 | 1,739 | ||||||
| Operating costs and expenses: | ||||||||
| Research and development | 60,081 | 103,120 | ||||||
| General and administrative | 10,867 | 18,326 | ||||||
| Legal expenses | 8,941 | 6,577 | ||||||
| Total operating costs and expenses | 79,889 | 128,023 | ||||||
| Loss from operations | (79,266 | ) | (126,284 | ) | ||||
| Other income (expense): | ||||||||
| Loss from assumption of Cognate BioServices debt | (5,680 | ) | - | |||||
| Inducement loss from exercise of derivative warrants | (1,457 | ) | - | |||||
| Change in fair value of derivative liability | 17,891 | 15,676 | ||||||
| Loss from extinguishment of debt | (1,152 | ) | - | |||||
| Interest expense | (3,818 | ) | (4,153 | ) | ||||
| Foreign currency transaction gain (loss) | (6,732 | ) | 20 | |||||
| Net loss | (80,214 | ) | (114,741 | ) | ||||
| Deemed dividend related to warrant modification | (5,647 | ) | - | |||||
| Net loss applicable to common stockholders | $ | (85,861 | ) | $ | (114,741 | ) | ||
| Net loss per share applicable to common stockholders - basic and diluted | $ | (0.77 | ) | $ | (1.48 | ) | ||
| Weighted average shares used in computing basic and diluted loss per share | 111,078 | 77,713 | ||||||
See accompanying notes to the consolidated financial statements
| F-4 |
NORTHWEST BIOTHERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
| For the years ended | ||||||||
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| Net loss | $ | (80,214 | ) | $ | (114,741 | ) | ||
| Other comprehensive loss | ||||||||
| Foreign currency translation adjustment | 1,971 | 67 | ||||||
| Total comprehensive loss | $ | (78,243 | ) | $ | (114,674 | ) | ||
See accompanying notes to the consolidated financial statements
| F-5 |
NORTHWEST BIOTHERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands)
| Common Stock | Additional Paid-in | Accumulated | Cumulative Translation | Total Stockholders' | ||||||||||||||||||||
| Shares | Par value | Capital | Deficit | Adjustment | Equity (Deficit) | |||||||||||||||||||
| Balance at January 1, 2015 | 68,957 | $ | 69 | $ | 485,615 | $ | (520,521 | ) | $ | (190 | ) | $ | (35,027 | ) | ||||||||||
| Proceeds from issuance of common stock, net of offering cost | 14,360 | 14 | 81,648 | - | - | 81,662 | ||||||||||||||||||
| Redeemable securities settlement | 80 | - | 299 | - | - | 299 | ||||||||||||||||||
| Issuance of common stock for debt conversion | 985 | 1 | 6,499 | - | - | 6,500 | ||||||||||||||||||
| Issuance of common stock in connection with conversion of accounts payable - Cognate BioServices | 682 | 1 | 3,750 | - | - | 3,751 | ||||||||||||||||||
| Issuance of common stock for conversion of accrued interest | 39 | - | 387 | - | - | 387 | ||||||||||||||||||
| Proceeds from exercise of warrants | 1,728 | 2 | 7,428 | - | - | 7,430 | ||||||||||||||||||
| Reclassification of warrant liabilities related to warrants exercised for cash | - | - | 264 | - | - | 264 | ||||||||||||||||||
| Cashless warrants exercise | 572 | 1 | 520 | - | - | 521 | ||||||||||||||||||
| Common stock issued for services | 403 | - | 3,389 | - | - | 3,389 | ||||||||||||||||||
| Stock issued to Cognate BioServices as compensation under Cognate Agreements | 8,052 | 8 | 40,757 | - | - | 40,765 | ||||||||||||||||||
| Issuance of warrants in conjunction with demand notes | - | - | 57 | - | - | 57 | ||||||||||||||||||
| Net loss | - | - | - | (114,741 | ) | - | (114,741 | ) | ||||||||||||||||
| Cumulative translation adjustment | - | - | - | - | 67 | 67 | ||||||||||||||||||
| Balance at December 31, 2015 | 95,858 | 96 | 630,613 | (635,262 | ) | (123 | ) | (4,676 | ) | |||||||||||||||
| Issuance of common stock and warrants for cash in a registered direct offering | 41,857 | 42 | 19,945 | - | - | 19,987 | ||||||||||||||||||
| Offering cost related to registered direct offering | - | - | (1,877 | ) | - | - | (1,877 | ) | ||||||||||||||||
| Issuance of common stock and warrants for cash in private offering | 6,377 | 7 | 2,199 | - | - | 2,206 | ||||||||||||||||||
| Warrants exercised for cash | 15,357 | 15 | 8,051 | - | - | 8,066 | ||||||||||||||||||
| Offering costs related to warrants exercise | - | - | (795 | ) | - | - | (795 | ) | ||||||||||||||||
| Modification on warrant exercise price | - | - | 5,647 | - | - | 5,647 | ||||||||||||||||||
| Deemed dividend related to warrant exercise price modification | - | - | (5,647 | ) | - | - | (5,647 | ) | ||||||||||||||||
| Issuance of common stock for accounts payable conversion | 78 | - | 28 | - | - | 28 | ||||||||||||||||||
| Issuance of common stock and warrants for conversion of debt and accrued interest | 6,035 | 6 | 3,015 | - | - | 3,021 | ||||||||||||||||||
| Common stock issued as compensation | 250 | - | 127 | - | - | 127 | ||||||||||||||||||
| Return of common stock and warrants from Cognate | (8,052 | ) | (8 | ) | 8 | - | - | - | ||||||||||||||||
| Extinguishment of shares payable related to Cognate | - | - | 22,539 | - | - | 22,539 | ||||||||||||||||||
| Extinguishment of derivative liabilities related to Cognate | - | - | 10,131 | - | - | 10,131 | ||||||||||||||||||
| Shares payment due to Cognate BioServices | (732 | ) | (1 | ) | (8,884 | ) | - | - | (8,885 | ) | ||||||||||||||
| Reclassification of warrant liabilities related to warrants exercised for cash | - | - | 1,872 | - | - | 1,872 | ||||||||||||||||||
| Net loss | - | - | - | (80,214 | ) | - | (80,214 | ) | ||||||||||||||||
| Cumulative translation adjustment | - | - | - | - | 1,971 | 1,971 | ||||||||||||||||||
| Balance at December 31, 2016 | 157,028 | $ | 157 | $ | 686,972 | $ | (715,476 | ) | $ | 1,848 | $ | (26,499 | ) | |||||||||||
See accompanying notes to the consolidated financial statements
| F-6 |
NORTHWEST BIOTHERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| For the years ended | ||||||||
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net Loss | $ | (80,214 | ) | $ | (114,741 | ) | ||
| Reconciliation of net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 189 | 56 | ||||||
| Amortization of debt discount and accretion on redeemable securities | - | 57 | ||||||
| Amortization of deferred financing cost | 850 | 1,248 | ||||||
| Change in fair value of derivatives | (17,891 | ) | (15,676 | ) | ||||
| Inducement loss | 1,457 | - | ||||||
| Loss from extinguishment of debt | 1,152 | - | ||||||
| Loss from assumption of Cognate BioServices share settled debt (in default) | 5,680 | - | ||||||
| Stock and warrants issued to Cognate BioServices | 13,654 | 40,765 | ||||||
| Common stock issued as compensation | 127 | 3,389 | ||||||
| Correction on debt from prior period | - | (53 | ) | |||||
| Subtotal of non-cash charges | 5,218 | 29,786 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expenses and other current assets | 366 | (478 | ) | |||||
| Accounts payable and accrued expenses | 1,037 | 2,809 | ||||||
| Related party accounts payable and accrued expenses | 17,899 | 3,048 | ||||||
| Other non-current assets | 42 | (135 | ) | |||||
| Net cash used in operating activities | (55,652 | ) | (79,711 | ) | ||||
| Cash Flows from Investing Activities: | ||||||||
| Purchase of property, plant and equipment | (4,939 | ) | (6,751 | ) | ||||
| Net cash used in investing activities | (4,939 | ) | (6,751 | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Proceeds from mortgage loan | - | 4,997 | ||||||
| Deferred offering cost related to mortgage loan | - | (138 | ) | |||||
| Proceeds from issuance of notes payable | 5,450 | - | ||||||
| Proceeds from issuance of notes payable to related party | 260 | 1,400 | ||||||
| Repayment of notes payable to related parties | - | (1,400 | ) | |||||
| Proceeds from issuance of common stock and warrants in a registered direct offering | 19,987 | 81,662 | ||||||
| Offering cost related to registered direct offering | (1,077 | ) | - | |||||
| Proceeds from issuance of common stock and warrants in private offering | 6,417 | - | ||||||
| Warrants exercised for cash | 8,066 | 7,430 | ||||||
| Offering costs related to warrants exercise | (795 | ) | - | |||||
| Net cash provided by financing activities | 38,308 | 93,951 | ||||||
| Effect of exchange rate changes on cash and cash equivalents | 6,106 | (456 | ) | |||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | (16,177 | ) | 7,033 | |||||
| Cash, cash equivalents and restricted cash, beginning of the year | 23,048 | 16,015 | ||||||
| Cash, cash equivalents and restricted cash, end of the year | $ | 6,871 | $ | 23,048 | ||||
| Supplemental disclosure of cash flow information | ||||||||
| Interest payments on mortgage loan | $ | (1,784 | ) | $ | (1,369 | ) | ||
| Interest payments on senior convertible notes | $ | (550 | ) | $ | (1,103 | ) | ||
See accompanying notes to the consolidated financial statements
| F-7 |
NORTHWEST BIOTHERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| For the years ended | ||||||||
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| Supplemental schedule of non-cash investing and financing activities: | ||||||||
| Deemed dividend related to modification of warrant | $ | 5,647 | $ | - | ||||
| Issuance of debt with debt discount | $ | 310 | $ | - | ||||
| Return of common stock and warrants from Cognate | $ | 8 | $ | - | ||||
| Extinguishment of shares payable related to Cognate | $ | 22,539 | $ | - | ||||
| Extinguishment of derivative liabilities related to Cognate | $ | 10,131 | $ | - | ||||
| Issuance of warrants in conjunction with demand notes | $ | - | $ | 57 | ||||
| Issuance of common stock for accounts payable conversion | $ | 28 | $ | - | ||||
| Issuance of common stock and warrants in connection with conversion of accounts payable - Cognate BioServices | $ | - | $ | 3,751 | ||||
| Issuance of common stock and warrants for conversion of debt and accrued interest | $ | 1,869 | $ | 6,887 | ||||
| Accrued renewal fee incurred from mortgage loan | $ | 488 | $ | - | ||||
| Accrued exit fee incurred from mortgage loan | $ | - | $ | 51 | ||||
| Offering costs payable | $ | 800 | $ | - | ||||
| Reclassification of warrant liabilities related to warrants exercised for cash | $ | 825 | $ | 264 | ||||
| Reclassification of warrant liabilities related to cashless warrants exercise | $ | - | $ | 521 | ||||
| VAT receivable related to UK facility | $ | - | $ | 537 | ||||
| Redeemable security settlement | $ | - | $ | 299 | ||||
See accompanying notes to the consolidated financial statements
| F-8 |
NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
| 1. | Organization and Description of Business |
Northwest Biotherapeutics, Inc. and its wholly owned subsidiaries NW Bio Gmbh, and Aracaris Capital, Ltd (collectively, the “Company”, “we”, “us” and “our”) were organized to discover and develop innovative immunotherapies for cancer.
The Company is developing an experimental dendritic cell vaccine using its platform technology known as DCVax. DCVax is currently being tested for use in the treatment of certain types of cancers.
Cognate BioServices, Inc. (“Cognate BioServices”), which is a company related by common ownership (Note 9), provides the Company with mission critical contract manufacturing services, research and development services, distribution and logistics, and related services, in compliance with the Company’s specifications and the applicable regulatory requirements for clinical grade cellular products. The Company and Cognate BioServices are currently parties to a series of contracts providing for these services as more fully described below. The Company is dependent on Cognate BioServices to provide the manufacturing services, and any interruption of such services could potentially have a material adverse effect on the Company’s ability to proceed with its clinical trials. Cognate BioServices’ manufacturing facility for clinical-grade cellular products is located in Memphis, Tennessee. In addition, a Cognate affiliate in Germany works with the Fraunhofer Institute to produce DCVax-L products there, and Cognate affiliates in the UK and Israel are preparing for production of DCVax-L products in those locations.
