NORTHWEST BIOTHERAPEUTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share and per share
amounts)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
802
|
|
|
$
|
21,813
|
|
Restricted cash - interest payments held in escrow
|
|
|
685
|
|
|
|
886
|
|
Prepaid expenses and other current assets
|
|
|
785
|
|
|
|
1,402
|
|
Total current assets
|
|
|
2,272
|
|
|
|
24,101
|
|
|
|
|
|
|
|
|
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
46,550
|
|
|
|
46,157
|
|
Restricted cash - interest payments held in escrow, net of current portion
|
|
|
-
|
|
|
|
349
|
|
Other assets
|
|
|
120
|
|
|
|
190
|
|
Total non-current assets
|
|
|
46,670
|
|
|
|
46,696
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
48,942
|
|
|
$
|
70,797
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
13,339
|
|
|
$
|
11,721
|
|
Accounts payable to related party
|
|
|
11,845
|
|
|
|
5,455
|
|
Accrued expenses (includes related party of $14 and $11 as of September 30, 2016 and December 31, 2015, respectively)
|
|
|
1,295
|
|
|
|
1,309
|
|
Convertible notes (net of deferred financing cost of $246 and $0 as of September 30, 2016 and December 31, 2015, respectively; includes related party note of $50 as of September 30, 2016 and December 31, 2015)
|
|
|
10,939
|
|
|
|
185
|
|
Note payable - in dispute
|
|
|
-
|
|
|
|
934
|
|
Mortgage loan (net of deferred financing cost of $237 and $468 as of September 30, 2016 and December 31, 2015, respectively)
|
|
|
10,148
|
|
|
|
11,144
|
|
Environmental remediation liability
|
|
|
6,200
|
|
|
|
6,200
|
|
Derivative liability
|
|
|
198
|
|
|
|
27,982
|
|
Total current liabilities
|
|
|
53,964
|
|
|
|
64,930
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities:
|
|
|
|
|
|
|
|
|
Convertible note (net of deferred financing cost of $0 and $457 as of September 30, 2016 and December 31, 2015, respectively)
|
|
|
-
|
|
|
|
10,543
|
|
Total non-current liabilities
|
|
|
-
|
|
|
|
10,543
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
53,964
|
|
|
|
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 September 30, 2016 and December 31, 2015, respectively
|
|
|
-
|
|
|
|
-
|
|
Common stock ($0.001 par value); 450,000,000 shares authorized; 120,776,695 and 95,858,087 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively
|
|
|
121
|
|
|
|
96
|
|
Additional paid-in capital
|
|
|
678,624
|
|
|
|
630,613
|
|
Accumulated deficit
|
|
|
(684,770
|
)
|
|
|
(635,262
|
)
|
Accumulated other comprehensive gain (loss)
|
|
|
1,003
|
|
|
|
(123
|
)
|
Total stockholders' equity (deficit)
|
|
|
(5,022
|
)
|
|
|
(4,676
|
)
|
Total liabilities and stockholders' equity (deficit)
|
|
$
|
48,942
|
|
|
$
|
70,797
|
|
The accompanying notes
are an integral part of these unaudited condensed consolidated financial statements.
NORTHWEST BIOTHERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research grant and other
|
|
$
|
159
|
|
|
$
|
291
|
|
|
$
|
552
|
|
|
$
|
876
|
|
Total revenues
|
|
|
159
|
|
|
|
291
|
|
|
|
552
|
|
|
|
876
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
21,094
|
|
|
|
9,138
|
|
|
|
43,247
|
|
|
|
56,562
|
|
General and administrative
|
|
|
4,581
|
|
|
|
4,366
|
|
|
|
15,323
|
|
|
|
19,212
|
|
Total operating costs and expenses
|
|
|
25,675
|
|
|
|
13,504
|
|
|
|
58,570
|
|
|
|
75,774
|
|
Loss from operations
|
|
|
(25,516
|
)
|
|
|
(13,213
|
)
|
|
|
(58,018
|
)
|
|
|
(74,898
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inducement loss
|
|
|
(1,457
|
)
|
|
|
-
|
|
|
|
(1,457
|
)
|
|
|
-
|
|
Change in fair value of derivative liability
|
|
|
(217
|
)
|
|
|
36,490
|
|
|
|
17,238
|
|
|
|
(12,362
|
)
|
Loss from extinguishment of debt
|
|
|
(433
|
)
|
|
|
-
|
|
|
|
(433
|
)
|
|
|
-
|
|
Interest expense
|
|
|
(691
|
)
|
|
|
(1,046
|
)
|
|
|
(2,138
|
)
|
|
|
(3,475
|
)
|
Foreign currency transaction loss
|
|
|
(913
|
)
|
|
|
384
|
|
|
|
(4,700
|
)
|
|
|
72
|
|
Net income (loss)
|
|
|
(29,227
|
)
|
|
|
22,615
|
|
|
|
(49,508
|
)
|
|
|
(90,663
|
)
|
Deemed dividend related to warrant modification
|
|
|
(3,007
|
)
|
|
|
-
|
|
|
|
(5,647
|
)
|
|
|
-
|
|
Net income (loss) applicable to common stockholders
|
|
$
|
(32,234
|
)
|
|
$
|
22,615
|
|
|
$
|
(55,154
|
)
|
|
$
|
(90,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share applicable to common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.28
|
)
|
|
$
|
0.29
|
|
|
$
|
(0.52
|
)
|
|
$
|
(1.22
|
)
|
Diluted
|
|
$
|
(0.28
|
)
|
|
$
|
0.25
|
|
|
$
|
(0.52
|
)
|
|
$
|
(1.22
|
)
|
Weighted average shares used in computing basic earnings (loss) per share
|
|
|
114,836
|
|
|
|
78,062
|
|
|
|
105,501
|
|
|
|
74,394
|
|
Weighted average shares used in computing diluted earnings (loss) per share
|
|
|
114,836
|
|
|
|
89,821
|
|
|
|
105,501
|
|
|
|
74,394
|
|
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
NORTHWEST BIOTHERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in thousands)
