NWBO Northwest Biotherapeutics Inc (QB)

NORTHWEST BIOTHERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share and per share amounts)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

1. Organization and Description of Business

Northwest Biotherapeutics, Inc. and its wholly owned subsidiaries NW Bio Gmbh, and Aracaris Capital, Ltd (collectively, the “Company”, “we”, “us” and “our”) were organized to discover and develop innovative immunotherapies for cancer.

The Company is developing an experimental dendritic cell vaccine using its platform technology known as DCVax. DCVax is currently being tested for use in the treatment of certain types of cancers.

Cognate BioServices, Inc. (“Cognate BioServices”), which is a company related by common ownership (Note 9), provides the Company with mission critical contract manufacturing services, research and development services, distribution and logistics, and related services, in compliance with the Company’s specifications and the applicable regulatory requirements for clinical grade cellular products. The Company and Cognate BioServices are currently parties to a series of contracts providing for these services as more fully described below. The Company is dependent on Cognate BioServices to provide the manufacturing services, and any interruption of such services could potentially have a material adverse effect on the Company’s ability to proceed with its clinical trials. Cognate BioServices’ manufacturing facility for clinical-grade cellular products is located in Memphis, Tennessee. In addition, a Cognate affiliate in the UK (which was formerly part of Cognate BioServices, and is now known as Advent BioServices) is preparing for production of DCVax-L products there. The Company and Advent are in the process of developing contract arrangements for manufacturing and related services for the U.K. and Europe.

Although there are many contract manufacturers for small molecule drugs and for biologics, there are only a few contract manufacturers in the U.S., and even fewer in Europe, that specialize in producing living cell products and that have a track record of success with regulatory authorities. The manufacturing of living cell products is highly specialized and entirely different than production of biologics: the physical facilities and equipment are different, the types of personnel and skill sets are different, and the processes are different. The regulatory requirements relating to manufacturing and cellular products are especially challenging and are one of the most frequent reasons for the development of a company’s cellular products to be put on clinical hold (i.e., stopped by regulatory authorities).

In addition, the Company’s programs require a large amount of capacity in these specialized manufacturing facilities. The Company’s products are fully personalized and not made in standardized batches: the Company’s products are made on demand, patient by patient, on an as needed basis.

2. Liquidity, Financial Condition and Management Plans

During the nine months ended September 30, 2017 and 2016, the Company used approximately $21.7 million and $41.6 million of cash in its operating activities, respectively. The expenditures in 2017 have included substantial payments for expenses previously incurred in connection with the Phase III clinical trial of DCVax-L.

During the nine months ended September 30, 2017, the Company raised approximately $24.9 million in equity and debt securities to fund its operations, and raised an additional $5 million from a third party who retired the 2014 Notes on the Company’s behalf (see Note 7 for further details). As expected for a company that is pre-revenue, the Company incurred a net loss of $23.3 million and $46.1 million for the three and nine months ended September 30, 2017, respectively. The Company had current assets of $2.1 million and a working capital deficit of approximately $79 million at September 30, 2017. The Company owed an aggregate of $27.8 million of trade liabilities to certain related parties as of September 30, 2017 (after waiver by such related parties of $3.75 million related to certain payables, which was owed to them by the Company), based on invoicing to date while the Company and Cognate were negotiating an overall settlement of amounts owed for 2016 and 2017. Subsequent to September 30, 2017, the parties reached an agreement in principle for settlement of the overall amounts due, which the reduced the amounts that would otherwise have been owed under the contracts between the parties. The parties are now in the process of drafting and executing the agreement.

The Company has not yet generated any material revenue from the sale of its products and is subject to all of the risks and uncertainties that are typically faced by biotechnology companies that devote substantially all of their efforts to R&D and clinical trials and do not yet have commercial products. The Company expects to continue incurring losses for the foreseeable future. The Company’s existing liquidity is not sufficient to fund its operations, anticipated capital expenditures, working capital and other financing requirements until the Company reaches significant revenues.  Until that time, the Company will need to obtain additional equity and/or debt financing, especially if the Company experiences downturns in its business that are more severe or longer than anticipated, or if the Company experiences significant increases in expense levels resulting from being a publicly-traded company or from expansion of operations.  If the Company attempts to obtain additional equity or debt financing, the Company cannot assume that such financing will be available to the Company on favorable terms, or at all.