Although there are many contract manufacturers for small molecule drugs and for biologics, there are only a few contract manufacturers in the U.S., and even fewer in Europe, that specialize in producing living cell products and that have a track record of success with regulatory authorities. The manufacturing of living cell products is highly specialized and entirely different than production of biologics: the physical facilities and equipment are different, the types of personnel and skill sets are different, and the processes are different. The regulatory requirements relating to manufacturing and cellular products are especially challenging and are one of the most frequent reasons for the development of a company’s cellular products to be put on clinical hold (i.e., stopped by regulatory authorities).
In addition, the Company’s programs require a large amount of capacity in these specialized manufacturing facilities, and require that the large capacity be dedicated exclusively to the Company’s programs. Most medical products, including cellular products, are made in standardized batches: the same manufacturing suites are used for a number of companies’ products, at designated times scheduled in advance. In contrast, the Company’s products are fully personalized and not made in standardized batches: the Company’s products are made on demand, patient by patient, on an as needed basis.
| 2. | Liquidity, Financial Condition and Management Plans |
The Company used approximately $55.7 million of cash in its operating activities for the year ended December 31, 2016. The Company incurred a $80.2 million net loss for the year ended December 31, 2016, including $5.8 million of net aggregate charges for the interest associated with the accretion of convertible notes discount, stock based compensation, a fair value change in derivative financial instruments, loss from extinguishment of debt, inducement cost related to extinguishment and modification on warrant liabilities, and a loss from the assumption of Cognate debt. Management believes that the Company has access to capital resources through the sale of equity and debt financing arrangements. Notwithstanding, the Company has not secured any commitments for new financing for this specific purpose at this time.
The Company had current assets of $7.9 million as of December 31, 2016, and a working capital deficit of approximately $68.5 million at December 31, 2016. The Company owed an aggregate of $23.7 million of trade liabilities to related parties as of December 31, 2016. The Company has not yet generated any material revenue from the sale of its products and is subject to all of the risks and uncertainties that are typically faced by biotechnology companies that devote substantially all of their efforts to R&D and clinical trials and do not yet have commercial products. The Company expects to continue incurring losses for the foreseeable future. The Company’s existing liquidity is not sufficient to fund its operations, anticipated capital expenditures, working capital and other financing requirements until the Company reaches significant revenues. Until that time, the Company will need to obtain additional equity and/or debt financing, especially if the Company experiences downturns in its business that are more severe or longer than anticipated, or if the Company experiences significant increases in expense levels resulting from being a publicly-traded company or from expansion of operations. If the Company attempts to obtain additional equity or debt financing, the Company cannot assume that such financing will be available to the Company on favorable terms, or at all.
| F-9 |
Because of recurring operating losses, net operating cash flow deficits, and an accumulated deficit, there is substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements have been prepared assuming that 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.
| 3. | Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying consolidated financial statements of the Company were prepared in accordance with generally accepted accounting principles in the U.S. (“U.S. GAAP”) and include the assets, liabilities, revenues and expenses of the wholly owned subsidiaries in Germany and the United Kingdom. All intercompany transactions and accounts have been eliminated in consolidation.
Consolidation
The Company’s policy is to consolidate all entities in which it can vote a majority of the outstanding voting stock. In addition, the Company consolidates entities which meet the definition of a variable interest entity (VIE) for which the Company is the primary beneficiary, if any. The primary beneficiary is the party who has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and who has an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the VIE.
Prior Period Reclassifications
Certain prior period amounts that were combined in the December 31, 2015 consolidated financial statements have been reclassified for comparability with the December 31, 2016 presentation. These reclassifications had no effect on previously reported net loss.
Cash and Cash Equivalents
Cash consists of funds deposited in checking accounts. The Company has them either in a form of bank deposits or highly liquid debt instruments in investment-grade pursuant to the Company's investment policy. Accounts at each institution are insured by the Federal Deposit Insurance Corporation ("FDIC") up to $250,000. As of December 31, 2016, the Company held a total deposit of approximately $5.8 million with one institution which exceeded the FDIC limit. The management believes that no material credit or market risk exposure exists due to the high credit quality of the institutions that have custody of the Company’s funds. The Company has not incurred any losses on such accounts.
Restricted Cash
The Company records cash held in an escrow account to secure certain debt interest obligations as restricted cash. As of December 31, 2016 and 2015, the Company has $0.7 million and $1.2 million, respectively of restricted cash, respectively.
Property, Plant and Equipment
Property and equipment are stated at cost. Depreciation and amortization are provided for using straight-line methods, in amounts sufficient to charge the cost of depreciable assets to operations over their estimated service lives. Repairs and maintenance costs are charged to operations as incurred. For more details see Note 6.
| F-10 |
The Company assesses its long-lived assets for impairment whenever facts and circumstances indicate that the carrying amounts may not be fully recoverable. To analyze recoverability, the Company projects undiscounted net future cash flows over the remaining lives of such assets. If these projected undiscounted net future cash flows are less than the carrying amounts, an impairment loss would be recognized, resulting in a write-down of the assets with a corresponding charge to earnings. The impairment loss is measured based upon the difference between the carrying amounts and the fair values of the assets. Assets to be disposed of are reported at the lower of the carrying amounts or fair value less cost to sell. Management determines fair value using the discounted cash flow method or other accepted valuation techniques.
Accordingly, during the year ended December 31, 2016, an assessment was undertaken to determine whether $44.6 million of assets of the Company might be impaired. The Company’s estimate of undiscounted cash flows indicated that such carrying amounts were expected to be recovered, and therefore there was no impairment as of December 31, 2016. Of course, it is possible that the estimate of undiscounted cash flows could change at some time in the future, resulting in a need at that time to write down such assets to fair value.
Use of Estimates
In preparing financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of expenses during the reporting period. Due to inherent uncertainty involved in making estimates, actual results reported in future periods may be affected by changes in these estimates. On an ongoing basis, the Company evaluates its estimates and assumptions. These estimates and assumptions include valuing equity securities in share-based payment arrangements, estimating the fair value of financial instruments recorded as derivative liabilities, useful lives of depreciable assets and whether impairment charges may apply, and the fair value of environmental remediation liabilities.
Fair Value of Financial Instruments
ASC 820, Fair Value Measurements, provides guidance on the development and disclosure of fair value measurements. Under this accounting guidance, fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.
The accounting guidance classifies fair value measurements in one of the following three categories for disclosure purposes:
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Inputs other than Level 1 prices for similar assets or liabilities that are directly or indirectly observable in the marketplace.
Level 3: Unobservable inputs which are supported by little or no market activity and values determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.
The carrying amount of the Company’s financial instruments, including cash and cash equivalents and accounts payable approximate their fair values. As of December 31, 2016, the carrying amount of the notes payable approximate fair value as its interest rate approximates current market rates.
Deferred Financing Costs
The Company capitalizes costs related to the issuance of debt which are included on the accompanying consolidated balance sheets. Deferred financing costs are amortized using a straight-line method that approximates the interest method over the life of the related loan and are included as a component of interest expense on the accompanying consolidated statements of operations.
| F-11 |
Warrant Liability
The Company accounts for the common stock warrants outstanding as of December 31, 2016 in accordance with the guidance contained in ASC 815-40-15-7D, "Contracts in Entity's Own Equity" whereby under that provision they do not meet the criteria for equity treatment and must be recorded as a liability. Accordingly, the Company classifies the warrant instrument as a liability at its fair value and adjusts the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company's statements of operations. The fair value of the warrants issued by the Company in connection with the Conversion Transaction has been estimated using a Monte Carlo simulation. In addition, Under ASC 815, registered common stock warrants that require the issuance of registered shares upon exercise and do not expressly preclude an implied right to cash settlement are accounted for as derivative liabilities. The Company classifies these derivative warrant liabilities on the consolidated balance sheet as a current liability.
Environmental Remediation Liabilities
The Company records environmental remediation liabilities for properties acquired. The environmental remediation liabilities are initially recorded at fair value. The liability is reduced for actual costs incurred in connection with the clean-up activities for each property. Upon completion of the clean-up, the environmental remediation liability is adjusted to equal the fair value of the remaining operation, maintenance and monitoring activities to be performed for the property. The reduction in the liability resulting from the completion of the clean-up is included in other income. As of December 31, 2016, the Company estimate that the total environmental remediation costs associated with the purchase of the UK Facility will amount to approximately $6.2 million. Contamination clean-up costs that improve the property from its original acquisition state are capitalized as part of the property’s overall development costs. The Company engaged a third party specialist to conduct certain surveys of the condition of the property which included, among other things, a preliminary analysis of potential environmental remediation exposures. The Company determined, based on information contained in the specialist’s report, that it would be required to estimate the fair value of an unconditional obligation to remediate specific ground contamination at an estimated fair value of approximately $6.2 million. The Company computed its preliminary estimate of the fair value of this obligation using a probability weighted approach that measures the likelihood of the following two potential outcomes: (i) a higher probability requirement of erecting a protective barrier around the affected area at an estimated cost of approximately $4.5 million, and (ii) a lower probability requirement of having to excavate the affected area at an estimated cost of approximately $32.0 million. The Company’s estimate is preliminary and therefore subject to change as further studies are conducted, and as additional facts come to the Company’s attention. Environmental remediation efforts are complex, technical and subject to various uncertainties. Accordingly, it is at least reasonably possible that any changes in the Company’s estimate could materially differ from the management’s preliminary assessment discussed herein.
Foreign Currency Translation and Transactions
The Company has operations in Germany and the United Kingdom in addition to the U.S. The Company translated its assets and liabilities into U.S. dollars using end of period exchange rates and revenues and expenses are translated into U.S. dollars using weighted average rates. Foreign currency translation adjustments are reported as a separate component of accumulated other comprehensive income (loss) within stockholders’ equity (deficit).
During the year ended December 31, 2016, the Company recorded $2.0 million of foreign currency translation gain primarily due to the strengthening of the U.S. dollar relative to the Euro and British pound sterling.
During the year ended December 31, 2016, the Company also recorded $6.7 million of foreign currency transaction loss on the Consolidated Statement of Operations, which was primarily related to the inter-company transactions related re-valuation to the UK facility.
Comprehensive Loss
The Company reports comprehensive loss and its components in its consolidated financial statements. Comprehensive loss consists of net loss and foreign currency translation adjustments, affecting stockholders’ equity (deficit) that, under U.S, GAAP, is excluded from net loss.
| F-12 |
Revenue Recognition
The Company recognizes revenue in accordance with the terms stipulated under the patient service contract. In various situations, the Company receives certain payments for DCVax®-L for patient treatment. These payments are non-refundable, and are not dependent on the Company’s ongoing future performance. Due to potential collectability issues with patients, the Company has adopted a policy of recognizing these payments as revenue when received.
Accrued Outsourcing Costs
Substantial portions of our preclinical studies and clinical trials are performed by third-party laboratories, medical centers, contract research organizations and other vendors (collectively "CROs"). These CROs generally bill monthly or quarterly for services performed, or bill based upon milestones achieved. For clinical studies, expenses are accrued when services are performed. The Company monitors patient enrollment, the progress of clinical studies and related activities through internal reviews of data that is tracked by the CROs under contractual arrangements, correspondence with the CROs and visits to clinical sites.
Research and Development Costs
Research and development costs are charged to operations as incurred and consist primarily of clinical trial costs, related party manufacturing costs, consulting costs, contract research and development costs, clinical site costs and compensation costs. Research and development costs were approximately $60.1 million and $103.1 million for the years ended December 31, 2016 and 2015, respectively.