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net income (loss)
|
|
$
|
(29,227
|
)
|
|
$
|
22,615
|
|
|
$
|
(49,508
|
)
|
|
$
|
(90,663
|
)
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
626
|
|
|
|
(461
|
)
|
|
|
1,126
|
|
|
|
143
|
|
Total comprehensive income (loss)
|
|
$
|
(28,601
|
)
|
|
$
|
22,154
|
|
|
$
|
(48,382
|
)
|
|
$
|
(90,520
|
)
|
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
NORTHWEST BIOTHERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’
EQUITY (DEFICIT)
(Unaudited)
(in thousands)
|
|
Common Stock
|
|
|
Additional Paid-in
|
|
|
Accumulated
|
|
|
Cumulative Translation
|
|
|
Total Stockholders'
|
|
|
|
Shares
|
|
|
Par value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Adjustment
|
|
|
Equity (Deficit)
|
|
Balance January 1, 2016
|
|
|
95,858
|
|
|
$
|
96
|
|
|
$
|
630,613
|
|
|
$
|
(635,262
|
)
|
|
$
|
(123
|
)
|
|
$
|
(4,676
|
)
|
Issuance of common stock and warrants for cash in a registered direct offering
|
|
|
13,282
|
|
|
|
13
|
|
|
|
13,687
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,700
|
|
Offering cost related to registered direct offering
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,077
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,077
|
)
|
Issuance of common stock and warrants for cash in private offering
|
|
|
2,572
|
|
|
|
3
|
|
|
|
923
|
|
|
|
-
|
|
|
|
-
|
|
|
|
926
|
|
Warrants exercised for cash
|
|
|
15,358
|
|
|
|
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
|
|
|
|
0
|
|
|
|
28
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28
|
|
Issuance of common stock and warrants for debt and accrued interest conversion
|
|
|
2,222
|
|
|
|
3
|
|
|
|
1,430
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,433
|
|
Common stock issued as compensation
|
|
|
190
|
|
|
|
-
|
|
|
|
98
|
|
|
|
-
|
|
|
|
-
|
|
|
|
98
|
|
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
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(49,508
|
)
|
|
|
-
|
|
|
|
(49,508
|
)
|
Cumulative translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,126
|
|
|
|
1,126
|
|
Balance at September 30, 2016
|
|
|
120,776
|
|
|
$
|
121
|
|
|
$
|
678,624
|
|
|
$
|
(684,770
|
)
|
|
$
|
1,003
|
|
|
$
|
(5,022
|
)
|
The accompanying notes
are an integral part of these unaudited condensed consolidated financial statements.
NORTHWEST BIOTHERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(Unaudited)
(in thousands)
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(49,508
|
)
|
|
$
|
(90,663
|
)
|
Reconciliation of net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
135
|
|
|
|
44
|
|
Amortization of deferred financing cost
|
|
|
639
|
|
|
|
1,013
|
|
Change in fair value of derivatives
|
|
|
(17,238
|
)
|
|
|
12,362
|
|
Inducement loss
|
|
|
1,457
|
|
|
|
-
|
|
Loss from extinguishment of debt
|
|
|
433
|
|
|
|
-
|
|
Stock issued to (returned by) Cognate BioServices
|
|
|
13,654
|
|
|
|
9,400
|
|
Common stock issued as compensation
|
|
|
98
|
|
|
|
3,389
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
617
|
|
|
|
(563
|
)
|
Accounts payable and accrued expenses
|
|
|
1,697
|
|
|
|
7,083
|
|
Related party accounts payable and accrued expenses
|
|
|
6,391
|
|
|
|
1,496
|
|
Other non-current assets
|
|
|
70
|
|
|
|
(42
|
)
|
Net cash used in operating activities
|
|
|
(41,555
|
)
|
|
|
(56,481
|
)
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
|
(4,770
|
)
|
|
|
(4,010
|
)
|
Funding of escrow - convertible notes
|
|
|
550
|
|
|
|
-
|
|
Net cash used in investing activities
|
|
|
(4,220
|
)
|
|
|
(4,010
|
)
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from mortgage loan
|
|
|
-
|
|
|
|
4,997
|
|
Deferred offering cost related to mortgage loan
|
|
|
-
|
|
|
|
(138
|
)
|
Proceeds transferred from escrow account
|
|
|
-
|
|
|
|
287
|
|
Proceeds from issuance of common stock and warrants in a registered direct offering
|
|
|
13,700
|
|
|
|
-
|
|
Offering cost related to registered direct offering
|
|
|
(1,077
|
)
|
|
|
-
|
|
Proceeds from issuance of common stock and warrants in private offering
|
|
|
926
|
|
|
|
40,000
|
|
Warrants exercised for cash
|
|
|
8,066
|
|
|
|
7,431
|
|
Offering costs related to warrants exercise
|
|
|
(795
|
)
|
|
|
-
|
|
Net cash provided by financing activities
|
|
|
20,820
|
|
|
|
52,577
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
3,944
|
|
|
|
(84
|
)
|
Net decrease in cash and cash equivalents
|
|
|
(21,011
|
)
|
|
|
(7,998
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
21,813
|
|
|
|
13,390
|
|
Cash and cash equivalents at end of period
|
|
$
|
802
|
|
|
$
|
5,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Interest payments on mortgage loan
|
|
$
|
(1,497
|
)
|
|
$
|
(1,025
|
)
|
Interest payments on senior convertible notes
|
|
$
|
(550
|
)
|
|
$
|
(1,103
|
)
|
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