Because of recurring operating losses, net operating cash flow deficits, and an accumulated deficit, there is substantial doubt about the Company’s ability to continue as a going concern. The Company has operated with going concern determinations throughout more than a decade, and so the condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  The Company did 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 unaudited condensed consolidated interim financial statements include the accounts of the Company and its subsidiaries. All material intercompany balances and transactions have been eliminated. Certain immaterial reclassifications have been made to prior period amounts to conform to the current period presentation.

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and on the same basis as the Company prepares its annual audited consolidated financial statements. The condensed consolidated balance sheet as of September 30, 2017, condensed consolidated statements of operations for the three and nine months ended September 30, 2017 and 2016, condensed consolidated statements of comprehensive loss for the three and nine months ended September 30, 2017 and 2016, condensed consolidated statement of stockholders’ equity (deficit) for the nine months ended September 30, 2017, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2017 and 2016 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented. The results for the three and nine months ended September 30, 2017 are not necessarily indicative of results to be expected for the year ending December 31, 2017 or for any future interim period. The condensed consolidated balance sheet at December 31, 2016 has been derived from audited financial statements; however, it does not include all of the information and notes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2016, and notes thereto included in the Company’s annual report on Form 10-K, which was filed with the SEC on April 17, 2017.

Use of Estimates

In preparing condensed consolidated financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of expenses during the reporting period. Due to inherent uncertainty involved in making estimates, actual results reported in future periods may be affected by changes in these estimates. On an ongoing basis, the Company evaluates its estimates and assumptions. These estimates and assumptions include valuing equity securities in share-based payment arrangements, valuing environmental liabilities, estimating the fair value of financial instruments recorded as derivative liabilities, and estimating the useful lives of depreciable assets and whether impairment charges may apply.

Warrant Liability

The Company accounts for certain common stock warrants outstanding as a liability at fair value and adjusts the instruments to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company's statements of operations. The fair value of the warrants issued by the Company has been estimated using Monte Carlo simulation and or a Black Scholes model.

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.

Environmental Remediation Liabilities

The Company records environmental remediation liabilities for properties acquired. The environmental remediation liabilities are initially recorded at fair value. The liability is reduced for actual costs incurred in connection with the clean-up activities for each property. Upon completion of the clean-up, the environmental remediation liability is adjusted to equal the fair value of the remaining operation, maintenance and monitoring activities to be performed for the property. The amount of the additional liability resulting from the completion of the clean-up, if any, would be included in other income (expense). As of September 30, 2017, the Company estimated that the total environmental remediation costs associated with the purchase of the UK Facility will be approximately $6.2 million. This is a projected potential future cost. No such environmental costs have been incurred to date and none are in the upcoming twelve months or on a long-term basis. Contamination clean-up costs that improve the property from its original acquisition state will be capitalized as part of the property’s overall development costs. The Company engaged a third-party specialist to conduct certain surveys of the condition of the property which included, among other things, a preliminary analysis of potential environmental remediation exposures. The Company determined, based on information contained in the specialist’s report, that it would be required to estimate the fair value of an unconditional obligation to remediate specific ground contamination at an estimated fair value of approximately $6.2 million. The Company computed the fair value of this obligation using a probability weighted approach that measures the likelihood of the following two potential outcomes: (i) a higher probability requirement of erecting a protective barrier around the affected area at an estimated cost of approximately $4.5 million, and (ii) a lower probability requirement of having to excavate the affected area at an estimated cost of approximately $32.0 million. The Company’s estimate is preliminary and therefore subject to change as further studies are conducted, and as additional facts come to the Company’s attention. Environmental remediation efforts are complex, technical and subject to various uncertainties. Accordingly, it is at least reasonably possible that any changes in the Company’s estimate could materially differ from the management’s preliminary assessment discussed herein.      