Income Taxes
The Company recognizes income taxes on an accrual basis based on tax positions taken or expected to be taken in its tax returns. A tax position is defined as a position in a previously filed tax return or a position expected to be taken in a future tax filing that is reflected in measuring current or deferred income tax assets and liabilities. Tax positions are recognized only when it is more likely than not (i.e., likelihood of greater than 50%), based on technical merits, that the position would be sustained upon examination by taxing authorities. Tax positions that meet the more likely than not threshold are measured using a probability-weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. A valuation allowance is established to reduce deferred tax assets if all, or some portion, of such assets will more than likely not be realized. Should they occur, our policy is to classify interest and penalties related to tax positions as income tax expense. Since our inception, no such interest or penalties have been incurred, however prior to 1998 the Company was a limited liability company and the Company’s tax losses and credits generally flowed directly to the members.
Non-Employee Stock Based Compensation
Compensation expense for all stock-based awards is measured on the grant date based on the fair value of the award and is recognized as an expense, on a straight-line basis, over the employee's requisite service period (generally the vesting period of the equity award). The fair value of each option award is estimated on the grant date using a Black-Scholes option valuation model. Stock-based compensation expense is recognized only for those awards that are expected to vest using an estimated forfeiture rate. The Company estimates pre-vesting option forfeitures at the time of grant and reflects the impact of estimated pre-vesting option forfeitures in compensation expense recognized. For options and warrants issued to non-employees, the Company recognizes stock compensation costs utilizing the fair value methodology over the related period of benefit.
The Company accounts for stock based compensation awards issued to non-employees for services, at either the fair value of the services or the instruments issued in exchange for such services (based on the same methodology described for employee stock based compensation), whichever is more readily determinable.
| F-13 |
Debt Extinguishment
The Company accounts for the income or loss from extinguishment of debt by comparing the difference between the reacquisition price and the net carrying amount of the debt being extinguished should be recognized as gain or loss when the debt is extinguished. The gain or loss from debt extinguishment is recorded in the consolidated statements of operations under "other income (expense)" as loss from extinguishment of convertible debt.
Share-settled Debt
Share-settled debt may settle by providing the holder with a variable number of shares with an aggregate fair value equaling the debt principal outstanding. (In some cases, a discount to the fair value of the share price may be used to determine the number of shares to be delivered, resulting in settlement at a premium.) Share-settled debt was analyzed to determine that the share settled debt does not contain a beneficial conversion feature or contingent beneficial conversion feature. Share-settled debt is recorded at fair value.
Sequencing
As of October 13, 2016, the Company adopted a sequencing policy whereby all future instruments may be classified as a derivative liability with the exception of instruments related to share-based compensation issued to employees or directors.
Loss per Share
Basic loss per share is computed on the basis of the weighted average number of shares outstanding for the reporting period. Diluted loss per share is computed on the basis of the weighted average number of common shares (including redeemable shares) plus dilutive potential common shares outstanding using the treasury stock method. Any potentially dilutive securities are anti-dilutive due to the Company’s net losses. For the years presented, there is no difference between the basic and diluted net loss per share.
Segments
The Company operates in one reportable segment and, accordingly, no segment disclosures have been presented herein.
Adoption of Recent Accounting Pronouncements
Going Concern
In August 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-15, “Presentation of Financial Statements - Going Concern”, which provide guidance about management's responsibility in evaluating whether there is substantial doubt relating to an entity’s ability to continue as a going concern and to provide related footnote disclosures as applicable. ASU 2014-15 is effective for the interim and annual periods ending after December 15, 2016 and the Company adopted the provisions of ASU 2014-15 as of December 31, 2016. There was no impact from adoption of this guidance on the Company's consolidated financial statements.
Interest - Imputation of Interest
In August 2015, the FASB issued ASU No. 2015-15, “Interest - Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements”, which clarifies the treatment of debt issuance costs from line-of-credit arrangements after the adoption of ASU No. 2015-03, “Interest - Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs”. In particular, ASU No. 2015-15 clarifies that the SEC staff would not object to an entity deferring and presenting debt issuance costs related to a line-of-credit arrangement as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of such arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company adopted ASU No. 2015-15 during the first quarter of fiscal 2016, and its adoption did not have a material impact on its consolidated financial statements.
| F-14 |
Restricted Cash
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which clarifies the presentation of restricted cash in the statements of cash flows. Under ASU 2016-18, restricted cash is included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows. The Company adopted ASU 2016-18 during the three months ended December 31, 2016 on a retrospective basis. As a result, net cash provided by operating activities increased by $1.1 million in the year ended December 31, 2015. Beginning-of-period cash and restricted cash increased by $1.2 million in 2016. The following is a summary of our cash and restricted cash total as presented in the consolidated statements of cash flows for the years ended December 31, 2016 and 2015 (in thousands):
| December 31, 2016 | December 31, 2015 | |||||||
| Cash and cash equivalents | $ | 6,186 | $ | 21,813 | ||||
| Restricted cash | 685 | 1,235 | ||||||
| Total cash and restricted cash | $ | 6,871 | $ | 23,048 | ||||
Recent Accounting Pronouncements
Statement of Cash Flows
In August 2016, the FASB issued ASU No. 2016-15 Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments, which addresses specific cash flow classification issues where there is currently diversity in practice including debt prepayment and proceeds from the settlement of insurance claims. ASU 2016-15 is effective for annual periods beginning after December 15, 2017, with early adoption permitted. The Company is currently assessing the impact that ASU No. 2016-15 will have on its consolidated financial statements.
Compensation-Stock Compensation
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting. Under ASU No. 2016-09, companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement and the APIC pools will be eliminated. In addition, ASU No. 2016-09 eliminates the requirement that excess tax benefits be realized before companies can recognize them. ASU No. 2016-09 also requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. Furthermore, ASU No. 2016-09 will increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. An employer with a statutory income tax withholding obligation will now be allowed to withhold shares with a fair value up to the amount of taxes owed using the maximum statutory tax rate in the employee’s applicable jurisdiction(s). ASU No. 2016-09 requires a company to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on the statement of cash flows. Under current U.S. GAAP, it was not specified how these cash flows should be classified. In addition, companies will now have to elect whether to account for forfeitures on share-based payments by (1) recognizing forfeitures of awards as they occur or (2) estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, as is currently required. These aspects of ASU 2016-09 are effective for reporting periods beginning after December 15, 2016, with early adoption permitted provided that all of the guidance is adopted in the same period. The Company will adopt this guidance as of and for the three months ended March 31, 2017. The Company does not expect the adoption of ASU 2016-09 to have a material impact on its consolidated financial statements and related disclosures.
Revenue from Contracts with Customer
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, an updated standard on revenue recognition. ASU No. 2014-09 provides enhancements to the quality and consistency of how revenue is reported by companies while also improving comparability in the financial statements of companies reporting using International Financial Reporting Standards or U.S. GAAP. The main purpose of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively and improve guidance for multiple-element arrangements. In July 2015, the FASB voted to approve a one-year deferral of the effective date of ASU No. 2014-09, which will be effective for the Company in the first quarter of fiscal year 2018 and may be applied on a full retrospective or modified retrospective approach. The Company is currently evaluating the pending adoption of ASU 2014-09 and its impact on the Company's consolidated financial statements and has not yet identified which transition method will be applied upon adoption.
| F-15 |
In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customer. The new guidance is an update to ASC 606 and provides clarity on: identifying performance obligations and licensing implementation. For public companies, ASU No. 2016-10 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently evaluating the impact of this guidance on its consolidated financial position, results of operations and cash flows.
Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements; and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU 2016-01 will be effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the impact that ASU 2016-01 will have on its consolidated financial statements and related disclosures.
Leases
In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842) which supersedes FASB ASC Topic 840, Leases (Topic 840) and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases. The standard will be effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. The Company is currently evaluating the impact that ASU 2016-02 will have on its consolidated financial statements and related disclosures.
| 4. | Fair Value Measurements |
Extinguishment of Derivative Liabilities related to Cognate
On May 2, 2016, the Company submitted a remediation plan (the “Remediation Plan”) related to certain stock previously issued to Cognate to regain compliance with Nasdaq’s Rule 5635. The Remediation Plan was accepted by Nasdaq on August 30, 2016.
| F-16 |
Pursuant to the Remediation Plan, the Company canceled the most favored nation provisions related to warrants and common shares issued to Cognate under 2013 Manufacturing Services agreement (“2013 Agreement”) and 2014 Manufacturing Services Agreements (“2014 Agreements”) through a binding agreement with Cognate. In addition, Cognate returned and the Company extinguished 6,880,574 warrants at an original exercise price of $4.00 that were issued under the 2014 Agreements; the Company issued replacement warrants of 4,305,772 at a higher exercise price ($4.27). The fair value of the 4.3 million replacement warrants was approximately $403,000 on the grant date, and was recorded in the additional paid in capital. The aggregate fair value of the 6.88 million warrants extinguished as of August 30, 2016 was approximately $10.1 million, and was recorded through additional paid in capital.
A summary of weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring Cognate warrants extinguishment as of August 30, 2016 is as follows:
| Date of valuation | August 30, 2016 | |||
| Strike price | $ | 0.35 | ||
| Contractual term (years) | 2.8 | |||
| Volatility (annual) | 81 | % | ||
| Risk-free rate | 1 | % | ||
| Dividend yield (per share) | 0 | % | ||
Derivative Warrants Granted in 2016
Public and Private Offering
During the year ended December 31, 2016, the Company issued 15,819,000 warrants (the “Warrants”) to multiple investors (the “Holders”), including 643,000 warrants at exercise price of $0.35 to Jerry Jasinowski, who serves as the board director of the Company. Since the Company’s adopted sequencing policy (see FN 3), the warrants were classified as liabilities and measured at fair value on the grant date, with changes in fair value recognized as other income on the statement of operation and disclosed in the financial statements as long as the contracts remain classified as liabilities
A summary of weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring warrant granted during the year ended December 31, 2016 is as follows:
| 2016 Warrants Granted | ||||
| Strike price | $ | 0.36 | ||
| Contractual term (years) | 5.0 | |||
| Volatility (annual) | 99 | % | ||
| Risk-free rate | 2 | % | ||
| Dividend yield (per share) | 0 | % | ||
Debt Conversion
During the year ended December 31, 2016, the Company issued 6,034,000 shares of common stock and 2,517,000 warrants (the “Warrants”) to a debt holder (the “Holder”) to convert his outstanding debt in dispute and accrued interest for total $2.5 million. The Warrants were classified as liabilities and measured at fair value on the grant date, with changes in fair value recognized as other income on the statement of operation and disclosed in the financial statements as long as the contracts remain classified as liabilities
| F-17 |
A summary of weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring warrant granted during the year ended December 31, 2016 is as follows:
| 2016 Warrants Granted | ||||
| Strike price | $ | 0.48 | ||
| Contractual term (years) | 5.5 | |||
| Volatility (annual) | 137 | % | ||
| Risk-free rate | 1 | % | ||
| Dividend yield (per share) | 0 | % | ||
Share settled Debt
The fair value of share settled debt (in default) was valued based upon the closing price of the Company’s common stock as of October 13, 2016 and December 31, 2016.
Extinguishment of Warrant Liabilities Related to Cash Exercise
During the year ended December 31, 2016 approximately 2,555,000 warrants classified as derivative liabilities were exercised for cash. A summary of weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring warrant exercises (originally recorded as liabilities) during the year ended December 31, 2016 is as follows:
| 2016 Warrants Exercises | ||||
| Strike price | $ | 0.35 | ||
| Contractual term (years) | 2.2 | |||
| Volatility (annual) | 84 | % | ||
| Risk-free rate | 1 | % | ||
| Dividend yield (per share) | 0 | % | ||
The following table classifies the Company’s liabilities measured at fair value on a recurring basis into the fair value hierarchy as of December 31, 2016 and 2015 (in thousands):
| Fair value measured at December 31, 2016 | ||||||||||||||||
| Quoted prices in active | Significant other | Significant | ||||||||||||||
| Fair value at | markets | observable inputs | unobservable inputs | |||||||||||||
| December 31, 2016 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Derivative liability | $ | 4,862 | $ | - | $ | - | $ | 4,862 | ||||||||
| Share-settled debt (in default) | 5,200 | 5,200 | ||||||||||||||
| Total fair value | $ | 10,062 | $ | - | $ | - | $ | 10,062 | ||||||||
| Fair value measured at December 31, 2015 | ||||||||||||||||
| Quoted prices in active | Significant other | Significant | ||||||||||||||
| Fair value at | markets | observable inputs | unobservable inputs | |||||||||||||
| December 31, 2015 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Derivative liability | $ | 27,982 | $ | - | $ | - | $ | 27,982 | ||||||||
There were no transfers between Level 1, 2 or 3 during the years ended December 31, 2016 and 2015, respectively.