NORTHWEST BIOTHERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS - CONTINUED
(Unaudited)
(in thousands)
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Supplemental schedule of non-cash investing and financing activities:
|
|
|
|
|
|
|
Deemed dividend related to modification of warrant
|
|
$
|
5,647
|
|
|
$
|
-
|
|
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 common stock for accounts payable conversion
|
|
$
|
28
|
|
|
$
|
-
|
|
Issuance of common stock for debt conversion
|
|
$
|
934
|
|
|
$
|
6,500
|
|
Issuance of common stock for conversion of accrued interest
|
|
$
|
66
|
|
|
$
|
387
|
|
Accrued renewal fee incurred from mortgage loan
|
|
$
|
211
|
|
|
$
|
-
|
|
Accrued exit fee incurred from mortgage loan
|
|
$
|
-
|
|
|
$
|
51
|
|
Reclassification of warrant liabilities related to warrants exercised for cash
|
|
$
|
825
|
|
|
$
|
264
|
|
Reclassification of warrant liabilities related to cashless warrants exercise
|
|
$
|
-
|
|
|
$
|
521
|
|
Redeemable security settlement
|
|
$
|
-
|
|
|
$
|
299
|
|
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
1. Organization and Description of Business and Recent
Developments
Northwest Biotherapeutics, Inc. and its
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’s platform technology,
DCVax®, is currently being tested for the treatment of certain types of cancers through clinical trials in the United States
and Europe.
2. Liquidity and Financial Condition
For the three and nine months ended September
30, 2016, the Company recognized net losses of $29.2 million and $49.5 million, respectively.
During
the three and nine months ended September 30, 2016, the Company used approximately $9.8 million and $41.6 million of cash in its
operating activities respectively.
These cash outflows included substantial
amounts of accrued costs relating to prior periods of higher activity and expenditures in the Company’s Phase III clinical
trial which have subsequently been reduced, and included substantial amounts of legal costs which the Company anticipates may be
subject to reimbursement under the Company’s insurance, with further legal expenses going forward being covered by insurance
directly. The Company had current assets of $2.3 million, accounts payable of $13.3 million and accounts payable to related party
of $11.8 million, convertible notes, net of $10.9 million and mortgage loans, net of $10.1 million.
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 financial statements have been prepared assuming the Company will continue as a going concern and do not
include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that might become necessary should the Company not be able to continue as a going concern.
3. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated
interim financial statements include the accounts of the Company and its subsidiaries. All material intercompany balances and transactions
have been eliminated. Certain immaterial reclassifications have been made to prior period amounts to conform to the current period
presentation.
The accompanying unaudited condensed consolidated
financial statements of the Company have been prepared in accordance with the accounting principles generally accepted in the United
States of America (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and
Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and on the same basis as the Company
prepares its annual audited consolidated financial statements. The condensed consolidated balance sheet as of September 30, 2016,
condensed consolidated statements of operations for the three and nine months ended September 30, 2016 and 2015, condensed consolidated
statements of comprehensive loss for the three and nine months ended September 30, 2016 and 2015, condensed consolidated statement
of stockholders’ equity (deficit) for the nine months ended September 30, 2016, and the condensed consolidated statements
of cash flows for the nine months ended September 30, 2016 and 2015 are unaudited, but include all adjustments, consisting only
of normal recurring adjustments, which the Company considers necessary for a fair presentation of the financial position, operating
results and cash flows for the periods presented. The results for the three and nine months ended September 30, 2016 are not necessarily
indicative of results to be expected for the year ending December 31, 2016 or for any future interim period. The condensed consolidated
balance sheet at December 31, 2015 has been derived from audited financial statements; however, it does not include all of the
information and notes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated
financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2015,
and notes thereto included in the Company’s annual report on Form 10-K, which was filed with the SEC on March 16, 2016, as
amended on April 29, 2016.