Comprehensive Loss

The Company reports comprehensive loss and its components in its condensed consolidated financial statements. Comprehensive loss consists of net loss and foreign currency translation adjustments, affecting stockholders’ equity (deficit) that, under U.S, GAAP, are excluded from net loss.

Research and Development Costs

Research and development costs are charged to operations as incurred and consist primarily of clinical trial costs, related party manufacturing costs, consulting costs, contract research and development costs, clinical site costs and compensation costs. 

Significant Accounting Policies

There have been no material changes in the Company’s significant accounting policies to those previously disclosed in the 2016 Annual Report.

Adoption of Recent Accounting Pronouncements  

Compensation-Stock Compensation

In March 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting . Under ASU No. 2016-09, companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement and the APIC pools will be eliminated. In addition, ASU No. 2016-09 eliminates the requirement that excess tax benefits be realized before companies can recognize them. ASU No. 2016-09 also requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. Furthermore, ASU No. 2016-09 will increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. An employer with a statutory income tax withholding obligation will now be allowed to withhold shares with a fair value up to the amount of taxes owed using the maximum statutory tax rate in the employee’s applicable jurisdiction(s). ASU No. 2016-09 requires a company to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on the statement of cash flows. Under current U.S. GAAP, it was not specified how these cash flows should be classified. In addition, companies will now have to elect whether to account for forfeitures on share-based payments by (1) recognizing forfeitures of awards as they occur or (2) estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, as is currently required. These aspects of ASU 2016-09 are effective for reporting periods beginning after December 15, 2016, with early adoption permitted provided that all of the guidance is adopted in the same period. The Company’s adoption of ASU No. 2016-09 on January 1, 2017 did not have a material impact on its condensed consolidated financial statements and related disclosures. In accordance with the adoption of ASU No. 2016-09, the Company will record forfeitures, if any, when such forfeitures occur.

Recent Issued Accounting Pronouncements

Compensation-Stock Compensation

In May 2017, the FASB issued ASU 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. It is effective prospectively for the annual period ending December 31, 2018 and interim periods within that annual period. Early adoption is permitted. The Company is currently evaluating the impact of adopting this standard on the condensed consolidated financial statements and disclosures, but does not expect it to have a significant impact.

Accounting for Certain Financial Instruments with Down Round Features

On July 13, 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 . 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 will be evaluating the impact of adopting this standard on the condensed consolidated financial statements and disclosures.

4. Fair Value Measurements

Derivative Warrants Granted in 2017

During the nine months ended September 30, 2017, the Company issued approximately 192 million warrants (the “Warrants”) to multiple investors (the “Holders”). Since the Company’s adoption of a sequencing policy (see Note 3), the warrants were classified as liabilities and measured at fair value on the grant date, with changes in fair value recognized as other income on the statements of operations and disclosed in the financial statements.

A summary of weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring warrants granted during the nine months ended September 30, 2017 is as follows:

Embedded Conversion Features

A summary of weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring embedded conversion features at inception for convertible notes issued during the nine months ended September 30, 2017 is as follows:

The following table classifies the Company’s liabilities measured at fair value on a recurring basis into the fair value hierarchy as of September 30, 2017 and December 31, 2016 (in thousands):

There were no transfers between Level 1, 2 or 3 during the nine-month period ended September 30, 2017.

The following table presents changes in Level 3 liabilities measured at fair value for the nine-month period ended September 30, 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).

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 September 30, 2017 and December 31, 2016 is as follows:

5. Property & Equipment and Construction in Progress

Property and equipment consist of the following at September 30, 2017 and December 31, 2016 (in thousands):

* Construction in progress includes both the land acquisition costs and the building costs.

Depreciation expense was approximately $41,000 and $55,000 for the three months ended September 30, 2017 and 2016. Depreciation expenses were approximately $141,000 and $135,000 for the nine months ended September 30, 2017 and 2016.

