(Former Name, Former
Address and Former Fiscal Year, if changed since last report)
Securities registered pursuant to Section 12(b) of the
Act: common stock, par value $0.001 per share
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
¨
No
x
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
¨
No
x
Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange
Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
x
No
¨
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
x
No
¨
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
¨
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth
company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
Indicate by check mark whether the registrant
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The aggregate market value of the voting
and non-voting common equity held by non-affiliates of the registrant was $108,579,000 on June 30, 2018. As of April 1, 2019,
the registrant had 537,090,275 shares of common stock outstanding.
PART
I
This Report on Form 10-K for Northwest
Biotherapeutics, Inc. may contain forward-looking statements within the meaning of Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements are characterized by future
or conditional verbs such as “may,” “will,” “expect,” “intend,” “anticipate,”
believe,” “estimate” and “continue” or similar words. You should read statements that contain these
words carefully because they discuss future expectations and plans, which contain projections of future results of operations
or financial condition or state other forward-looking information. Such statements are only predictions and our actual results
may differ materially from those anticipated in these forward-looking statements. We believe that it is important to communicate
future expectations to investors. However, there may be events in the future that we are not able to accurately predict or control.
Factors that may cause such differences include, but are not limited to, those discussed under Item 1A of this Report, including
the uncertainties associated with product development, the risk that products that appeared promising in early clinical trials
do not demonstrate safety and efficacy in larger-scale clinical trials, the risk that we will not obtain approval to market our
products, the risks associated with dependence upon key personnel and the need for additional financing. We do not assume any
obligation to update forward-looking statements as circumstances change.
Unless the context otherwise requires,
“Northwest Biotherapeutics,” the “Company,” “we,” “us,” “our” and
similar names refer to Northwest Biotherapeutics, Inc. DCVax® is a registered trademark of the Company.
Overview
We are a
biotechnology company focused on developing personalized immune therapies for cancer. We have developed a platform technology,
DCVax
®
, which uses activated dendritic cells to mobilize a patient's own immune system
to attack their cancer.
Our lead product, DCVax®-L, is designed
to treat solid tumor cancers in which the tumor can be surgically removed. This product is in an ongoing 331-patient Phase III
trial for newly diagnosed Glioblastome multiforme (GBM). On May 29, 2018, interim blinded data from the Phase III trial collected
in 2017 were published in a peer reviewed scientific journal. On November 17, 2018, updated interim blinded data from the Phase
III trial were presented at the Society for Neuro-Oncology annual meeting. As the Company noted in its announcement of the publication
and in subsequent reports, the data could get either better or worse as it continues to mature. The Company has been consulting
with its Scientific Advisory Board, the Steering Committee of the trial and other independent experts about the ongoing handling
of the trial
As previously reported, the Company is
now moving forward with the several stages of work that are needed to reach completion of this trial. These include finalizing
the Statistical Analysis Plan, conducting the final data collection, data validation and data lock, and then unblinding and analyzing
the data. Each of these stages are multi-month processes, involving teams of outside experts as well as Company personnel. This
work also involves substantial pioneering, without a well-established pathway or roadmap since very few personalized cell therapies
have reached late stage development. Accordingly, the Company’s projections, estimates and expectations are subject to material
changes as the work proceeds.
Our second product, DCVax®-Direct,
is designed to treat inoperable solid tumors. A 40-patient Phase I trial has been completed, and included treatment of a diverse
range of cancers. The Company is working on preparations for Phase II trials of DCVax-Direct.
The DCVax Technology
Our platform technology, DCVax, is a personalized
immune therapy that uses a patient's own dendritic cells, or DCs, the master cells of the immune system, as the therapeutic agent.
The patient’s DCs are obtained through a blood draw, or leukapheresis. The DCs are then activated and loaded with biomarkers
(“antigens”) from the patient’s own tumor. For DCVax-L, the antigen loading process takes place during the manufacturing
of the product. For DCVax-Direct, the antigen loading process takes place
in situ
in the tumor after the product is directly
injected into the patient’s inoperable tumor. The loading of antigens into the DCs “educates” the DCs about
what the immune system needs to target.
Clinical Trials and Early Access Programs
DCVax-L for
Operable
Solid
Tumors: GBM Brain Cancer
Our lead product candidate is DCVax-L
for Glioblastoma multiforme (GBM): the most aggressive and lethal type of brain cancer. With standard of care treatment for GBM
today, including surgery, radiation and chemotherapy, the median time to tumor recurrence is about 7 months, and the median survival
is about 15-17 months. There is an urgent need for new and better treatments.
DCVax-L is currently in a 331-patient
Phase III trial. The Company has reported on the blinded interim data (the data from both arms of the trial combined) and the
Company is now in the process of working towards completion of the trial, as described above.
The Company plans to conduct Phase II
trials of DCVax-L in combination with other agents, such as checkpoint inhibitors, when resources permit. Such combination trials
may include DCVax-L and Pembrolizumab (Keytruda) for colorectal cancer, as the Company has previously reported. Certain preparatory
work will be required and regulatory approvals will have to be obtained for these trials, in addition to financing.
DCVax-L Early Access Programs
In March 2014, we received
approval from the German regulatory authority of a “Hospital Exemption” for DCVax-L for glioma brain cancers under
Section 4b of the German Drug Law outside of our Phase III trial. We undertook treatment of 9 patients under the Hospital Exemption.
During 2018, we transferred our European manufacturing to the UK, and terminated such activities in Germany. As part of this termination
of activities, we notified the German regulatory authorities that we were returning the Hospital Exemption license (which requires
in-country manufacturing).
As previously reported, we have also treated
a substantial number of compassionate use patients, under an Expanded Access Protocol in the US. We have also treated compassionate
use patients as “Specials” in the U.K.
DCVax-Direct for
Inoperable
Solid Tumor Cancers
Our DCVax-Direct product offers a potential
new treatment option for inoperable tumors. This can potentially apply to a wide range of clinical situations: for example, situations
in which patients' tumors are considered inoperable because the patient has multiple tumors, or their tumor cannot be completely
removed, or the surgery would cause undue damage to the patient and impair their quality of life.
A large number of patients with a variety
of cancer types are faced with this situation, because their tumors are already locally advanced or have begun to metastasize
by the time symptoms develop and the patients seek diagnosis and treatment. For these patients, the outlook today is bleak and
survival remains quite limited.
DCVax-Direct is administered by direct
injection into a patient's tumors. It can potentially be injected into any number of tumors, enabling patients with locally advanced
disease or with metastases to be treated. With image guidance, DCVax-Direct can also be injected into tumors in virtually any
location in the body.
We conducted a 40-patient Phase I trial
of DCVax-Direct at MD Anderson Cancer Center and at Orlando Health. The patients enrolled in this trial had failed other treatments,
and had multiple tumors and actively progressing disease. In spite of this heavy disease burden, since the trial was primarily
to demonstrate safety, the treatment regimen in this first clinical trial was very conservative: only one tumor was injected in
each patient, and most of the patients received only 3 treatments over the course of 2 weeks, with some receiving a 4
th
treatment at week 8 and beyond.
Despite these challenging circumstances,
effects seen in various patients include examples of tumor necrosis (i.e., cell death) in the injected tumors, shrinkage or stabilization
in some non-injected tumors, stabilization of disease and survival times beyond what was expected.
This Phase I trial was designed to be
very informative: we treated numerous diverse types of cancers (sarcoma, pancreatic, colorectal, lung, melanoma and others); we
tested three different dose levels and various methods of image-guided administration; we collected both imaging and biopsy data,
and correlated them with clinical effects in patients; we evaluated both local effects in the injected tumors and systemic effects
in the non-injected tumors; we evaluated potential endpoints for future trials; and most importantly, we evaluated safety.
In the Phase I stage of the DCVax-Direct
Phase I/II trial, the safety profile was excellent (as has also been the case over the years with DCVax-L). Typically, patients
develop a fever after the injections, to a limited extent and for a limited duration, and they do not generally experience any
significant toxicities.
Based upon the data and experience to
date, we are planning to proceed with Phase II trials of DCVax-Direct in various cancers, when resources permit. In the Phase
II trials, we plan to inject multiple tumors, rather than just one tumor, and we plan to administer more doses than in the Phase
I trial.
Target Markets for DCVax Products
Since our DCVax-L product is potentially
applicable to all types of operable solid tumors, and our DCVax-Direct product is potentially applicable to all types of inoperable
solid tumors, we believe that the potential markets for DCVax products are particularly large. According to the American Cancer
Society, 1 in 2 men, and 1 in 3 women, in the U.S. will develop some form of cancer in their lifetime. There are nearly 1.5 million
new cases of cancer per year in the U.S., and nearly 600,000 deaths from cancer. The incidence is similar in Europe, the U.K.
and elsewhere.
Brain cancer
Brain cancers fall into two broad categories:
primary (meaning the cancer first originates in the brain) and metastatic (meaning the cancer first appears elsewhere in the body,
but subsequently metastasizes or spreads to the brain). In the U.S. alone, on an annual basis, there are some 40,000 new cases
of primary brain cancer (including about 12,000 cases of GBM, the most severe grade of primary brain cancer), and some 160,000
new cases of metastatic brain cancer. The incidence is similar in Europe, the U.K. and elsewhere.
In addition, brain cancer is a serious
medical problem in children 18 years and under. It is the second most frequent type of childhood cancers (after leukemias) and,
following progress in reducing death rates from leukemias, it is now a leading cause of childhood cancer deaths.
Very little has changed in the last 30
years in the treatment and clinical outcomes for GBM. With typical standard of care treatment today - surgery, radiation
and chemotherapy - patients still generally die within a median of about 15-17 months from diagnosis. Loco-regional
therapy with alternating electric fields has recently shown an increase in median Progression Free Survival (i.e., time to tumor
recurrence) to 6.7 months, and median Overall Survival to 20.9 months, respectively from randomization in clinical trials. However,
there has been no material advance in survival with systemic therapies since the addition of temozolomide more than 12 years ago,
despite investigations with many diverse agents. There is an urgent need for new treatment options.
Manufacturing of DCVax
We use a batch manufacturing technology
for our DCVax products, and we believe this manufacturing approach is a key part of the practicality of our product and its economic
feasibility. Generally, we are able to produce enough doses for the patient’s treatment regimen through just one manufacturing
process. When a batch of DCVax product has been made, we then cryopreserve it.
Both of these technologies, the personalized
batch manufacturing for each patient and the cryopreservation, are essential elements of our manufacturing model and product economics.
Together, they enable us to usually incur the high costs of manufacturing just one time for each patient, and then store the multi-year
or multi-dose quantity of product, frozen, in single doses. This makes DCVax effectively an “off the shelf” product
for the patient after the initial manufacturing, even though it is personalized, and we anticipate that this will enable the pricing
of DCVax to be in line with other new cancer drugs. We also believe that both economies of scale and automation will further enhance
the product economics. The manufacturing process today is also rapid: about 8 days for DCVax-L, and 7 days for DCVax-Direct, followed
by quality control and release testing (including a sterility test that may take a couple of weeks) .
We contract out the manufacturing of our
DCVax products to Cognate BioServices for the U.S. and Canada, and to Advent BioServices (formerly Cognate U.K.) for Europe. Although
there are many contract manufacturers for small molecule drugs and for biologics, there are very few companies who specialize
in manufacturing living cell products. Manufacturing of cellular products is fundamentally different than production of small
molecules or biologics, and the regulatory requirements are very difficult to meet. Both Cognate BioServices and Advent BioServices
specialize in the production of cellular products.
Our DCVax programs generally require that
the applicable manufacturing capacity be dedicated exclusively to our programs. Most medical products, including other types of
cellular products, are made in batches on a pre-scheduled basis. In contrast, our products are fully personalized and can only
be made in individual personalized batches, not large-scale batches of standardized products, and our products are made on demand,
on an ongoing basis. So, the manufacturing suites generally must be dedicated entirely to NW Bio’s products.
Cognate BioServices’ manufacturing
facility for clinical-grade cell products is located in Memphis, Tennessee. Cognate BioServices' facility is approximately 80,000
square feet, and produces both the Company’s DCVax products and other clients’ products. We believe the current manufacturing
facilities have the potential to produce DCVax for at least several thousand patients per year. We are also developing facilities
for manufacturing in the U.K. for the European market. It is necessary for us to have manufacturing operations in Europe to meet
the logistical requirements for European patients relating to the collection, delivery and processing of the patient’s blood
draw containing the immune cells (for which the time window is too limited to reach the US manufacturing facility).
Intellectual Property and Orphan Drug
Designation
We have an integrated strategy for protection
of our technology through both patents and other mechanisms, such as Orphan Drug status. As of December 31, 2018, we have over
190 issued patents and more than 65 pending patent applications worldwide, grouped into 12 patent families. Of these, 181 issued
patents and 35 pending patent applications directly relate to our DCVax products. In the United States and Europe, some of our
patents and applications relate to the composition and use of products, while other patents and applications relate to other aspects
such as manufacturing and quality control. For example, in the United States, we have four issued and seven pending patent applications
that relate to the composition and/or use of our DCVax products. We also have other U.S patents and applications that cover, among
other things, quality control for DCVax and an automated system which we believe will help enable the scale-up of production for
large numbers of patients on a cost-effective basis. Similarly, in Europe, we have five patents issued by and six pending patent
applications with the European Patent Office (“EPO”) that cover our DCVax products, and other patents and applications
that cover aspects such as manufacturing and quality control, and the automated system. In Japan, we have seven issued patents
and three pending patent applications relating to our DCVax products, as well as manufacturing related patents. Patents have been
granted and are pending in other foreign jurisdictions which may be potential future markets for our DCVax products.
During 2018, two new patents were issued
to us as part of our worldwide patent portfolio. The newly issued patents cover methods and devices for manufacturing dendritic
cells related to our DCVax products, as well as encompassing certain dendritic cell compositions for direct injection into patient
tumors related to DCVax-Direct.
During 2017, six new patents were issued
to us as part of our worldwide patent portfolio. The newly issued patents cover a variety of subject matter, including certain
processes and methods for manufacturing and for enhancing the potency of dendritic cells related to our DCVax products, as well
as encompassing certain dendritic cell compositions for direct injection into patient tumors related to DCVax-Direct.
The expiration dates of the issued U.S.
patents involved in our current business range from 2022 to 2026. The expiration dates of the issued European patents involved
in our current business range from 2022 to 2024. For some of the earlier dates, we plan to seek extensions of the patent life,
and believe we have reasonable grounds for doing so.
In addition to our patent portfolio, we
have obtained Orphan Drug designation for our lead product, DCVax-L for glioma brain cancers. Such designation brings with it
a variety of benefits, including potential market exclusivity for seven years in the U.S. and ten years in Europe if our product
is the first of its type to reach the market.
This market exclusivity applies regardless
of patents, (i.e., even if the company that developed it has no patent coverage on the product). In addition, the time period
for such market exclusivity does not begin to run until product sales begin. In contrast, the time period of a patent begins when
the patent is filed and runs down during the years while the product is going through development and clinical trials.
Competition
The biotechnology and biopharmaceutical
industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products.
A large and growing number of companies are actively involved in the research and development of immune therapies or cell-based
therapies for cancer (including Juno, Kite, Bellicum, Argos, Agenus, Asterias, Dandrit, Immunicum, Sotio, Tocagen, AiVita and
many others). In addition, many big pharma companies (including BMS, Merck, Pfizer, Astra Zeneca, Roche and others) are rapidly
commercializing checkpoint inhibitor drugs to “take the brakes off” patients’ immune responses to cancer. Other
novel technologies for cancer are also under development or have recently been approved, such as the Optune electro-therapy device
of NovoCure and oncolytic viruses. Additionally, many companies are actively involved in the research and development of monoclonal
antibody-based and bi-specific or tri-specific antibody-based cancer therapies. Currently, a substantial number of antibody-based
drugs are approved for commercial sale for cancer therapy, and a large number of additional ones are under development. Many other
third parties compete with us in developing alternative therapies to treat cancer, including: biopharmaceutical companies; biotechnology
companies; pharmaceutical companies; academic institutions; and other research organizations, as well as some medical device companies.
We face extensive competition from companies
developing new treatments for brain cancer. These include a variety of immune therapies, as mentioned above, as well as a variety
of small molecule drugs and biologics. There are also a number of existing drugs used for the treatment of brain cancer that may
compete with our product, including, Avastin® (Roche Holding AG), Gliadel® (Eisai Co. Ltd.), and Temodar® (Merck &
Co., Inc.), as well as the Optune electro-therapy device (Novocure) and oncolytic viruses. Both checkpoint inhibitor drugs and
T cell-based therapies are pursuing clinical trials for solid tumors, including brain cancer, as well.
Most of our competitors have significantly
greater financial resources and expertise in research and development, manufacturing, pre-clinical testing, conducting clinical
trials, obtaining regulatory approvals and marketing and sales than we do. Smaller or early-stage companies may also prove to
be significant competitors, particularly if they enter into collaborative arrangements with large and established companies. These
third parties compete with us in recruiting and retaining qualified scientific and management personnel and collaborators, as
well as in acquiring technologies complementary to our programs, and in obtaining sites for our clinical trials and enrolling
patients.
Corporate Information
We were formed in 1996 and incorporated
in Delaware in July 1998. Our principal executive offices are located in Bethesda, Maryland, and our telephone number is (240)
497-9024. Our website address is
www.nwbio.com
. The information on our website is not part of this report. We have included
our website address as a factual reference and do not intend it to be an active link to our website.
Available Information
Our website address is
www.nwbio.com
.
We make available, free of charge through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and all amendments to those reports as soon as is reasonably practicable after such material is electronically
filed with or furnished to the Securities and Exchange Commission (the “SEC”), but other information on our website
is not incorporated into this report. The SEC maintains an Internet site that contains these reports at
www.sec.gov
.
Employees and Contractors
As of December 31, 2018, we had 12 full-time
employees in the US, and 2 full-time employees in Europe. We believe our employee relations are positive.
In addition to our full-time employees,
a substantial number of contractors provide various services for our operations. For example, we have contract management of our
clinical trials and contract manufacturing of our products.
Our business, financial condition,
operating results and prospects are subject to the following material risks. Additional risks and uncertainties not presently
foreseeable to us may also impair our business operations. If any of the following risks actually occurs, our business, financial
condition or operating results could be materially adversely affected. In such case, the trading price of our common stock could
decline, and our stockholders may lose all or part of their investment in the shares of our common stock.
Risks Related to our Operations
We will need to raise substantial
funds, on an ongoing basis, for general corporate purposes and operations, including our clinical trials. Such funding may not
be available or may not be available on acceptable terms.
We will need substantial additional funding,
on an ongoing basis, in order to continue execution of our clinical trials, to move our product candidates towards commercialization,
to continue prosecution and maintenance of our large patent portfolio, to continue development and optimization of our manufacturing
and distribution arrangements, and for other corporate purposes. Any financing, if available, may include restrictive covenants
and provisions that could limit our ability to take certain actions, preference provisions for the investors, and/or discounts,
warrants, anti-dilution rights, the provision of collateral, or other incentives. Any financing will involve issuance of equity
and/or debt, and such issuances will be dilutive to existing shareholders. There can be no assurance that we will be able to complete
any of the financings, or that the terms for such financings will be acceptable. If we are unable to obtain additional funds on
a timely basis or on acceptable terms, we may be required to curtail or cease some or all of our operations at any time.
We are likely to continue to incur
substantial losses, and may never achieve profitability.
As of December 31, 2018, we had net cash
outflows (losses) from operations, since inception. We may never achieve or sustain profitability.
Our auditors have issued a “going
concern” audit opinion.
Management has determined and our independent
auditors have indicated in their report on our December 31, 2018 financial statements that there is substantial doubt about our
ability to continue as a going concern. We have received such a “going concern” opinion each of the preceding years
for more than a decade. A “going concern” opinion indicates that the financial statements have been prepared assuming
we will continue as a going concern and do not include any adjustments to reflect the possible future effects on the recoverability
and classification of assets, or the amounts and classification of liabilities that may result if we do not continue as a going
concern. Therefore, you should not rely on our consolidated balance sheet as an indication of the amount of proceeds that would
be available to satisfy claims of creditors, and potentially be available for distribution to stockholders, in the event of liquidation.
Our management and our independent
auditors have identified certain internal control deficiencies, which our management and our independent auditor believe constitute
material weaknesses.
In connection with the preparation of
our financial statements for the year ended December 31, 2018, and prior years, our management and our independent auditor identified
certain internal control deficiencies that, in the aggregate, represent material weaknesses, as described more fully in “Item
9A. Controls and Procedures” of Part I of this Form 10-K. Although we have undertaken and continue to undertake efforts
to strengthen our internal controls, we continue to have material weaknesses, including certain newly identified material weaknesses.
Our failure to successfully complete the
remediation of the existing weaknesses could lead to heightened risk for financial reporting mistakes and irregularities, and/or
lead to a loss of public confidence in our internal controls that could have a negative effect on the market price of our common
stock. In addition, our ability to retain or attract qualified individuals to serve on our Board and to take on key management
or other roles within our Company is uncertain.
As a company with a novel technology
and unproven business strategy, an evaluation of our business and prospects is difficult.
We are still in the process of developing
our product candidates through clinical trials. Our technology is novel and involves mobilizing the immune system to fight a patient’s
cancer. Immune therapies have been pursued by many parties for decades, and have experienced many failures. In addition, our technology
involves personalized treatment products, a new approach to medical products that involves new product economics and business
strategies, which have not yet been shown to be commercially feasible or successful. We have not yet gone through scale-up of
our operations to commercial scale. The novelty of our technology, product economics, and business strategy, and the limited scale
of our operations to date, makes it difficult to assess our prospects for generating revenues commercially in the future.
We will need to expand our management
and technical personnel as our operations progress, and we may not be able to recruit such additional personnel and/or retain
existing personnel.
As of December 31, 2018, we had 12 full-time
employees in the US, and 2 full-time employees in Europe. Of this group, only five employees are considered Management. Other
personnel are retained on a consulting or contractor basis. Many biotech companies would typically have a larger number of employees
by the time they reach late stage clinical trials. Such trials and other programs require extensive management capabilities, activities
and skill sets, including scientific, medical, regulatory (for FDA and foreign regulatory counterparts), manufacturing, distribution
and logistics, site management, reimbursement, business, financial, legal, public relations outreach to both the patient community
and physician community, intellectual property, administrative, regulatory (SEC), investor relations and other.