Use of Estimates
In preparing condensed consolidated 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,
valuing environmental liabilities, estimating the fair value of equity instruments recorded as derivative liabilities, and estimating
the useful lives of depreciable assets and whether impairment charges may apply.
Warrant Liability
The Company accounts for certain common
stock warrants outstanding as a liability at fair value and adjusts the instruments 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.
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 amount of the additional liability resulting from the completion of the clean-up,
if any, would be included in other income (expense). As of September 30, 2016, the Company estimated that the total environmental
remediation costs associated with the purchase of the UK Facility will be approximately $6.2 million. This is a projected potential
future cost. No such environmental costs have been incurred to date and none are currently pending. Contamination clean-up costs
that improve the property from its original acquisition state will be 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 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.
Comprehensive Loss
The Company reports comprehensive loss
and its components in its condensed consolidated financial statements. Comprehensive loss consists of net loss and foreign currency
translation adjustments, affecting stockholders’ equity (deficit) that, under U.S, GAAP, are excluded from net loss.
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.
Significant Accounting Policies
There have been no material changes in
the Company’s significant accounting policies to those previously disclosed in the 2015 Annual Report.
Recent Issued Accounting Pronouncements
Statement of Cash Flows
In August 2016, the FASB issued ASU No.
2016-15,
Statement of Cash Flows
(Topic 230). This amendment provides guidance on the presentation and classification of
specific cash flow items to improve consistency within the statement of cash flows. ASU 2016-15 is effective for fiscal years,
and interim periods within those fiscal years beginning after December 15, 2017, with early adoption permitted. The Company is
evaluating the effect that ASU 2016-15 will have on its financial statements and related disclosures.
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 is currently assessing the impact that ASU No.
2016-09 will have on its consolidated financial statements.
Revenue from Contracts with Customer
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, 2016. The Company is currently evaluating
the impact that ASU No. 2016-10 will have on its consolidated financial statements.
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 issued to Cognate to regain compliance with Nasdaq’s
Rule 5635. The Remediation Plan was accepted by
Nasdaq on August 30, 2016.
Pursuant to the Remediation Plan, the
Company canceled the most favored nation provisions related to warrants 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 issued under the 2014 Agreements;
the Company issued replacement warrants of 4,305,772 at a higher exercise price. The aggregate fair value of the warrants extinguished
as of August 30, 2016 using Monte Carlo simulation 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 warrant extinguishment as of August 30, 2016 is as follows:
Date of valuation
|
|
August 30, 2016
|
|
Strike price
|
|
$
|
0.35
|
|
Volatility (annual)
|
|
|
81
|
%
|
Risk-free rate
|
|
|
1
|
%
|
Contractual term (years)
|
|
|
2.8
|
|
Dividend yield (per share)
|
|
|
0
|
%
|
Extinguishment of Warrant Liabilities
Related to Cash Exercise
During the quarter ended September 30,
2016 approximately 2,555,000 warrants classified as derivative liabilities were exercised for cash (see footnote 9). A summary
of weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring warrant exercises (originally
recorded as liabilities) during the quarter ended September 30, 2016 is as follows:
|
|
2016 Warrants
Exercises
|
|
Strike price
|
|
$
|
0.35
|
|
Volatility (annual)
|
|
|
83
|
%
|
Risk-free rate
|
|
|
1
|
%
|
Contractual term (years)
|
|
|
2.2
|
|
Dividend yield (per share)
|
|
|
0
|
%
|
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 classifies the Company’s
liabilities measured at fair value on a recurring basis into the fair value hierarchy as of September 30, 2016 and December 31,
2015 (in thousands):
|
|
Fair value measured at September 30, 2016
|
|
|
|
|
|
|
Quoted
prices in active
|
|
|
Significant other
|
|
|
Significant
|
|
|
|
Fair value at
|
|
|
markets
|
|
|
observable inputs
|
|
|
unobservable inputs
|
|
|
|
September 30, 2016
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Derivative liability
|
|
$
|
198
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
198
|
|
|
|
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 nine
month period ended September 30, 2016.
The following table presents changes in
Level 3 liabilities measured at fair value for the nine-month period ended September 30, 2016. 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).