The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s management.
The following table presents changes in Level 3 liabilities measured at fair value for the years ended December 31, 2016 and 2015. Both observable and unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level 3 category. Unrealized gains and losses associated with liabilities within the Level 3 category include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long- dated volatilities) inputs (in thousands).
| F-18 |
| Warrant | Share-settled | |||||||||||
| Liability | Debt (in Default) | Total | ||||||||||
| Balance – January 1, 2015 | $ | 44,742 | $ | - | $ | 44,742 | ||||||
| Change in fair value | (15,676 | ) | - | (15,676 | ) | |||||||
| Cashless warrants exercise | (521 | ) | - | (521 | ) | |||||||
| Warrants exercised for cash | (264 | ) | - | (264 | ) | |||||||
| Redeemable security settlement | (299 | ) | - | (299 | ) | |||||||
| Balance – December 31, 2015 | 27,982 | - | 27,982 | |||||||||
| Extinguishment of derivative liabilities related to Cognate | (10,131 | ) | (10,131 | ) | ||||||||
| Extinguishment of warrant liabilities related to warrants exercised for cash | (415 | ) | (415 | ) | ||||||||
| Warrants granted | 5,317 | 5,317 | ||||||||||
| Share-settled debt assumed from Cognate | - | 5,680 | 5,680 | |||||||||
| Conversion of share-settled debt | - | (480 | ) | (480 | ) | |||||||
| Change in fair value | (17,891 | ) | - | (17,891 | ) | |||||||
| Balance – December 31, 2016 | $ | 4,862 | $ | 5,200 | $ | 10,062 | ||||||
A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring the Company’s warrant liabilities that are categorized within Level 3 of the fair value hierarchy for the years ended December 31, 2016 and 2015 is as follows:
| Date of valuation | December 31, 2016 | December 31, 2015 | ||||||
| Strike price | $ | 0.60 | $ | 3.49 | ||||
| Contractual term (years) | 4.7 | 3.1 | ||||||
| Volatility (annual) | 98 | % | 87 | % | ||||
| Risk-free rate | 2 | % | 1 | % | ||||
| Dividend yield (per share) | 0 | % | 0 | % | ||||
5. Share-based Compensation
Related Party
The Company recorded approximately $13.6 million and $40.8 million expenses for stock based payment expense to Cognate for the year ended December 31, 2016 and 2015, respectively (see FN9).
The Company issued 175,000 shares and 318,116 shares of common stock for services to Cognate debt holders in partial satisfaction of amounts owed to Cognate for manufacturing services, which resulted in compensation expense of $86,000 and $2.7 million for the years ended December 31, 2016 and 2015, respectively.
Other
The Company issued 75,000 shares and 85,228 shares of common stock for the years ended December 31, 2016 and 2015, respectively, which resulted in share based compensation of approximately $41,000 and $0.7 million, respectively.
6. Property and Equipment
Property and equipment consist of the following at December 31, 2016 and 2015 (in thousands):
| December 31, | December 31, | |||||||
| 2016 | 2015 | |||||||
| Leasehold improvements | $ | 69 | $ | 69 | ||||
| Office furniture and equipment | 25 | 25 | ||||||
| Computer equipment and software | 626 | 598 | ||||||
| 720 | 692 | |||||||
| Less: accumulated depreciation | (405 | ) | (216 | ) | ||||
| Total property, plant and equipment, net | 315 | 476 | ||||||
| Construction in progress (property in the United Kingdom)* | 44,559 | 45,681 | ||||||
| $ | 44,874 | $ | 46,157 | |||||
| F-19 |
* Construction in progress includes both the land acquisition costs and the building costs.
Depreciation expense was approximately $189,000 and $56,000 for the years ended December 31, 2016 and 2015, respectively.
7. Notes Payable
The following table summarizes outstanding debt as of December 31, 2016 and 2015, respectively (amount in thousands):
| Remaining | ||||||||||||||||||||||||||
| Stated | Conversion | Remaining | Deferred | Carrying | ||||||||||||||||||||||
| Maturity Date | Interest Rate | Price | Face Value | Debt Discount | Financing Cost | Value | ||||||||||||||||||||
| 6% unsecured (1) | 3/25/2011 & 9/19/2011 | 6 | % | $ | 3.09 | $ | 135 | $ | - | $ | - | $ | 135 | |||||||||||||
| 10% unsecured note to related party | On Demand | 10 | % | N/A | 50 | - | - | 50 | ||||||||||||||||||
| 12% unsecured note to related party (2) | On Demand | 12 | % | N/A | 260 | - | - | 260 | ||||||||||||||||||
| 2014 Senior convertible notes | 8/15/2017 | 5 | % | $ | 6.60 | 11,000 | - | (175 | ) | 10,825 | ||||||||||||||||
| 10% unsecured (3) | 11/4/2017 | 10 | % | N/A | 2,450 | - | - | 2,450 | ||||||||||||||||||
| 8% unsecured note (4) | 6/30/2018 | 8 | % | N/A | 3,310 | (310 | ) | - | 3,000 | |||||||||||||||||
| Share-settled debt, at fair value (5) | In Default | 18 | % | $ | 0.35 | 5,200 | - | - | 5,200 | |||||||||||||||||
| Mortgage loan (6) | 11/16/2017 & 8/16/2017 | 12 | % | N/A | 10,156 | - | (365 | ) | 9,791 | |||||||||||||||||
| Ending balance as of December 31, 2016 | $ | 32,561 | $ | (310 | ) | $ | (540 | ) | $ | 31,711 | ||||||||||||||||
| Remaining | ||||||||||||||||||||||
| Stated | Conversion | Deferred | Carrying | |||||||||||||||||||
| Maturity Date | Interest Rate | Price | Face Value | Financing Cost | Value | |||||||||||||||||
| 15% unsecured - in dispute | 7/31/2011 | 15 | % | N/A | $ | 934 | $ | - | $ | 934 | ||||||||||||
| 6% unsecured | 3/25/2011 & 9/19/2011 | 6 | % | $ | 3.09 | 135 | - | 135 | ||||||||||||||
| 10% unsecured note to related party | On Demand | 10 | % | N/A | 50 | - | 50 | |||||||||||||||
| 2014 Senior convertible notes | 8/15/2017 | 5 | % | $ | 6.60 | 11,000 | (457 | ) | 10,543 | |||||||||||||
| Mortgage loan | 11/16/2017 & 8/16/2017 | 12 | % | N/A | 11,612 | (468 | ) | 11,144 | ||||||||||||||
| Ending balance as of December 31, 2015 | $ | 23,731 | $ | (925 | ) | $ | 22,806 | |||||||||||||||
| (1) | This $135,000 note as of December 31, 2016 consists of two separate 6% notes in the amounts of $110,000 and $25,000. In regard to the $110,000 note, the Company has made ongoing attempts to locate the creditor to repay or convert this note, but has been unable to locate the creditor to date. In regard to the $25,000 note, the holder has elected to convert these notes into equity, the Company has delivered the applicable conversion documents to the holder, and the Company is waiting for the holder to execute and return the documents. |
| (2) | On November 28, 2016, Leslie J. Goldman loaned the Company $260,000 pursuant to a Demand Promissory Note (the “Goldman Note”). The Goldman Note bore interest at 12% per annum, and is payable upon demand, with 5 days’ prior written notice by Mr. Goldman to the Company. |
| (3) | On November 4, 2016, the Company entered into three promissory notes agreement (“the Notes”) with an individual investor for an aggregate amount of $2.45 million. The Notes bore interest at the rate of 10% with 1 year term. |
| (4) | On December 30, 2016, the Company entered into a note purchase agreement (the “Note”) with an individual investor for an aggregate principal amount of $3,310,000. The Note bore interest at 8% per annum with 18 months term. The Note carries an original issue discount of $300,000 and $10,000 legal cost that was reimbursable to the investor. |
| (5) | On October 13, 2016, the Company entered an Assignment and Assumption Agreement (the “Agreement”) with Cognate to assume certain Collateralized Full Recourse Redeemable Notes (the “Notes”) owed by Cognate for total $5.7 million. The Notes were originally due in January 2016 and are currently in default and bore a default interest rate of 18% per annual. During 2016, the Company issued 1,000,000 shares of common stock to convert $480,000 of the Notes. The Company had a $5.2 million principal balance and a $0.2 million accrued interest balance as of December 31, 2016. |
These Notes settle by providing the debt holder with a variable number of the Company’s shares with an aggregate fair value determined by reference to the debt principal outstanding. Because the value that the holder receives at settlement does not vary with the value of the Company’s equity shares, the settlement provision is not considered a conversion option for financial accounting purposes. Rather, these Notes are recognized as share-settled debt at fair value. The share-settled debt is currently in default.
| F-20 |
| (6) | On August 17, 2016 and November 17, 2016, the Mortgage loan lender issued two automatic one-year extensions of mortgage loan maturity date to August 16, 2017 and November 16, 2017, with a renewal fees of approximately $0.2 million and $0.3 million, respectively, which are not due until the end of the extension period and were recorded as deferred financing cost. The Company recorded the renewal fees as deferred financing cost on the balance sheet and amortized the renewal fess through the remaining life of the mortgage using a straight-line method. |
The following table summarizes total interest expenses related to senior convertible notes, share-settled debt, other notes and mortgage loan for years ended December 31, 2016 and 2015, respectively (in thousands):
| For the years ended | ||||||||
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| Interest expenses related to senior convertible notes: | ||||||||
| Contractual interest | $ | 551 | $ | 640 | ||||
| Accelerated interest due to the conversion of convertible senior notes into common stock | - | 763 | ||||||
| Amortization of debt issuance costs | 282 | 363 | ||||||
| Accelerated amortization of debt issuance cost due to the conversion of convertible senior notes into common stock | - | 302 | ||||||
| Total interest expenses related to senior convertible notes | 833 | 2,068 | ||||||
| Interest expenses related to other notes: | ||||||||
| 15% unsecured originally due July 2011 - in dispute | 860 | 140 | ||||||
| 10% unsecured notes due November 2017 | 57 | - | ||||||
| 6% unsecured | 7 | (70 | ) | |||||
| 10% unsecured note due 2014 (related party) - on demand | 25 | 18 | ||||||
| 12% unsecured note (related party) - on demand | 3 | - | ||||||
| Share-settled debt, at fair value (in default) | 200 | - | ||||||
| Amortization of debt discount | - | 57 | ||||||
| Total interest expenses related to other notes | 1,152 | 145 | ||||||
| Interest expenses related to mortgage loan: | ||||||||
| Contractual interest | 1,259 | 1,349 | ||||||
| Amortization of debt issuance costs | 568 | 582 | ||||||
| Total interest expenses on the mortgage loan | 1,827 | 1,931 | ||||||
| Other interest expenses | 6 | 9 | ||||||
| Total interest expenses | $ | 3,818 | $ | 4,153 | ||||
| 8. | Net Loss per Share Applicable to Common Stockholders |
Basic loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the reporting period. Diluted loss per common share is computed similar to basic loss per common share except that it reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock.
The following table sets forth the computation of loss per share for the years ended December 31, 2016 and 2015, respectively:
| F-21 |
The following securities were not included in the diluted net loss per share calculation because their effect was anti-dilutive as of the periods presented (in thousands):
| For the years ended | ||||||||
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| Common stock options | 1,551 | 1,551 | ||||||
| Common stock warrants - equity treatment | 38,241 | 14,834 | ||||||
| Common stock warrants - liability treatment | 20,037 | 12,433 | ||||||
| Share-settled debt and accrued interest, at fair value | 15,429 | - | ||||||
| Convertible notes and accrued interest | 1,766 | 1,763 | ||||||
| Potentially dilutive securities | 77,024 | 30,581 | ||||||
9. Related Party Transactions
Cognate BioServices, Inc.