In order to fully perform all these diverse
functions, with trials and programs under way at many sites across the U.S. and in Europe, we may need to expand our management,
technical and other personnel. However, with respect to management and technical personal, the pool of such personnel with expertise
and experience with living cell products, such as our DCVax immune cell product, is very limited. In addition, we are a small
company with limited resources, our business prospects are uncertain and our stock price is volatile. For some or all of such
reasons, we may not be able to recruit all the management, technical and other personnel we need, and/or we may not be able to
retain all of our existing personnel. In such event, we may have to continue our operations with a small team of personnel, and
our business and financial results may suffer.
We rely at present on third-party
contract manufacturers. As a result, we may be at risk for capacity limitations and/or supply disruptions.
We currently rely upon Cognate BioServices,
Inc., or Cognate, to produce all of our DCVax product candidates in the U.S., and we currently rely upon Advent BioServices Ltd.,
or Advent, to produce our DCVax products for Europe. Until February 2018, Cognate BioServices was owned by Toucan Capital Fund
III, L.P., who is an affiliate. Advent continues to be owned by Toucan Capital Fund III. We have agreements in place with Cognate
BioServices pursuant to which Cognate BioServices has agreed to provide manufacturing and other services for the clinical trials
and initial potential commercialization, in connection with our Phase III clinical trial of DCVax-L in brain cancer, and other
programs. The agreements require us to make certain minimum monthly payments to Cognate BioServices in order to have dedicated
manufacturing capacity available for our products, irrespective of whether we actually order any DCVax products. The agreements
also specify the amounts we must pay for Cognate BioServices’ manufacturing of DCVax products for patients. We also have
an agreement in place with Advent BioServices, or Advent, pursuant to which Advent has agreed to provide manufacturing and other
services. The agreement requires us to make certain minimum monthly payments to Advents in order to have dedicated manufacturing
capacity available for our products, irrespective of whether we actually order any DCVax products. The agreement also specifies
the amounts we must pay for Advent’s manufacturing of DCVax products for patients. However, there can be no assurance that
these agreements with Cognate and Advent will be sufficient.
The agreements with Cognate may cover
commercial as well as clinical activities, and will only be terminable early by either party for uncured material breach by the
other party, although we can also suspend or stop our program at any time, and pay a fee under the agreements. The agreement with
Advent will only be terminable upon twelve months’ notice.
We have been in breach of the services
agreements with Cognate on numerous occasions, including as of December 31, 2018, primarily for non-payment. Since Cognate is
now owned by institutional investors, and Toucan no longer has any ownership or operational interests in Cognate, our breaches
of the services agreements may not be tolerated in the future as they have been in the past, and if we continue to breach the
services agreements, for non-payment or otherwise, Cognate could terminate these agreements.
However, we believe that Cognate has also
been in material breach of our agreements during various periods. We have disputed substantial amounts invoiced to us by Cognate,
and we have been in extended negotiations with Cognate. There can be no assurance what the outcome of these negotiations will
be, including, without limitation, whether a settlement will be reached and if so, whether or not it will be favorable for the
Company, whether litigation will be necessary and whether it will be necessary or desirable to change our manufacturing arrangements.
If it is necessary or desirable to change our manufacturing arrangements, that could involve increased costs related to manufacturing
of our products and could result in delays in our programs or applications for various regulatory approvals.
Although Advent is owned by Toucan, if
we breach our agreement with Advent, such breaches may not be tolerated as were breaches of the Cognate BioServices agreements
in the past, and Advent could cease providing services and/or terminate the agreements.
Since Cognate and Advent are now separate
companies with different owners, and Cognate has no operations in Europe and Advent has no operations in the U.S., the manufacturing
of our products will not be conducted or overseen by a single company. Advent was just spun off from Cognate in Q4 of 2016, and
as such is relatively new as a standalone company. The products for the Phase III clinical trial in Europe and the U.K. were manufactured
by a different party (the Fraunhofer Institute), under oversight by Cognate. It is not yet clear whether or to what extent it
will be feasible for Cognate to supervise or advise on the manufacturing in the U.K. Having separate manufacturers in the U.S.
and Europe, and/or having a relatively recent spun off new manufacturer in the U.K., could result in a lack of consistency or
continuity in the manufacturing of DCVax products.
We have exited from our manufacturing
arrangements in Germany and Israel, and we are consolidating our manufacturing arrangements in the U.K. This involves development
of new facilities and operations in the U.K. Such facilities or operations may take more time and involve more costs than anticipated,
and/or may not obtain the necessary approvals.
Our intention is for the U.K. facility
to manufacture DCVax products for the whole European region. With the impending exit of the U.K. from the European Union (Brexit),
it is unclear whether it will be feasible for U.K.-based manufacturing to supply DCVax products throughout Europe. It could be
years before the full legal and regulatory rules and requirements become clear. We anticipate that the manufacturing facilities
in the U.K. will eventually obtain the necessary approvals, and will be able to supply DCVax products, for clinical trials or
otherwise, anywhere in Europe; however, this may not turn out to be feasible, for regulatory, operational and/or logistical reasons.
Problems with the manufacturing facilities,
processes or operations of Cognate BioServices or Advent BioServices could result in a failure to produce, or a delay in producing
adequate supplies of our DCVax product candidates. A number of factors could cause interruptions or delays, including the inability
of a supplier to provide raw materials, equipment malfunctions or failures, damage to a facility due to natural disasters or otherwise,
changes in FDA or European regulatory requirements or standards that require modifications to our manufacturing processes, action
by the FDA or European regulators, or by us that results in the halting or slowdown of production of components or finished products
due to regulatory issues, our manufacturers going out of business or failing to produce product as contractually required, insufficient
technical personnel and/or specialized facilities to produce sufficient products, and/or other factors. Because manufacturing
processes for our DCVax product candidates are highly complex, require specialized facilities (dedicated exclusively to DCVax
production) and personnel that are not widely available in the industry, involve equipment and training with long lead times,
and are subject to lengthy regulatory approval processes, alternative qualified production capacity may not be available on a
timely basis or at all. Also, as noted above, Cognate or Advent could choose to terminate its agreements with us if we are in
breach, or if we undergo a change of control. Difficulties, delays or interruptions in the manufacturing and supply and delivery
of our DCVax product candidates could require us to stop enrolling new patients into our trials, and/or require us to stop the
trials or other programs, stop the treatment of patients in the trials or other programs, increase our costs, damage our reputation
and, if our product candidates are approved for sale, cause us to lose revenue or market share if our manufacturers are unable
to timely meet market demands.
The manufacturing of our product
candidates will have to be greatly scaled up for commercialization, and neither we nor our contract manufacturers have experience
with such scale-up.
As is the case with any clinical trial,
our Phase III clinical trial of DCVax-L for GBM involves a number of patients that is a small fraction of the number of potential
patients for whom DCVax-L may be applicable in the commercial market. The same will be true of our other clinical programs with
our other DCVax product candidates. If our DCVax-L, and/or other DCVax product candidates, are approved for commercial sale, it
will be necessary to greatly scale up the volume of manufacturing, far above the level needed for the trials. Neither we nor our
contract manufacturers have experience with such scale-up. In addition, there are likely only a few consultants or advisors in
the industry who have such experience and can provide guidance or assistance, because active immune therapies such as DCVax are
a fundamentally new category of product in two major ways: these active immune therapy products consist of living cells, not chemical
or biologic compounds, and the products are personalized. To our knowledge, no such products have successfully completed the necessary
scale-up for commercialization of large volumes of products without material difficulties. For example, Dendreon Corporation encountered
substantial difficulties trying to scale up the manufacturing of its Provenge® product for commercialization. To our knowledge,
even the CAR-T products which are being commercialized have so far only scaled up to modest product volumes.
The necessary specialized facilities,
equipment and personnel may not be available or obtainable for the scale-up of manufacturing of our product candidates.
The manufacture of living cells requires
specialized facilities, equipment and personnel which are entirely different than what is required for the manufacturing of chemical
or biologic compounds. Scaling up the manufacturing of living cell products to volume levels required for commercialization will
require enormous amounts of these specialized facilities, equipment and personnel - especially where, as in the case
of our DCVax product candidates, the product is personalized and must be made for each patient individually. Since living cell
products are so new, and have barely begun to reach commercialization, the supply of the specialized facilities and personnel
needed for them has not yet developed. However there has been a sharp increase in the demand for these specialized facilities
and personnel, as large numbers of companies seek to develop T cell and other immune cell products. It may not be possible for
us or our manufacturers to obtain all of the specialized facilities and personnel needed for commercialization of our DCVax product
candidates, or even for further sizeable trials. This could delay or halt our commercialization and/or further substantial trials.
Our technology is novel, involves
complex immune system elements, and may not prove to be effective.
Data already obtained, or in the future
obtained, from pre-clinical studies and clinical trials do not necessarily predict the results that will be obtained from later
pre-clinical studies and clinical trials. Over the course of several decades, there have been many different immune therapy product
designs - and many product failures and company failures. To our knowledge, to date, only a couple of active immune
therapies have been approved by the FDA, including one dendritic cell therapy and a couple of CAR-T cell therapies. The human
immune system is complex, with many diverse elements, and the state of scientific understanding of the immune system is still
limited. Some immune therapies previously developed by other parties showed surprising and unexpected toxicity in clinical trials.
Other immune therapies developed by other parties delivered promising results in early clinical trials, but failed in later stage
clinical trials.
Although we believe the results from the
small early stage clinical trials of DCVax-L for newly diagnosed GBM were quite positive, those results may not be achieved in
our later stage clinical trials, such as the 331-patient Phase III trial for GBM that is nearing completion, and our product candidates
may not ultimately be found to be effective. Similarly, although we believe the interim blinded data from the Phase III trial
that we have collected and reported to date are encouraging, the results of this trial when the data are unblinded may not be
as encouraging or may not be positive at all. Further, although the safety profile of our DCVax-L product was excellent in the
early stage clinical trials, toxicity may be seen as we treat larger numbers of patients in late stage clinical trials. If such
toxicity occurs, it could limit, delay or stop further clinical development or commercialization of our DCVax-L product.
We have only conducted the Phase I portion
of our first-in-man Phase I/II clinical trial with our DCVax Direct product, after prior early stage trials with DCVax-L and DCVax-Prostate.
Although the early results have not indicated any significant toxicity, we do not yet know what efficacy or toxicity DCVax-Direct
may show in a larger sample of human patients. This product may not ultimately be found to be effective, and/or it may be found
to be toxic, which could limit, delay or stop clinical development or commercialization of DCVax-Direct.
Clinical trials for our product
candidates are expensive and time consuming, and their outcome is uncertain.
The process of obtaining and maintaining
regulatory approvals for new therapeutic products is expensive, lengthy and uncertain. Costs and timing of clinical trials may
vary significantly over the life of a project owing to any or all of the following non-exclusive reasons:
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the duration of the clinical trial;
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the number of sites included in the trials;
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the countries in which the trial is conducted;
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the length of time required and ability to enroll eligible patients;
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the number of patients that participate in the trials;
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the number of doses that patients receive;
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the drop-out or discontinuation rates of patients;
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per patient trial costs;
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third party contractors failing to comply with regulatory requirements or meet their contractual obligations to us in
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our final product candidates having different properties in humans than in laboratory testing;
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the need to suspend or terminate our clinical trials;
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insufficient or inadequate supply or quality of necessary materials to conduct our trials;
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potential additional safety monitoring, or other conditions required by the FDA or comparable foreign regulatory authorities
regarding the scope or design of our clinical trials, or other studies requested by regulatory agencies;
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problems engaging independent review Boards, or IRBs, to oversee trials or in obtaining and maintaining IRB approval of
studies;
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the duration of patient follow-up;
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the efficacy and safety profile of a product candidate;
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the costs and timing of obtaining regulatory approvals; and
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the costs involved in enforcing or defending patent claims or other intellectual property rights.
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Late stage clinical trials, such as our
Phase III clinical trial for GBM patients, are especially expensive, typically requiring tens or hundreds of millions of dollars,
and take years to reach their outcomes. Such outcomes often fail to reproduce the results of earlier trials. It is often necessary
to conduct multiple late stage trials (including multiple Phase III trials) in order to obtain sufficient results to support product
approval, which further increases the expense. Sometimes trials are further complicated by changes in requirements while the trials
are under way (for example, when the standard of care changes for the disease that is being studied in the trial). For example,
while the Company’s lead program, the Phase III clinical trial of DCVax-L for brain cancer, has been under way, there has
been a very large proliferation of new treatments in various stages of development, as well as some new product approvals, for
brain cancer. Any of our current or future product candidates could take a significantly longer time to gain regulatory approval
than we expect, or may never gain approval, either of which could delay or stop the commercialization of our DCVax product candidates.
We may be required to suspend or
discontinue clinical trials due to unexpected side effects or other safety risks that could preclude approval of our product candidates.
Our clinical trials may be suspended at
any time for a number of reasons. For example, we may voluntarily suspend or terminate our clinical trials if at any time we believe
that they present an unacceptable risk to the clinical trial patients. In addition, the FDA or other regulatory agencies may order
the temporary or permanent discontinuation of our clinical trials at any time if they believe that the clinical trials are not
being conducted in accordance with applicable regulatory requirements or that they present an unacceptable safety risk to the
clinical trial patients.
Administering any product candidate to
humans may produce undesirable side effects. These side effects could interrupt, delay or halt clinical trials of our product
candidates and could result in the FDA or other regulatory authorities denying further development or approval of our product
candidates for any or all targeted indications. Ultimately, some or all of our product candidates may prove to be unsafe for human
use. Moreover, we could be subject to significant liability if any volunteer or patient suffers, or appears to suffer, adverse
health effects as a result of participating in our clinical trials.
We have limited experience in conducting
and managing clinical trials, and we rely on third parties to assist with these services.
We rely on third parties to assist us,
on a contract services basis, in managing and monitoring all of our clinical trials. We do not have experience conducting late
stage clinical trials by ourselves without third party service firms, nor do we have experience in supervising such third parties
in managing late stage, multi-hundred patient clinical trials, other than our current Phase III trial for GBM. Our lack of experience
and/or our reliance on these third-party service firms may result in delays or failure to complete these trials successfully and
on time. If the third parties fail to perform, we may not be able to find sufficient alternative suppliers of those services in
a reasonable time period, or on commercially reasonable terms, if at all. If we were unable to obtain alternative suppliers of
such services, we might be forced to delay, suspend or stop our Phase III trial for GBM.
We may fail to comply with regulatory
requirements.
Our success will be dependent upon our
ability, and our collaborative partners’ abilities, to maintain compliance with regulatory requirements in multiple countries,
including current good manufacturing practices, or cGMP, and safety reporting obligations. The failure to comply with applicable
regulatory requirements can result in, among other things, fines, injunctions, civil penalties, total or partial suspension of
regulatory approvals, refusal to approve pending applications, recalls or seizures of products, operating and production restrictions
and criminal prosecutions.
Regulatory approval of our product
candidates may be withdrawn at any time.
After any regulatory approval has been
obtained for medicinal products (including any early or conditional approval), the product and the manufacturer are subject to
continual review, including the review of adverse experiences and clinical results that are reported after our products are made
available to patients, and there can be no assurance that such approval will not be withdrawn or restricted. Regulators may also
subject approvals to restrictions or conditions, or impose post-approval obligations on the holders of these approvals, and the
regulatory status of such products may be jeopardized if such obligations are not fulfilled. If post-approval studies are required,
such studies may involve significant time and expense.
The manufacturer and manufacturing facilities
we use to make any of our products will also be subject to periodic review and inspection by the FDA, EMA or other regulator,
as applicable. The discovery of any new or previously unknown problems with the product, manufacturer or facility may result in
restrictions on the product or manufacturer or facility, including withdrawal of the product from the market. We will continue
to be subject to the FDA or the European Medicines Agency, or EMA, and other regulatory requirements, as applicable, governing
the labeling, packaging, storage, advertising, promotion, recordkeeping, and submission of safety and other post-market information
for all of our product candidates, even those that the FDA, EMA, or other regulator, as applicable, had approved. If we fail to
comply with applicable continuing regulatory requirements, we may be subject to fines, restriction, suspension or withdrawal of
regulatory approval, product recalls and seizures, operating restrictions and other adverse consequences.
Our Operations under early access
programs, such as the hospital exemption in Germany, may not be successful.
There is not much accumulated or available
experience, information or precedents in regard to early access programs such as hospital exemption programs and/or similar programs,
especially for new types of treatments such as immune therapies. Establishing operations under an early access program will require
us to establish and implement new operational, contractual, financial and other arrangements with physicians, hospitals, patients
and others. We may not be successful in establishing and implementing such arrangements, and/or such arrangements may not be financially
satisfactory or viable.
We may not be successful in negotiating
reimbursement.
If our DCVax-L product obtains regulatory
approval for commercialization, such commercialization will be difficult and may not be feasible unless we obtain coverage by
health insurance and/or national health systems for reimbursement of our product price. Obtaining such coverage by health insurance
and/or national health systems will be difficult and we do not have experience with such processes. Our DCVax-L product is a fully
personalized, individual product and, as such, is expected to be expensive. In addition, our DCVax-L product involves a cost structure
(with much of the costs upfront, in connection with the manufacturing of the personalized DCVax-L product for a patient) that
is different than traditional drugs and may require different reimbursement arrangements. These factors may make our negotiations
for reimbursement more difficult. We may not be successful in negotiating or obtaining reimbursement, or obtaining it on acceptable
or viable terms.
Our product candidates will require
a different distribution model than conventional therapeutic products, and this may impede commercialization of our product candidates.
Our DCVax product candidates consist of
living human immune cells. Such products are entirely different from chemical or biologic drugs, and require different handling,
distribution and delivery than chemical or biologic drugs. One crucial difference is that the biomaterial ingredients (immune
cells and tumor tissue) from which we make DCVax products and the finished DCVax products themselves are subject to time constraints
in the shipping and handling. The biomaterial ingredients come from the medical centers to the manufacturing facility fresh and
not frozen, and must arrive within a certain window of time and in usable condition. Performance failures by the medical center
or the courier company can result in biomaterials that are not usable, in which case it may not be possible to make DCVax product
for the patient involved. The finished DCVax products are frozen, and must remain frozen throughout the process of distribution
and delivery to the medical center or physician’s office, until the time of administration to the patient, and cannot be
handled at room temperature until then or their viability will be lost. In addition, our DCVax product candidates are personalized
and they involve ongoing treatment cycles over several years for each patient. Each product shipment for each patient must be
tracked and managed individually. For all of these reasons, among others, we will not be able to simply use the distribution networks
and processes that already exist for conventional drugs. It may take time for shipping companies, hospitals, pharmacies and physicians
to adapt to the requirements for handling, distribution and delivery of these products, which may adversely affect our commercialization.
Our product candidates will require
different marketing and sales methods and personnel than conventional therapeutic products. Also, we lack sales and marketing
experience. These factors may result in significant difficulties in commercializing our product candidates.
The commercial success of any of our product
candidates will depend upon the strength of our sales and marketing efforts. We do not have a marketing or sales force and have
no experience in marketing or sales of products like our lead product, DCVax-L for GBM, or our additional product, DCVax-Direct.
To fully commercialize our product candidates, we will need to recruit and train marketing staff and a sales force with technical
expertise and ability to manage the distribution of our DCVax-L for GBM. As an alternative, we could seek assistance from a corporate
partner or a third-party services firm with a large distribution system and a large direct sales force. However, since our DCVax
products are living cell, immune therapy products, and these are a fundamentally new and different type of product than are on
the market today, we would still have to train such partner’s or such services firm’s personnel about our products,
and would have to make changes in their distribution processes and systems to handle our products. We may be unable to recruit
and train effective sales and marketing forces or our own, or of a partner or a services firm, and/or doing so may be more costly
and difficult than anticipated. Such factors may result in significant difficulties in commercializing our product candidates,
and we may be unable to generate significant revenues.
The availability and amount of potential
reimbursement for our product candidates by government and private payers is uncertain and may be delayed and/or inadequate.
The availability and extent of reimbursement
by governmental and/or private payers is essential for most patients to be able to afford expensive treatments, such as cancer
treatments. In the United States, the principal decisions about reimbursement for new medicines are typically made by the Centers
for Medicare & Medicaid Services, or CMS, an agency within the U.S. Department of Health and Human Services, as CMS decides
whether and to what extent a new medicine will be covered and reimbursed under Medicare. Private payers tend to follow CMS to
a substantial degree. It is difficult to predict what CMS will decide with respect to reimbursement for fundamentally novel products
such as ours, as there have been very few products similar to ours to date., We are aware of only a couple of active immune therapies
that have reached the stage of reimbursement decisionmaking processes, including one dendritic cell therapy and a couple of CAR-T
cell therapies. Although CMS has approved coverage and reimbursement for a couple of these products, and private payers seem to
be following suit in the US, there remain substantial questions and concerns about reimbursement for these products, especially
outside the US.
Reimbursement agencies in Europe can be
even more conservative than CMS in the U.S. A number of cancer drugs which have been approved for reimbursement in the U.S. have
not been approved for reimbursement in certain European countries, and/or the level of reimbursement approved in Europe is lower
than in the U.S. Reportedly, in Europe reimbursement for certain immune therapies was initially declined, and reportedly involved
difficult negotiations. The same could happen with respect to our DCVax products.
Various factors could increase the difficulties
for our DCVax products to obtain reimbursement. Costs and/or difficulties associated with the reimbursement of Provenge and/or
T cell therapies could create an adverse environment for reimbursement of other immune therapies, such as our DCVax products.
Approval of other competing products (drugs and/or devices) for the same disease indications could make the need for our products
and the cost-benefit balance seem less compelling. The cost structure of our product is not a typical cost structure for medical
products, as the majority of our costs are incurred up front, when the manufacturing of the personalized product is done. Our
atypical cost structure may not be accommodated in any reimbursement for our products. If we are unable to obtain adequate levels
of reimbursement, our ability to successfully market and sell our product candidates will be adversely affected.
The manner and level at which reimbursement
is provided for services related to our product candidates (e.g., for administration of our product to patients) are also important.
If the reimbursement for such services is inadequate, that may lead to physician resistance and adversely affect our ability to
market or sell our products.
The methodology under which CMS makes
coverage and reimbursement determinations is subject to change, particularly because of budgetary pressures facing the Medicare
program. For example, the Medicare Prescription Drug, Improvement, and Modernization Act, or Medicare Modernization Act, enacted
in 2003, provided for a change in reimbursement methodology that has reduced the Medicare reimbursement rates for many drugs,
including oncology therapeutics. The Affordable Care Act may also result in changes in reimbursement arrangements that adversely
affect the prospects for reimbursement of our products.
In markets outside the U.S., the prices
of medical products are subject to direct price controls and/or to reimbursement with varying price control mechanisms, as part
of national health systems. In general, the prices of medicines under such systems are substantially lower than in the U.S. Some
jurisdictions operate positive and/or negative list systems under which products may only be marketed once a reimbursement price
has been agreed. Other countries allow companies to fix their own prices for medicines, but monitor and control company profits.