6. Stock-based Compensation

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 Options granted to Dr. Bosch and Dr. Boynton are subject to vesting requirements. 50% of the Options vested on the grant date, and 50% will vest 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.

The following table summarizes stock option activities for the Company’s option plans for the nine months ended September 30, 2017 (amount in thousands, except per share number):

The following assumptions were used to compute the fair value of stock options granted during the nine months ended September 30, 2017:

The weighted average grant date fair value was approximately $0.7 million and the unrecognized compensation cost was approximately $0.2 million as of September 30, 2017, and will be recognized over the next 1.8 years.

The Company recorded stock based compensation expense of approximately $0.4 million and $0.5 million, which was included as part of research and development expenses for the three and nine months ended September 30, 2017, respectively.

7. Outstanding Debt

The following table summarizes outstanding debt as of September 30, 2017 and December 31, 2016, respectively (amount in thousands, except per share data):

Goldman Notes

During the nine months ended September 30, 2017, Leslie J. Goldman, an officer of the Company, loaned the Company an aggregate amount of $1,334,000 pursuant to certain Demand Promissory Note Agreements (the “Goldman Notes”). $470,000 of the Goldman Notes bore interest at the rate of 12% per annum, and $864,000 of the Goldman Notes bore interest at the rate of 10% per annum.

During the nine months ended September 30, 2017, the Company made an aggregate principal payment of $955,000 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 $350,000 outstanding debt incurred during the year ended December 31, 2016.

The outstanding principal amount for Goldman Notes was $689,000 as of September 30, 2017.

Toucan Notes

During the nine months ended September 30, 2017, Toucan Capital Fund III loaned the Company an aggregate amount of $1,170,000 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 nine months ended September 30, 2017, the Company repaid approximately $688,000 of the Toucan Notes.

The outstanding principal amount for Toucan Notes was $482,000 as of September 30, 2017.

Board of Directors Notes

During the nine months ended September 30, 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.

The mortgage loan was originally due in November 2017 and has been renewed for an additional one year until November 16, 2018.

Due to the Nasdaq delisting on December 19, 2016, the term of the 2014 Convertible Senior Notes (the “2014 Notes”) Indenture required the Company to offer to repurchase the entire principal and all remaining interest through the Notes’ original maturity date. The debt holders (the “Holders”) accepted the offer, and the Company was required to repurchase the entire 2014 Notes on March 10, 2017. 

The full repurchase of $11 million of 2014 Notes, as well as $660,000 of interest payments and cash and stock forbearance payments were completed during the nine months ended September 30, 2017, through a series of transactions.

During the nine months ended September 30, 2017, the Company entered into multiple agreements to extend the date for payment of the 2014 Notes to June 20, 2017. As an additional consideration to the Holders to delay the 2014 Notes repayment, the Company issued the Holders an aggregate 7.1 million common stock. The total forbearance charge of $2.6 million was recorded as a debt extinguishment loss and was based upon the fair value of the common stock of $2.1 million on the grant date and cash payments of $0.5 million.

During the nine months ended September 30, 2017, the Company repaid in cash $3.0 million of principal of the 2014 Notes, and repaid an additional $3.0 million of principal in common stock and warrants, and $5 million of principal of the 2014 Notes was repurchased by the investor pursuant to an Exchange Agreement and Note Agreement, as described below.

2017 Secured Convertible Notes

On June 21, 2017, an unaffiliated investor (the “Investor”) agreed to purchase $5.0 million of the 2014 Notes from the Holders, pursuant to a Purchase Agreement (the “Purchase Agreement”).

Also on June 21, 2017, the Company and the Investor entered into an Exchange Agreement (the “Exchange Agreement”) pursuant to which the Investor agreed to exchange its $5.0 million of the 2014 Note for new convertible notes (the “2017 Notes”) with an aggregate principal amount of approximately $5.6 million, inclusive of original issue discount of approximately 9%. The Company and the Investor also entered another secured convertible note with an aggregate principal amount of approximately $355,000, inclusive of original issue discount of approximately 9%, for $204,000 in cash. Total debt outstanding as of September 30, 2017 was $5.4 million under the 2017 Secured Convertible Notes.