The Company and Cognate BioServices entered into a DCVax-L Manufacturing Services Agreement and a DCVax-Direct Manufacturing Services Agreement, both effective January 17, 2014, and those Agreements followed and superseded Manufacturing Services Agreements in 2011 and 2007. The 2007 and 2011 Agreements had provided for baseline charges to the Company per month for dedicated manufacturing capacity, and the 2014 DCVax-L and DCVax-Direct Manufacturing Services Agreements also provide for such baseline charges. These minimum charges reflect the fact that the manufacturing suites and capacity that are going to be used for production of the Company’s DCVax products must be dedicated exclusively to the DCVax products and cannot be used to produce numerous different clients’ products in batches on a “campaign” basis, as is usually the case in contract manufacturing facilities. See description in Note 1 above. The capacity charges in the DCVax-L and DCVax-Direct Agreements entered into in January 2014 were increased in connection with the expansion of DCVax-L and DCVax-Direct production needed for the Company’s growing programs and requested by the Company.
The 2007 and 2011 Agreements also contained certain provisions for fees in the event that the Company shuts down or suspends its DCVax-L clinical trial program during the Term of the Agreement.
Under the April 2011 Agreement, the Company was contingently obligated to pay a $2 million fee if the Company did stop or suspend its DCVax-L program. This provision terminated with the January 17, 2014 DCVax®-L Manufacturing Services Agreement.
Under the January 17, 2014 DCVax®-L Manufacturing Services Agreement and the DCVax-Direct Agreement, a new set of provisions apply going forward to any shut down or suspension. Under these provisions, the Company will be contingently obligated to pay certain fees to Cognate BioServices (in addition to any other remedies) if the Company shuts down or suspends its DCVax-L program or DCVax-Direct program. For a shut down or suspension of the DCVax-L program, the fees will be as follows:
| F-22 |
| · | Prior to the last dose of the last patient enrolled in the Phase III trial for DCVax®-L or After the last dose of the last patient enrolled in the Phase III clinical trial for DCVax®-L but before any submission for product approval in any jurisdiction or after the submission of any application for market authorization but prior to receiving a marketing authorization approval: in any of these cases, the fee shall be $3 million. |
| · | At any time after receiving the equivalent of a marketing authorization for DCVax®-L in any jurisdiction, the fee shall be $5 million. |
For a shut down or suspension of the DCVax-Direct program, the fees will be as follows:
| · | Prior to the last dose of the last patient enrolled in the Phase I/II trial for DCVax®-Direct, the fee shall be $1.5 million. |
| · | After the last dose of the last patient enrolled in the Phase I/II clinical trial for DCVax®-Direct but before the initiation of a Phase III trial the fee shall be $2.0 million. |
| · | After initiation of a phase III trial but before submission of an application for market authorization in any jurisdiction or after the submission of an application for market authorization but prior to receiving a market authorization approval: in each of these cases, the fee shall be $3.0 million. |
| · | At any time after receiving the equivalent of a marketing authorization for DCVax®-Direct in any jurisdiction the fee shall be $5.0 million. |
While our DCVax programs are ongoing, the Company is required to pay certain fees for dedicated production suites or capacity reserved exclusively for DCVax production, and pay for a certain minimum number of patients, whether or not we fully utilize the dedicated capacity and number of patients.
Remediation Plan
As previously reported, on April 26, 2016, the Nasdaq Staff notified the Company that it had reviewed certain stock issuances by the Company to Cognate during 2014 and 2015, and that the Staff had determined that those issuances should be aggregated for purposes of applying Nasdaq rules. Under Nasdaq rules, for purposes of measuring against the limit of 20% of total shares outstanding, all of the stock issuances made by the Company to Cognate during 2014 and 2015 were aggregated, and they were measured against only the shares outstanding in January 2014. Based on the aggregation, the Nasdaq staff determined that certain issuances violated certain Nasdaq listing rules.
The Company proposed a remediation plan (the “Remediation Plan”) that Cognate would surrender certain shares and warrants it had received in connection with the Contracts, Cognate would accept an increase in the exercise price of certain warrants received in connection with the Contracts, and the most favored nation anti-dilution provisions would be deleted from the Contracts.
The Remediation Plan was accepted by the Nasdaq staff on August 30, 2016. Pursuant to the Remediation Plan:
(a) Cognate returned and the Company canceled 8,052,092 restricted shares previously issued to Cognate under the most favored nation anti-dilution provisions of the Contracts, and the most favored nation provisions were deleted from the Contracts. The Company debited par value and credited additional paid in capital on August 30, 2016.
(b) Cognate returned and the Company canceled warrants for 6,880,574 shares issued under the 2014 Agreements, and the Company issued to Cognate new warrants for 4,305,772 shares at a higher exercise price ($4.27) with 5 year term (see FN 4).
(c) Cognate returned and the Company canceled 731,980 of the total of 5,101,330 restricted shares initially issued under the 2014 Agreements. The Company debit to the par value and credit to additional paid in capital.
The remaining portions of the multi-year lock-up and vesting periods relating to shares and warrants held by Cognate were also cancelled.
| F-23 |
The Nasdaq settlement does not affect other obligations of the Company to Cognate, including for existing unpaid invoices, as the Company has previously reported.
Cognate Expenses and Accounts Payable
As of December 31, 2016 and 2015, the Company owed Cognate $23.4 million and $5.5 million, respectively, for unpaid invoices for manufacturing, product distribution, product and process development, and related services. The Company and Cognate are in negotiations in regard to a potential reduction or settlement with respect to the unpaid invoices. The terms have not yet been finalized.
The following table shows a summary of research and development costs from Cognate relating to the DCVax-L and DCVax-Direct programs, product and process development work and preparations for upcoming Phase II trials for the years ended December 31, 2016 and 2015, respectively (in thousands):
| For the years ended | ||||||||
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| Cognate research and development cost - services | $ | 34,665 | $ | 37,703 | ||||
| Stock issued to and returned by Cognate | 13,654 | 40,765 | ||||||
| Total | $ | 48,319 | $ | 78,468 | ||||
Share Based Payments
Fiscal 2016 Activities
On September 7, 2016, under the Company’s Remediation Agreement with Nasdaq, Cognate returned 8,052,092 vested shares to the Company. The Company cancelled them and recorded this as a reduction in shares outstanding. Cognate also held 731,980 unvested shares at that time. Cognate returned those 731,980 shares to the Company and the Company cancelled them as well. At the time, the development expense associated with the 731,980 shares was $221,000.
Fiscal 2015 Activities
For the year ended December 31, 2015, the Company issued 318,116 shares of common stock for services to Cognate’s designee in partial satisfaction of amounts owed to Cognate for manufacturing services, which resulted in compensation expense of $2.7 million.
On October 19, 2015, the Company issued 8,052,092 shares of common stock to Cognate which had been approved by the Board on November 12, 2014 and reported by the Company at that time, but had not yet been issued because all key terms were not finalized, to satisfy certain obligations for unpaid invoices for manufacturing and related services. On October 19, 2015, the terms of the award were finalized. The Company recorded a stock compensation expense of $38.8 million based on the fair value of the common stock on October 19, 2015, because all key terms for the shares were finalized. The fair value was determined based upon the market price of unrestricted tradable shares of the Company’s stock. However, the shares issued to Cognate were unregistered non-tradable shares that were subject to multiple restrictions, including affiliate trading restrictions and a 3-year Lock-up.
On October 19, 2015, the Company also approved the issuance of 3,812,555 warrants which had been approved by the Board on November 12, 2014 and publicly reported by the Company at that time and thereafter. The 3,812,555 warrants have not yet been issued, while the parties finalize certain key terms.
On October 22, 2015, the Company issued 681,884 shares of common stock to Cognate to satisfy approximately $3.8 million of current obligations for unpaid invoices for manufacturing and related services by Cognate.
The Company recorded approximately $13.6 million and $40.8 million of expense for the years ended December 31, 2016 and 2015, respectively, for stock based payment expense to Cognate. The fair value calculation of these shares was determined using the market price for tradable shares on the date of issuance.
| F-24 |
Shares payable to related party - elimination of most favored nation provision
Shares and warrants previously issued to Cognate in partial payment of invoices for manufacturing services were under a 3-year lock-up, which had been in place since January 2014. The lock-up prevented Cognate from selling the shares received. During the lock-up, if the Company entered into a transaction with other investors or creditors on more favorable terms than Cognate received, the Company had an ongoing obligation, under the Manufacturing Services Agreements, to conform the terms of Cognate’s shares and warrants to the same terms as the other investors or creditors, under a most favored nation provision.
During the nine months period ended September 30, 2016, the Company entered into several financings with unrelated institutional investors that triggered the most favored nation provision.
However, these most favored nation shares were never issued to Cognate. Under the Remediation Agreement, Cognate agreed to eliminate the most favored nation provisions, and to forego these shares that had already been triggered. As a result of the elimination of the most favored nation, the Company reclassified $22.5 million shares payable which resulted in an increase to additional paid in capital.
Letter Agreement and Assignment Agreement with Related Party
The Company entered into a Letter Agreement (the “Agreement”) with Cognate and related agreements in connection with an institutional financing of Cognate and to enable the Company to continue obtaining services from Cognate for the Company’s ongoing Phase III DCVax®-L trial and upcoming Phase II DCVax®-Direct trials. As an initial implementation step pursuant to the Agreement, on October 13, 2016 the Company entered into an Assignment and Assumption Agreement (the “Assignment Agreement”) pursuant to which the Company agreed to assume certain Cognate debt obligations in connection with preparations for initiation of Phase II clinical trials and further services in ongoing trials. The Company and Cognate are in negotiations in regard to crediting of the assumed debt against a portion of the unpaid invoices owed by the Company to Cognate. The terms for the crediting have not yet been finalized.
As further consideration for Cognate's forbearance described above, in the future, when and if permitted, the Company will reverse the conversion of $3.75 million of Cognate's accounts receivable into shares of the Company’s common stock effected in connection with the Company's October, 2015, $30,000,000 financing transaction, to the extent and/or when not prohibited by applicable law, rules and regulations, including but not limited to Delaware law.
As previously reported, the Company has also been negotiating with the third party lender in regard to the assumed debt. Based on discussions to date, the Company anticipates that, over a period of up to one year, the obligations could total an amount up to approximately $5 million. The Company will report on the results of further negotiations and finalization in a future periodic filing. To discharge an initial obligation of $480,000, the Company issued to the lender 1,000,000 shares of common stock at $0.48 per share.
Cognate Organization
Pursuant to an institutional financing of Cognate in October 2016, Cognate’s operations outside the US were separated from its operations in the US. The operations outside the US include Cognate BioServices GmbH in Germany, Cognate BioServices Ltd. In the UK, and Cognate Israel in Israel. Both Cognate BioServices, Inc. in the US and the Cognate affiliates outside the US are owned by Toucan Fund III. The Cognate affiliate in Germany works with the Fraunhofer Institute to produce DCVax-L products there, and Cognate affiliates in the UK and Israel are preparing for production of DCVax-L products in those locations. Approximately $4.3 million of the total research and development cost were related to Cognate entities outside the US are included in the overall amounts reported with respect to Cognate.
Other Related Parties
Jerry Jasinowski – Private Offering
On December 22, 2016, the Company issued 1,285,714 shares of common stock at $0.35 and warrants to purchase an additional 642,857 shares of Common Stock at an exercise price of $0.35 per share with a five year term to Jerry Jasinowski, who was appointed to the Board of Directors in April 2012. The Company received proceeds of $450,000.
| F-25 |
Leslie J. Goldman – Demand Loan
On November 28, 2016, Leslie J. Goldman, an officer of the Company, loaned the Company $260,000 pursuant to a Demand Promissory Note (the “Goldman Note”). The Goldman Note bore interest at the rate of 12% per annum, and was payable upon demand, with 5 days’ prior written notice by Mr. Goldman to the Company.