The downward pressure on health care costs in general, particularly prescription drugs, has become very intense. As a result,
increasingly high barriers are being erected to the entry of new products. Accordingly, in markets outside the U.S., the reimbursement
for our products may be reduced compared with the U.S. and may be insufficient to generate commercially reasonable revenues and
profits.
Competition in the biotechnology
and biopharmaceutical industry is intense, rapidly expanding and most of our competitors have substantially greater resources
than we do.
The biotechnology and biopharmaceutical
industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products.
A growing number of other companies, such as Juno, Kite Bellicum, Argos, Agenus, Asterias, Dandrit, Immunicum, Sotio, Tocagen,
AiVita and many others, are actively involved in the research and development of immune therapies or cell-based therapies for
cancer. In addition, other novel technologies for cancer are under development or commercialization, such as checkpoint inhibitor
drugs (which are being rapidly developed by numerous big pharma companies including BMS, Merck, Pfizer, Astra Zeneca, Roche and
others) and various T cell-based therapies (which are also being rapidly developed by numerous companies with extraordinary resource
backing), as well as the electro-therapy device of NovoCure. Additionally, many companies are actively involved in the research
and development of monoclonal antibody-based cancer therapies. Currently, a substantial number of antibody-based products are
approved for commercial sale for cancer therapy, and a large number of additional ones are under development, including late stage
trials. Many other third parties compete with us in developing alternative therapies to treat cancer, including: biopharmaceutical
companies; biotechnology companies; pharmaceutical companies; academic institutions; and other research organizations, as well
as some medical device companies (e.g., NovoCure and MagForce Nano Technologies AG).
We face extensive competition from companies
developing new treatments for brain cancer. These include a variety of immune therapies, as mentioned above (including T cell-based
therapies and checkpoint inhibitor drugs), as well as a variety of small molecule drugs and biologics drugs. There are also a
number of existing drugs used for the treatment of brain cancer that may compete with our product, including, Avastin® (Roche
Holding AG), Gliadel® (Eisai Co. Ltd.), and Temodar® (Merck& Co., Inc.), as well as NovoCure’s electrotherapy
device.
Most of our competitors have significantly
greater financial resources and expertise in research and development, manufacturing, pre-clinical testing, conducting clinical
trials, obtaining regulatory approvals and marketing and sales than we do. Smaller or early-stage companies may also prove to
be significant competitors, particularly if they enter into collaborative arrangements with large and established companies.
These third parties compete with us in
recruiting and retaining qualified scientific and management personnel and collaborators, as well as in acquiring technologies
complementary to our programs, and in obtaining sites for our clinical trials and enrolling patients.
Our competitors may complete their clinical
development more rapidly than we and our products do, may develop more effective or affordable products, or may achieve earlier
or longer patent protection or earlier product marketing and sales. Any products developed by us may be rendered obsolete and
non-competitive.
Competing generic medicinal products may be approved.
In the E.U., there exists a process for
approval of generic biological medicinal products once patent protection and other forms of data and market exclusivity have expired.
Arrangements for approval of generic biologics products exist in the U.S. as well, and the FDA has begun approving bio-similar
products. Other jurisdictions may approve generic biologic medicinal products as well. If generic biologic medicinal products
are approved, competition from such products may substantially reduce sales of our products.
We may be exposed to potential product
liability claims, and our existing insurance may not cover these claims, in whole or in part. In addition, insurance against such
claims may not be available to us on reasonable terms in the future, if at all.
Our business exposes us to potential product
liability risks that are inherent in the testing, manufacturing, marketing, sale and use of therapeutic products. We have insurance
coverage but this insurance may not cover any claims made. In the future, insurance coverage may not be available to us on commercially
reasonable terms (including acceptable cost), if at all. Insurance that we obtain may not be adequate to cover claims against
us. Regardless of whether they have any merit or not, and regardless of their eventual outcome, product liability claims may result
in substantially decreased demand for our product candidates, injury to our reputation, withdrawal of clinical trial participants
or physicians, and/or loss of revenues. Thus, whether or not we are insured, a product liability claim or product recall may result
in losses that could be material.
We may be subject to environmental
regulatory requirements, and could fail to meet such requirements, and we do not carry insurance against environmental damage
or injury claims.
We may need to store, handle, use and
dispose of controlled hazardous, radioactive and biological materials in our business. Our development activities may result in
our becoming subject to regulatory requirements, and if we fail to comply with applicable requirements we could be subject to
substantial fines and other sanctions, delays in research and production, and increased operating costs. In addition, if regulated
materials were improperly released at our current or former facilities or at locations to which we send materials for disposal,
we could be liable for substantial damages and costs, including cleanup costs and personal injury or property damages, and we
could incur delays in research and production and increased operating costs.
Insurance covering certain types of claims
of environmental damage or injury resulting from the use of these materials is available but can be expensive and is limited in
its coverage. We have no insurance specifically covering environmental risks or personal injury from the use of these materials
and if such use results in liability, our business may be seriously harmed.
Collaborations play an important
role in our business, and could be vulnerable to competition or termination.
We work with scientists and medical professionals
at a variety of academic and other institutions, some of whom have conducted research for us or have assisted in developing our
research and development strategy. These scientists and medical professionals are collaborators, not our employees. They may have
commitments to, or contracts with, other institutions or businesses (including competitors) that limit the amount of time they
have available to work with us. We have little control over these individuals. We can only expect that they devote time to us
and our programs as required by any license, consulting or sponsored research agreements we may have with them. In addition, these
individuals may have arrangements with other companies to assist in developing technologies that may compete with our products.
If these individuals do not devote sufficient time and resources to our programs, or if they provide substantial assistance to
our competitors, our business could be seriously harmed.
The success of our business strategy may
partially depend upon our ability to develop and maintain our collaborations and to manage them effectively. Due to concerns regarding
our ability to continue our operations or the commercial feasibility of our personalized DCVax product candidates, these third
parties may decide not to conduct business with us or may conduct business with us on terms that are less favorable than those
customarily extended by them. If either of these events occurs, our business could suffer significantly.
We may have disputes with our collaborators,
which could be costly and time consuming. Failure to successfully defend our rights could seriously harm our business, financial
condition and operating results. We intend to continue to enter into collaborations in the future. However, we may be unable to
successfully negotiate any additional collaboration and any of these relationships, if established, may not be scientifically
or commercially successful.
Our business could be adversely
affected by new legislation and/or product related issues.
Changes in applicable legislation and/or
regulatory policies or discovery of problems with the product, production process, site or manufacturer may result in delays in
bringing products to market, the imposition of restrictions on the product’s sale or manufacture, including the possible
withdrawal of the product from the market, or may otherwise have an adverse effect on our business.
Our business could be adversely
affected by animal rights activists.
Our business activities have involved
animal testing and could involve further such testing, as such testing is required before new medical products can be tested in
clinical trials in human patients. Animal testing has been the subject of controversy and adverse publicity. Some organizations
and individuals have attempted to stop animal testing by pressing for legislation and regulation in these areas. To the extent
that the activities of such groups are successful, our business could be adversely affected. Negative publicity about us, our
pre-clinical trials and our product candidates could also adversely affect our business.
Multiple late stage clinical trials
of DCVax-L for GBM, our lead product, may be required before we can obtain regulatory approval.
Typically,
companies conduct multiple late stage clinical trials of their product candidates before seeking product approval. Our current
Phase III 331-patient clinical trial of DCVax-L for GBM is our first late stage trial. We may be required to conduct additional
late stage trials with DCVax-L for GBM before we can obtain product approval. This would substantially delay our commercialization
,
and might not be possible to carry out, due to development and/or approval of competing products,
lack of funding, and/or other factors. In addition, our Phase III trial of DCVax-L was placed on a partial clinical hold for new
screening for enrollment in 2015. Although the FDA lifted its hold in February 2017 as previously reported by the Company, the
Company had already closed enrollment with 331 of the planned 348 patients. Since we did not enroll the last 17 of the planned
348 patients, this could adversely affect the statistical and other analyses of our Phase III trial results, and could make it
more difficult to seek product approval or more likely that further trials could be required. In addition, a rapidly growing number
of products are under development for brain cancer, including immunotherapies such as checkpoint inhibitor drugs and T cell-based
therapies, and some (e.g., NovoCure’s device) have been approved in the U.S. It is possible that the standard of care for
brain cancer could change before we complete our Phase III trial or before we are able to seek approval for commercialization.
This could necessitate further clinical trials with our DCVax-L product candidate for brain cancer, which may not be feasible.
Changes in manufacturing methods
for DCVax-L could require us to conduct equivalency studies and/or additional clinical trials.
With biologics products, “the process
is the product”: i.e., the manufacturing process is considered to be as integral to the product as is the composition of
the product itself. If any changes are made in the manufacturing process, and such changes are considered material by the regulatory
authorities, the company sponsor may be required to conduct equivalency studies to show that the product is equivalent under the
changed manufacturing processes as under the original manufacturing processes, and/or the company sponsor may be required to conduct
additional clinical trials. In addition, if there are multiple manufacturing locations, equivalency studies may be required to
show that the products produced in the respective facilities are substantially the same. Our manufacturing processes have undergone
some changes during the early clinical trials, and we have multiple manufacturing locations. Accordingly, we may be required to
conduct equivalency studies, and/or additional clinical trials, before we can obtain product approval, unless the regulatory authorities
are satisfied that the changes in processes do not affect the quality, efficacy or safety of the product, and satisfied that the
products made in each manufacturing location are substantially the same.
We may not receive regulatory approvals
for our product candidates or there may be a delay in obtaining such approvals.
Our products
and our ongoing development activities are subject to regulation by regulatory authorities in the countries in which we and our
collaborators and distributors wish to test, manufacture or market our products. For instance, the FDA will regulate the product
in the U.S. and equivalent authorities, such as the EMA will regulate in Europe and other jurisdictions. Regulatory approval by
these authorities will be subject to the evaluation of data relating to the quality, efficacy and safety of the product for its
proposed use, and there can be no assurance that the regulatory authorities will find our data sufficient to support product approval
of DCVax-L or DCVax-Direct. In addition, the endpoint against which the data is measured must be acceptable to the regulatory
authorities
,
and the statistical analysis plan for how the data will be evaluated must also
be acceptable to the regulatory authorities. The primary endpoint of our Phase III trial of DCVax-L is progression free survival,
or PFS. Sometimes regulators have accepted this endpoint, and sometimes not. There can be no assurance that the regulatory authorities
will find this to be an approvable endpoint for Glioblastoma multiforme cancer
.
In addition,
as previously recognized, the PFS endpoint in our Phase III trial is complicated and potentially confounded by the phenomenon
of pseudo-progression, in which a patient appears to have disease progression (tumor recurrence) but does not actually have such
progression (for example, where the appearance of progression is actually inflammation or scarring, or is infiltration of beneficial
immune cells). The secondary endpoint of our Phase III trial is overall survival, or OS. There can be no assurance that regulatory
authorities will find a secondary endpoint to be an acceptable basis for product approval. In addition, as previously recognized,
the OS endpoint in our Phase III trial is complicated or confounded by the trial design, which allowed all patients (including
patients initially assigned to the placebo arm of the trial) to “cross over” and receive DCVax-L treatment after recurrence
of their tumor. These factors could result in regulatory authorities refusing to accept either of these endpoints, or the analysis
of our data relating to either of these endpoints, as a basis for approval.
The time period required to obtain regulatory
approval varies between countries. In the U.S., for products without “Fast Track” status, it can take up to 18 months
after submission of an application for product approval to receive the FDA's decision. Even with Fast Track status, FDA review
and decision can take up to 12 months. At present, we do not have Fast Track status for our lead product, DCVax-L for GBM. We
plan to apply for Fast Track status, but there can be no assurance that FDA will grant us such status for DCVax-L.
Different regulators may impose their
own requirements and may refuse to grant, or may require additional data before granting, an approval, notwithstanding that regulatory
approval may have been granted by other regulators. Regulatory approval may be delayed, limited or denied for a number of reasons,
including insufficient clinical data, the product not meeting safety or efficacy requirements or any relevant manufacturing processes
or facilities not meeting applicable requirements as well as case load at the regulatory agency at the time.
We may not obtain or maintain the
benefits associated with orphan drug status, including market exclusivity.
Although our lead product, DCVax-L for
GBM, has been granted orphan drug status in both the U.S. and the E.U., we may not receive the benefits associated with orphan
drug designation (including the benefit providing for market exclusivity for a number of years). This may result from a failure
to maintain orphan drug status, or result from a competing product reaching the market that has an orphan designation for the
same disease indication. Under U.S. and E.U. rules for orphan drugs, if such a competing product reaches the market before ours
does, the competing product could potentially obtain a scope of market exclusivity that limits or precludes our product from being
sold in the U.S. for seven years or from being sold in the E.U. for ten years. Also, in the E.U., even after orphan status has
been granted, that status is re-examined shortly prior to the product receiving any regulatory approval. The EMA must be satisfied
that there is evidence that the product offers a significant benefit relative to existing therapies, in order for the therapeutic
product to maintain its orphan drug status. Accordingly, our product candidates will have to re-qualify for orphan drug status
prior to any potential product approval in the E.U., and may have to do so elsewhere as well.
Our intellectual property rights
may be overturned, narrowed or blocked, and may not provide sufficient commercial protection for our product candidates, or third
parties may infringe upon our intellectual property.
The patent position of biotechnology and
pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions and has in recent years been
the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of our patent
rights are highly uncertain. Patent laws afford only limited protection and may not protect our rights to the extent necessary
to sustain any competitive advantage we may have. In addition, the laws of some foreign countries do not protect proprietary rights
to the same extent as the laws of the United States, and we may encounter significant problems in protecting our proprietary rights
in those countries. Moreover, patents and patent applications relating to living cell products are relatively new, involve complex
factual and legal issues, and are largely untested in litigation - and as a result, are uncertain. Our pending and future
patent applications may not result in patents being issued which adequately protect our technology or products or which effectively
prevent others from commercializing the same or competitive technologies and products. As a result, we may not be able to obtain
meaningful patent protection for our commercial products, and our business may suffer as a result. Third parties may challenge
our existing patents, and such challenges could result in overturning or narrowing some of our patents. Even if our patents are
not challenged, third parties could assert that their patents block our use of technology covered by some or all of our patents.
As of December 31, 2018, we had over 181
issued patents and 35 pending patent applications worldwide relating to our product candidates and related matters such as manufacturing
processes. The issued patents expire at various dates from 2022 to 2026. Our issued patents may be challenged, and such challenges
may result in reductions in scope, cancellations or invalidations. Our pending patent applications may not result in issued patents.
Moreover, our patents and patent applications may not be sufficiently broad to prevent others from using substantially similar
technologies or from developing competing products. We also face the risk that others may independently develop similar or alternative
technologies, or design around our patented technologies. As a result, no assurance can be given that any of our pending or future
patent applications will be granted, that the scope of any patent protection currently granted or that may be granted in the future
will exclude competitors or provide us with competitive advantages, that any of the patents that have been or may be issued to
us will be held valid if subsequently challenged, or that other parties will not claim rights to or ownership of our patents or
other proprietary rights that we hold.
We have taken security measures (including
execution of confidentiality agreements) to protect our proprietary information, especially proprietary information that is not
covered by patents or patent applications. These measures, however, may not provide adequate protection for our trade secrets
or other proprietary information. In addition, others may independently develop substantially equivalent proprietary information
or techniques or otherwise gain access to our trade secrets.
We may be exposed to claims or lawsuits
that our products infringe patents or other proprietary rights of other parties.
Our commercial success depends upon our
ability and the ability of our collaborators to develop, manufacture, market and sell our product candidates and use our proprietary
technologies without infringing the proprietary rights of third parties. We have not conducted a comprehensive freedom-to-operate
review to determine whether our proposed business activities or use of certain of the technology covered by patent rights owned
by us would infringe patents issued to third parties.
There is a substantial amount of litigation
involving patent and other intellectual property rights in the biotechnology and biopharmaceutical industries generally. The patent
landscape is especially uncertain in regard to cell therapy products, as it involves complex legal and factual questions for which
important legal principles remain unresolved. We may become party to, or be threatened with, future adversarial proceedings or
litigation regarding intellectual property rights with respect to our products and technology, including interference proceedings,
Inter Partes Reexamination, or Post Grant Review before the U.S. Patent and Trademark Office. Third parties may assert infringement
claims against us based on existing patents or patents that may be granted in the future. If we are found to infringe a third
party’s intellectual property rights, we could be required to obtain a license from such third party to continue developing
and marketing our products and technology. However, we may not be able to obtain any required license on commercially reasonable
terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to
the same technologies licensed to us. We could be forced, including by court order, to cease commercializing the infringing technology
or product. In addition, we could be found liable for monetary damages. If the infringement is found to be willful, we could be
liable for treble damages. A finding of infringement could prevent us from commercializing our product candidates or force us
to cease some of our business operations, which could materially harm our business. Claims that we have misappropriated the confidential
information or trade secrets of third parties could have a similar negative impact on our business.
We have already been exposed to one patent
lawsuit by a large company, which we vigorously defended. Our defense resulted in the plaintiff withdrawing nearly all of the
claims it filed, and in settlement of the last claims without our paying the plaintiff anything. However, the litigation was expensive
and time consuming. We have also been exposed to claims (without a lawsuit) by a competitor asserting or implying (and commentaries
by third parties based on the claims by our competitor) that a patent issued to our competitor covers our products. We believe
these claims to be without merit. However, if a lawsuit for infringement were brought against us, there can be no assurance that
a judge or jury would agree with our position, and in any event such litigation would be expensive and time consuming. In the
future, we may again be exposed to claims by third parties - with or without merit - that our products infringe their intellectual
property rights.
Even if resolved in our favor, litigation
or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses, and could distract
our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of
the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive
these results to be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or
proceedings could substantially increase our operating losses and reduce the resources available for development activities or
any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to adequately
conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings
more effectively than we can because of their greater financial resources. Uncertainties resulting from the initiation and continuation
of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.
DCVax is our only technology in
clinical development.
Unlike many pharmaceutical companies that
have a number of products in development and which utilize many different technologies, we are dependent on the success of our
DCVax platform technology. While the DCVax technology has a wide scope of potential use, and is embodied in several different
product lines for different clinical situations, if the core DCVax technology is not effective or is toxic or is not commercially
viable, our business could fail. We do not currently have other technologies that could provide alternative support for us.
Risks Related to our Common Stock
The market price of our common stock
is volatile and can be adversely affected by several factors.
The share prices of publicly traded biotechnology
and emerging pharmaceutical companies, particularly companies without consistent product revenues and earnings, can be highly
volatile and are likely to remain highly volatile in the future. The price which investors may realize in sales of their shares
of our common stock may be materially different than the price at which our common stock is quoted, and will be influenced by
a large number of factors, some specific to us and our operations, and some unrelated to our operations. Such factors may cause
the price of our stock to fluctuate frequently and substantially. Such factors may include large purchases or sales of our common
stock, shorting of our stock, positive or negative events, commentaries or publicity relating to our company, management or products,
or other companies, management or products, including other immune therapies for cancer or immune therapies or cancer therapies
generally, positive or negative events relating to healthcare and the overall pharmaceutical and biotech sector, the publication
of research by securities analysts and changes in recommendations of securities analysts, legislative or regulatory changes, and/or
general economic conditions. In the past, shareholder litigation, including class action litigation, has been brought against
other companies that experienced volatility in the market price of their shares and/or unexpected or adverse developments in their
business. Whether or not meritorious, litigation brought against a company following such developments can result in substantial
costs, divert management’s attention and resources, and harm the company’s financial condition and results of operations.
Our Common Stock is considered a
“penny stock” and may be difficult to sell.
The Commission has adopted regulations
which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share
or an exercise price of less than $5.00 per share, subject to specific exemptions. Historically, the price of our Common Stock
has fluctuated greatly. As of the date of this filing, the market price of our common stock is less than $5.00 per share, and
therefore is a “penny stock” according to Commission rules. The “penny stock” rules impose additional
sales practice requirements on broker-dealers who sell securities to persons other than established customers and accredited investors
(generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse).
For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of securities
and have received the purchaser’s written consent to the transaction before the purchase. Additionally, for any transaction
involving a penny stock, unless exempt, the broker-dealer must deliver, before the transaction, a disclosure schedule prescribed
by the Commission relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be
sent disclosing recent price information on the limited market in penny stocks. These additional burdens imposed on broker-dealers
may restrict the ability or decrease the willingness of broker-dealers to sell our common stock, and may result in decreased liquidity
for our common stock and increased transaction costs for sales and purchases of our common stock as compared to other securities.
Linda Powers and Cognate BioServices,
each have beneficial ownership of material amounts of our securities, and this concentration of ownership may have a negative
effect on the Company and/or the market price of our common stock.
As of December 31, 2018, Linda Powers,
our Chief Executive Officer and Chairperson of the Board of Directors, beneficially owned a material percentage of our outstanding
securities on that date. This concentration of ownership could involve conflicts of interest, and may adversely affect the trading
price of our common stock because investors may perceive disadvantages in owning stock of companies with stockholders who could
have conflicts of interest. Ms. Powers’ holdings of our securities could enable her to exert some material influence upon
matters requiring approval by our stockholders, including the election and removal of directors and any proposed merger, consolidation
or sale of all or substantially all of our assets, as well as over our business plans, strategies or operations. This influence
could have the effect of delaying, deferring or preventing a change in control, or impeding a merger or consolidation, takeover
or other business combination or action that could be favorable to investors. Cognate BioServices also beneficially owned and/or
had a contractual claim to receive a material percentage of our outstanding securities as of December 31, 2018. Since the management
buyout of Cognate BioServices in February 2018, Cognate BioServices is no longer an affiliate of Linda Powers; however, Cognate’s
continued beneficial ownership of a material percentage of our outstanding securities could adversely affect the Company and/or
our stock, for example if perceived adversely by investors, and could enable Cognate to exert influence over matters requiring
approval by our stockholders, as well as over our business plans, strategies or operations.
The requirements of the Sarbanes-Oxley
Act of 2002 and other U.S. securities laws impose substantial costs, and may drain our resources and distract our management.