The 2017 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 2017 Notes are secured by the property owned by the Company in the U.K., and not by any other assets of the Company. The 2017 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. The transaction was accounted for as a debt extinguishment. The Company recorded an approximate $1.8 million embedded conversion feature on the 2017 Notes as part of debt discount on the issuance date.

On August 4, 2017, the Company induced the holder to convert $650,000 principal of the 2017 Notes into approximately 3.3 million shares of common stock at fair value of $0.24. In addition, the Company also issued approximately 1.6 million warrants with an exercise price of $0.23 and 1.6 million warrants with an exercise price of $0.30. The aggregate fair value of these 3.2 million warrants was approximately $0.4 million using a Black-Scholes model. The Company also reversed approximately $108,000 of embedded derivative liabilities and a $256,000 unamortized debt discount associated with the 2017 Notes. The Company recorded approximately $668,000 debt extinguishment loss from this conversion.

8. Net Loss per Share Applicable to Common Stockholders

Basic loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the reporting period. Diluted loss per common share is computed similar to basic loss per common share except that it reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock.

The following 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): 

9. Related Party Transactions

Cognate BioServices, Inc.

Cognate Expenses and Accounts Payable

At September 30, 2017 and December 31, 2016, the Company owed Cognate $27.8 million (after waiver of $3.75 million by Cognate as described below) and $23.4 million, respectively, for unpaid invoices for manufacturing and related services, based on Cognate invoicing to date. The Company and Cognate have been negotiating an overall settlement for amounts owed to Cognate for 2016 and 2017, to reduce the amounts otherwise due under the contracts, and subsequent to September 30, 2017 reached an agreement in principle. The parties are now in the process of drafting and executing the agreement.

During the nine months ended September 30, 2017, Cognate waived its right to receive payment of $3.75 million in connection with certain payables, which was owed to Cognate by the Company as of December 31, 2016 and March 31, 2017. Following this waiver, the Company owed Cognate $27.8 million for unpaid invoices as of September 30, 2017. 

Overall, for the three months ended September 30, 2017 and 2016, the Company incurred research and development costs related to Cognate BioServices of $7.8 million and $18.2 million, respectively, relating to the DCVax-L and DCVax-Direct programs, product and process development work and preparations for upcoming Phase II trials. 

Overall, for the nine months ended September 30, 2017 and 2016, the Company incurred research and development costs related to Cognate BioServices of approximately $13.0 million and $34.8 million, respectively, relating to the DCVax-L and DCVax-Direct programs, product and process development work and preparations for upcoming Phase II trials, based on Cognate invoicing to date.  The substantial reduction in costs related to Cognate BioServices relates in part to reduction in clinical trial related activity, in part to an arrangement being tested under which the Company would no longer have capacity dedicated to its programs and instead would have to arrange for advance scheduling in regard to each patient individually, and in part to negotiations that were under way between the Company and Cognate for an overall settlement for amounts owed to Cognate for 2016 and 2017. While the negotiations were under way and pending a final determination of amounts, for the first two quarters of this year only, Cognate invoiced a reduced portion of the contract amounts. Subsequent to September 30, 2017, the parties reached an agreement in principle for settlement of the overall amounts due from the Company to Cognate for 2017. The parties are now in the process of drafting and executing the agreement.

Cognate Organization

Pursuant to an institutional financing of Cognate in October 2016, Cognate’s operations outside the US were separated from its operations in the US. The operations outside the US include Cognate BioServices GmbH in Germany, Advent BioServices, Ltd (formerly called Cognate BioServices Ltd.) in the UK, and Cognate Israel in Israel. As a result of the separation, the Cognate affiliates outside the US are now owned by Toucan Capital Fund III, as is Cognate US. The Cognate affiliates in Germany and Israel are in the process of being wound down, and manufacturing and related activities are being expanded and consolidated in the U.K. The Company is in the process of establishing contract arrangements for the U.K. operations. Approximately $1.3 and $3.7 million of the total research and development cost related to Cognate entities outside the US are included in the overall amounts reported with respect to Cognate for the three and nine months ended September 30, 2017, respectively.

