Notes to the Consolidated Financial Statements
1.
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Organization and Description of Business
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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.
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Liquidity, Financial Condition and Management Plans
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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.
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.
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Summary of Significant Accounting Policies
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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.
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.
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.
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.
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.
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):
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December 31, 2016
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|
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December 31, 2015
|
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Cash and cash equivalents
|
|
$
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6,186
|
|
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$
|
21,813
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Restricted cash
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|
|
685
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|
|
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1,235
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Total cash and restricted cash
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$
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6,871
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|
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$
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23,048
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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.
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.
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Fair Value Measurements
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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.
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 $10.1 million, and was recorded through additional paid in capital.
A summary of weighted average (in aggregate)
significant unobservable inputs (Level 3 inputs) used in measuring Cognate warrants extinguishment as of August 30, 2016 is as
follows:
Date of valuation
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August 30, 2016
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Strike price
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$
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0.35
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Contractual term (years)
|
|
|
2.8
|
|
Volatility (annual)
|
|
|
81
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%
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Risk-free rate
|
|
|
1
|
%
|
Dividend yield (per share)
|
|
|
0
|
%
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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:
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|
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
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).
|
|
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
|
|
* 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.
|
(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:
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 fol
l
ows:
|
·
|
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.
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.
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.
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.
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.
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.
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.
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.
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 fol
l
ows:
|
·
|
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.
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.
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):
|
|
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
|
%
|
|
|
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.
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.