We are subject to certain of the requirements
of the Sarbanes-Oxley Act of 2002, as well as the reporting requirements under the Exchange Act. The Sarbanes-Oxley Act
requires, among other things, that we maintain effective disclosure controls and procedures and internal controls over financial
reporting. Over the years we have identified a number of material weaknesses in our internal controls. As a small company
with limited staff it is challenging to maintain effective controls, especially where this requires segregation of duties among
multiple staff. While the Company has spent significant resources in remediating these weaknesses, and has remediated
a number of material weaknesses, material weaknesses remain. Control weaknesses raise the risk of future material errors
in the company's financial statements. In addition, ongoing weaknesses can subject us to SEC enforcement action, which might
include monetary fines or other equitable remedies that could be detrimental to the ongoing business of the Company.
We do not intend to pay any cash
dividends in the foreseeable future and, therefore, any return on your investment in our common stock must come from increases
in the market price of our common stock.
We have not paid any cash dividends on
our common stock to date in our history, and we do not intend to pay cash dividends on our common stock in the foreseeable future.
We intend to retain future earnings, if any, for reinvestment in the development and expansion of our business. Also, any credit
agreements which we may enter into with institutional lenders may restrict our ability to pay dividends. Therefore, any return
on your investment in our capital stock must come from increases in the fair market value and trading price of our common stock.
Such increases in the trading price of our stock may not occur.
Our certificate of incorporation
and bylaws and Delaware law, have provisions that could discourage, delay or prevent a change in control.
Our certificate of incorporation and bylaws
and Delaware law contain provisions which could make it more difficult for a third party to acquire us, even if closing such a
transaction would be beneficial to our stockholders. We are authorized to issue up to 100,000,000 shares of preferred stock. This
preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by our Board
of Directors without further action by stockholders. The terms of any series of preferred stock may include voting rights (including
the right to vote as a series on particular matters), preferences as to dividend, liquidation, conversion and redemption rights
and sinking fund provisions. No preferred stock is currently outstanding. The issuance of any preferred stock could materially
adversely affect the rights of the holders of our common stock, and therefore, reduce the value of our common stock. In particular,
specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell our
assets to, a third party and thereby preserve control by the present management.
Provisions of our certificate of incorporation
and bylaws and Delaware law also could have the effect of discouraging potential acquisition proposals or tender offers or delaying
or preventing a change in control, including changes a stockholder might consider favorable. Such provisions may also prevent
or frustrate attempts by our stockholders to replace or remove our management. In particular, the certificate of incorporation
and bylaws and Delaware law, as applicable, among other things:
•
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provide the Board of Directors with the ability to alter the bylaws without stockholder approval;
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•
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establish staggered terms for board members;
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•
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place limitations on the removal of directors; and
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•
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provide that vacancies on the Board of Directors may be filled by a majority of directors
in office, although less than a quorum.
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We are also subject to Section 203 of
the Delaware General Corporation Law which, subject to certain exceptions, prohibits “business combinations” between
a publicly-held Delaware corporation and an “interested stockholder,” which is generally defined as a stockholder
who becomes a beneficial owner of 15% or more of a Delaware corporation’s voting stock for a three-year period following
the date that such stockholder became an interested stockholder.
A substantial number of shares of
common stock may be sold in the market, which may depress the market price for our common stock.
Sales of a substantial number of shares
of our common stock in the public market could cause the market price of our common stock to decline. A substantial majority of
the outstanding shares of our common stock are freely tradable without restriction or further registration under the Securities
Act. As of December 31, 2018, 523.2 million shares of our common stock are issued and outstanding. In addition, as of December
31, 2018, 372.2 million shares of our common stock are issuable upon exercise of outstanding warrants and 82 million shares of
our common stock are issuable upon exercise of outstanding options.
We may have claims and lawsuits
against us that may result in adverse outcomes.
From time to time, we may be subject to
a variety of claims and lawsuits. As described more fully in “Item 3. Legal Proceedings,” of Part I of this Form 10-K,
in the past, we were engaged in responding to a shareholder demand for access to certain corporate books and records, and we were
also engaged in several shareholder litigations. We believed that that the claims were without merit, fought them vigorously and
settled them. We have also had several small litigations, for example relating to certain payables. However, litigation and claims
are subject to inherent uncertainties, and adverse rulings or outcomes could occur, and/or could lead to further claims or litigation.
Adverse outcomes or further litigation could result in significant monetary damages or injunctive relief that could adversely
affect our business. A material adverse impact on our financial statements also could occur for the period in which an unfavorable
final outcome becomes probable and its effect becomes reasonably estimable. In addition, litigation and claims may divert material
amounts of management time and attention from our business, and/or involve significant legal costs and expenses.
ITEM 1B.
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UNRESOLVED STAFF COMMENTS
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Not applicable.
Operating Lease
On July 31, 2012, we entered into a non-cancelable
operating lease for 7,097 square feet of office space in Bethesda, Maryland, which expired on March 31, 2018. On March 30, 2018,
we entered a renewal agreement to extend the lease until March 31, 2019. On March 4, 2019, we entered 2
nd
Amendment
to Office Lease to extend the lease for another 2 years beginning on April 1, 2019. Rent expense for the year ended December 31,
2018 and 2017 were $0.3 million and $0.3 million, respectively.
On October 28, 2013, we entered into a
non-cancelable operating lease for 4,251 square feet of office space in Germany, which was set to expire in December 2017. On
November 15, 2017, we entered a renewal agreement to extend the lease until December 31, 2018. On November 26, 2018, we entered
another renewal agreement to extend the lease until December 31, 2019.
On December 30, 2017, in connection with
our termination of manufacturing activities in Germany and transfer of such activities to the UK, we assumed the Cognate Bioservices,
GmbH facility lease agreement for the facility which had been leased for production of DCVax-L products, and entered a settlement
with its lessor to terminate the lease. We paid lessor approximately $479,000 in 6 installments during the year ended December
31, 2018 as a settlement in order to be released from responsibility for the remaining years of the lease term.
On March 26, 2016, we 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, we entered
a renewal agreement to extend the office lease for an additional 1 year until March, 2018. The U.K. office lease was ended on
March 12, 2018 and no further renewal agreement was entered. On September 3, 2018, we entered into another operating lease agreement
for office space in London which commenced on November 1, 2018 with term of 6 months. Rent expense in the U.K. for the year ended
December 31, 2018 and 2017 was approximately $61,000 and $151,000, respectively.
Manufacturing Service
Agreement
On May 14, 2018, the Company entered into
a DCVax®-L Manufacturing and Services Agreement (“MSA”) with Advent BioServices, a related party which was formerly
part of Cognate BioServices and was spun off separately as part of an institutional financing of Cognate. The Advent Agreement
provides for manufacturing of DCVax-L products for the European region. The Agreement is structured in the same manner as the
Company’s existing Agreements with Cognate BioServices. The Advent Agreement provides for a program initiation payment of
approximately $1.0 million (£0.7 million), in connection with technology transfer and operations to the U.K. from Germany,
development of new Standard Operating Procedures (SOPs), training of new personnel, selection of new suppliers and auditing for
GMP compliance, and other preparatory activities. Such initiation payment was fully paid by the Company as of December 31, 2018.
The Advent Agreement provides for certain payments for achievement of milestones and, as is the case under the existing agreement
with Cognate BioServices, the Company is required to pay certain fees for dedicated production capacity reserved exclusively for
DCVax production, and pay for manufacturing of DCVax-L products for a certain minimum number of patients, whether or not the Company
fully utilizes the dedicated capacity and number of patients. Either party may terminate the MSA on twelve months’ notice,
to allow for transition arrangements by both parties.
U.K. Facility
On August 19, 2014, we completed the acquisition
of property in Sawston, U.K which we planned to develop into the manufacturing hub for our DCVax products for the European region
(“U.K. Facility”). The purchase price was £13 million ($20.8 million at the then current exchange rate, excluding
professional fees of $1.5 million associated with the purchase of the U.K Facility). On December 9, 2014, we completed the acquisition
of additional property adjacent to and surrounded by the initial property. The purchase price was £5 million. The overall
property includes several existing buildings, including an existing building of approximately 87,000 square feet which we are
re-purposing and developing for manufacturing of DCVax products for the European market.
On October 10, 2017, we entered into an
agreement to lease to Commodities Centre, a commodity storage and distribution firm domiciled in the U.K., an existing approximately
275,000 square foot warehouse building on the Company’s property in Sawston, U.K. The term of the lease will be five years,
with the potential for the tenant to discontinue at three years and five months. The tenant will undertake at least $1.1 million
of repairs and improvements to the building in return for five and a half months of free rent (which began upon execution of the
lease and ends on March 24, 2018). Thereafter, the tenant will pay rent at an annualized rate of approximately $1.0 million for
the first year, and thereafter rent at an annualized rate of approximately $1.4 million for each year or partial year for the
rest of the lease term, plus VAT. The tenant will also pay a proportional share of the common costs and the insurance costs for
the overall site. The tenant will pay for its own utilities and other costs for use of the warehouse.
On December 14, 2018, we sold most of
the U.K. property to an unrelated company. However, we retained a lease-back of the approximately 87,000 square foot manufacturing
facility and adjacent areas for 20 years with a renewal option for another 20 years on favorable terms, and we retained ownership
of a 17-acre parcel of property that we did not sell. Under the long-term lease of the 87,000 square foot facility, the annual
rent is approximately $0.6 million, with rent reviews for potential increases (which are capped) only once every five years. Additionally,
we will pay certain service charges of approximately $45,000 per year for the first 3 years, and approximately $55,000 per year
for the next 7 years, and up to a potential maximum of approximately $110,000 per year for the remaining 10 years.
ITEM 3.
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LEGAL PROCEEDINGS
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U.S. Securities and Exchange Commission
As previously reported, the Company has
received a number of formal information requests (subpoenas) from the SEC regarding several broad topics that have been previously
disclosed, including the Company’s membership on Nasdaq and delisting, related party matters, the Company’s programs,
internal controls, the Company’s Special Litigation Committee, disclosures and the publication of interim clinical trial
data. Testimony of certain officers and third parties has been taken as well. The Company has been cooperating with the SEC investigation.
As hoped, the investigation is winding to a conclusion. After investigation of a broad array of issues over the past two-plus
years, the SEC Staff has informed us preliminarily that they have concerns in regard to two issues, relating to the Company’s
internal controls over financial reporting and the adequacy of certain disclosures made in the past. We have previously
disclosed material weaknesses in our internal controls. As for disclosures, we believe our disclosures complied with applicable
law. Despite our belief that the Staff should close the investigation, there can be no assurance that the Staff will not
recommend some action involving the Company and/or individuals. Given the stage of the process, the Company is unable to provide
a current assessment of the potential outcome or potential liability, if any.
Chardan Capital Markets v. Northwest
Biotherapeutics, Inc.
On June 22, 2017, Chardan Capital Markets,
LLC filed a lawsuit against the Company in the United District Court for the Southern District of New York, captioned Chardan
Capital Markets v. Northwest Biotherapeutics, Inc., 1:17-cv-04727-PKC. Chardan alleges that it provided capital placement agent
services to the Company in December 2016 under a contract and that it has not been fully compensated for those services. Chardan
further alleges that it provided additional services to the Company in March 2017 in anticipation of entering into a contract
and that it received no compensation. The operative complaint asserted claims sounding in unjust enrichment, quantum meruit, and
breach of contract, and sought recovery in the amount of $496,000, plus interest and attorneys’ fees and costs. The Company
filed a motion to dismiss the complaint on December 1, 2017. On August 6, 2018, the District Court granted the Company’s
motion to dismiss in its entirety and entered a Judgment dismissing Chardan’s Amended Complaint. On September 5, 2018,
Chardan filed a notice of appeal seeking review of the District Court’s ruling. Chardan’s brief on appeal was
originally due to be filed on or before October 30, 2018, but Chardan did not file its brief on that day. On October 31,
2018, the Clerk of Court of the United States Court of Appeals for the Second Circuit entered an order stating that the “case
is deemed in default” and ordering “that the appeal is dismissed effective November 14, 2018 if the brief and any
required appendix are not filed by that date.” Chardan did not file its brief and appendix on or before November 14,
2018. Accordingly, Chardan’s appeal has been dismissed by force of the October 31, 2018 order of the Court of Appeals.
ITEM 4.
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MINE SAFETY DISCLOSURES
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Not Applicable.
Notes to the Consolidated
Financial Statements
1. Organization and Description of
Business
Northwest Biotherapeutics, Inc. and its
wholly owned subsidiaries NW Bio Gmbh, Aracaris Ltd 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 experimental
dendritic cell vaccines using its platform technology known as DCVax®. DCVax is being tested in clinical trials for use in
the treatment of certain types of cancers.
Cognate BioServices, Inc. (“Cognate
BioServices”), a company which was related by common ownership until a management buyout of Cognate occurred on February
6, 2018, 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 for North America. Advent BioServices, Ltd (“Advent”) provides such services
for the U.K. and Europe. Advent was formerly the U.K. branch of Cognate BioServices. Advent is a related party owned by Toucan
Capital Fund III, who also owned Cognate BioServices prior to the management buyout. The Company and Cognate BioServices, and
the Company and Advent BioServices, are currently parties to a series of contracts providing for these services as more fully
described below. The Company is currently dependent on Cognate BioServices and Advent 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.
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 dedicated capacity in these specialized manufacturing facilities. 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. Financial Condition, Going Concern
and Management Plans
The Company has incurred annual net operating
losses since its inception. As of December 31, 2018, the Company had an accumulated deficit of $824.4 million and
a net loss of $35.8 million and $73.1 million for the years ended December 31, 2018 and 2017, respectively.
The Company used approximately $34.6 million of cash in its operating activities for the year ended December 31, 2018. 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 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 within one year from the date of this filing. The consolidated financial statements have been prepared
assuming that the Company will continue as a going concern, and do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets, or the amounts and classification of liabilities that may result from
the outcome of this uncertainty.
3. Summary of Significant Accounting
Policies
Basis of Presentation
The accompanying consolidated financial
statements of the Company were prepared in accordance with generally accepted accounting principles in the U.S. (“U.S. GAAP”)
and include the assets, liabilities, revenues and expenses of the wholly owned subsidiaries in Germany and the United Kingdom.
All intercompany transactions and accounts have been eliminated in consolidation.
Consolidation
The Company’s policy is to consolidate
all entities in which it can vote a majority of the outstanding voting stock. In addition, the Company consolidates entities
which meet the definition of a variable interest entity (VIE) for which the Company is the primary beneficiary, if any.
The primary beneficiary is the party who has the power to direct the activities of a VIE that most significantly impact the entity’s
economic performance and who has an obligation to absorb losses of the entity or a right to receive benefits from the entity that
could potentially be significant to the VIE.
Cash and Cash Equivalents
Financial instruments that potentially
subject the Company to concentration of credit risk consist of cash accounts in a financial institution which, at times may exceed
the Federal depository insurance coverage (“FDIC”) of $250,000. At December 31, 2018, the Company had a cash
balance on deposit that exceeded the balance insured by the FDIC limit by approximately $22 million. The Company had not
experienced losses on these accounts and management believes the Company is not exposed to significant risks on such accounts.
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.
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 years ended December
31, 2018 and 2017, an assessment was undertaken to determine whether the assets of the Company might be impaired. From time to
time the Company asks its real estate experts in the U.K. to provide a valuation of its U.K. property. 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, 2018 and 2017. 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 consolidated financial statements
in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported
amounts of expenses during the reporting period. Due to inherent uncertainty involved in making estimates, actual results reported
in future periods may be affected by changes in these estimates. On an ongoing basis, the Company evaluates its estimates and
assumptions. These estimates and assumptions include valuing equity securities in share-based payment arrangements, 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.
|
Warrant Liability
The Company accounts for certain common
stock warrants outstanding as a liability at fair value and adjusts the instruments to fair value at each reporting period. This
liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized
in the Company’s consolidated statements of operations. The fair value of the warrants issued by the Company has been estimated
using Monte Carlo simulation and or a Black Scholes model.
Embedded Conversion Features
The Company evaluates embedded conversion
features within convertible debt to determine whether the embedded conversion feature(s) should be bifurcated from the host instrument
and accounted for as a derivative at fair value with changes in fair value recorded in the Statement of Operations. If the
conversion feature does not require recognition of a bifurcated derivative, the convertible debt instrument is evaluated for consideration
of any beneficial conversion feature (“BCF”) requiring separate recognition. When the Company record a BCF, the intrinsic
value of the BCF is recorded as a debt discount against the face amount of the respective debt instrument (offset to additional
paid-in capital) and amortized to interest expense over the life of the debt.
Sale and Leaseback Transactions
The Company accounts for the sale and
leaseback of the UK manufacturing facility in accordance with ASC 840-40. Gains on sale leaseback transactions are recognized
at the time of sale if the fair value of the property sold is more than the net book value of the property. Gains on sale and
leaseback transactions are deferred and amortized over the remaining lease term. On December 14, 2018, the Company completed
the sale and leaseback of the real estate assets associated with U.K. manufacturing facility for proceeds of $45.6 million,
net of closing costs. Approximately $4.7 million of the total $8.0 million gain on the sale has been deferred ($3.3 million
gain on sale was recognized in December 2018).
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 previously reported, in December 2018,
the Company sold the U.K. property which had involved a possibility of certain environmental liability. Following that sale, the
Company no longer has such environmental liability as of December 31, 2018.
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.
The Company converts
receivables and payables denominated in other than the Company’s functional currency at the exchange rate as of the balance
sheet date. The resulting transaction exchange gains or losses related to intercompany receivable and payables, are included in
other income and expense.
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.
Income Taxes
The Company evaluates
its tax positions and estimates its current tax exposure along with assessing temporary differences that result from different
book to tax treatment of items not currently deductible for tax purposes. These differences result in deferred tax assets and
liabilities on the Company
’
s Consolidated Balance Sheets,
which are estimated based upon the difference between the financial statement and tax bases of assets and liabilities using the
enacted tax rates that will be in effect when these differences reverse. In general, deferred tax assets represent future tax
benefits to be received when certain expenses previously recognized in the Company
’
s
Consolidated Statements of Comprehensive Loss become deductible expenses under applicable income tax laws or loss or credit carryforwards
are utilized. Accordingly, realization of the Company
’
s
deferred tax assets is dependent on future taxable income against which these deductions, losses and credits can be utilized.
The Company must
assess the likelihood that the Company
’
s deferred tax assets
will be recovered from future taxable income, and to the extent the Company believes that recovery is not more likely than not,
the Company must establish a valuation allowance. Management judgment is required in determining the Company
’
s
provision for income taxes, the Company
’
s deferred tax assets
and liabilities and any valuation allowance recorded against the Company
’
s
net deferred tax assets. Excluding foreign operations, the Company recorded a full valuation allowance at each balance sheet date
presented because, based on the available evidence, the Company believes it is more likely than not that it will not be able to
utilize all of its deferred tax assets in the future. The Company intends to maintain the full valuation allowance until sufficient
evidence exists to support the reversal of the valuation allowance.
Stock Based Compensation
The Company expenses stock-based compensation
to employees and Board members over the requisite service period based on the estimated grant-date fair value of the awards. Stock-based
awards with graded-vesting schedules are recognized on a straight-line basis over the requisite service period for each separately
vesting portion of the award. For stock-based compensation awards to non-employees, the Company re-measures the fair value of
the non-employee awards at each reporting period prior to vesting and finally at the vesting date of the award. Changes in the
estimated fair value of these non-employee awards are recognized as compensation expense in the period of change.
The Company estimates the fair value of
stock option grants using the Black-Scholes option pricing model and the assumptions used in calculating the fair value of stock-based
awards represent management’s best estimates and involve inherent uncertainties and the application of management’s
judgment.
Expected Term
-
The expected term of options represents the period that the Company’s stock-based awards are expected to be outstanding
based on the simplified method, which is the half-life from vesting to the end of its contractual term.
Expected Volatility
-
The Company computes stock price volatility over expected terms based on its historical common stock trading prices.
Risk-Free Interest Rate
-
The Company bases the risk-free interest rate on the implied yield available on U. S. Treasury zero-coupon issues with an equivalent
remaining term.
Expected Dividend
-
The Company has never declared or paid any cash dividends on its common shares and does not plan to pay cash dividends in the
foreseeable future, and, therefore, uses an expected dividend yield of zero in its valuation models.
Effective on January 1, 2017, the Company
recognizes forfeitures when they occur. Ultimately, the actual expenses recognized over the vesting period will be for those shares
that vested. Prior to making this election, the Company estimated a forfeiture rate for awards at 0%, as the Company did not have
a significant history of forfeitures.
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 and recognizes this 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.
Convertible Preferred Stock
Preferred shares subject to mandatory
redemption are classified as liability instruments and are measured at fair value. The Company classifies conditionally redeemable
preferred shares, which includes preferred shares that feature redemption rights that are either within the control of the holder
or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control, as temporary equity
(‘mezzanine’) until such time as the conditions are removed or lapse.
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 and convertible preferred stock.
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 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 Standards
Revenue from Contracts with Customer
In April 2016, the Financial Accounting
Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-10 to clarify the implementation
guidance on licensing and the identification of performance obligations consideration included in ASU 2014-09, Revenue from Contracts
with Customers (“ASU 2014-09”), which is also known as ASC 606, was issued in May 2014 and outlines
a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes
most current revenue recognition guidance, including industry-specific guidance. In March 2016, the FASB issued ASU 2016-08
to provide amendments to clarify the implementation guidance on principal versus agent considerations. The Company implemented
the standard on the effective date of January 1, 2018 on a modified retrospective basis to contracts which were not completed
as of this date. Adoption of this standard did not have a material impact on the Company’s consolidated financial statements
as we did not have any unrecognized transaction price, or any remaining performance obligations under the Company’s patient
service contracts. Payments from patients 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.
Recognition and Measurement of Financial
Assets and Financial Liabilities
In January 2016, the FASB issued ASU No.
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 has adopted this guidance during the quarter ended March 31, 2018. The adoption of this update did not impact
the Company’s consolidated financial statements and related disclosures.
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 adopted ASU No. 2016-15 as of January 1, 2018. The adoption of this update did not impact the Company’s
consolidated financial statements and related disclosures.
Compensation-Stock Compensation
In May 2017, the FASB issued ASU No. 2017-09,
Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting
, which clarifies when to account for a change
to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is
required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as
a result of the change in terms or conditions. The Company adopted ASU 2017-09 as of December 31, 2018. The adoption of this standard
did not impact the Company’s consolidated financial statements.
Accounting for Certain Financial Instruments with Down
Round Features
In July 2017, the FASB has issued a two-part
ASU No. 2017-11, (i).
Accounting for Certain Financial Instruments with Down Round Features
and (ii)
Replacement of
the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Noncontrolling Interests with a Scope Exception
which simplifies the accounting for certain financial instruments
with down round features, a provision in an equity-linked financial instrument (or embedded feature) that provides a downward
adjustment of the current exercise price based on the price of future equity offerings. It is effective for public business entities
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted.