Other Related Parties

Leslie J. Goldman - Demand Loans

During the nine months ended September 30, 2017, Leslie J. Goldman, an officer of the Company, loaned the Company an aggregate amount of $1,334,000 pursuant to certain Demand Promissory Note Agreements (the “Goldman Notes”). $470,000 of the Goldman Notes bore interest at the rate of 12% per annum, and $864,000 of the Goldman Notes bore interest at the rate of 10% per annum.

During the nine months ended September 30, 2017, the Company made an aggregate principal payment of $955,000 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 $350,000 outstanding debt incurred from the year ending December 31, 2016.

The outstanding principal amount for Goldman Notes was $689,000 as of September 30, 2017.

Toucan Capital III Fund - Demand Loans

During the nine months ended September 30, 2017, Toucan Capital Fund III loaned the Company an aggregate amount of $1,170,000 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 nine months ended September 30, 2017, the Company repaid approximately $688,000 of the Toucan Notes.

The outstanding principal amount for Toucan Notes was $482,000 as of September 30, 2017.

Various Related Parties - Demand Loans

During the nine months ended September 30, 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.

10. Stockholders’ Equity (Deficit)

Common Stock Issuances

First Quarter of 2017

Public Offering

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.

Warrants Exercised for Cash

During the quarter 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.

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.

Share-settled Debt

On March 30, 2017, the Company issued 2.5 million shares of common stock to the holder of the Company’s share-settled debt (the “Holder”) as advance payment for future debt conversion. The fair value of the remaining share-settled debt will be reduced when the Company is notified by the Holder of the value at which the shares have been sold.

Second Quarter of 2017

Public and Private Offering

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.

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.

Warrants Exercised for Cash

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.

Stock Compensation - 2014 Senior Convertible Notes

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

On June 14, 2017, the Company issued 1 million shares of common stock to the holder of the Company’s share-settled debt (the “Holder”) as advance payment for future debt conversion. The fair value of the remaining share-settled debt will be reduced when the Company is notified by the Holder of the value at which the shares have been sold.

Third Quarter of 2017

Public and Private 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.

Warrants Exercised for Cash and Warrants Modification

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.

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 were approximately $3.1 million as of July 17, 2017.

Debt Conversions

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.

Share-settled Debt

During the quarter ended September 30, 2017, the Company issued 3.5 million shares of common stock to the holder of the Company’s share-settled debt as advance payment for future debt conversion. The fair value of the remaining share-settled debt will be reduced when the Company is notified by the Holder of the value at which the shares have been sold.

As of September 30, 2017, the outstanding share-settled debt was approximately $4.0 million.

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.

11. Variable Interest Entities

Variable Interest Entities (“VIEs”) are entities in which equity investors lack the characteristics of a controlling financial interest.  VIEs are consolidated by the primary beneficiary.  The primary beneficiary is the party who has both the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the entity. 

After the assumption of $5.7 million in debt originally incurred by Cognate in October 2016 the Company had an implicit variable interest in Cognate to potentially fund Cognate’s losses (if Cognate incurs losses).  The Company determines whether it is the primary beneficiary of Cognate upon its initial involvement and the Company reassess whether it is the primary beneficiary of Cognate on an ongoing basis.  The determination of whether the Company is the primary beneficiary of Cognate is based upon the facts and circumstances and requires significant judgment.  The Company’s considerations in determining Cognate’s most significant activities and whether the Company has power to direct those activities include, but are not limited to, Cognate’s purpose and design and the risks passed through to investors, the equity ownership and voting interests of Cognate, management, service and/or other agreements of Cognate, involvement in Cognate’s initial design and the existence of explicit or implicit financial guarantees.  As of September 30, 2017, the Company does not have the power over the most significant activities (control of operating decisions) and therefore does not meet the "power" criteria of the primary beneficiary.