|
|
Warrant
|
|
|
|
Liability
|
|
Balance - January 1, 2016
|
|
$
|
27,982
|
|
Extinguishment of derivative liabilities related to Cognate
|
|
|
(10,131
|
)
|
Extinguishment of warrant liabilities related to warrants exercised for cash
|
|
|
(415
|
)
|
Change in fair value
|
|
|
(17,238
|
)
|
Balance – September 30, 2016
|
|
$
|
198
|
|
The Company’s warrant liabilities
are measured at fair value using the Monte Carlo simulation valuation methodology. 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 nine months ended September 30, 2016 is as follows:
Date of valuation
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Strike price
|
|
$
|
3.98
|
|
|
$
|
3.49
|
|
Volatility (annual)
|
|
|
89
|
%
|
|
|
87
|
%
|
Risk-free rate
|
|
|
1
|
%
|
|
|
1
|
%
|
Contractual term (years)
|
|
|
2.2
|
|
|
|
3.1
|
|
Dividend yield (per share)
|
|
|
0
|
%
|
|
|
0
|
%
|
5. Property, Plant and Equipment
Property and equipment consist of the following at September
30, 2016 and December 31, 2015 (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Leasehold improvements
|
|
$
|
69
|
|
|
$
|
69
|
|
Office furniture and equipment
|
|
|
25
|
|
|
|
25
|
|
Computer equipment and software
|
|
|
626
|
|
|
|
598
|
|
Construction in progress (property in the United Kingdom)*
|
|
|
46,181
|
|
|
|
45,681
|
|
|
|
|
46,901
|
|
|
|
46,373
|
|
Less: accumulated depreciation
|
|
|
(351
|
)
|
|
|
(216
|
)
|
|
|
$
|
46,550
|
|
|
$
|
46,157
|
|
* Construction in progress includes both
the land acquisition costs and the building costs.
Depreciation expense was approximately
$55,000 and $29,000 for the three months ended September 30, 2016 and 2015. Depreciation expense was approximately $135,000 and
$44,000 for the nine months ended September 30, 2016 and 2015.
6. Notes Payable
The following table summarizes outstanding debt as of September
30, 2016 and December 31, 2015 (amount in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Stated
|
|
Conversion
|
|
|
|
|
|
Debt
|
|
|
Carrying
|
|
|
|
Maturity
Date
|
|
Interest
Rate
|
|
Price
|
|
|
Face
Value
|
|
|
Discount
|
|
|
Value
|
|
6% unsecured (1)
|
|
9/19/2011
|
|
6%
|
|
$
|
3.09
|
|
|
$
|
135
|
|
|
$
|
-
|
|
|
$
|
135
|
|
8% unsecured note to related
party
|
|
On Demand
|
|
8%
|
|
|
N/A
|
|
|
|
50
|
|
|
|
-
|
|
|
|
50
|
|
2014 Senior convertible
notes (2)
|
|
8/15/2017
|
|
5%
|
|
$
|
6.60
|
|
|
|
11,000
|
|
|
|
(246
|
)
|
|
|
10,754
|
|
Mortgage
loan (3)
|
|
11/16/2016
& 8/13/2017
|
|
12%
|
|
|
N/A
|
|
|
|
10,385
|
|
|
|
(237
|
)
|
|
|
10,148
|
|
Ending balance
as of September 30, 2016
|
|
|
|
|
|
|
|
|
|
$
|
21,570
|
|
|
$
|
(483
|
)
|
|
$
|
21,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Stated
|
|
Conversion
|
|
|
|
|
|
Debt
|
|
|
Carrying
|
|
|
|
Maturity
Date
|
|
Interest
Rate
|
|
Price
|
|
|
Face
Value
|
|
|
Discount
|
|
|
Value
|
|
15% unsecured
- in dispute
|
|
7/31/2011
|
|
15%
|
|
|
N/A
|
|
|
$
|
934
|
|
|
$
|
-
|
|
|
$
|
934
|
|
6% unsecured
|
|
9/19/2011
|
|
6%
|
|
$
|
-
|
|
|
|
135
|
|
|
|
-
|
|
|
|
135
|
|
8% unsecured note to related
party
|
|
On Demand
|
|
8%
|
|
|
N/A
|
|
|
|
50
|
|
|
|
-
|
|
|
|
50
|
|
2014 Senior convertible
notes
|
|
8/15/2017
|
|
5%
|
|
$
|
-
|
|
|
|
11,000
|
|
|
|
(457
|
)
|
|
|
10,543
|
|
Mortgage
loan
|
|
11/16/2016
& 8/13/2017
|
|
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 September
30, 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) The Company has $0.7 million remaining
in escrowed interest payments, which is sufficient to fund, when due, the total aggregate amount of the two scheduled semi-annual
interest payments during the remaining term of the notes, excluding additional interest, if any.
(3) On August 17, 2016, the lender issued
an automatic one year extension of the second mortgage loan maturity date to August 17, 2017 with a renewal fee of approximately
$0.2 million, which is not due until the end of the extension period and will be recorded as deferred financing cost.