The Company adopted this standard on its consolidated financial statements and disclosures as of January 1, 2019, and given its
sequencing policy in effect as of October 13, 2016, the impact of this standard was not material.
Improvements to Non-employee Share-Based Payment Accounting
In June 2018, the FASB issued ASU 2018-07
“Improvements to Nonemployee Share-Based Payment Accounting”, which simplifies the accounting for share-based payments
granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be
aligned with the requirements for share-based payments granted to employees. The amendments are effective for fiscal years beginning
after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted,
but no earlier than an entity’s adoption date of Topic 606. The Company adopted this standard on its consolidated financial
statements as of January 1, 2019, and the adoption did not have a material impact on its consolidated financial statements.
SEC Disclosure Update and Simplification
In August 2018, the Security Exchange
Commission (SEC) adopted the final rule under SEC Release No. 33-10532, “Disclosure Update and Simplification,” amending
certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments
expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the
amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be provided
in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of
each period for which a statement of comprehensive income is required to be filed. This final rule was effective on November 5,
2018. The adoption did not have a material impact on its consolidated financial statements.
Recent Accounting Standards to Be Adopted
Leases
In February 2016, the FASB issued ASU
No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”) which supersedes ASC Topic 840, Leases. ASU 2016-02
requires lessees to recognize a right-of-use asset and a lease liability on their balance sheets for all the leases with terms
greater than twelve months. Based on certain criteria, leases will be classified as either financing or operating, with classification
affecting the pattern of expense recognition in the income statement. For leases with a term of twelve months or less, a lessee
is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities.
If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the
lease term. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those years,
with early adoption permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning
of the earliest period presented using a modified retrospective approach. In July 2018, the FASB issued ASU No. 2018-11, “Leases
(Topic 842): Targeted Improvements” that allows entities to apply the provisions of the new standard at the effective date
(e.g. January 1, 2019), as opposed to the earliest period presented under the modified retrospective transition approach (January
1, 2017) and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The
modified retrospective approach includes a number of optional practical expedients primarily focused on leases that commenced
before the effective date of Topic 842, including continuing to account for leases that commence before the effective date in
accordance with previous guidance, unless the lease is modified. The Company is currently evaluating the effect the guidance will
have on its Consolidated Financial Statements.
4. Fair Value Measurements
In accordance with ASC 820 (Fair Value
Measurements and Disclosures), the Company uses various inputs to measure the outstanding warrants and certain embedded conversion
feature associated with convertible debt on a recurring basis to determine the fair value of the liability. ASC 820 also establishes
a hierarchy categorizing inputs into three levels used to measure and disclose fair value. The hierarchy gives the highest priority
to quoted prices available in active markets and the lowest priority to unobservable inputs. An explanation of each level in the
hierarchy is described below:
Level 1 – Unadjusted quoted prices in active markets
for identical instruments that are accessible by the Company on the measurement date
Level 2 – Quoted prices in markets that are not active
or inputs which are either directly or indirectly observable
Level 3 – Unobservable inputs for the instrument requiring
the development of assumptions by the Company
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, 2018 and 2017 (in thousands):
|
|
Fair value measured
at December 31, 2018
|
|
|
|
|
|
|
Quoted prices in active
|
|
|
Significant other
|
|
|
Significant
|
|
|
|
Fair value at
|
|
|
markets
|
|
|
observable inputs
|
|
|
unobservable inputs
|
|
|
|
December 31, 2018
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Warrant liability
|
|
$
|
29,995
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
29,995
|
|
Embedded conversion feature
|
|
|
357
|
|
|
|
-
|
|
|
|
-
|
|
|
|
357
|
|
Total fair value
|
|
$
|
30,352
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
30,352
|
|
|
|
Fair value measured
at December 31, 2017
|
|
|
|
|
|
|
Quoted prices in active
|
|
|
Significant other
|
|
|
Significant
|
|
|
|
Fair value at
|
|
|
markets
|
|
|
observable inputs
|
|
|
unobservable inputs
|
|
|
|
December 31, 2017
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Warrant liability
|
|
$
|
40,171
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
40,171
|
|
Embedded conversion feature
|
|
|
2,608
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,608
|
|
Share-settled debt (in default)
|
|
|
3,308
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,308
|
|
Total fair value
|
|
$
|
46,087
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
46,087
|
|
There were no transfers between Level
1, 2 or 3 during the years ended December 31, 2018 and 2017.
The following table presents changes in
Level 3 liabilities measured at fair value for the years ended December 31, 2018 and 2017. 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).
|
|
|
|
|
Embedded
|
|
|
Share-settled
|
|
|
|
|
|
|
Warrant
|
|
|
Conversion
|
|
|
Debt
|
|
|
|
|
|
|
Liability
|
|
|
Feature
|
|
|
(in Default)
|
|
|
Total
|
|
Balance – January 1, 2017
|
|
$
|
4,862
|
|
|
$
|
-
|
|
|
$
|
5,200
|
|
|
$
|
10,062
|
|
Warrants granted related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public and private offering
|
|
|
19,623
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,623
|
|
Debt conversion
|
|
|
7,543
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,543
|
|
Issuance of debt
|
|
|
139
|
|
|
|
-
|
|
|
|
-
|
|
|
|
139
|
|
Cognate accounts payable settlement
|
|
|
11,204
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,204
|
|
Modification of warrant liabilities
|
|
|
3,048
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,048
|
|
|
|
|
41,557
|
|
|
|
-
|
|
|
|
-
|
|
|
|
41,557
|
|
Issuance of convertible notes
|
|
|
-
|
|
|
|
4,262
|
|
|
|
-
|
|
|
|
4,262
|
|
Extinguishment of embedded derivative liabilities related to debt conversion
|
|
|
-
|
|
|
|
(5,264
|
)
|
|
|
-
|
|
|
|
(5,264
|
)
|
Extinguishment of warrant liabilities related to warrants exercised for cash
|
|
|
(2,162
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,162
|
)
|
Extinguishment of warrant liabilities related to cashless warrants exercise
|
|
|
(3,054
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,054
|
)
|
Conversion of share-settled debt
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,892
|
)
|
|
|
(1,892
|
)
|
Change in fair value
|
|
|
(1,032
|
)
|
|
|
3,610
|
|
|
|
-
|
|
|
|
2,578
|
|
Balance – December 31, 2017
|
|
|
40,171
|
|
|
|
2,608
|
|
|
|
3,308
|
|
|
|
46,087
|
|
Warrants granted
|
|
|
10,066
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,066
|
|
Bifurcated embedded derivative liability
|
|
|
-
|
|
|
|
351
|
|
|
|
|
|
|
|
351
|
|
Extinguishment of warrant liabilities related to warrants exercised for cash
|
|
|
(2,492
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,492
|
)
|
Conversion of share-settled debt
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,308
|
)
|
|
|
(3,308
|
)
|
Extinguishment of derivative liabilities related to repayment of debt
|
|
|
-
|
|
|
|
(2,049
|
)
|
|
|
-
|
|
|
|
(2,049
|
)
|
Change in fair value
|
|
|
(17,750
|
)
|
|
|
(553
|
)
|
|
|
|
|
|
|
(18,303
|
)
|
Balance – December 31, 2018
|
|
$
|
29,995
|
|
|
$
|
357
|
|
|
$
|
-
|
|
|
$
|
30,352
|
|
A summary of the weighted average (in
aggregate) significant unobservable inputs (Level 3 inputs) used in measuring the Company’s warrant liabilities and embedded
conversion feature that are categorized within Level 3 of the fair value hierarchy as of December 31, 2018 and 2017 is as follows:
|
|
As of December 31, 2018
|
|
|
As of December 31, 2017
|
|
|
|
Warrant
|
|
|
Embedded
|
|
|
Warrant
|
|
|
Embedded
|
|
|
|
Liability
|
|
|
Conversion Feature
|
|
|
Liability
|
|
|
Conversion Feature
|
|
Strike price
|
|
$
|
0.29
|
|
|
$
|
0.44
|
|
|
$
|
0.31
|
|
|
$
|
0.50
|
|
Contractual term (years)
|
|
|
2.2
|
|
|
|
1.5
|
|
|
|
2.6
|
|
|
|
2.5
|
|
Volatility (annual)
|
|
|
85
|
%
|
|
|
85
|
%
|
|
|
110
|
%
|
|
|
102
|
%
|
Risk-free rate
|
|
|
3
|
%
|
|
|
3
|
%
|
|
|
2
|
%
|
|
|
2
|
%
|
Dividend yield (per share)
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
5. Stock-based Compensation
Stock Options
The following table summarizes stock option
activity for the Company’s option plans during the years ended December 31, 2018 and 2017 (amount in thousands, except per
share number):
|
|
Number of Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average
Remaining
Contractual Life (in
years)
|
|
|
Total Intrinsic Value
|
|
Outstanding as of January 1, 2017
|
|
|
1,551
|
|
|
$
|
10.56
|
|
|
|
1.9
|
|
|
$
|
-
|
|
Granted
|
|
|
11,343
|
|
|
|
0.25
|
|
|
|
4.5
|
|
|
|
-
|
|
Forfeited/expired
|
|
|
(238
|
)
|
|
|
9.90
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding as of December 31, 2017
|
|
|
12,656
|
|
|
|
1.32
|
|
|
|
4.1
|
|
|
|
-
|
|
Granted
|
|
|
100,090
|
|
|
|
0.23
|
|
|
|
9.3
|
|
|
|
-
|
|
Forfeited/expired
|
|
|
(12,587
|
)
|
|
|
1.27
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding as of December 31, 2018
|
|
|
100,159
|
|
|
$
|
0.24
|
|
|
|
9.3
|
|
|
$
|
-
|
|
Options vested and exercisable
|
|
|
81,972
|
|
|
$
|
0.24
|
|
|
|
9.3
|
|
|
$
|
-
|
|
2018 Grants
During the year ended December 31, 2018,
the Company issued options to certain directors, officers and consultants (collectively, the “Options”).
The Options are subject to vesting requirements.
50% of the Options were vested on the grant date, and the remaining 50% of the Options are vesting monthly over a period of 24
months following the Board approvals of the Options, subject to acceleration upon the occurrence of certain achievement milestones.
A performance milestone was achieved and the Company accelerated vesting on 25% of these outstanding Options.
On November 18, 2018, the disinterested
members of the Company’s Board of Directors (the “Board”) approved an increase of the equity compensation option
pool to reflect increases in the numbers of issued and outstanding shares since the prior equity awards were made. This incremental
increase added approximately 3.1 million options to the pool. The incremental options are being issued in individual awards which
are in the process of being implemented in individual agreements, including with respect to certain conditions such as vesting
over 4 years, subject to potential acceleration events, and, in the case of the independent directors, shareholder approval of
the awards. The exercise price of the options will be $0.25, in accordance with the prior trading day’s closing price, and
the exercise period will be 10 years.
2017 Grants
On June 13, 2017, the Company granted
options (the “Options”) to acquire shares of the Company’s common stock (the “Shares”) to Dr. Marnix
Bosch, the Chief Technical Officer of the Company, and Dr. Alton Boynton, the Chief Scientific Officer of the Company. The Options
were granted pursuant to the Second Amended and Restated Northwest Biotherapeutics, Inc. 2007 Stock Plan (the “Equity Plan”).
The Equity Plan provided for awards of various types of equity securities (including common stock, restricted stock units, options
and/or other derivative securities) to employees and directors of the Company.
Dr. Bosch received Options exercisable
for approximately 7.9 million Shares and Dr. Boynton received Options exercisable for approximately 3.4 million Shares. The
Options are exercisable at a price of $0.25 per share, and have a 5-year exercise period. The exercise period of the Options was
extended to 10 years during Q1 2018. The Options granted to Dr. Bosch and Dr. Boynton are subject to vesting requirements. 50%
of the Options were vested on the grant date, and 50% are vesting over a 24-month period in equal monthly installments, provided
that the recipient continues to be employed by the Company. The unvested portions of the Options are subject to accelerated vesting
upon (i) a change of effective control of the Company, (ii) the filing of the first Biologics License Application or other application
for product approval in any jurisdiction, (iii) completion of any randomized clinical trial that meets its endpoint(s) (Phase
II or Phase III), (iv) decision by the Board, in its discretion or (v) the death of the recipient.
Modification of Stock Options
As noted above, in January 2018, the Board
approved extension of the exercise period for options that were granted to Dr. Alton Boyton and Dr. Marnix Bosch on June 13, 2017,
from 5 years to 10 years to conform to the exercise period of other employee options. The Company accounted for the modification
as a Type I (probable-to-probable) modification and the incremental cost was approximately $0.3 million.
The following assumptions were used to
compute the fair value of stock options granted during the years ended December 31, 2018 and 2017:
|
|
For the years ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Exercise price
|
|
$
|
0.23
|
|
|
$
|
0.25
|
|
Expected term (years)
|
|
|
5.2
|
|
|
|
2.8
|
|
Expected stock price volatility
|
|
|
96
|
%
|
|
|
96
|
%
|
Risk-free rate of interest
|
|
|
3
|
%
|
|
|
2
|
%
|
The following table summarizes stock-based
compensation expense related to stock options for the years ended December 31, 2018 and 2017 (in thousands):
|
|
For the years ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Research and development
|
|
$
|
1,743
|
|
|
$
|
568
|
|
General and administrative
|
|
|
12,367
|
|
|
|
-
|
|
Total stock-based compensation expense
|
|
$
|
14,110
|
|
|
$
|
568
|
|
The weighted average grant date fair value
was approximately $16.3 million. As of December 31, 2018, there was approximately $1.6 million of total unrecognized compensation
expense related to both employee and non-employee non-vested share-based compensation arrangements granted under the plans for
employee stock options. That cost is expected to be recognized over a weighted average period of 1.7 years.
6. Sale and Leaseback Transactions
in the U.K.
On December 14, 2018, the Company completed
the transactions, involving the Company’s U.K. property: the sale of most of the property for approximately $47.2 million
in gross proceeds, the retention of the Company’s ownership of 17 acres of the property, and the lease-back of the 87,000
square foot manufacturing facility which the Company has been developing on the property, together with adjacent areas, for 20
years with a renewal option for another 20 years on favorable terms.
Total gain from the sale was approximately
$8.0 million, of which the Company recognized approximately $3.3 million upfront gain on the closing date in December 2018, and
approximately $4.7 million of the gain has been deferred.
The Company recorded the following amounts
on December 14, 2018, resulting in a gain of $3.3 million on the sale of the U.K. property calculated as the difference
between the consideration amount for the assets and the net carrying amount of the assets and liabilities extinguished. The following
sets forth the calculation of the gain on sale as of the closing (in thousands):
Cash consideration received, net of fees
|
|
$
|
45,595
|
|
Extinguishment of environmental liability
|
|
|
6,200
|
|
Land and buildings – carrying value
|
|
|
(45,168
|
)
|
Accumulated depreciation costs written off
|
|
|
1,397
|
|
Deferred profit on sale-leaseback transaction
|
|
|
(4,748
|
)
|
Gain from sale of property in the United Kingdom
|
|
$
|
3,276
|
|
7. Property, Plant and Equipment
Property, plant and equipment consist
of the following at December 31, 2018 and 2017 (in thousands):
|
|
December 31,
|
|
|
December 31,
|
|
|
Estimated
|
|
|
2018
|
|
|
2017
|
|
|
Useful Life
|
Leasehold improvements
|
|
$
|
81
|
|
|
$
|
81
|
|
|
Lesser of lease term or estimated useful life
|
Office furniture and equipment
|
|
|
25
|
|
|
|
25
|
|
|
3 years
|
Computer equipment and software
|
|
|
599
|
|
|
|
622
|
|
|
3 years
|
|
|
|
705
|
|
|
|
728
|
|
|
|
Less: accumulated depreciation
|
|
|
(683
|
)
|
|
|
(559
|
)
|
|
|
Total property, plant and equipment, net
|
|
$
|
22
|
|
|
$
|
169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land in the United Kingdom
|
|
$
|
86
|
|
|
$
|
29,003
|
|
|
NA
|
Buildings in the United Kingdom
|
|
|
-
|
|
|
|
18,601
|
|
|
15 years
|
Less: accumulated depreciation
|
|
|
-
|
|
|
|
(285
|
)
|
|
|
Total facilities in the United Kingdom, net
|
|
$
|
86
|
|
|
$
|
47,319
|
|
|
|
Depreciation expense was approximately
$1.3 million and $0.4 million for the years ended December 31, 2018 and 2017, respectively.
8. Notes Payable
The following two tables summarize outstanding
debt as of December 31, 2018 and 2017, respectively (amount in thousands):
|
|
|
|
Stated
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of
|
|
|
|
|
|
|
|
|
Interest
|
|
|
Conversion
|
|
|
|
|
|
Remaining
|
|
|
Embedded
|
|
|
Carrying
|
|
|
|
Maturity
Date
|
|
Rate
|
|
|
Price
|
|
|
Face
Value
|
|
|
Debt
Discount
|
|
|
Conversion
Option
|
|
|
Value
|
|
Short term convertible notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6% unsecured (1)
|
|
Due
|
|
|
6
|
%
|
|
$
|
3.09
|
|
|
$
|
135
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
135
|
|
10% unsecured (2)
|
|
10/18/2019
|
|
|
10
|
%
|
|
$
|
0.22
|
|
|
|
500
|
|
|
|
(43
|
)
|
|
|
-
|
|
|
|
457
|
|
18% unsecured (3)
|
|
In Default
|
|
|
18
|
%
|
|
$
|
0.21
|
|
|
|
914
|
|
|
|
-
|
|
|
|
357
|
|
|
|
1,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,549
|
|
|
|
(43
|
)
|
|
|
357
|
|
|
|
1,863
|
|
Short term convertible notes payable - related
party
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10% unsecured (4)
|
|
On Demand
|
|
|
10
|
%
|
|
$
|
0.23
|
|
|
|
5,400
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8% unsecured (5)
|
|
6/20/2019 and 12/12/2019
|
|
|
8
|
%
|
|
|
N/A
|
|
|
|
3,840
|
|
|
|
(383
|
)
|
|
|
-
|
|
|
|
3,457
|
|
10% unsecured (9)
|
|
Various
|
|
|
10
|
%
|
|
|
N/A
|
|
|
|
3,658
|
|
|
|
(400
|
)
|
|
|
|
|
|
|
3,258
|
|
12% unsecured (10)
|
|
Various
|
|
|
12
|
%
|
|
|
N/A
|
|
|
|
440
|
|
|
|
-
|
|
|
|
-
|
|
|
|
440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,938
|
|
|
|
(783
|
)
|
|
|
-
|
|
|
|
7,155
|
|
Short term notes payable - related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10% unsecured - Related Parties (12)
|
|
On Demand
|
|
|
10
|
%
|
|
|
N/A
|
|
|
|
324
|
|
|
|
-
|
|
|
|
-
|
|
|
|
324
|
|
12% unsecured - Related Parties (12)
|
|
On Demand
|
|
|
12
|
%
|
|
|
N/A
|
|
|
|
69
|
|
|
|
-
|
|
|
|
-
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
393
|
|
|
|
-
|
|
|
|
-
|
|
|
|
393
|
|
Long term notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8% unsecured (16)
|
|
2/13/2020
|
|
|
8
|
%
|
|
|
N/A
|
|
|
|
1,155
|
|
|
|
(119
|
)
|
|
|
-
|
|
|
|
1,036
|
|
5% unsecured (17)
|
|
1/13/2020
|
|
|
10
|
%
|
|
|
N/A
|
|
|
|
1,000
|
|
|
|
(50
|
)
|
|
|
-
|
|
|
|
950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,155
|
|
|
|
(169
|
)
|
|
|
-
|
|
|
|
1,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance as of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,435
|
|
|
$
|
(995
|
)
|
|
$
|
357
|
|
|
$
|
16,797
|
|
|
|
|
|
Stated
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Fair Value of
|
|
|
|
|
|
|
|
|
Interest
|
|
|
Conversion
|
|
|
|
|
|
Debt (Discount)/
|
|
|
Embedded
|
|
|
Carrying
|
|
|
|
Maturity
Date
|
|
Rate
|
|
|
Price
|
|
|
Face
Value
|
|
|
Premium
|
|
|
Conversion
Option
|
|
|
Value
|
|
Short term convertible notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6% unsecured (1)
|
|
Due
|
|
|
6
|
%
|
|
$
|
3.09
|
|
|
$
|
135
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8% unsecured (6)
|
|
9/3/2018 and 12/5/2018
|
|
|
8
|
%
|
|
|
N/A
|
|
|
|
2,007
|
|
|
|
355
|
|
|
|
-
|
|
|
|
2,362
|
|
8% unsecured (7)
|
|
6/30/2018
|
|
|
8
|
%
|
|
|
N/A
|
|
|
|
1,655
|
|
|
|
(103
|
)
|
|
|
-
|
|
|
|
1,552
|
|
10% unsecured (8)
|
|
On Demand
|
|
|
10
|
%
|
|
|
N/A
|
|
|
|
650
|
|
|
|
-
|
|
|
|
-
|
|
|
|
650
|
|
12% unsecured (10)
|
|
On Demand
|
|
|
12
|
%
|
|
|
N/A
|
|
|
|
440
|
|
|
|
(82
|
)
|
|
|
-
|
|
|
|
358
|
|
8% unsecured (11)
|
|
On Demand
|
|
|
8
|
%
|
|
|
N/A
|
|
|
|
2,200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,952
|
|
|
|
170
|
|
|
|
-
|
|
|
|
7,122
|
|
Short term notes payable - related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10% unsecured - Related Parties (12)
|
|
On Demand
|
|
|
10
|
%
|
|
|
N/A
|
|
|
|
1,071
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,071
|
|
12% unsecured - Related Parties (12)
|
|
On Demand
|
|
|
12
|
%
|
|
|
N/A
|
|
|
|
50
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,121
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-settled debt, at fair value (13)
|
|
In Default
|
|
|
18
|
%
|
|
$
|
0.24
|
|
|
|
3,308
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term mortgage loan (14)
|
|
8/16/2018 & 11/16/18
|
|
|
12
|
%
|
|
|
N/A
|
|
|
|
11,629
|
|
|
|
(403
|
)
|
|
|
-
|
|
|
|
11,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term convertible notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12% secured convertible notes (15)
|
|
06/21/20
|
|
|
12
|
%
|
|
$
|
0.50
|
|
|
|
5,350
|
|
|
|
(1,948
|
)
|
|
|
2,608
|
|
|
|
6,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8% unsecured (5)
|
|
06/20/19
|
|
|
8
|
%
|
|
|
N/A
|
|
|
|
2,880
|
|
|
|
(373
|
)
|
|
|
-
|
|
|
|
2,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance as of December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31,375
|
|
|
$
|
(2,554
|
)
|
|
$
|
2,608
|
|
|
$
|
31,429
|
|
(1)
|
This $135,000 note as of December 31, 2018 and December 31, 2017 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 October 18, 2018, the Company entered into an Unsecured Convertible Promissory Note Agreement
Plus Warrant (the “Note”) with an individual investor (the “Holder”) for an aggregate principal amount
of $500,000. The Note bore interest at a rate of 10% per annum and is convertible at a conversion price of $0.22 per share
of common stock. The Note is due and payable on October 18, 2019. Upon issuance of the Note, the Holder received a 2-year
warrant to purchase 714,286 common shares of the Company at an exercise price of $0.35 per share (the “Warrants”).