On October 8, 2015, Leslie J. Goldman, an officer of the Company, loaned the Company $400,000 pursuant to a Demand Promissory Note (the “Goldman Note”). The Goldman Note bore interest at the rate of 8% per annum, and was payable upon demand, with 7 days’ prior written notice by Mr. Goldman to the Company. The Goldman Note would also bear 35% warrant coverage on the repayment amount if the Note were not repaid within 30 days of issuance. On November 20, 2015, the Company made a payment of $403,858 to Mr. Goldman including the accrued interest related to the coupon amount. The Company issued 28,384 warrants with a 5 year term and exercise price of $4.98 to Mr. Goldman in connection with this transaction.
10. Stockholders’ Equity (Deficit)
Common Stock Issuances
First Quarter of 2016
On February 29, 2016, the Company entered into a Securities Purchase Agreement (the “Agreement”) with certain institutional investors (the “Purchasers”), for a registered direct offering (the “Offering”) of 5,882,353 shares (the “Shares”) of the Company’s Common Stock at the purchase price of $1.70 per share, and Series A Warrants (the “Series A Warrants”) to purchase an additional 2,941,177 shares of Common Stock at an exercise price of $2.25 per share. The Series A Warrants will become exercisable on the six month anniversary of issuance and expire five years thereafter.
In addition, the Company granted the Purchasers a sixty (60) day overallotment option in the form of Series B Warrants to purchase an additional 5,882,353 shares of Common Stock at an exercise price of $3.00 per share (the “Series B Warrants”). The Series B Warrants were exercisable immediately and were to expire within sixty (60) days. However, on May 2, 2016, the Company and the investors agreed to extend this warrant exercise period by twenty-one (21) days, from May 2 to May 23, 2016. The Company and the Purchasers consummated the purchase and sale of the Securities on March 3, 2016 (the “Closing”) and the Company raised gross proceeds of $10 million and net proceeds of approximately $9.2 million, after deducting placement agent fees, attorneys’ fees and other expenses. Subsequent to the reporting period, the Series B Warrants were extended an additional twenty-one (21) days to May 23, 2016.
Each Purchaser also received Series C Warrants (the “Series C Warrants”) to purchase up to 2,941,177 shares of Common Stock. The Series C Warrants vest and become exercisable only if, and to the extent that, the Series B Warrants held by such Purchaser are exercised. The Series C warrants will be issuable and exercisable for one-half share of Common Stock per each Series B Warrant exercised. The Series C Warrants have an exercise price of $4.00 per share, shall be exercisable on the six-month anniversary of issuance and will expire five years thereafter.
In connection with the Offering and the concurrent private placement, the Company agreed to pay the Placement Agent a cash placement fee equal to 7% of the aggregate purchase price for the common stock sold in the registered offering. The Placement Agent also received Common Stock purchase warrants (the “Compensation Warrants”) to purchase up to 294,118 shares of Common Stock, or 5% of the aggregate number of shares of common Stock sold in the registered offering, at an exercise price of $2.125, or 125% of the public offering price per share in the registered offering, which are exercisable six months following issuance and terminate on February 29, 2021.
Second Quarter of 2016
On May 15, 2016, the Company entered into an agreement with a holder (the “Holder”) of the Company’s existing Series A, B and C Warrants, pursuant to which the Holder agreed to exercise all of the Holder’s Series B Warrants to purchase 4,411,764 shares of Common Stock. In consideration, the Company agreed to reduce the exercise price of the Series B Warrants to $0.96 per share, the Company’s closing price on the prior trading day, for gross proceeds of approximately $4,235,000, and agreed to issue new Series D Common Stock Purchase Warrants (the “Series D Warrants”) to purchase up to 2,205,882 shares of Common Stock at an exercise price of $1.00 per share (subject to customary adjustments such as for stock splits and dividends), with an exercise period of five years, commencing six months after issuance.
| F-26 |
The Holder’s exercise of the Series B Warrants to purchase 4,411,764 shares of Common Stock triggered the existing outstanding Series C Warrants to become vested and exercisable for up to 2,205,882 shares of Common Stock. The Company agreed to reset the exercise price of the Series A and Series C Warrants to $1.00 per share.
In connection with the offering and the concurrent private placement, the Company agreed to pay the Placement Agent a cash placement fee equal to 7% of the aggregate purchase price for the common stock sold. The Placement Agent also received Common Stock purchase warrants (the "Compensation Warrants") to purchase up to 220,588 shares of Common Stock, or 5% of the aggregate number of shares of common Stock sold, at an exercise price of $1.20, or 125% of the public offering price per share, which are exercisable six months following issuance and terminate on May 15, 2021.
The modification of the warrant exercise price increased the value of the warrants by approximately $2.6 million. This cost was recorded as a deemed dividend in additional paid-in capital due to the absence of retained earnings. This cost is included in modification of warrants and increased the net loss available to common shareholders on the consolidated statements of operations.
Third Quarter of 2016
During the quarter ended September 30, 2016, the Company issued 7,400,000 shares of common stock at $0.50 per share, and warrants to purchase an additional 3,700,000 shares of Common Stock at an exercise price of $0.60 per share with five years term through a registered direct offering. The Company received net proceeds of approximately $3.4 million, after deducting aggregate placement agent fees and attorneys’ fees of approximately $321,000.
During the quarter ended September 30, 2016, the Company entered into multiple agreements with certain holders (the “Holders”) of the Company’s existing warrants, pursuant to which the Holders agreed to exercise all of the Holders’ warrants to purchase 10,945,694 shares of common stock. In consideration, the Company agreed to reduce the exercise price of the warrants to $0.35 per share, for net proceeds of approximately $3.4 million, after deducting aggregate placement agent fees, attorneys’ fees and bank clearing fees of approximately $454,000, and agreed to issue new common stock purchase warrants to purchase up to 10,945,694 shares of common stock at a weighted average exercise price of $0.44 per share, with an exercise period of 5 years, commencing 6 months after issuance. In connection with the registered direct offering, the Company granted 263,122 warrants at an exercise price of $0.44 to the placement agents. The placement agent warrants are exercisable 6 months following issuance and terminate on February 22, 2022.
The modification of the warrant exercise price increased the value of the warrants by approximately $3.0 million. This cost was recorded as a deemed dividend in additional paid-in capital due to the absence of retained earnings. This cost is included in modification of warrants and increased the net loss available to common shareholders on the consolidated statements of operations
During the quarter ended September 30, 2016, the Company issued a total of 2,572,216 shares of Common stock at $0.36 per share to several angel investors for aggregate proceeds of $0.9 million. The Company also issued 1,286,111 warrants at an exercise price of $0.42 per share, with an exercise period of 5 years.
On September 16, 2016, the Company converted a note in dispute and relevant accrued interest of $1.0 million into 2,222,222 shares of common stock. The fair value of the common shares on the issuance date was approximately $1.0 million. In addition, the Company issued 1,111,111 warrants at an exercise price of $0.45 with an exercise period of 5 years, commencing 6 months after issuance. The fair value of the warrants was approximately $0.4 million using a Black-Scholes model at the date of issuance related to the conversion of note and accrued interest. The total loss on extinguishment of debt recorded on the statement of operations was approximately $0.4 million related to this conversion.
Fourth Quarter of 2016
During the quarter ended December 31, 2016, the Company issued 28,575,000 shares of common stock at $0.35 per share, and warrants to purchase an additional 14,287,500 shares of Common Stock at an exercise price of $0.35 per share with five years term through a registered direct offering. The Company received net proceeds of approximately $9.2 million, after deducting aggregate placement agent fees and attorneys’ fees of approximately $0.8 million.
| F-27 |
In October 2016 and November 2016, the Company issued a total of 2,518,687 shares of Common stock at a weighted average price of $0.53 per share to several angel investors for aggregate proceeds of $1.3 million. The Company also issued 1,259,345 warrants at a weighted average exercise price of $0.51 per share, with an exercise period of 5 years.
On December 22, 2016, the Company issued 1,285,714 shares of common stock at $0.35 and warrants to purchase an additional 642,857 shares of Common Stock at an exercise price of $0.35 per share with a five year term to Jerry Jasinowski, who was appointed to the Board of Directors in April 2012. The Company received proceeds of $450,000.
Total warrants issued from direct offerings and private placement have value of approximately $4.2 million, see FN 4 for more details regarding valuation.
During the quarter ended December 31, 2016, the Company issued a total of 60,000 shares of Common stock at $0.49 per share to several scientific board members as share based compensation. The Company recorded the $29,400 expense in research and development for the year ended December 31, 2016.
During the quarter ended December 31, 2016, the Company converted accrued interest associated with a note in dispute that was originally issued in 2011. The accrued interest balance as of December 13, 2016 was $1.5 million. In order to extinguish this accrued interest liability, the Company issued 2,812,174 shares of common stock and 1,406,086 warrants at a weighted average exercise price of $0.50 with an exercise period of 5 years, commencing 6 months after issuance. The fair value of the common shares on the issuance date was approximately $1.5 million. The fair value of the warrants on the issuance date was approximately $0.6 million using a Black-Scholes model, see FN 4 for more details regarding valuation.
The total loss on the extinguishment of accrued interest was approximately $0.7 million during the three months ended December 31, 2016. This amount was recorded as a component of loss from extinguishment of debt on the consolidated statements of operations.
During the quarter ended December 31, 2016, the Company issued 1,000,000 shares of common stock to convert $480,000 debt which was assigned by Cognate.
First Quarter 2015
During the quarter ended March 31, 2015, the Company issued an aggregate of 888,187 shares of common stock from the exercise of warrants, receiving approximately $3.7 million of proceeds.
During the quarter ended March 31, 2015, the Company issued 80,068 shares of common stock to an individual investor as settlement of redemption of redeemable securities. The fair value of the settlement was $0.3 million and was recorded to offset derivative liabilities.
During the quarter ended March 31, 2015, the Company issued an aggregate of 385,000 shares of common stock to an individual investor from the cashless exercise of warrants previously issued. The warrants were classified as warrant liability. The fair value of the warrants on the date of exercise was $0.5 million.
Second Quarter 2015
On April 2, 2015, the Company entered into a stock purchase agreement (the “Agreement”) with Woodford Investment Management LLP as agent for the CF Woodford Equity Income Fund and other clients (collectively, “Woodford”). Pursuant to the Agreement, the Company agreed to sell, and Woodford agreed to purchase, 5,405,405 shares of the Company’s unregistered common stock, par value $0.001 per share (the “Shares”), at a purchase price of $7.40 per Share for an aggregate purchase price of $40 million. The sale of the Shares took place in two separate closings as follows: (i) 1,554,054 shares for a purchase price of $11.5 million which closed on April 8, 2015; and (ii) an additional 3,851,351 shares for a purchase price of $28.5 million which closed on May 1, 2015. There are no warrants, pre-emptive rights or other rights or preferences.
| F-28 |
During the quarter ended June 30, 2015, the Company converted $4.5 million of the 2014 Convertible Senior Notes into common stock on the terms set forth in the agreement. Pursuant to the exchange, on the terms set forth in the Notes, the investors received 701,033 shares of the Company’s common stock, which included accelerated interest.
During the quarter ended June 30, 2015, the Company issued an aggregate of 723,422 shares of common stock from the exercise of warrants for total proceeds of $3.1 million. Of which 9,200 shares of common stock were related to extinguishment of warrant liabilities. The fair value of the warrant liabilities was $0.06 million on the date of exercise, which were recorded as a component of additional paid-in-capital.
During the quarter ended June 30, 2015, the Company issued an aggregate of 183,895 shares of common stock to multiple investors from the cashless exercise of warrants previously issued.
During the quarter ended June 30, 2015, the Company issued an aggregate of 85,228 shares of common stock to an individual investor as stock based compensation. The fair value of the stock on the issuance date was $0.7 million.