The following table summarizes total interest
expenses related to senior convertible notes, other notes and mortgage loan for the three and nine months ended September 30, 2016
and 2015, respectively (in thousands):
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Interest expenses related to senior convertible notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual interest
|
|
$
|
139
|
|
|
$
|
151
|
|
|
$
|
413
|
|
|
$
|
502
|
|
Accelerated interest due to the conversion of convertible senior notes into common stock
|
|
|
-
|
|
|
|
200
|
|
|
|
-
|
|
|
|
763
|
|
Amortization of debt issuance costs
|
|
|
71
|
|
|
|
80
|
|
|
|
211
|
|
|
|
292
|
|
Accelerated amortization of debt issuance cost due to the conversion of convertible senior notes into common stock
|
|
|
-
|
|
|
|
68
|
|
|
|
-
|
|
|
|
302
|
|
Total interest expenses related to senior convertible notes
|
|
|
210
|
|
|
|
499
|
|
|
|
624
|
|
|
|
1,859
|
|
Interest expenses related to other notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15% unsecured originally due July 2011 - in dispute
|
|
|
35
|
|
|
|
35
|
|
|
|
105
|
|
|
|
105
|
|
6% unsecured
|
|
|
2
|
|
|
|
3
|
|
|
|
6
|
|
|
|
69
|
|
8% unsecured note due 2014 (related party) - on demand
|
|
|
1
|
|
|
|
1
|
|
|
|
3
|
|
|
|
3
|
|
Total interest expenses related to other notes
|
|
|
38
|
|
|
|
39
|
|
|
|
114
|
|
|
|
177
|
|
Interest expenses related to mortgage loan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual interest
|
|
|
305
|
|
|
|
360
|
|
|
|
970
|
|
|
|
994
|
|
Amortization of debt issuance costs
|
|
|
136
|
|
|
|
147
|
|
|
|
428
|
|
|
|
437
|
|
Total interest expenses on the mortgage loan
|
|
|
441
|
|
|
|
507
|
|
|
|
1,398
|
|
|
|
1,431
|
|
Other interest expenses
|
|
|
2
|
|
|
|
1
|
|
|
|
2
|
|
|
|
8
|
|
Total interest expenses
|
|
$
|
691
|
|
|
$
|
1,046
|
|
|
$
|
2,138
|
|
|
$
|
3,475
|
|
7. Net Earnings (Loss) per Share Applicable
to Common Stockholders
Basic and diluted earnings (loss) per common
share are computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period.
Diluted earnings (loss) per share includes the determinants of basic net income per share and, in addition, gives effect to the
potential dilution that would occur if securities or other contracts to issue common stock were exercised, vested or converted
into common stock, unless they are anti-dilutive. Diluted weighted average common shares include common stock potentially issuable
under our convertible notes, vested and unvested stock options and unvested RSUs, except where the effect of including them is
anti-dilutive.
The following table summarizes the overall
and per-share earnings (loss) calculation for the three and nine months ended September 30, 2016 and 2015, respectively (in thousands,
except per share amount):
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net earnings (loss) applicable to common stockholders - basic
|
|
$
|
(32,234
|
)
|
|
$
|
22,615
|
|
|
$
|
(55,154
|
)
|
|
$
|
(90,663
|
)
|
Interest on convertible senior notes
|
|
|
-
|
|
|
|
79
|
|
|
|
-
|
|
|
|
-
|
|
Net earnings (loss) - diluted
|
|
$
|
(32,234
|
)
|
|
$
|
22,694
|
|
|
$
|
(55,154
|
)
|
|
$
|
(90,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic
|
|
|
114,836
|
|
|
|
78,062
|
|
|
|
105,501
|
|
|
|
74,394
|
|
Common stock warrants
|
|
|
-
|
|
|
|
12,373
|
|
|
|
-
|
|
|
|
-
|
|
Convertible notes
|
|
|
-
|
|
|
|
1,811
|
|
|
|
-
|
|
|
|
-
|
|
Less: unvested issued restricted stock
|
|
|
-
|
|
|
|
(2,425
|
)
|
|
|
-
|
|
|
|
-
|
|
Weighted average shares outstanding - diluted
|
|
|
114,836
|
|
|
|
89,821
|
|
|
|
105,501
|
|
|
|
74,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.28
|
)
|
|
$
|
0.29
|
|
|
$
|
(0.52
|
)
|
|
$
|
(1.22
|
)
|
Diluted
|
|
$
|
(0.28
|
)
|
|
$
|
0.25
|
|
|
$
|
(0.52
|
)
|
|
$
|
(1.22
|
)
|
For the periods where the Company reported losses, all common
stock equivalents are excluded from the computation of diluted earnings per share, since the result would be anti-dilutive. (in
thousands):
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Common stock options
|
|
|
1,551
|
|
|
|
1,551
|
|
Common stock warrants - equity treatment
|
|
|
38,990
|
|
|
|
12,929
|
|
Common stock warrants - liability treatment
|
|
|
1,316
|
|
|
|
12,434
|
|
Convertible notes and accrued interest
|
|
|
1,744
|
|
|
|
1,811
|
|
Potentially dilutive securities
|
|
|
43,601
|
|
|
|
28,725
|
|
8. Related Party Transactions
Cognate BioServices, Inc.
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.
As a result 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 on September 7, 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 exercise
price of $4.27 with 5 years term; and
(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 remaining portions of the multi-year lock-up and vesting
periods relating to shares and warrants held by Cognate were also cancelled.
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
At September 30, 2016 and December 31,
2015, the Company owed Cognate $11.8 million and $5.5 million, respectively, for unpaid invoices for manufacturing, product distribution,
product and process development, and related services.