The fair value of the Warrants on the issuance date was approximately $57,000 using the Black-Scholes Model, which was recorded
as a discount with a corresponding credit to warrant liabilities.
|
|
(3)
|
On May 1, 2018,
the Company entered into a Convertible Secured Full Recourse Redeemable Note Agreement
(the “Secured Note”) of $1.4 million with an existing investor, who is currently
holding certain share-settled debt of the Company. The Secured Note included an original
issue discount of $0.1 million and $50,000 legal cost that was reimbursable to the investor.
The Secured Note was due on August 25, 2018 and is currently in default. The Secured
Note currently bears a default interest rate at 18%.
|
Due to the events of default,
the holder is entitled to convert all or any amount of the outstanding principal amount and interest into shares of the common
stock of the Company without restrictive legend of any nature. The conversion price is equal to 90% of the average of the 5 lowest
daily VWAP of the Company’s common stock during the 15 consecutive trading days immediately preceding the conversion date.
The Company recorded $351,000 interest expenses related to embedded derivative liabilities as of the maturity date of the Secured
Note and revalued at $357,000 as of December 31, 2018.
The Company recognized interest
expense of approximately $189,000 resulting from amortization of debt discount for the Secured Note.
The accrued interest associated
with the Secured Note was approximately $111,000 as of December 31, 2018.
(4)
|
Between February 2018 and April 2018, the Company’s Chief Executive Officer, Linda Powers,
loaned the Company aggregate funding of $5.4 million, and the Company entered into convertible note agreements for this amount
(the “Convertible Notes”). The Convertible Notes bear interest rate at 10% per annum, and are repayable upon 15
days’ notice from the holder (and in any event no later than five years from the date of the Convertible Notes).
|
|
|
|
The principal and interest of the Convertible Notes are convertible into Series B Preferred
Stock at conversion price of $2.30 per share, and each share of Series B Preferred Stock is convertible into 10 shares of
common stock. Additionally, the Convertible Notes carry Class D-2 Warrants, with half of the Class D-2 Warrants due and issuable
when the loan was provided, and half of the Class D-2 Warrants due on a proportional basis in the event of conversion of some
or all of the Note. The Class D-2 Warrants have five-year term.
|
|
The Company issued 23.5 million Class D-2 Warrants with an exercise price of $0.30, including
11.7 million contingently issuable warrants, which will be issued upon Mrs. Powers conversion of the Convertible Notes. The
fair value of the warrants was approximately $4.2 million, which was recorded as debt discount at the issuance date.
|
|
|
|
The Company recorded $4.2 million interest expense as amortization on the debt discount immediately
due to the term of the Convertible Notes, which are on demand.
|
|
|
|
The accrued unpaid interest associated with the Convertible Notes was approximately $451,000
as of December 31, 2018.
|
|
|
(5)
|
This $3.8 million note as of December 31, 2018 consists of two separate 8% notes in the amounts
of $1.2 million and $2.6 million.
|
During the year ended December
31, 2018, the Company converted approximately $1.9 million principal and $0.3 million accrued interest into approximately 13.1
million shares of common stock at fair value of $3.1 million. The Company recorded an approximate $0.9 million debt extinguishment
loss from this conversion.
|
(6)
|
This $2.0 million
note as of December 31, 2017 consists of two separate 8% notes in the amounts of $1.1
million and $0.9 million. Both notes were fully converted to the Company’s common
shares as of December 31, 2018.
|
During the year ended December
31, 2018, the Company converted approximately $2.0 million principal and $75,000 accrued interest into approximately 10.4 million
shares of common stock at fair value of $2.5 million. The Company recorded an approximate $0.4 million debt extinguishment loss
from this conversion.
During the year ended December
31, 2017, the Company converted approximately $0.4 million principal and $15,000 accrued interest into approximately 3.0 million
shares of common stock at fair value of $0.6 million. The Company recorded an approximate $0.2 million debt extinguishment loss
from this conversion.
(7)
|
On December 30, 2016, the Company
entered into a note purchase agreement (the “Note”) with an individual investor for an aggregate principal
amount of $3.3 million. 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.
During the year ended December
31, 2018, the Company entered into multiple exchange agreement with the Note holder to convert approximately $1.7 million
principal and $33,000 accrued interest into approximately 6.8 million shares of common stock at fair value of $1.8 million.
The Company recorded approximately $0.1 million debt extinguishment loss from this conversion
During the year ended December
31, 2017, the Company entered into multiple exchange agreement with the Note holder to convert approximately $1.7 million
principal and $0.2 million accrued interest into approximately 13.1 million shares of common stock at fair value of $2.7
million. The Company recorded approximately $0.8 million debt extinguishment loss from this conversion
|
(8)
|
In 2017, the Company entered two
promissory note agreements (the “Notes”) with certain investors for an aggregate principal amount of $650,000.
The Notes bore interest at 10% per annum, and were payable upon demand.
During the year ended December
31, 2018, the Company agreed to take the proceeds from the $500,000 note and $12,000 accrued interest to offset certain
Series A convertible preferred stock subscription receivable.
During the year ended December
31, 2018, the Company made $150,000 principal payment and $22,000 interest payment.
|
(9)
|
Between October 1, 2018 and November
7, 2018, the Company entered into multiple one-year promissory notes (the “Notes”) with multiple holders (the
“Holders”) for an aggregate principal amount of $3.7 million. The notes included approximately $0.2 million
OID. The Notes bore interest at 10% per annum.
Upon issuance of the Notes, each of the
Holders also received a 2-year warrant (the “Warrants”) to purchase 5.8 million common shares at an exercise price
of $0.35 per share. The fair value of the Warrants on the issuance date was approximately $0.5 million using the Black-Scholes
Model, which was recorded as a discount with a corresponding credit to warrant liabilities.
During the year ended December
31, 2018, the Company recognized interest expense of approximately $0.3 million resulting from amortization of debt discount
for the Notes. The remaining debt discount as of December 31, 2018 was approximately $0.4 million.
The accrued interest associated
with the Note was approximately $64,000 as of December 31, 2018.
|
(10)
|
During the year ended December
31, 2017, the Company entered two promissory note agreements (the “Notes”) with the same investor for an aggregate
principal amount of $440,000. The Notes bore interest at 12% per annum, and is payable upon demand. The Company also issued
approximately 1.2 million warrants with a weighted average strike price of $0.19 in conjunction the Note. The fair value
of the Warrants on the issuance date was approximately $139,000 using the Black-Scholes Model, which was recorded as a
discount with a corresponding credit to warrant liabilities.
During the year ended December
31, 2018 and 2017, the Company recognized interest expense of approximately $82,000 and $57,000 resulting from amortization
of debt discount for the Notes, respectively.
|
(11)
|
On
December 29, 2017, the Company entered into a promissory note agreement (the “Note”) with a third party for principal
amount of $2.2 million. The Note bore interest at 8% per annum, and is payable upon demand. The Note was fully repaid in January
2018.
|
Goldman Notes
In 2017, Leslie J. Goldman,
an officer of the Company, loaned the Company an aggregate amount of $1.3 million pursuant to certain Demand Promissory Note Agreements.
On January 3, 2018, Mr. Leslie loaned the Company an additional $30,000 (collectively the “Goldman Notes”). Approximately
$0.5 million of the Goldman Notes bear interest at the rate of 12% per annum, and $0.8 million of the Goldman Notes bear interest
at the rate of 10% per annum.
During the year ended December
31, 2017, the Company made an aggregate principal payment of $1.2 million to settle some of Mr. Goldman’s outstanding demand
notes, and an aggregate of $47,000 interest payment associated with these demand notes. Such payment included repayment of $0.3
million outstanding debt incurred during the year ended December 31, 2016.
During the year ended December
31, 2018, the Company made an aggregate principal payment of $0.4 million on the Goldman Notes.
The outstanding principal amount
for the Goldman Notes was approximately $69,000 and $0.4 million as of December 31, 2018 and December 31, 2017, respectively.
There was approximately $73,000
accrued interest associated with the Goldman Notes which remained unpaid and due as of December 31, 2018.
Toucan Notes
In 2017, Toucan Capital Fund
III loaned the Company an aggregate amount of $1.2 million pursuant to multiple Demand Promissory Notes (the “Toucan Notes”).
The Toucan Notes bear interest at 10% per annum, and are payable upon demand, with 7 days’ prior written notice to the Company.
During the year ended December
31, 2017, the Company made an aggregate principal payment of approximately $0.8 million on the Toucan Notes.
During the year ended December
31, 2018, the Company made an aggregate principal payment of approximately $0.4 million on the Toucan Notes. In addition, the
Company also made a partial interest payment of $18,000.
All principal was repaid as
of December 31, 2018. There was approximately $46,000 remaining of unpaid interest as of December 31, 2018.
Board of Directors Notes
In 2017, Jerry Jasinowski,
Robert Farmer and Cofer Black, members of the Company’s Board of Directors, loaned the Company an aggregate amount of $300,000
pursuant to multiple Demand Promissory Notes (the “Notes”). The Notes bear interest at 10% per annum, and are payable
upon demand, with 7 days’ prior written notice to the Company.
On November 28, 2018, the Company made a partial
payment of $40,000 to the Note held by Mr. Farmer.
The outstanding principal amount
and accrued interest for the Notes as of December 31, 2018 were approximately $260,000 and $51,000, respectively.
The Notes were fully paid back
in January 2019.
Advent BioServices Note
On September 26, 2018, Advent
BioServices, a related party which was formerly part of Cognate BioServices and was spun off separately as part of an institutional
financing of Cognate, provided a short-term loan to the Company in the amount of $65,000. The loan bears interest at 10% per annum,
and is payable upon demand, with 7 days’ prior written notice to the Company.
(13)
|
During the year
ended December 31, 2018 and 2017, the holder of the Company’s share-settled debt converted approximately $3.3 million
and $1.9 million of outstanding share-settled debt, respectively.
|
|
|
|
The Holder has also forgiven the outstanding
interest of approximately $1.4 million, which was recorded as gain from debt extinguishment during the year ended December
31, 2018.
|
(14)
|
Upon the closing of sale of property
in U.K. on December 14, 2018 (see Note 6), the two mortgage loans held by the Company were fully paid back as of December
31, 2018. The Company’s senior convertible notes secured by the mortgage loans were also paid back on December 14,
2018 (see note (15) below). The Company recorded debt extinguishment loss of approximately $0.4 million resulting from
written off remaining unamortized deferred financing cost.
The table below summarizes details
the break down for the senior mortgage payment on December 14, 2018 (amount in thousands):
|
Principal
|
|
$
|
9,758
|
|
Exit fee liability
|
|
|
120
|
|
Renewal fee
|
|
|
1,464
|
|
Other expenses
|
|
|
39
|
|
Total mortgage payment
|
|
$
|
11,381
|
|
(15)
|
These long-term secured convertible
notes (the “Notes”) have a 3-year maturity and bear interest at 12% per annum. No interest will be payable
during the term, but interest will accrue and be payable at maturity. The Notes are secured by the property owned by the
Company in the U.K., and not by any other assets of the Company. The Notes and accrued interest will be convertible at
any time during the term at fixed conversion prices: 50% of the principal and accrued interest will be convertible at
$0.25 per share, 25% of the principal and accrued interest will be convertible at $0.50 per share and 25% of the principal
and accrued interest will be convertible at $1.00 per share.
On December 14, 2018, upon the
closing of sale of U.K. property (see note 6), the Company made full repayment on the Notes including outstanding interest
of approximately $1.0 million. Additionally, the embedded conversion feature associated with the Notes, which had been
revalued as of December 14, 2018 to approximately $2.0 million (see note 4), and the remaining unamortized debt discount
were written off. The Company recorded approximately $0.7 million debt extinguishment gain.
|
The tables below summarize the detail for the Notes
payment on December 14, 2018 (amount in thousands):
Principal amount
|
|
$
|
5,350
|
|
Accrued interest
|
|
|
1,012
|
|
Total cash payment
|
|
$
|
6,362
|
|
|
|
|
|
|
Remaining unamortized debt discount
|
|
$
|
(1,374
|
)
|
Embedded derivative liability
|
|
|
2,049
|
|
Gain on debt extinguishment
|
|
$
|
675
|
|
(16)
|
On August 13, 2018, the Company
entered into a note purchase agreement (the “Note”) with an individual investor for an aggregate principal
amount of $1,155,000. The Note bears interest at 8% per annum with a 2-year term. The Note carries an aggregated original
issue discount of $150,000 and $5,000 for legal costs that were reimbursable to the investor.
During the year ended December
31, 2018, no repayments have been made on the Note. The remaining debt discount and accrued interest associated with the
Note as of December 31, 2018 was $119,000 and $36,000, respectively
|
(17)
|
On August 13, 2018, the Company entered into
an 18 month Note with an institutional investor at a 5% annual interest rate for $1.0
million with principal and interest payable on the maturity date of January 13, 2020.
Upon issuance of the Note, the investor received a 2-year, 50% warrant containing 833,333
exercise shares (the “Warrants”) at an exercise price of $0.60 per share.
The Warrants had fair value of approximately $67,000 on the grant date, which was recorded
as debt discount. The Note also includes a prepayment provision.
|
The following table summarizes total interest expenses related
to senior convertible notes, share-settled debt, other notes and mortgage loans for the years ended December 31, 2018 and 2017,
respectively (in thousands):
|
|
For the years ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Interest expenses related to 2014 Senior convertible notes:
|
|
|
|
|
|
|
|
|
Contractual interest
|
|
$
|
-
|
|
|
$
|
424
|
|
Amortization of debt issuance costs
|
|
|
-
|
|
|
|
175
|
|
Total interest expenses related to senior convertible
notes
|
|
|
-
|
|
|
|
599
|
|
Interest expenses related to other notes:
|
|
|
|
|
|
|
|
|
Contractual interest
|
|
|
2,265
|
|
|
|
1,924
|
|
Amortization on debt premium
|
|
|
(355
|
)
|
|
|
407
|
|
Amortization of debt discount
|
|
|
6,210
|
|
|
|
846
|
|
Total interest expenses related to other notes
|
|
|
8,120
|
|
|
|
3,177
|
|
Interest expenses related to mortgage loan:
|
|
|
|
|
|
|
|
|
Contractual interest
|
|
|
1,174
|
|
|
|
1,263
|
|
Amortization of debt issuance costs
|
|
|
496
|
|
|
|
495
|
|
Total interest expenses on the mortgage loan
|
|
|
1,670
|
|
|
|
1,758
|
|
Interest expenses related to Series A convertible preferred stock
|
|
|
68
|
|
|
|
-
|
|
Other interest expenses
|
|
|
13
|
|
|
|
11
|
|
Total interest expense
|
|
$
|
9,871
|
|
|
$
|
5,545
|
|
9. 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 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,
|
|
|
|
2018
|
|
|
2017
|
|
Series A convertible preferred stock
|
|
|
-
|
|
|
|
97,200
|
|
Series B convertible preferred stock
|
|
|
-
|
|
|
|
55,819
|
|
Common stock options
|
|
|
100,159
|
|
|
|
12,656
|
|
Common stock warrants - equity treatment
|
|
|
-
|
|
|
|
30,838
|
|
Common stock warrants - liability treatment
|
|
|
360,414
|
|
|
|
289,568
|
|
Contingently issuable warrants
|
|
|
11,739
|
|
|
|
-
|
|
Share-settled debt and accrued interest, at fair value
|
|
|
-
|
|
|
|
18,211
|
|
Convertible notes and accrued interest
|
|
|
32,954
|
|
|
|
15,735
|
|
Potentially dilutive securities
|
|
|
505,266
|
|
|
|
520,027
|
|
10. 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 ideally 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.
Under the January 17, 2014 DCVax®-L
Manufacturing Services Agreement and the DCVax-Direct Agreement, a new set of provisions apply going forward to any shut down
or suspension. Under these provisions, the Company will be contingently obligated to pay certain fees to Cognate BioServices
(in addition to any other remedies) if the Company shuts down or suspends its DCVax-L program or DCVax-Direct program.
For a shut down or suspension of the DCVax-L
program, the fees will be as follows:
|
·
|
Prior
to the last dose of the last patient enrolled in the Phase III trial for DCVax®-L
or After the last dose of the last patient enrolled in the Phase III clinical trial for
DCVax®-L but before any submission for product approval in any jurisdiction or after
the submission of any application for market authorization but prior to receiving a marketing
authorization approval: in any of these cases, the fee shall be $3 million.
|
|
·
|
At
any time after receiving the equivalent of a marketing authorization for DCVax®-L
in any jurisdiction, the fee shall be $5 million.
|
For a shut down or suspension of the DCVax-Direct
program, the fees will be as follows:
|
·
|
Prior
to the last dose of the last patient enrolled in the Phase I/II trial for DCVax®-Direct,
the fee shall be $1.5 million.
|
|
·
|
After
the last dose of the last patient enrolled in the Phase I/II clinical trial for DCVax®-Direct
but before the initiation of a Phase III trial the fee shall be $2.0 million.
|
|
·
|
After
initiation of a phase III trial but before submission of an application for market authorization
in any jurisdiction or after the submission of an application for market authorization
but prior to receiving a market authorization approval: in each of these cases, the fee
shall be $3.0 million.
|
|
·
|
At
any time after receiving the equivalent of a marketing authorization for DCVax®-Direct
in any jurisdiction the fee shall be $5.0 million.
|
As of December 31, 2018, no shut-down or suspension fees were
triggered.
In addition, 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.
Settlements of 2016 and 2017 Obligations
to Cognate;
On December 31, 2017, the Company and
Cognate entered into settlement agreements with Cognate BioServices, Inc. (the “Cognate Settlement Agreement”) for
unpaid invoices and obligations for 2016 and 2017 (the “Cognate Obligations”) and for temporary reduction in the contractual
amounts owed for 2017.
The Company and Cognate negotiated an
overall settlement for amounts owed to Cognate for 2016 and 2017, to reduce the amounts otherwise due under the contracts and
at the conclusion the remaining accounts payable to Cognate BioServices, Inc. was approximately $4.5 million. According to the
Cognate Settlement Agreement, approximately $22.0 million of the Cognate Obligations were satisfied through the issuance or obligation
to issue to Cognate 2.9 million shares of Series A Convertible Preferred Stock and 5.2 million shares of Series B Convertible
Preferred Stock. Each share of Series A Convertible Preferred Stock and Series B Convertible Preferred Stock are convertible into
10 shares of Common Stock. The Company also issued Cognate 29.4 million shares of Class D-1 Warrants with exercise price of $0.22
per share and 52 million shares of Class D-2 Warrants with exercise price of $0.30 per share.
The following table shows a summary of
the Cognate Settlement Agreement (amount in thousands):
Unpaid invoices for 2016 and 2017
|
|
$
|
(21,963
|
)
|
Fair value of Series A Convertible Preferred Stock
|
|
|
6,919
|
|
Fair value of Series B Convertible Preferred Stock
|
|
|
12,235
|
|
Fair value of Class D-1 and Class D-2 warrants
|
|
|
11,204
|
|
Additional research and development cost recorded from Cognate settlement
|
|
$
|
8,395
|
|
Advent BioServices Agreement
On May 14, 2018, the Company entered into
a DCVax®-L Manufacturing and Services Agreement with Advent BioServices, a related party which was formerly part of Cognate
BioServices and was spun off separately as part of an institutional financing of Cognate. The Advent Agreement provides for manufacturing
of DCVax-L products for the European region. The Advent Agreement provides for a program initiation payment of approximately $1.0
million (£0.7 million), in connection with technology transfer and operations transfer to the U.K. from Germany, development
of new Standard Operating Procedures (SOPs), training of new personnel, selection of new suppliers and auditing for GMP compliance,
and other preparatory activities. Such initiation payment was fully paid by the Company as of December 31, 2018. The Advent Agreement
provides for certain payments for achievement of milestones and, as is the case under the existing agreements with Cognate BioServices,
the Company is required to pay certain fees for dedicated production capacity reserved exclusively for DCVax production, and pay
for a certain minimum number of patients, whether or not the Company fully utilizes the dedicated capacity and number of patients.
Either party may terminate the Advent Agreement at any time for any reason on twelve months’ notice. The notice period is
designed to enable an effective transition and minimize or avoid interruption of product supply. During the twelve-month period,
the Company will continue to pay the minimum fees and the applicable fees for any DCVax products beyond the minimums, and Advent
will continue to produce the DCVax products.
Cognate & Advent Expenses and Accounts
Payable
The following table summarizes expenses
incurred to related parties (i.e., amounts invoiced) during the year ended December 31, 2018 and 2017 (amount in thousands) (some
of which remain unpaid as noted in the second table below):
|
|
For the years ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Cognate BioServices, Inc. (no longer related party since Q2 2018)
|
|
$
|
873
|
|
|
$
|
12,082
|
|
Cognate BioServices GmbH
|
|
|
66
|
|
|
|
1,330
|
|
Cognate Israel
|
|
|
168
|
|
|
|
1,008
|
|
Advent BioServices
|
|
|
6,258
|
|
|
|
1,807
|
|
Research and development cost from Cognate settlement
|
|
|
-
|
|
|
|
8,395
|
|
Total
|
|
$
|
7,365
|
|
|
$
|
24,622
|
|
The following table summarizes outstanding
unpaid accounts payable held by related parties as of December 31, 2018 and 2017 (amount in thousands).
These unpaid amounts
include part of the expenses reported in the table above and also certain expenses incurred in prior periods. The unpaid amounts
to Cognate BioServices, Inc. also include certain amounts that the Company disputes and that are under discussion with Cognate.