The maximum exposure to loss is limited to the notional amounts of the implicit variable interest in Cognate.  The Company has no current plans to provide any support additional to that which is noted above.  Therefore, the maximum exposure to loss from its implicit interest is limited to $4.5 million as of September 30, 2017; which is the shutdown fee the Company must pay to terminate their relationship with Cognate.

12. Commitments and Contingencies

Contingent Payment to Cognate BioServices

Under the January 17, 2014 DCVax®-L Manufacturing Services Agreement and the DCVax-Direct Agreement, a new set of provisions apply going forward to any shut down or suspension.  Under these provisions, the Company will be contingently obligated to pay certain fees to Cognate BioServices (in addition to any other remedies) if the Company shuts down or suspends its DCVax-L program or DCVax-Direct program.  For a shutdown or suspension of the DCVax-L program, the fees will be as fol l ows:

For a shutdown or suspension of the DCVax-Direct program, the fees will be as follows:

As of September 30, 2017, none of the above fees were triggered; however, the Company and Cognate discussed these fee provisions as part of an ongoing negotiation to determine the overall amounts to be paid for 2016 and 2017. Subsequent to September 30, 2017, the parties reached an agreement in principle for settlement of the overall amounts due from the Company to Cognate for 2017 which involves a reduction of the amounts that would otherwise be due under the contracts and includes suspension fees for the DCVax-L and DCVax-Direct programs.

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. The Company and Cognate are testing an arrangement under which the Company would no longer have capacity dedicated to its programs and instead would have to arrange for advance scheduling in regard to each patient individually. In addition, the Company and Cognate are in the process of negotiating an overall settlement of amounts owed to Cognate for 2016 and 2017.

Derivative and Class Action Litigation

On June 19, 2015, two purported shareholders filed a lawsuit in the Delaware Court of Chancery, captioned Tharp, et al. v. Cognate, et al. , C.A. 11179-VCG (Del. Ch. filed June 19, 2015), purportedly suing on behalf of a class of similarly situated shareholders and derivatively on behalf of the Company. The lawsuit named Cognate BioServices, Inc., Toucan Partners, Toucan Capital Fund III, our CEO Linda Powers and the individuals who then served on the Company’s Board of Directors as defendants, and named the Company as a “nominal defendant” with respect to the derivative claims. The complaint generally challenged certain transactions between the Company and Cognate and the Toucan entities, in which Cognate and the Toucan entities provided services and financing to the Company, or agreed to the conversion of debts owed to them by the Company into equity. The complaint sought unspecified monetary relief for the Company and the plaintiffs, and various forms of equitable relief, including disgorgement of allegedly improper benefits, rescission of the challenged transactions, and an order forbidding similar transactions in the future. After considerable litigation and negotiations, the parties reached an agreement to settle the case, along with the Yonemura case, discussed below. On October 17, 2017, the court entered a final order and judgment approving the settlement.

On November 19, 2015, a third purported shareholder filed a lawsuit in the U.S. District Court for the District of Maryland, captioned Yonemura v. Powers, et al. , No. 15-03526 (D. Md. filed Nov. 19, 2015), claiming to sue derivatively on behalf of the Company. The complaint names the individuals who then served on the Company’s Board of Directors, Toucan Capital Fund III, L.P., Toucan General II, LLC, Toucan Partners, LLC, and Cognate as defendants, and names the Company as a nominal defendant. The complaint generally challenges the same transactions disputed in the Delaware case, claiming that the Company purportedly overcompensated Cognate and Toucan for certain services and loans in payments of stock, and that the Company’s CEO, Ms. Powers, benefited from these transactions with Cognate and Toucan, which she allegedly owns or controls. The complaint asserts that the alleged overpayments unjustly enriched Ms. Powers, Toucan, and Cognate; that the Company’s directors breached their fiduciary duties of loyalty and good faith to the Company by authorizing the payments to Cognate; and that Ms. Powers, Cognate, and Toucan aided and abetted the directors’ breaches of fiduciary duties. The plaintiff sought an award of unspecified damages to the Company and equitable remedies, including disgorgement by Ms. Powers, Toucan, and Cognate of the allegedly improper benefits received as a result of the disputed transactions. The plaintiff also sought costs and disbursements associated with bringing suit, including attorneys’ fees and expert fees. As discussed above, the parties have agreed to settle the Yonemura case along with the Tharp case; the Stipulation and Agreement of Compromise and Settlement thus addresses the claims in both lawsuits. The proceedings in the Yonemura case are currently stayed, and the plaintiff in Yonemura has agreed to dismiss that case on or before November 23, 2017.