The following table shows a summary of
research and development cost 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 three and nine months ended September 30, 2016 and 2015, respectively (in
thousands):
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Cognate research and development cost - services
|
|
$
|
6,794
|
|
|
$
|
10,137
|
|
|
$
|
21,135
|
|
|
$
|
29,992
|
|
Stock issued to and returned by Cognate
|
|
|
11,376
|
|
|
|
(6,385
|
)
|
|
|
13,653
|
|
|
|
9,400
|
|
Total
|
|
$
|
18,170
|
|
|
$
|
3,752
|
|
|
$
|
34,788
|
|
|
$
|
39,392
|
|
Share Based Payments
As of August 30, 2016, the research and
development expense associated with the remaining 731,980 shares of unvested stock payable to Cognate was approximately $221,000.
Pursuant to the Remediation Plan mentioned above, the Company cancelled the remaining unvested 731,980 shares without a replacement
of shares. The Company also cancelled 8,052,092 vested shares, which was recorded as reduction of shares outstanding.
The Company recorded $8.9 million of income
and $9.4 million of expense for the nine-month periods ended September 30, 2016 and 2015, respectively, for stock based payment
expense to Cognate through August 30, 2016 (the date of vesting). The fair value calculation of these shares was determined using
the market price for tradable shares.
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 (but which were not implemented, due to being cancelled and eliminated under the Remediation Agreement). The first
reset occurred in February 2016, had an effective price of $1.70 and would have resulted in an obligation by the Company to issue
6.0 million shares to Cognate. The second reset occurred in May 2016, had an effective price of $0.96 and would have resulted
in an obligation to issue an additional 12.0 million shares. The third reset occurred in July 2016, had an effective price
of $0.60 and would have resulted in an obligation to issue an additional 16.6 million shares. The final reset occurred in
August 2016, had an effective price of $0.35 and would have resulted in an obligation to issue an additional 31.6 million shares.
None of these most favored nation shares were issued to Cognate. Under the Remediation Agreement, Cognate
agreed to eliminate the most favored nation provisions, and to forego all 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
additional paid in capital.
9. 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.
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 condensed, 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 condensed, 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.
Stock Purchase Warrants
The following is a summary of warrant activity
for the nine months ended September 30, 2016 (in thousands, except per share data):
|
|
Number of
|
|
|
Weighted Average
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
Outstanding as of December 31, 2015
|
|
|
27,267,441
|
|
|
$
|
4.40
|
|
Warrants granted in a registered direct offering
|
|
|
12,058,825
|
|
|
|
3.04
|
|
Warrants granted to Cognate*
|
|
|
3,405,671
|
|
|
|
1.70
|
|
Warrants expired and cancelled
|
|
|
(16,791
|
)
|
|
|
11.86
|
|
Outstanding as of March 31, 2016
|
|
|
42,715,146
|
|
|
$
|
3.53
|
|
Warrants granted in a registered direct offering
|
|
|
2,426,440
|
|
|
|
1.02
|
|
Warrants granted to Cognate*
|
|
|
5,329,961
|
|
|
|
0.96
|
|
Warrants exercised for cash
|
|
|
(4,411,764
|
)
|
|
|
0.96
|
|
Warrants expired and cancelled
|
|
|
(1,614,837
|
)
|
|
|
8.82
|
|
Outstanding as of June 30, 2016
|
|
|
44,444,946
|
|
|
$
|
2.67
|
|
Warrants granted to investors
|
|
|
18,428,640
|
|
|
|
0.64
|
|
Warrants granted to Cognate
|
|
|
4,305,772
|
|
|
|
4.27
|
|
Cognate warrants returned/cancelled
|
|
|
(15,806,512
|
)
|
|
|
0.35
|
|
Warrants exercised for cash
|
|
|
(10,945,739
|
)
|
|
|
0.35
|
|
Warrants expired and cancelled
|
|
|
(120,979
|
)
|
|
|
11.30
|
|
Outstanding as of September 30, 2016
|
|
|
40,306,128
|
|
|
$
|
2.83
|
|
* Warrants contained down round protection (most favored nation
provisions).
10. Contingencies
Derivative and Class Action Litigation
In 2014, as previously reported, the Company
received demand letters from three purported individual shareholders seeking to inspect our corporate books and records pursuant
to Section 220 of the Delaware General Corporation Law. The demand letters were all substantially similar, and claimed that their
purpose is to investigate possible mismanagement and breaches of fiduciary duty by the Company’s directors and officers.
They requested a range of documents. On November 13, 2014, one of the purported shareholders filed a complaint in the Delaware
Court of Chancery seeking to enforce her books and records demand. The Company reached negotiated agreements and provided limited
records, under confidentiality agreements. On July 16, 2015, the parties filed, and the court entered, a stipulation dismissing
the case.
On June 19, 2015, two of the purported
shareholders filed a complaint purportedly suing on behalf of a class of similarly situated shareholders and derivatively on behalf
of the Company in the Delaware Court of Chancery. The lawsuit names Cognate BioServices, Inc., Toucan Partners, Toucan Capital
Fund III, our CEO Linda Powers and 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 objects to 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 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. On September
1, 2015, the Company and other named defendants filed motions to dismiss. In response, the plaintiffs filed an amended complaint
on November 6, 2015. The Company and the other named defendants filed motions to dismiss plaintiffs’ amended complaint on
January 19, 2016. The plaintiffs filed an answering brief in opposition to the motion to dismiss on April 4, 2016. The Company
and the other defendants filed reply briefs on May 18, 2016. The Company intends to continue to vigorously defend the case.