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Cognate BioServices, Inc. (no longer related party in Q2 2018)
*
|
|
$
|
9,472
|
|
|
$
|
4,520
|
|
Cognate BioServices GmbH
|
|
|
4
|
|
|
|
279
|
|
Cognate Israel
|
|
|
-
|
|
|
|
239
|
|
Advent BioServices
|
|
|
3,967
|
|
|
|
165
|
|
Total
|
|
$
|
13,443
|
|
|
$
|
5,203
|
|
|
*
|
Including certain
disputed amounts that the Company is in the process of discussing with Cognate.
|
Forgiveness of Certain Payables to
Cognate BioServices, Inc.
In the second quarter of fiscal 2017 Cognate
released from the Company the obligation under the 2016 Letter agreement to reimburse them $3.75 million of accounts receivable.
This was recorded as a contribution to capital in the statement of stockholders’ deficit.
Other Related Parties Loans
Linda F. Powers - Demand Loans
Between February 2018 and April 2018,
the Company’s Chief Executive Officer, Linda Powers, loaned the Company aggregate funding of $5.4 million, and the Company
entered into convertible note agreements for these amounts (the “Convertible Notes”). The Convertible Notes bear interest
at a rate of 10% per annum, and are repayable upon 15 days’ notice from the holder (and in any event no later than five
years from the date of the Convertible Notes).
The Convertible Notes are convertible
into Series B Preferred Stock at a conversion price of $2.30 per share, and each share of Series B Preferred Stock is convertible
into 10 shares of common stock. Additionally, the Convertible Notes carry Class D-2 Warrants, with half of the Class D-2 Warrants
due and issuable when the loan was provided, and half of the Class D-2 Warrants due on a proportional basis in the event of conversion
of some or all of the Note. The Class D-2 Warrants have five-year term.
The Company issued 23.5 million Class
D-2 Warrants with an exercise price of $0.30, including 11.7 million contingently issuable warrants, which will be issued upon
Mrs. Powers’ conversion of her Convertible Notes. The fair value of the warrants was approximately $4.2 million, which was
recorded as debt discount at the issuance date.
The Company recorded $4.2 million of interest
expenses as amortization on the debt discount immediately due to the terms of the Convertible Notes, which are on demand.
On November 11, 2018, the Company and
Ms. Powers agreed to extend the notes to a maturity of one year following the respective funding dates. In consideration of the
continuing forbearance, the Company will issue warrants representing 50% of the repayment amounts of the Notes. The warrants will
have exercise price at $0.35 per share, and have an exercise period of 2 years. However, the Company has not finalized the
terms of the warrant agreement.
The accrued unpaid interest associated
with the Convertible Notes was approximately $451,000 as of December 31, 2018.
Leslie J. Goldman - Demand Loans
In 2017, Leslie J. Goldman, an officer
of the Company, loaned the Company an aggregate amount of $1.3 million pursuant to multiple Demand Promissory Note Agreements.
On January 3, 2018, Mr. Goldman loaned the Company an additional $30,000 (collectively the “Goldman Notes”). Approximately
$0.5 million of the Goldman Notes bear interest at the rate of 12% per annum, and $0.8 million of the Goldman Notes bear interest
at the rate of 10% per annum.
During the year ended December 31, 2017,
the Company made an aggregate principal payment of $1.2 million to settle some of Mr. Goldman’s outstanding demand notes,
and an aggregate interest payment of $47,000 associated with these demand notes. Such payment included repayment of $0.3 million
outstanding debt incurred during the year ended December 31, 2016.
During the year ended December 31, 2018,
the Company made an aggregate principal payment of $0.4 million to the Goldman Notes.
The outstanding principal amount for the
Goldman Notes was approximately $69,000 and $0.4 million as of December 31, 2018 and 2017, respectively.
There was approximately $73,000 accrued
unpaid interest associated with the Goldman Notes as of December 31, 2018.
Toucan Capital III Fund - Demand Loans
In April, 2017, Toucan Capital Fund III
loaned the Company an aggregate amount of $1.2 million pursuant to multiple Demand Promissory Notes (the “Toucan Notes”).
The Toucan Notes bear interest at 10% per annum, and are payable upon demand, with 7 days’ prior written notice to the Company.
During the year ended December 31, 2017,
the Company made an aggregate principal payment of approximately $0.8 million to the Toucan Notes.
During the year ended December 31, 2018,
the Company made an aggregate principal payment of approximately $0.4 million to the Toucan Notes. In addition, the Company also
made a partial interest payment of $18,000.
All principal was repaid as of December
31, 2018. There was approximately $46,000 of remaining unpaid interest as of December 31, 2018.
Board of Directors - Demand Loans
In April, 2017, Jerry Jasinowski, Robert
Farmer and Cofer Black, members of the Company’s Board of Directors, loaned the Company an aggregate amount of $0.3 million
pursuant to multiple Demand Promissory Notes (the “Notes”). The Notes bear interest at 10% per annum, and are payable
upon demand, with 7 days’ prior written notice to the Company.
On November 28, 2018, the Company made a payment of $40,000
to the Note held by Mr. Farmer.
There was approximately $51,000 accrued
interest associated with the Notes as of December 31, 2018.
Advent BioServices Note
On September 26, 2018, Advent BioServices,
a related party which was formerly part of Cognate BioServices and was spun off separately as part of an institutional financing
of Cognate, and which is owned by Toucan Capital Fund III, provided a short-term loan to the Company in the amount of $65,000.
The loan bears interest at 10% per annum, and is payable upon demand, with 7 days’ prior written notice to the Company.
This Note remains outstanding and unpaid.
The amount owed to Advent under this Note at December 31, 2018 was $65,000 based on the current exchange rate.
11. Temporary Equity
Series A Convertible Preferred Stock
The following table summarizes the Company’s Series A
Convertible Preferred Stock activities for the year ended December 31, 2018 and 2017 (amount in thousands):
|
|
Series A Convertible
Preferred Stock
|
|
|
|
Shares
|
|
|
Amount
|
|
Balances as of January 1, 2017
|
|
|
-
|
|
|
$
|
-
|
|
Issuance of Series A convertible preferred stock and warrants for cash (net of $11.0
million warrant liability and $0.7 million subscription receivable)
|
|
|
7,058
|
|
|
|
276
|
|
Beneficial conversion feature of Series A convertible preferred stock
|
|
|
-
|
|
|
|
(276
|
)
|
Deemed dividends related to immediate accretion of beneficial conversion feature of Series A
convertible preferred stock
|
|
|
-
|
|
|
|
276
|
|
Issuance of common stock for conversion of Series A convertible preferred stock
|
|
|
(400
|
)
|
|
|
(680
|
)
|
Deemed dividends on conversion of Series A convertible preferred stock to common stock
|
|
|
-
|
|
|
|
624
|
|
Issuance of Series A convertible preferred stock and warrants in exchange for existing warrants
|
|
|
121
|
|
|
|
300
|
|
Conversion of certain payables to Cognate BioServices, Inc. to Series A
convertible preferred stock and warrants
|
|
|
2,941
|
|
|
|
6,919
|
|
Balance as of December 31, 2017
|
|
|
9,720
|
|
|
|
7,439
|
|
Issuance of Series A convertible preferred stock and warrants for cash (net of $0.5 million warrant
liability)
|
|
|
294
|
|
|
|
27
|
|
Conversion of note payable to offset Series A convertible preferred stock subscription receivable
|
|
|
-
|
|
|
|
500
|
|
Conversion of interest payable to offset Series A convertible preferred stock subscription receivable
|
|
|
-
|
|
|
|
71
|
|
Issuance of common stock for conversion of Series A convertible preferred stock
|
|
|
(10,014
|
)
|
|
|
(18,929
|
)
|
Deemed dividends on conversion of Series A convertible preferred stock to
common stock
|
|
|
-
|
|
|
|
10,892
|
|
Balance as of December 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
The Company determined that the Series
A Shares contain contingent liquidation provisions allowing liquidation by the holder upon certain defined events (“deemed
liquidation events”). As the event that may trigger the liquidation of the Series A Shares is not solely within the Company’s
control, the Series A Shares are classified as mezzanine equity (temporary equity) in the Company’s consolidated balance
sheets.
If a liquidation or deemed liquidation
event occurs, and the Series A preferred stock has not yet been converted by election of the holder or by mandatory conversion
at the election of the Company, the holder will be entitled to a liquidation preference of either (a) an amount equal to the amount
the holder paid for their preferred stock, or (b) the proportionate proceeds applicable to their shares on an as converted basis.
2017 Activities
On December 8, 2017, the Company entered
into Subscription Agreements (the “Series A Subscription Agreements”) with certain investors (the “Series A
Investors”). Pursuant to the Series A Subscription Agreements, the Company issued to the Series A Investors an aggregate
of 7.1 million shares of the Company’s Series A Convertible Preferred Stock, par value $0.001 per share (the “Series
A Shares”), at a purchase price of $1.70 per share, and 2 year Class D-1 Common Stock Purchase Warrants (the “Class
D-1 Warrants”) to purchase up to 70.6 million shares of common stock at an exercise price of $0.22 per share. The Company
received $11.3 million cash, which was net of $0.7 million receivable from the Series A Investors.
The Series A Shares are convertible into
common stock, but only when common stock is available or after 6 months following issuance. When sufficient shares of common stock
are available for issuance upon conversion, each Series A Shares will be convertible at the option of the holder, at any time,
into a total of 10 shares of common stock, par value $0.001 per share, for a total of 70.6 million shares of common stock (the
equivalent of a conversion price of $0.17 per share of common stock).
Due to the Sequencing Policy, the Class
D-1 Warrants were classified as warrant liabilities. On the issuance date, the Company estimated the fair value of the Class D-1
Warrants at approximately $11 million under the Black-Scholes option pricing model using the following primary assumptions:
contractual term of 2.0 years, volatility rate of 117%, risk-free interest rate of 2% and expected dividend
rate of 0%. The entire fair value of the Class D-1 Warrants was allocated to the $11.3 million net proceeds (net of subscription
receivable of $0.7 million), creating a corresponding preferred stock discount in the same amount.
The initial fair value of the warrants
of approximately $11 million was deducted from the gross proceeds from the Series A Investors to arrive at the initial discounted
carrying value of the Series A Shares. The initial discounted carrying value resulted in recognition of a beneficial conversion
feature of $0.3 million, further reducing the initial carrying value of the Series A Shares. The discount to the aggregate stated
value of the Series A Shares, resulting from recognition of the beneficial conversion feature was immediately accreted as a reduction
of additional paid-in capital and an increase in the carrying value of the Series A Shares. The accretion is presented in the
Consolidated Statement of Operations as a deemed dividend, increasing net loss to arrive at net loss attributable to common stockholders.
On December 28, 2017, certain Series A
Investors converted 400,000 shares of Series A Shares into 4,000,000 shares of common stock based on original term. The Company
recognized approximately $624,000 of deemed dividends upon such conversion.
2018 Activities
During the year ended December 31, 2018,
the Company issued 294,118 shares of the Series A Convertible Preferred Stock, par value $0.001 per share (the “Series A
Shares”), at a purchase price of $1.70 per share, and 2-year Class D-1 Common Stock Purchase Warrants (the “Class
D-1 Warrants”) to purchase up to 2.9 million shares of common stock at an exercise price of $0.22 per share. The Company
received $0.5 million cash.
Due to the Sequencing Policy, the Class
D-1 Warrants were classified as warrant liabilities. On the issuance date, the Company estimated the fair value of the Class D-1
Warrants at approximately $500,000 under the Black-Scholes option pricing model using the following primary assumptions:
Exercise price
|
|
$
|
0.22
|
|
Expected term (years)
|
|
|
2.0
|
|
Expected stock price volatility
|
|
|
116
|
%
|
Risk-free rate of interest
|
|
|
2
|
%
|
Dividend yield (per share)
|
|
|
0
|
%
|
The fair value of the Class D-1 Warrants
was allocated to the $500,000 proceeds, creating a corresponding preferred stock discount in the same amount.
On September 7, 2018, the Company delivered
notice of its exercise of the right to cause the mandatory conversion of all outstanding Series A Shares of the Company’s
common stock, par value $0.001 per share, pursuant to the Amended and Restated Certificate of Designations of Series A Convertible
Preferred Stock (the “Mandatory Conversion”). The issuance of shares of common stock upon consummation of the Mandatory
Conversion eliminated all outstanding shares of preferred stock, replacing them with common stock.
Pursuant to this Mandatory Conversion
during the year ended December 31, 2018, approximately 10.0 million shares of Series A Shares were converted into 100.0 million
shares of common stock in accordance with their terms. The Company recognized approximately $10.9 million of deemed dividends
upon such conversion.
During the year ended December 31, 2018,
one of the Series A Shareholders converted his $500,000 note and $71,000 accrued interest with the Company to offset his current
subscription due amount to the Company.
Series B Convertible Preferred Stock
The following table summarizes the Company’s Series B
Convertible Preferred Stock activities for the year ended December 31, 2018 and 2017 (amount in thousands):
|
|
Series B Convertible
Preferred Stock
|
|
|
|
Shares
|
|
|
Amount
|
|
Balances as of January 1, 2017
|
|
|
-
|
|
|
$
|
-
|
|
Issuance of Series B convertible preferred stock and warrants for cash (net of $0.5
million warrant liability and $7,000 subscription receivable)
|
|
|
381
|
|
|
|
366
|
|
Beneficial conversion feature of Series B convertible preferred stock
|
|
|
-
|
|
|
|
(366
|
)
|
Deemed dividends related to immediate accretion of beneficial conversion feature of Series B
convertible preferred stock
|
|
|
-
|
|
|
|
366
|
|
Conversion of certain payables to Cognate BioServices, Inc. to Series B
convertible preferred stock and warrants
|
|
|
5,201
|
|
|
|
12,235
|
|
Balance as of December 31, 2017
|
|
|
5,582
|
|
|
|
12,601
|
|
Issuance of Series B convertible preferred stock and warrants for cash (net of $4.3 million warrant
liability and $10,000 subscription receivable)
|
|
|
2,868
|
|
|
|
2,309
|
|
Beneficial conversion feature of Series B convertible preferred stock
|
|
|
-
|
|
|
|
(2,086
|
)
|
Deemed dividends related to immediate accretion of beneficial conversion feature of Series B
convertible preferred stock
|
|
|
-
|
|
|
|
2,086
|
|
Issuance of common stock for conversion of Series B convertible preferred stock
|
|
|
(8,450
|
)
|
|
|
(19,697
|
)
|
Deemed dividends on conversion of Series B convertible preferred stock to
common stock
|
|
|
-
|
|
|
|
4,787
|
|
Balance as of December 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
The Company determined that the Series
B Shares contain contingent liquidation provisions allowing liquidation by the holder upon certain defined events (“deemed
liquidation events”). As the event that may trigger the liquidation of the Series B Shares is not solely within the Company’s
control, the Series B Shares are classified as mezzanine equity (temporary equity) in the Company’s consolidated balance
sheets.
If a liquidation or deemed liquidation
event occurs, and the Series B preferred stock has not yet been converted by election of the holder or by mandatory conversion
at the election of the Company, the holder will be entitled to a liquidation preference of either (a) an amount equal to the amount
the holder paid for their preferred stock, or (b) the proportionate proceeds applicable to their shares on an as converted basis.
2017 Activities
On December 29, 2017, the Company entered
into Subscription Agreements (the “Series B Subscription Agreements”) with certain unaffiliated investors (the “Series
B Investors”). Pursuant to the Series B Subscription Agreements, the Company issued to the Series B Investors
an aggregate of 381,000 shares of the Company’s Series B Convertible Preferred Stock, par value $0.001 per share (the “Series
B Shares”), at a purchase price of $2.30 per share, and 2 year Class D-2 Common Stock Purchase Warrants (the “Class
D-2 Warrants”) to purchase up to 3.8 million shares of common stock at an exercise price of $0.30 per share. The Company
received approximately $869,000 cash, which was net of $7,000 receivable from the Series B Investors.
The Series B Preferred Stock is convertible
into common stock, but only when common stock is available or after 6 months following issuance. When sufficient shares of common
stock are available for issuance upon conversion, each share of Series B Preferred Stock will be convertible at the option of
the holder, at any time, into a total of 10 shares of common stock, par value $0.001 per share, for a total of 3.8 million shares
of common stock (the equivalent of a conversion price of $0.23 per share of common stock). The Class D-2 Warrants are not currently
exercisable and will become exercisable only when shares of common stock are available for issuance upon exercise.
Due to the Sequencing Policy, the Class
D-2 Warrants were classified as warrant liabilities. On the issuance date, the Company estimated the fair value of the Class D-2
Warrants at approximately $503,000 under the Black-Scholes option pricing model using the following primary assumptions:
contractual term of 2.0 years, volatility rate of 116%, risk-free interest rate of 2% and expected dividend
rate of 0%. The entire fair value of the Class D-2 Warrants was allocated to the $869,000 net proceeds, creating a corresponding
preferred stock discount in the same amount.
The initial fair value of the warrants
of approximately $0.5 million was deducted from the gross proceeds from the Series B Investors to arrive at the initial discounted
carrying value of the Series B Shares. The initial discounted carrying value resulted in recognition of a beneficial conversion
feature of $0.4 million, further reducing the initial carrying value of the Series B Shares. The resulting discount to the aggregate
stated value of the Series B Shares, resulting from recognition of the beneficial conversion feature, was immediately accreted
as a reduction of additional paid-in capital and an increase in the carrying value of the Series A Shares. The accretion is presented
in the Consolidated Statement of Operations as a deemed dividend, increasing net loss to arrive at net loss attributable to common
stockholders.
2018 Activities
During the year ended December 31, 2018,
the Company issued 2.9 million shares of the Series B Convertible Preferred Stock, par value $0.001 per share (the “Series
B Shares”), at a purchase price of $2.30 per share, and 2-year Class D-2 Common Stock Purchase Warrants (the “Class
D-2 Warrants”) to purchase up to 28.7 million shares of common stock at an exercise price of $0.30 per share. The Company
received $6.6 million cash.
Due to the Sequencing Policy, the Class
D-2 Warrants were classified as warrant liabilities. On the issuance date, the Company estimated the fair value of the Class D-2
Warrants at approximately $4.3 million under the Black-Scholes option pricing model using the following primary assumptions:
Exercise price
|
|
$
|
0.30
|
|
Expected term (years)
|
|
|
2.0
|
|
Expected stock price volatility
|
|
|
115
|
%
|
Risk-free rate of interest
|
|
|
2
|
%
|
Dividend yield (per share)
|
|
|
0
|
%
|
The entire fair value of the Class D-2
Warrants was allocated to the $6.6 million net proceeds, creating a corresponding preferred stock discount in the same amount.
The initial fair value of the warrants
of approximately $4.3 million was deducted from the gross proceeds from the Series B Investors to arrive at the initial discounted
carrying value of the Series B Shares. The initial discounted carrying value resulted in recognition of a beneficial conversion
feature of $2.1 million, further reducing the initial carrying value of the Series B Shares. The resulting discount to the aggregate
stated value of the Series B Shares, resulting from recognition of the beneficial conversion feature, was immediately accreted
as a reduction of additional paid-in capital and an increase in the carrying value of the Series B Shares. The accretion is presented
in the Consolidated Statement of Operations as a deemed dividend, increasing net loss to arrive at net loss attributable to common
stockholders.
On September 7, 2018, the Company delivered
notice of its exercise of the right to cause the mandatory conversion of all outstanding Series A Shares of the Company’s
common stock, par value $0.001 per share, pursuant to the Amended and Restated Certificate of Designations of Series B Convertible
Preferred Stock (the “Mandatory Conversion”). The issuance of shares of common stock upon consummation of the Mandatory
Conversion eliminated all outstanding shares of preferred stock, replacing them with common stock.
Pursuant to this Mandatory Conversion,
during the year ended December 31, 2018, approximately 8.5 million shares of Series B Shares were converted into 85 million shares
of common stock based on original term. The Company recognized approximately $4.8 million of deemed dividends upon such conversion.
12. Stockholders’ Deficit
2018 Activities
Increase of Authorized Shares
On April 27, 2018, the Company held a
Special Meeting of Shareholders to vote on several matters, including increasing the number of authorized shares of common stock
from 450,000,000 to 1,200,000,000, par value $0.001 per share, and increasing the number of authorized shares of preferred stock
from 40,000,000 to 100,000,000, par value $0.001 per share. On May 2, 2018, the Company filed a Certificate of Amendment of its
Seventh Amended and Restated Certificate of Incorporation with the Secretary of the State of Delaware, which effected the increase
in authorized shares of common stock and the increase in authorized shares of preferred stock.
Equity Financing
On June 22, 2018, the Company entered
into agreements with institutional investors for a registered direct offering with proceeds of $1.0 million. The Company issued
4 million shares of common stock at a purchase price of $0.25 per share. Additionally, the investors received 2-year Class D-3
warrants to purchase up to 2 million shares of common stock with an exercise price of $0.30 per share.
Debt Conversion
During the year ended December 31, 2018,
the Company converted approximately $6.1 million principal and $0.4 million accrued interest into approximately 32.4 million shares
of common stock at fair value of $8.1 million. The Company recorded an approximate $1.6 million debt extinguishment loss from
the conversion.
Warrants Exercised for Cash
During the year ended December 31, 2018,
the Company issued approximately 10.9 million shares of common stock from the exercise of warrants with an exercise price from
$0.22 to $0.26 for aggregate proceeds of $2.6 million.
Share-settled Debt
During the year ended December 31, 2018,
the Company issued 14.2 million shares of common stock to the holder of the Company’s share-settled debt as advance payment
for future debt conversion. There was no share-settled debt outstanding as of December 31, 2018.
2017 Activities
Equity Financing
On March 17, 2017, the Company entered
into agreements with institutional investors for a registered direct offering with gross proceeds of $7.5 million. The Company
issued 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 5 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, 3 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, and a pre-paid 3 month Class C warrant to purchase up to approximately 10.0 million
shares of common stock with an exercise price of $0.26 per share, of which $0.25 per share was pre-paid at the time of closing
and another $0.01 per share is payable upon exercise of each Class C Warrant. Total warrants issued in March 2017 have value of
approximately $6.2 million.
On April 14, 2017, the Company entered
into Stock Purchase Agreement with multiple investors. The Company issued approximately 1.4 million shares of common stock at
a price of $0.26 per share. The investors received Class A Common Stock Purchase Warrants to purchase up to approximately 1 million
shares of Common Stock at an exercise price of $0.26 per share (the “Class A Warrants”) and Class B Common Stock Purchase
Warrants to purchase up to approximately 1 million shares of Common Stock at an exercise price of $1.00 per share (the “Class
B Warrants”). Both the Class A Warrants and the Class B Warrants are exercisable immediately. The Class A Warrants are exercisable
for five years and the Class B Warrants are exercisable for three months. The Company received gross proceeds of $360,000 from
this offering.