During the quarter ended June 30, 2015, the Company issued an aggregate of 318,116 shares of common stock to Cognate’s designee in partial satisfaction of the 8.1 million shares that were approved by the Company’s Board in November 2014, and publicly reported at that time and thereafter, to satisfy certain payment obligations for unpaid invoices for manufacturing and related services, and certain anti-dilution obligations to Cognate under the most favored nation provisions in the Company’s agreements with Cognate, and were reported by the Company last November.
Third Quarter 2015
During the quarter ended September 30, 2015, the Company issued an aggregate of 116,675 shares of common stock from the exercise of warrants for total proceeds of $0.8 million, of which 57,500 shares of common stock were related to extinguishment of warrant liabilities. The fair value of the warrant liabilities was $0.2 million on the date of exercise, which was recorded as a component of additional paid-in-capital.
During the quarter ended September 30, 2015, the Company issued an aggregate of 2,566 shares of common stock to multiple investors from the cashless exercise of warrants previously issued.
During the quarter ended September 30, 2015, the Company converted $2 million of the 2014 Convertible Senior Notes into common stock on the terms set forth in the agreement. Pursuant to the exchange, on the terms set forth in the Notes, the investors received 322,502 shares of the Company’s common stock, which includes accelerated interest.
Fourth Quarter 2015
Effective October 2015, the Company entered into a stock purchase agreement (the “Agreement”) with Woodford Investment Management LLP as agent for the CF Woodford Equity Income Fund and other clients (collectively, “Woodford”). Pursuant to the Agreement, the Company issued 5,454,545 shares of common stock, par value $0.001 per share (the “Shares”), at a purchase price of $5.50 per share for an aggregate purchase price of $30 million (the “Woodford Financing”).
Additionally, in connection with the Woodford Financing, the Company issued 681,884 shares of common stock to Cognate, which were supposed to be registered tradable shares on the same terms as the Shares issued to Woodford, to satisfy $3.8 million of current obligations for unpaid invoices for manufacturing and related services by Cognate.
On October 19, 2015, the Company issued 8,052,092 shares of common stock to Cognate which had been approved by the Board on November 12, 2014 and reported by the Company at that time and thereafter, but had not yet been issued while the parties were finalizing certain terms,, to satisfy obligations for unpaid invoices for manufacturing and related services. As of December 31, 2015, the Company recorded a stock compensation expense of $38.8 million based on the fair value of the common stock on the issuance date. The fair value was determined based upon the market price of unrestricted tradable shares.
| F-29 |
On December 22, 2015, the Company entered into a Securities Purchase Agreement (the “Agreement”) with certain healthcare-focused institutional investors (the “Purchasers”), for a registered direct offering (the “Offering”) of 3,500,000 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) at the purchase price of $3.60 per share, and warrants (the “Warrants”) to purchase an additional 1,750,000 shares of Common Stock at an exercise price of $4.50 per share (the “Warrant Shares”, collectively with the Common Stock and the Warrants, the “Securities”). The Warrants will become exercisable on the six month anniversary of issuance and expire five years thereafter. The Company and the Purchasers consummated the purchase and sale of the Securities (the “Closing”) on December 24, 2015 and the Company raised gross proceeds of $12.6 million and net proceeds of approximately $11.65 million, after deducting placement agent fees, attorneys’ fees and other expenses.
Stock Purchase Warrants
The following is a summary of warrant activity for the years ended December 31, 2016 and 2015 (dollars in thousands, except per share data):
| Number of | Weighted Average | |||||||
| Warrants | Exercise Price | |||||||
| Outstanding as of January 1, 2015 | 29,385 | $ | 4.72 | |||||
| Warrants granted | 1,953 | 4.51 | ||||||
| Warrants exercised for cash | (1,678 | ) | 4.25 | |||||
| Warrants exercised on a cashless basis* | (304 | ) | 3.96 | |||||
| Warrant adjustment due to Cognate price reset | 62 | 3.35 | ||||||
| Warrants expired and cancellation | (2,431 | ) | 4.82 | |||||
| Adjustment related to prior issued warrants | 280 | 4.41 | ||||||
| Outstanding as of December 31, 2015 ** | 27,267 | 4.40 | ||||||
| Warrants granted in a registered direct offering | 14,485 | 2.70 | ||||||
| Warrants granted to Cognate* | 35,504 | 0.69 | ||||||
| Warrants canceled by Cognate | (37,147 | ) | 0.35 | |||||
| Warrants exercised for cash | (15,357 | ) | 0.53 | |||||
| Warrants granted *** | 35,287 | 0.43 | ||||||
| Warrants expired and cancellation | (1,761 | ) | 9.36 | |||||
| Outstanding as of December 31, 2016** | 58,278 | $ | 1.78 | |||||
* The warrants contain “down round protection” and the Company classifies these warrant instruments as liabilities at their fair value and adjusts the instruments to fair value at each reporting period.
** Approximately 49,827,000 warrants issued to Cognate and 37,147,000 warrants canceled by Cognate, during the 8-year period from 2008 through 2016, with a weighted average exercise price and remaining contractual term of $4.19 and 2.43 years, respectively. The weighted average exercise price gives effect to adjustments related to the most favored nation clause in these warrants.
*** According to the sequencing policy (FN3), the Company classifies these derivative warrant liabilities on the consolidated balance sheet as a current liability.
11. Variable Interest Entities
Variable Interest Entities (“VIEs”) are entities in which equity investors lack the characteristics of a controlling financial interest. VIEs are consolidated by the primary beneficiary. The primary beneficiary is the party who has both the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the entity.
| F-30 |
After the assumption of $5.7 million in debt originally incurred by Cognate in October 2016 and if in the future the Company reverses $3.8 of Cognate invoices that were previously paid in common stock and warrants in October 2016, the Company has an implicit variable interest in Cognate to potentially fund Cognate’s losses (if Cognate incurs losses). The Company determines whether it is the primary beneficiary of Cognate upon its initial involvement and the Company reassess whether it is the primary beneficiary of Cognate on an ongoing basis. The determination of whether the Company is the primary beneficiary of Cognate is based upon the facts and circumstances and requires significant judgment. The Company’s considerations in determining Cognate’s most significant activities and whether the Company has power to direct those activities include, but are not limited to, Cognate’s purpose and design and the risks passed through to investors, the voting interests of Cognate, management, service and/or other agreements of Cognate, involvement in Cognate’s initial design and the existence of explicit or implicit financial guarantees. As of December 31, 2016, the Company does not have the power over the most significant activities (control of operating decisions) and therefore does not meet the "power" criteria of the primary beneficiary.
The maximum exposure to loss is limited to the notional amounts of the implicit variable interest in Cognate. The Company has no current plans to provide any support additional to that which is noted above. Therefore, the maximum exposure to loss from its implicit interest is limited to $4.5 million as of December 31, 2016; which is the shutdown fee the Company must pay to terminate their relationship with Cognate.
12. Commitments and Contingencies
Contingent Payment to Cognate BioServices
Under the January 17, 2014 DCVax®-L Manufacturing Services Agreement and the DCVax-Direct Agreement, a new set of provisions apply going forward to any shut down or suspension. Under these provisions, the Company will be contingently obligated to pay certain fees to Cognate BioServices (in addition to any other remedies) if the Company shuts down or suspends its DCVax-L program or DCVax-Direct program. For a shut down or suspension of the DCVax-L program, the fees will be as follows:
| · | Prior to the last dose of the last patient enrolled in the Phase III trial for DCVax®-L or After the last dose of the last patient enrolled in the Phase III clinical trial for DCVax®-L but before any submission for product approval in any jurisdiction or after the submission of any application for market authorization but prior to receiving a marketing authorization approval: in any of these cases, the fee shall be $3 million. |
| · | At any time after receiving the equivalent of a marketing authorization for DCVax®-L in any jurisdiction, the fee shall be $5 million. |
For a shut down or suspension of the DCVax-Direct program, the fees will be as follows:
| · | Prior to the last dose of the last patient enrolled in the Phase I/II trial for DCVax®-Direct, the fee shall be $1.5 million. |
| · | After the last dose of the last patient enrolled in the Phase I/II clinical trial for DCVax®-Direct but before the initiation of a Phase III trial the fee shall be $2.0 million. |
| · | After initiation of a phase III trial but before submission of an application for market authorization in any jurisdiction or after the submission of an application for market authorization but prior to receiving a market authorization approval: in each of these cases, the fee shall be $3.0 million. |
| · | At any time after receiving the equivalent of a marketing authorization for DCVax®-Direct in any jurisdiction the fee shall be $5.0 million. |
While our DCVax programs are ongoing, the Company is required to pay certain fees for dedicated production suites or capacity reserved exclusively for DCVax production, and pay for a certain minimum number of patients, whether or not we fully utilize the dedicated capacity and number of patients.
Operating Lease
On July 31, 2012, the Company entered into a non-cancelable operating lease for 7,097 square feet of office space in Bethesda, Maryland, which expires in March 2018. Rent expense for 2016 and 2015 amounted to $0.3 million and $0.3 million, respectively.
On October 28, 2013, the Company entered into a non-cancelable operating lease for 4,251 square feet of office space in Germany, which expires in December 2017. The lease contains an option with 3 years extension, and a 6 month in advance notice is required.
| F-31 |
On March 26, 2016, the Company entered into a non-cancelable operating lease for 505 square feet of office space in London, which expires in March, 2017. On December 19, 2016, the Company entered a renewal agreement to extend the office lease for an additional 1 year until March, 2018. Rent expense in the U.K. for the year ended December 31, 2016 was approximately $120,000.
The Company’s future minimum lease payments are as follows as of December 31, 2016 (in thousands):
| Office Leases | ||||||||||||||||
| U.S. | Germany | U.K. | Total | |||||||||||||
| 2017 | $ | 318 | $ | 64 | $ | 175 | $ | 557 | ||||||||
| 2018 | 81 | - | 39 | 120 | ||||||||||||
| Total | $ | 399 | $ | 64 | $ | 214 | $ | 677 | ||||||||
Derivative and Class Action Litigation
On June 19, 2015, two purported shareholders filed a lawsuit in the Delaware Court of Chancery, captioned Tharp, et al. v. Cognate, et al., C.A. 11179-VCG (Del. Ch. filed June 19, 2015), purportedly suing on behalf of a class of similarly situated shareholders and derivatively on behalf of the Company. The lawsuit names Cognate BioServices, Inc., Toucan Partners, Toucan Capital Fund III, our CEO Linda Powers and the individuals who then served on the Company’s Board of Directors as defendants, and names the Company as a “nominal defendant” with respect to the derivative claims. The complaint generally challenges certain transactions between the Company and Cognate and the Toucan entities, in which Cognate and the Toucan entities provided services and financing to the Company, or agreed to the conversion of debts owed to them by the Company into equity. The complaint seeks unspecified monetary relief for the Company and the plaintiffs, and various forms of equitable relief, including disgorgement of allegedly improper benefits, rescission of the challenged transactions, and an order forbidding similar transactions in the future. The plaintiffs filed an amended complaint on November 6, 2015. The Company and the other named defendants filed motions to dismiss the amended complaint on January 19, 2016, which are now fully briefed. The Company intends to vigorously defend the case.
On November 19, 2015, a third purported shareholder filed a lawsuit in the U.S. District Court for the District of Maryland, captioned Yonemura v. Powers, et al., No. 15-03526 (D. Md. filed Nov. 19, 2015), claiming to sue derivatively on behalf of the Company. The complaint names the individuals who then served on the Company’s Board of Directors, Toucan Capital Fund III, L.P., Toucan General II, LLC, Toucan Partners, LLC, and Cognate as defendants, and names the Company as a nominal defendant. The complaint generally challenges the same transactions disputed in the Delaware case, claiming that the Company purportedly overcompensated Cognate and Toucan for certain services and loans in payments of stock, and that the Company’s CEO, Ms. Powers, benefited from these transactions with Cognate and Toucan, which she allegedly owns or controls. The complaint asserts that the alleged overpayments unjustly enriched Ms. Powers, Toucan, and Cognate; that the Company’s directors breached their fiduciary duties of loyalty and good faith to the Company by authorizing the payments to Cognate; and that Ms. Powers, Cognate, and Toucan aided and abetted the directors’ breaches of fiduciary duties. The plaintiff seeks an award of unspecified damages to the Company and seeks equitable remedies, including disgorgement by Ms. Powers, Toucan, and Cognate of the allegedly improper benefits received as a result of the disputed transactions. The plaintiff also seeks costs and disbursements associated with bringing suit, including attorneys' fees and expert fees. The Company intends to vigorously defend the case. The case is currently stayed pending the parties’ progress toward an acceptable resolution of the litigation.