On November 19, 2015, a third purported
shareholder who had sought corporate books and records filed a complaint in the U.S. District Court for the District of Maryland,
claiming to sue derivatively on behalf of the Company. The complaint names 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 claims that the plaintiff made a demand on the Company's Board of Directors to commence an action against the Company's
directors and its CEO and that the plaintiff commenced the derivative action after not receiving a response to the demand letter
within an allegedly "sufficient time." The complaint further claims 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. The Complaint also claims that the Company's directors breached their fiduciary duties of loyalty
and good faith to the Company by authorizing the payments to Cognate. Finally, the complaint claims that Ms. Powers, Cognate, and
Toucan aided and abetted the directors' breaches of fiduciary duties by causing the board to enter into the agreements with Cognate.
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. On February 2, 2016,
plaintiff and defendants filed a joint motion to stay the proceedings pending an investigation by a special committee of the Company's
Board of Directors into the allegations asserted in the demand letter and underlying the lawsuit. The court entered the stay on
March 18, 2016. 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 complaint in the U.S. District Court for the District of Maryland. The lawsuit
names 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 claims 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 seeks unspecified damages, attorneys’
fees, and costs. The Company and Ms. Powers filed a motion to dismiss plaintiffs’ amended complaint on April 12, 2016. The
plaintiffs filed an opposition to the motion to dismiss on June 13, 2016. The Company and Ms. Powers filed a reply in support of
their motion to dismiss on July 28, 2016. The Company intends to vigorously defend the case.
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. The Company has appointed a special
committee of its Board of Directors consisting of independent and disinterested directors to investigate the allegations set forth
in the demand letter, as well as the allegations asserted in the litigation summarized above.
11. Subsequent Events
Debt Financing
As the Company previously reported, in
late October and thereafter the Company engaged in discussions with institutional investors interested in providing financing.
Under Nasdaq rules, the number of shares which the Company may issue is limited in certain types of transactions (and not similarly
limited in other types of transactions). The number of shares which the investors were interested to purchase may exceed
the maximum number of shares issuable by the Company in the type of transaction contemplated. While this issue is being addressed,
the Company has entered into a debt financing.
On November 4, 2016, the Company entered
into Promissory Note Agreements (the “Notes”) for $2.5 million principal amount. The Notes are not convertible;
they have one-year maturity and 10% annual interest, with the interest payable at maturity. No equity or derivative equity securities
were issued in connection with this transaction.
Nasdaq Issue
In connection with the discussions with
interested investors, the Company contacted Nasdaq to make the necessary filings for Listing of Additional Shares and to pursue
a determination of the maximum number of shares the Company may issue to investors. On November 1, 2016, the Company submitted
to Nasdaq information about the Company’s prior financing transactions during the preceding six-month period. On November
7, 2016, the Company received a letter from Nasdaq indicating that certain of the Company’s financing transactions did not
comply with Nasdaq rules. The Nasdaq Staff had determined to aggregate a series of transactions that were completed with various
unrelated parties between May 15, 2016 and October 13, 2016 for purposes of assessing whether the 20% threshold for shareholder
approval had been triggered for issuances priced below the applicable market price. These transactions included repricing of existing
common stock purchase warrants and issuances of new common shares and common stock purchase warrants.
The Company and its representatives are
in discussions with the Nasdaq Staff regarding available avenues for remediation, and the Company intends to submit its plan of
remediation to Nasdaq on or before the November 18, 2016 deadline established by Nasdaq. If Nasdaq does not accept the plan of
remediation, Nasdaq may issue a notice of delisting. The Company would then have the right to request a hearing before an independent
Nasdaq Listing Qualifications Panel (the “Panel”). A request for a hearing would stay any suspension or delisting action
pending the hearing and the expiration of any additional extension period granted by the Panel. The Panel would have the discretion
to grant the Company an extension period of up to 180 calendar days from the date of the delisting letter within which the Company
would be required to demonstrate compliance with all applicable listing requirements.
Sale of Common Stock and Issuance of Warrants in a Private
Placement
In October 2016, the Company issued 740,909
shares of Common stock at $0.44 per share to several angel investors for aggregate proceeds of $326,000. The Company also issued
370,456 warrants at an exercise price of $0.52 per share, with an exercise period of five years.
Issuance of Common Shares in Satisfaction of Outstanding Obligations
On October 13, 2016, the Company converted
accrued interest of $0.5 million into 1,111,111 shares of common stock. In conjunction with the conversion, the Company
issued 555,556 warrants at an exercise price of $0.45 with an exercise period of 5 years, commencing 6 months after issuance.
Assignment Agreement with Related Party
As previously reported, on October 13, 2016 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’s prior report noted that the third party lender and the Company were negotiating to finalize the arrangements
related to this Assumption and that the Company planned to report the results in a future periodic filing. Based on discussions
to date, the Company anticipates that, over a period of up to a 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 million shares of common stock at $0.48 per share.