During the three months ended June 30,
2017, the Company entered into Subscription Agreements with multiple investors. The Company issued approximately 3.6 million shares
of common stock at a weighted average price of $0.15 per share. The investors also received approximately an aggregate 3.3 million
warrants at a weighted average exercise price of $0.33 per share. The Company received gross proceeds of $552,000 from this offering.
On September 22, 2017, the Company entered
into a Stock Purchase Agreement with multiple investors. The Company issued approximately 8.7 million shares of common stock at
a price of $0.20 per share. The investors received Class A Common Stock Purchase Warrants to purchase up to approximately 4.4
million shares of Common Stock at an exercise price of $0.22 per share (the “Class A Warrants”). The Class A Warrants
are exercisable immediately and are exercisable for five years. The Company received gross proceeds of $1.8 million (net proceeds
of $1.6 million) from this offering.
During the three months ended September
30, 2017, the Company entered into Subscription Agreements with multiple investors. The Company issued 5.4 million shares of common
stock at a weighted average price of $0.20 per share. The investors also received an aggregate of 5.3 million warrants at a weighted
average exercise price of $0.26 per share. The Company received gross proceeds of $1.1 million from this offering.
During the three months ended September
30, 2017, the Company received an aggregate of $2.6 million from multiple investors as an advance of certain Subscription Agreements
that were entered in November 2017. The Company recorded a $2.6 million shares payable as of September 30, 2017.
On October 20, 2017, the Company sold
2.9 million shares of common stock at a price of $0.17 per share and issued approximately 1.5 million Class D Warrants exercisable
at $0.22 per share for a period of 2 years for an aggregate of $0.5 million.
Debt Conversion
On May 22, 2017, the holders of certain
existing notes converted approximately $2.0 million principal amount and accrued interest for approximately 11 million shares
of its common stock at a price of $0.18 per share and issued to such investors approximately 8 million Class A warrants with exercise
price of $0.26 per share for a period of 5 years and approximately 8 million Class B warrants with exercise price of $1.00 per
share for a period of 90 days. The fair value of common stock and warrant liability as of the conversion date was approximately
$1.8 million and $0.9 million, respectively. The difference of $0.7 million was recorded as a debt extinguishment loss.
On May 31, 2017, the Company and certain
unaffiliated institutional investors (the “Investor”) entered into an Exchange Agreement (the “Exchange Agreement”)
pursuant to which the Investor agreed to exchange $3.0 million of the Company’s 2014 Senior Convertible Notes for 20,628,571
shares of common stock, warrants to acquire up to approximately 16 million shares of common stock at an exercise price of $0.175
per share and exercisable for 2 years from the date of issuance of such warrants, and 800,000 shares of Common Stock. The
fair value of common stock and warrant liability as of the conversion date was approximately $3.9 million and $1.6 million, respectively.
On June 5, 2017, the Company exchanged
approximately $0.5 million principal amount and accrued interest of certain notes held by an unaffiliated investor for approximately
3.3 million shares of its common stock at a price of $0.14 per share and issued to such investors approximately 2.5 million Class
D warrants with exercise price of $0.175 per share for a period of 2 years. The fair value of common stock and warrant liability
as of the conversion date was approximately $0.6 million and $0.3 million, respectively. The difference of $0.4 million was recorded
as a debt extinguishment loss.
During the quarter ended September 30,
2017, the Company induced certain debt holders to convert approximately $5.5 million of principal and interest into approximately
32.9 million shares of common stock at a fair value of approximately $7.8 million. In addition, the Company issued approximately
40.4 million warrants with a weighted average exercise price of $0.48 and a fair value of $4.7 million.
During the quarter ended December 31,
2017, the Company induced certain debt holders to convert approximately $1.0 million of principal and interest into approximately
7.3 million shares of common stock at a fair value of approximately $1.6 million. The Company recorded approximately $0.6 million
debt extinguishment loss.
Warrants Exercised for Cash
During the three months ended March 31,
2017, the Company issued an aggregate of 3.1 million shares of common stock from the exercise of warrants that were issued in
March 2017 for total proceeds of $31,000. All of these 3.1 million shares of common stock were related to extinguishment of warrant
liabilities. The fair value of the warrant liabilities was $713,000 on the date of exercise, which were recorded as a component
of additional paid-in-capital.
During the three months ended June 30,
2017, the Company issued approximately 6.9 million shares of common stock from the exercise of pre-paid warrants that were issued
in March 2017 with an exercise price of $0.26, of which $0.25 was paid in March and $0.01 was paid at the time of exercise, for
proceeds of $69,000 at the time of exercise during the three months ended June 30, 2017. All of these 6.9 million shares
of common stock were related to extinguishment of warrant liabilities. The fair value of the warrant liabilities was approximately
$1.1 million on the date of exercise, which were recorded as a component of additional paid-in-capital.
On August 7, 2017, the Company entered
into a $2.7 million financing with an institutional health care investor holding Class B Warrants exercisable for approximately
13.5 million shares of Common Stock of the Company, in which the investor exercised its Class B Warrants in full in return for
amendment of the investor’s Class B Warrants to reduce the exercise from $1.00 to $0.20 per share, as set forth in a Warrant
Repricing Letter Agreement. The Class B Warrants were originally issued on March 17, 2017 with an exercise period of 90 days,
and the exercise period was previously extended to August 24, 2017. The fair value of the amended Class B Warrants on the amendment
date was approximately $0.3 million using a Black-Scholes model. There was no residual value for the original Class B warrants
as of the amendment date, so the Company recorded $0.3 million as inducement loss.
As consideration for the investor’s
exercise in full of the Class B Warrants, the Company agreed to issue to the investor new Series A Warrants exercisable for the
purchase of 13.5 million shares of the Company’s Common Stock at an exercise price of $0.27 per share, with an exercise
period of 5 years. The Company also issued an aggregate amount of 0.9 million Class A warrants at an exercise price of $0.27 per
share, with an exercise period of 5 years to certain placement agent. The fair value of these 14.5 million warrants were approximately
$2.0 million using a Black-Scholes model, and the Company recorded such cost as inducement loss.
During the three months ended December31,
2017, the Company issued an aggregate of 231,000 shares of common stock from the exercise of warrants that were issued in March
2017 for total proceeds of $60,000. All of these 231,000 shares of common stock were related to extinguishment of warrant liabilities.
The fair value of the warrant liabilities was approximately $45,000 on the date of exercise, which were recorded as a component
of additional paid-in-capital.
Cashless Warrants Exercise
On July 17, 2017, holders of approximately
16 million Class A warrants of the Company exercised such warrants on a cashless basis in exchange for the delivery of approximately
6.9 million shares of the Company’s common stock. The fair value of these Class A warrants was approximately $3.1 million
as of July 17, 2017.
Stock Compensation - 2014 Senior Convertible
Notes
On March 10, 2017, the Company issued
approximately 4 million shares of common stock to the holders of the Company’s $11 million senior convertible notes as additional
consideration to enter into a payment plan and extend the debt payment. The fair value of the common stock on the grant date was
approximately $1.5 million. The Company recorded such cost as a debt extinguishment loss.
During the three months ended June 30,
2017, the Company issued approximately 3 million shares of common stock to the holders of the Company’s $11 million senior
convertible note as additional consideration to extend the debt payment and to enter into a forbearance agreement. The fair value
of the common stock on the grant date was approximately $0.5 million. The Company recorded such cost as a debt extinguishment
loss.
Share-settled Debt
During the year ended December 31, 2017,
the Company issued 11.5 million shares of common stock to convert approximately $1.9 million share-settled debt.
There was approximately $3.3 million outstanding
balance as of December 31, 2017.
Shares for Services
On July 6, 2017, as compensation for services
as a Director, the Company issued 1.3 million shares of its common stock at fair value of $0.18 to a designee of Robert Farmer.
On November 13, 2017, the Company issued
a total of 225,000 shares of Common stock at $0.165 per share to several scientific board members as share-based compensation.
The Company recorded the $37,000 expense in research and development.
Stock Purchase Warrants
The following is a summary of warrant
activity for the years ended December 31, 2018 and 2017 (dollars in thousands, except per share data):
|
|
Number of
|
|
|
Weighted Average
|
|
|
Remaining
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
Outstanding as of January 1, 2017
|
|
|
58,278
|
|
|
$
|
1.78
|
|
|
|
3.86
|
|
Warrants granted
|
|
|
362,240
|
|
|
|
0.36
|
|
|
|
|
|
Warrants exercised for cash
|
|
|
(24,558
|
)
|
|
|
0.11
|
|
|
|
|
|
Cashless warrants exercise
|
|
|
(16,071
|
)
|
|
|
0.20
|
|
|
|
|
|
Warrants expired and cancellation
|
|
|
(59,483
|
)
|
|
|
1.40
|
|
|
|
|
|
Outstanding as of December 31, 2017
|
|
|
320,406
|
|
|
|
0.50
|
|
|
|
2.62
|
|
Warrants granted
|
|
|
75,669
|
|
|
|
0.48
|
|
|
|
|
|
Warrants exercised for cash
|
|
|
(10,936
|
)
|
|
|
0.23
|
|
|
|
|
|
Warrants expired and cancellation
|
|
|
(12,986
|
)
|
|
|
1.33
|
|
|
|
|
|
Outstanding as of December 31, 2018
|
|
|
372,153
|
|
|
$
|
0.29
|
|
|
|
1.97
|
|
13. 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.
Advent
On May 14, 2018, the Company entered into
a DCVax-L Manufacturing and Services Agreement with Advent BioServices, a related party which was formerly part of Cognate and
was spun off separately as part of an institutional financing of Cognate. The Advent Agreement provides for manufacturing of DCVax-L
products for the European region. See Note 9 for more detail. As of December 31, 2018, the Company did not have the power
over the most significant activities (control of operating decisions) and therefore did 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 Advent, if any. Under the Advent Agreement, either party may
terminate at any time upon twelve months’ notice, providing a transition period for technology transfer. Accordingly,
the maximum exposure to loss, if any, is $6 million as of December 31, 2018, which is the minimum twelve-monthly payments the
Company must pay to terminate their relationship with Advent.
14. Commitments and Contingencies
Operating Lease
Office 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 expired on March 31,
2018. On March 30, 2018, the Company entered a renewal agreement to extend the lease until March 31, 2019. Rent expense for the
year ended December 31, 2018 and 2017 were $0.3 million and $0.3 million, respectively. On March 4, 2019, the Company entered
2
nd
Amendment to Office Lease to extend the lease for another 2 years beginning on April 1, 2019.
On
October 28, 2013, the Company entered into a non-cancelable operating lease for 4,251
square feet of office space in Germany, which expired in December 2017. The lease contains
an option with 3 years extension, and a 6 month in advance notice is required. On November
15, 2017, the Company entered a renewal agreement to extend the lease until December
31, 2018. On November 26, 2018, the Company entered another renewal agreement to extend
the lease until December 31, 2019.
On December 30, 2017, the Company assumed
Cognate Bioservices, GmbH lease agreement and entered a settlement with its lessor. The Company paid lessor approximately $479,000
in 6 installments during the year ended December 31, 2018.
On March 26, 2016, the Company entered
into a non-cancelable operating lease for 505 square feet of office space in London, which expired 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. The U.K.
office lease was ended on March 12, 2018 and no further renewal agreement was entered. On September 3, 2018, the Company entered
into another operating lease agreement for office space in London which commenced on November 1, 2018 with term of 6 months. Rent
expense in the U.K. for the year ended December 31, 2018 and 2017 was approximately $61,000 and $151,000, respectively.
Manufacturing Services Agreements
The Company has manufacturing services
agreements with Cognate BioServices in the US, and with Advent BioServices in the U.K.
Advent BioServices
On May 14, 2018, the Company entered into
a DCVax®-L Manufacturing and Services Agreement (“MSA”) with Advent BioServices, a related party which was formerly
part of Cognate BioServices and was spun off separately as part of an institutional financing of Cognate. The Advent Agreement
provides for manufacturing of DCVax-L products for the European region. The Agreement is structured in the same manner as the
Company’s existing Agreements with Cognate BioServices. The Advent Agreement provides for a program initiation payment of
approximately $1.0 million, in connection with technology transfer and operations to the U.K. from Germany, development of new
Standard Operating Procedures (SOPs), training of new personnel, selection of new suppliers and auditing for GMP compliance, and
other preparatory activities. Such initiation payment was fully paid by the Company as of December 31, 2018. The Advent Agreement
provides for certain payments for achievement of milestones and, as is the case under the existing agreement with Cognate BioServices,
the Company is required to pay certain fees for dedicated production capacity reserved exclusively for DCVax production, and pay
for manufacturing of DCVax-L products for a certain minimum number of patients, whether or not the Company fully utilizes the
dedicated capacity and number of patients. Either party may terminate the MSA on twelve months’ notice, to allow for transition
arrangements by both parties.
U.K. Facility
On October 10, 2017, the Company entered
into an agreement to lease to Commodities Centre, a commodity storage and distribution firm domiciled in the U.K., an existing
approximately 275,000 square foot warehouse building on the Company’s property in Sawston, U.K. The term of the lease will
be five years, with the potential for the tenant to discontinue at three years and five months. The tenant will undertake at least
$1.1 million of repairs and improvements to the building in return for five and a half months of free rent (which began upon execution
of the lease and ended on March 24, 2018). Thereafter, the tenant will pay rent at an annualized rate of approximately $1.0 million
for the first year, and thereafter rent at an annualized rate of approximately $1.4 million for each year or partial year for
the rest of the lease term, plus VAT. The tenant will also pay a proportional share of the common costs and the insurance costs
for the overall site. The tenant will pay for its own utilities and other costs for use of the warehouse.
On December 14, 2018, upon closing of
the sale for most of the property in the U.K., including the warehouse building (see note 6), the Company ended the lease agreement
as mentioned above. However, the Company retained lease-back of the approximately 87,000 square foot manufacturing facility for
20 years with a renewal option for another 20 years on favorable terms. The annual rent is approximately $0.6 million. Additionally,
the Company will pay a certain service charge for approximately $45,000 per year for the first 3 years, and approximately $55,000
per year for the next 7 years, and approximately $110,000 per year for the remaining 10 years.
The Company’s future minimum lease
payments are as follows as of December 31, 2018 (in thousands):
|
|
Office Leases
|
|
|
|
|
|
U.K.
|
|
|
|
|
|
|
U.S.
|
|
|
Germany
|
|
|
U.K.
|
|
|
U.K MSA
(1)
|
|
|
Vision Centre
|
|
|
Total
|
|
2019
|
|
$
|
325
|
|
|
$
|
16
|
|
|
$
|
18
|
|
|
$
|
4,814
|
|
|
$
|
681
|
|
|
$
|
5,854
|
|
2020
|
|
|
332
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,814
|
|
|
|
681
|
|
|
|
5,827
|
|
2021
|
|
|
84
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,814
|
|
|
|
681
|
|
|
|
5,579
|
|
2022
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,814
|
|
|
|
691
|
|
|
|
5,505
|
|
2023
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
691
|
|
|
|
691
|
|
Thereafter
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,920
|
|
|
|
10,920
|
|
Total
|
|
$
|
741
|
|
|
$
|
16
|
|
|
$
|
18
|
|
|
$
|
19,256
|
|
|
$
|
14,345
|
|
|
$
|
34,376
|
|
|
(1)
|
Including
lease payments under a lease where Advent is the lessee in 2019. Although the Company
is not a party to this lease, Advent is charging the Company its share of the cost of
this lease on a monthly basis and therefore the Company is including the minimum lease
payments in the above table. The Company included approximately $19.3 million of anticipated
payments to Advent BioServices over the remaining years for manufacturing facilities
under the Manufacturing Services Agreement with Advent
|
U.S. Securities and Exchange Commission
As previously reported, the Company has
received a number of formal information requests (subpoenas) from the SEC regarding several broad topics that have been previously
disclosed, including the Company’s membership on Nasdaq and delisting, related party matters, the Company’s programs,
internal controls, the Company’s Special Litigation Committee, disclosures and the publication of interim clinical trial
data. Testimony of certain officers and third parties has been taken as well. The Company has been cooperating with the SEC investigation.
As hoped, the investigation is winding to a conclusion. After investigation of a broad array of issues over the past two-plus
years, the SEC Staff has informed us preliminarily that they have concerns in regard to two issues, relating to the Company’s
internal controls over financial reporting and the adequacy of certain disclosures made in the past. We have previously
disclosed material weaknesses in our internal controls. As for disclosures, we believe our disclosures complied with applicable
law. Despite our belief that the Staff should close the investigation, there can be no assurance that the Staff will not
recommend some action involving the Company and/or individuals. Given the stage of the process, the Company is unable to provide
a current assessment of the potential outcome or potential liability, if any.
Chardan Capital Markets v. Northwest Biotherapeutics, Inc.
On June 22, 2017, Chardan Capital Markets,
LLC filed a lawsuit against the Company in the United District Court for the Southern District of New York, captioned Chardan
Capital Markets v. Northwest Biotherapeutics, Inc., 1:17-cv-04727-PKC. Chardan alleges that it provided capital placement agent
services to the Company in December 2016 under a contract and that it has not been fully compensated for those services. Chardan
further alleges that it provided additional services to the Company in March 2017 in anticipation of entering into a contract
and that it received no compensation. The operative complaint asserted claims sounding in unjust enrichment, quantum meruit, and
breach of contract, and sought recovery in the amount of $496,000, plus interest and attorneys’ fees and costs. The Company
filed a motion to dismiss the complaint on December 1, 2017. On August 6, 2018, the District Court granted the Company’s
motion to dismiss in its entirety and entered a Judgment dismissing Chardan’s Amended Complaint. On September 5, 2018,
Chardan filed a notice of appeal seeking review of the District Court’s ruling. Chardan’s brief on appeal was
originally due to be filed on or before October 30, 2018, but Chardan did not file its brief on that day. On October 31,
2018, the Clerk of Court of the United States Court of Appeals for the Second Circuit entered an order stating that the “case
is deemed in default” and ordering “that the appeal is dismissed effective November 14, 2018 if the brief and any
required appendix are not filed by that date.” Chardan did not file its brief and appendix on or before November 14,
2018. Accordingly, Chardan’s appeal has been dismissed by force of the October 31, 2018 order of the Court of Appeals.
15. 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, 2018 and 2017 are comprised of the following (in thousands):
|
|
As of December 31, 2018
|
|
|
As of December 31, 2017
|
|
|
|
|
|
|
|
|
Deferred tax asset
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
170,087
|
|
|
$
|
153,415
|
|
Research and development credit carry forwards
|
|
|
16,377
|
|
|
|
15,426
|
|
Stock based compensation and other
|
|
|
14,216
|
|
|
|
9,814
|
|
Total deferred tax assets
|
|
|
200,680
|
|
|
|
178,655
|
|
Valuation Allowance
|
|
|
(200,680
|
)
|
|
|
(178,655
|
)
|
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, 2018, the Company had
Federal and State net operating loss carry forwards for income tax purposes of approximately $599.3 million and unused research
and development tax credits of approximately $16.4 million available to offset future taxable income and income taxes, respectively,
expiring in 2018 through 2037. The Company has foreign net operating loss carry forwards of $30.5 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 Company’s tax years are still open under
statute from 2015 to present, although net operating loss carryovers from prior tax years are subject to examination and adjustments
to the extent utilized in future years.
During 2018 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,
2018 and 2017.
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)
|
|
As of December 31, 2018
|
|
|
As of December 31, 2017
|
|
Statutory federal income tax rate
|
|
|
21.0
|
%
|
|
|
34.0
|
%
|
State taxes, net of federal tax benefit
|
|
|
9.1
|
%
|
|
|
4.0
|
%
|
Tax rate differential on foreign income
|
|
|
-0.4
|
%
|
|
|
-0.4
|
%
|
Derivative gain or loss
|
|
|
10.7
|
%
|
|
|
-1.2
|
%
|
Cancellation of shares
|
|
|
0.0
|
%
|
|
|
0.2
|
%
|
Cancellation of warrants
|
|
|
0.0
|
%
|
|
|
-0.2
|
%
|
Other permanent items and true ups
|
|
|
0.5
|
%
|
|
|
-8.6
|
%
|
R&D Credit
|
|
|
2.7
|
%
|
|
|
0.7
|
%
|
Change in rate
|
|
|
17.9
|
%
|
|
|
-107.0
|
%
|
Change in valuation allowance
|
|
|
-61.5
|
%
|
|
|
78.5
|
%
|
Income tax provision (benefit)
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
As of December 31, 2018
|
|
|
As of December 31, 2017
|
|
Federal
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
|
|
|
(10,688
|
)
|
|
|
59,454
|
|
State
|
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
|
-
|
|
Deferred
|
|
|
(9,469
|
)
|
|
|
(2,911
|
)
|
Foreign
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
(1,868
|
)
|
|
|
924
|
|
Change in valuation allowance
|
|
|
22,025
|
|
|
|
(57,467
|
)
|
Income tax provision (benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
ASC 740 prescribes a recognition threshold
and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken
in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination
by taxing authorities. As of December 31, 2018, and 2017, there were no uncertain tax positions. The Company’s policy for
recording interest and penalties associated with uncertain tax positions is to record such expense as a component of income tax
expense. There were no amounts accrued for penalties or interest during the year ended December 31, 2018. Management is currently
unaware of any issues under review that could result in significant payments, accruals or material deviations from its position.
On December 22, 2017, legislation commonly
known as the Tax Cuts and Jobs Act, or the Tax Act, was signed in to law. The legislation significantly changes U.S. tax law by,
among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax
on deemed repatriated earnings of foreign subsidiaries. The Tax Act permanently reduces the U.S. corporate income tax rate to
21% from the existing applicable rate of 34%, effective January 1, 2018. As a result, the Company has recorded a decrease
to its deferred tax assets of $78.3 million and to valuation allowance of $78.3 million for the year ended December
31, 2017. The Tax Act also permits an indefinite carry forward of net operating losses generated in taxable
years ending after December 31, 2017, subject to a utilization limitation of 80% of taxable income.
As of December 31, 2018, the Company
completed its accounting for the tax effects of enactment of the Tax Act. The Tax Act did not have a material impact on the financial
statements since the Company’s deferred temporary differences in the United States are fully offset by a valuation allowance
and the Company does not have any significant off shore earnings from which to record the mandatory transition tax.
16. Subsequent Events
Between January 2019 and March 2019, the
Company converted debt of approximately $2.0 million principal and $125,000 accrued interest into approximately 10.9 million shares
of common stock at fair value of $2.8 million. The Company recorded an approximate $0.9 million debt extinguishment loss from
the conversion.
In March 2019, the Company issued 3.0
million shares of common stock from warrants exercised for cash. The Company received $688,000 cash.