On November 28, 2016, a purported shareholder filed a lawsuit in the Circuit Court for Montgomery County, Maryland, captioned Wells v. Powers, et al., Case No. 427353-V (Md. Cir. Ct., Mont. Cnty. filed Nov. 28, 2016), claiming to sue derivatively on behalf of the Company. The complaint names six current and former members of the Company’s Board of Directors, Toucan Partners, LLC, Toucan Capital Fund III, L.P., Toucan Partners, LP (a non-existent entity), Toucan General II, LLC, and Cognate as defendants, and names the Company as a nominal defendant. The complaint largely challenges the same transactions disputed in the two cases discussed above, claiming that the Company overcompensated Cognate and Toucan for certain services and loans. It asserts that, by authorizing those transactions, the individual defendants breached their fiduciary duties to the Company, abused their ability to control and influence the Company, and engaged in gross mismanagement of the Company’s business and assets. In addition, the complaint claims that the individual defendants are liable to the Company for misleading its investors and financiers. The complaint claims that the individual defendants were unjustly enriched by receiving compensation while the Company’s stock price was allegedly artificially inflated; that Ms. Powers, Toucan, and Cognate are “controlling” stockholders of the Company who breached their fiduciary duties to minority stockholders; that Ms. Powers, Toucan, and Cognate, benefited from these transactions due to their alleged “control”; that the alleged overpayments unjustly enriched Ms. Powers, Toucan, and Cognate; and that Toucan and Cognate aided and abetted the individual defendants in breaching their fiduciary duties. The complaint seeks the award of unspecified damages to the Company; an order from the court directing the Company to reform its corporate governance and internal procedures; and equitable remedies, including restitution and disgorgement from defendants. The plaintiff also seeks the costs and disbursements associated with bringing suit, including attorneys’ fees, costs, and expenses. The plaintiff filed an amended complaint on March 1, 2017. The Company intends to vigorously defend the case.
| F-32 |
Class Action Securities Litigation
On August 26, 2015, a purported shareholder of the Company filed a putative class action lawsuit in the U.S. District Court for the District of Maryland, captioned Lerner v. Northwest Biotherapeutics, Inc., et al., No. 15-02532 (D. Md. filed Aug. 26, 2015). The lawsuit named the Company and Ms. Powers as defendants. On December 14, 2015, the court appointed two lead plaintiffs. The Lead Plaintiffs filed an amended complaint on February 12, 2016, purportedly on behalf of all of those who purchased common stock in the Company between January 13, 2014 and August 21, 2015. The amended complaint generally claimed that the defendants violated Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934 by making misleading statements and/or omissions on a variety of subjects, including the status and results of the Company’s DCVax trials. The amended complaint sought unspecified damages, attorneys’ fees, and costs. The Company and Ms. Powers filed a motion to dismiss the amended complaint. On March 21, 2017, the court entered an order dismissing the case, and on April 12, 2017, the Lead Plaintiffs submitted a letter advising the court that they do not intend to file an amended complaint.
Shareholder Books and Record Demand
On December 7, 2015, the Company received a letter on behalf of shareholders demanding to inspect certain corporate books and records pursuant to Section 220 of the Delaware General Corporation Law. The demand letter claimed that its purpose was to investigate: (1) allegedly improper transactions, misconduct, and mismanagement by directors and an officer of the Company; (2) the possible breach of fiduciary duty by certain directors and officers of the Company; and (3) the independence and disinterestedness of the Company’s board, to determine whether a pre-suit demand would be necessary before commencing any derivative action on behalf of the Company.
U.S. Securities and Exchange Commission
As previously reported, on December 13, 2016, the Company received a formal information request (subpoena) from the SEC regarding several broad topics that have been previously disclosed, including the Company’s membership on Nasdaq and delisting, related party matters, internal controls and the Company’s Special Litigation Committee. The period covered is January 1, 2013 to the present. The investigation is ongoing and the Company is cooperating fully.
Special Litigation Committee
As previously reported, the Company appointed a Special Litigation Committee, and Committee has undertaken an inquiry into the allegations of various lawsuits filed against the Company, and an anonymous internet report raising a number of criticisms of the Company and its Board and management, including with respect to the reasonableness of the transactions with Cognate. The Committee has retained experts to analyze some of these issues.
13. Income Taxes
No provision was made for U.S. taxes on undistributed foreign earning as such earnings are considered to be permanently reinvested. It is not practicable to determine the amount of additional tax, if any that might be payable on those earnings if repatriated.
The tax effects of temporary differences and tax loss and credit carry forwards that give rise to significant portions of deferred tax assets and liabilities at December 31, 2016 and 2015 are comprised of the following (in thousands):
| F-33 |
| As of December 31, | ||||||||
| 2016 | 2015 | |||||||
| Deferred tax asset | ||||||||
| Net operating loss carryforward | $ | 204,106 | $ | 180,927 | ||||
| Research and development credit carry forwards | 14,911 | 12,661 | ||||||
| Stock based compensation and other | 17,106 | 24,759 | ||||||
| Total deferred tax assets | 236,123 | 218,347 | ||||||
| Valuation Allowance | (236,123 | ) | (218,347 | ) | ||||
| Deferred tax asset, net of allowance | $ | - | $ | - | ||||
The Company has identified the United States, Maryland, Germany and United Kingdom as significant tax jurisdictions.
At December 31, 2016, the Company had Federal and State net operating loss carry forwards for income tax purposes of approximately $507.5 million and unused research and development tax credits of approximately $14.9 million available to offset future taxable income and income taxes, respectively, expiring in 2018 through 2036. The Company has foreign net operating loss carry forwards of $17.7 million in various jurisdictions. The Company has not performed a detailed analysis to determine whether an ownership change under Section 382 of the IRC has occurred. The effect of an ownership change would be the imposition of an annual limitation on the use of net operating loss carryforwards attributable to periods before the change. Any limitation may result in expiration of a portion of the NOL or research and development credit carryforwards before utilization. The tax years 2013 through 2016 remain open to examination by federal agencies and other jurisdictions in which the Company operates.
During 2016 the Company reevaluated the pricing/deductibility of stock options granted and the value of warrants issued, resulting in the decrease in the potential future tax deduction from those instruments.
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and taxing strategies in making this assessment. In case the deferred tax assets will not be realized in future periods, the Company has provided a valuation allowance for the full amount of the deferred tax assets at December 31, 2016 and 2015.
The expected tax expense (benefit) based on the U.S. federal statutory rate is reconciled with actual tax expense (benefit) as follows:
(dollars in thousands)
| For the years ended | ||||||||
| 2016 | 2015 | |||||||
| Statutory federal income tax rate | 34.0 | % | 34.0 | % | ||||
| State taxes, net of federal tax benefit | 1.8 | % | 5.4 | % | ||||
| Tax rate differential on foreign income | -2.3 | % | 0.0 | % | ||||
| Derivative gain or loss and other | 7.6 | % | 5.8 | % | ||||
| Cancellation of shares | -16.6 | % | 0.0 | % | ||||
| Cancellation of warrants | -7.8 | % | 0.0 | % | ||||
| Other permanent items and true ups | 2.7 | % | 0.0 | % | ||||
| R&D Credit | 2.8 | % | 2.6 | % | ||||
| Change in valuation allowance | -22.2 | % | -47.8 | % | ||||
| Income tax provision (benefit) | 0.0 | % | 0.0 | % | ||||
| F-34 |
| For the years ended | ||||||||
| 2016 | 2015 | |||||||
| Federal | ||||||||
| Current | $ | - | $ | - | ||||
| Deferred | (11,160 | ) | (41,583 | ) | ||||
| State | ||||||||
| Current | - | - | ||||||
| Deferred | (1,427 | ) | (6,659 | ) | ||||
| Foreign | ||||||||
| Current | - | - | ||||||
| Deferred | (5,189 | ) | - | |||||
| Change in valuation allowance | 17,776 | 48,242 | ||||||
| Income tax provision (benefit) | $ | - | $ | - | ||||
14. Subsequent Events
Registered Direct Offering
On March 17, 2017, the Company entered into definitive agreements with institutional investors for a registered direct offering with gross proceeds of $7.5 million. The Company sold approximately 18.8 million shares of common stock at a purchase price of $0.26 per share, or pre-funded warrants in lieu of shares. Additionally, the investors received five year Class A warrants to purchase up to approximately 21.6 million shares of common stock with an exercise price of $0.26 per share. The investors also received three month Class B warrants to purchase up to approximately 21.6 million shares of common stock with an exercise price of $1.00 per share. Finally, in lieu of shares, to the extent required to prevent the beneficial ownership of an investor, together with affiliates, of the Company’s Common Stock from exceeding 4.99%, investors also received pre-funded Class C warrant to purchase up to approximately 10.0 million shares which are exercisable immediately. The exercise price of these Class C warrants will also be $0.26 per share, with $0.25 per share pre-funded at the time of closing and another $0.01 per share payable upon exercise of each Class C Warrant.
Debt Financing
Commencing March 1, 2017, the Company entered into a series of six nonconvertible, promissory notes with unrelated third parties (the “Notes”) in the original principal amount of $2,020,000 with an original issuance discount of 3% for aggregate net proceeds of $1,959,400 without interest. The Notes have a six-month maturity, may be prepaid without penalty by the Company prior to maturity and the lenders maintain an option to require payment prior to maturity upon the Company’s raising a minimum of $15 million.
On March 3, 2017, the Company entered into an additional nonconvertible, promissory note with an unrelated third party in the original principal amount of $1,155,000 with an original issuance discount of 10% for aggregate net proceeds of $1,000,000 with interest at 8% per annum. Such note has a six-month maturity, may be prepaid without penalty by the Company prior to maturity and the lender maintains an option to require payment prior to maturity upon the Company’s raising a minimum of $5 million.
Debt Repurchase
On March 9, 2017, the Company and certain debt holders (the “Holders”) of Convertible Senior Notes that were issued in August, 2014 (the “Notes”) signed a Note Repurchase Agreement providing for the (a) immediate payment to the Holder of $500,000 in cash, plus accrued interest through the stated maturity of the notes at 7% per annum, with retirement by the Holder of an equivalent amount of bonds; (b) immediate issuance to the Holders of $1.5 million worth of the Company’s common stock based on the 5-day VWAP of $0.3713 per share for the common stock measured from March 1, 2017; (c) payment, on the earlier of March 31, 2017 or the third business day after any new funding raise by the Company, of $500,000 plus accrued interest through the stated maturity of the Notes at 7% per annum, with a commensurate Bond retirement to occur upon the fulfillment of all obligations under the repurchase agreement; (d) payment, on April 19, 2017, of $2,000,000, plus accrued interest through the stated maturity of the Notes at 7% per annum, with retirement of $2,000,000 of bonds; payment, on May 20, 2017, of $2,500,000 plus accrued interest through the stated maturity of the Notes at 7% per annum, with retirement of $2,500,000 of bonds; (e) payment, on June 20, 2017, of $5,500,000 plus accrued interest through the stated maturity of the Notes at 7% per annum, with retirement of $5,500,000 of bonds; and (f) payment, when any cumulative financing of new cash during the period of the Note Repurchase Agreement exceeds $15 million, of 30% of such excess amount to repurchase Notes from the Holders within three business days of the closing of any such raise. Such prepayments will reduce the latest scheduled payments then currently due.
| F-35 |
Debt Conversion
On March 30, 2017, the Company issued 2,500,000 shares of the Company's common stock, par value $0.001 per share to convert certain existing obligations to an unrelated third party from debt which was assumed from Cognate on October 13, 2016, as previously reported, and for which the Company and Cognate are negotiating for a credit against a portion of unpaid invoices owed by the Company to Cognate.
| F-36 |