On November 28, 2016, a purported shareholder filed a lawsuit in the Circuit Court for Montgomery County, Maryland, captioned Wells v. Powers, et al. , Case No. 427353-V (Md. Cir. Ct., Mont. Cnty. filed Nov. 28, 2016), claiming to sue derivatively on behalf of the Company. The complaint names six current and former members of the Company’s Board of Directors, Toucan Partners, LLC, Toucan Capital Fund III, L.P., Toucan Partners, LP (a non-existent entity), Toucan General II, LLC, and Cognate as defendants, and names the Company as a nominal defendant. The complaint largely challenges the same transactions disputed in the two cases discussed above, claiming that the Company overcompensated Cognate and Toucan for certain services and loans. It asserts that, by authorizing those transactions, the individual defendants breached their fiduciary duties to the Company, abused their ability to control and influence the Company, and engaged in gross mismanagement of the Company’s business and assets. In addition, the complaint claims that the individual defendants are liable to the Company for misleading its investors and financiers. The complaint claims that the individual defendants were unjustly enriched by receiving compensation while the Company’s stock price was allegedly artificially inflated; that Ms. Powers, Toucan, and Cognate are “controlling” stockholders of the Company who breached their fiduciary duties to minority stockholders; that Ms. Powers, Toucan, and Cognate, benefited from these transactions due to their alleged “control”; that the alleged overpayments unjustly enriched Ms. Powers, Toucan, and Cognate; and that Toucan and Cognate aided and abetted the individual defendants in breaching their fiduciary duties. The plaintiff sought the award of unspecified damages to the Company; an order from the court directing the Company to reform its corporate governance and internal procedures; and equitable remedies, including restitution and disgorgement from defendants. The plaintiff also seeks the costs and disbursements associated with bringing suit, including attorneys’ fees, costs, and expenses. After considerable litigation and negotiations, the parties reached an agreement to settle the case. On October 6, 2017, the parties submitted a Stipulation and Agreement of Settlement, which the court preliminarily approved on November 6, 2017. A hearing is currently scheduled for January 3, 2018, at which the court is expected to consider, among other things, whether to grant final approval of the proposed settlement.

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 and the Company’s Special Litigation Committee. Testimony of certain officers and third parties has been taken as well. The Company is cooperating with the SEC investigation and is hopeful that it is reaching its final stages.

Special Litigation Committee

As previously reported, the Company appointed a Special Litigation Committee, and Committee has undertaken an inquiry into the allegations of various lawsuits filed against the Company, and an anonymous internet report raising a number of criticisms of the Company and its Board and management, including with respect to the reasonableness of the transactions with Cognate. The Committee has retained experts to analyze some of these issues.

13. Subsequent Events

Public and Private Offering

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 Modification

In October and November, 2017, the Company entered into multiple Exchange Agreements with an existing debt holder (the “Holder”). The Holder agreed to exchange his existing promissory notes with an aggregate original principal amount of $2.2 million for a new promissory note (the “Exchange Note”) in the principal amount of $2.4 million. The Exchange Note bore interest at 8% per annum and will be due in September 2018 and December 2018.

U.K. Lease

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 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.