(Former Name, Former Address and Former Fiscal
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common stock, par value $0.001 per share
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has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
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filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's
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The aggregate market value of the voting and
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the registrant had 414,665,188 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 in an ongoing Phase III trial
for newly diagnosed Glioblastome multiforme (GBM). 331 patients have been enrolled in the trial, and enrollment is closed. The
Company is also working on preparations for Phase II trials of DCVax-L for other indications.
Our second product, DCVax®-Direct,
is designed to treat inoperable solid tumors. A 40-patient Phase I trial has been completed, and included treatment of a diverse
range of cancers. The Company is working on preparations for Phase II trials of DCVax-Direct.
The DCVax Technology
Our platform technology,
DCVax, is a personalized immune therapy which consists of a therapeutic vaccine that uses a patient's own dendritic cells, or DCs,
the master cells of the immune system, as the therapeutic agent. The patient’s DCs are obtained through a blood draw, or
leukapheresis. The DCs are then activated and loaded with biomarkers (“antigens”) from the patient’s own tumor.
For DCVax-L, the antigen loading process takes place during the manufacturing of the product. For DCVax-Direct, the antigen loading
process takes place
in situ
after the product is directly injected into the patient’s inoperable tumors. The loading
of antigens into the DCs “educates” the DCs about what the immune system needs to target.
Clinical Trials and Early Access Programs
DCVax-L for
Operable
Solid Tumors:
GBM Brain Cancer
Our lead product candidate
is DCVax-L for Glioblastoma multiforme (GBM): the most aggressive and lethal type of brain cancer. With standard of care treatment
for GBM today, including surgery, radiation and chemotherapy, the median time to tumor recurrence is about 7 months, and the median
survival is about 15-17 months. There is an urgent need for new and better treatments.
DCVax-L is currently in
a 331-patient Phase III trial. Enrollment has closed. Patients in the trial are continuing to be treated, and “events”
of tumor recurrence and patient deaths are accumulating and being tracked. The trial includes a crossover option, under which patients
who were originally assigned to the placebo arm of the trial have an opportunity, when their tumor recurs, to cross over and start
receiving DCVax-L. Patients who were originally assigned to the treatment arm may also continue receiving the DCVax-L treatment
after their tumor recurs. The patients, the physicians and the Company remain blinded as to which arm of the trial patients were
in prior to crossover.
The trial was on partial
clinical hold for a period of time in regard to screening of new patients for enrollment; however, the patients already in the
trial continued to be treated in accordance with the trial protocol, without interruption. In December 2016, the Company announced
that to date the regulators had not agreed to remove the partial hold, and the Company had determined that it would not enroll
the last 17 of the planned 348 patients. Thereafter, in February 2017, the FDA lifted its partial hold. The Company had self-imposed
a hold on screening in countries outside the US, this remains in place in agreement with the regulators, and the Company will not
enroll the last 17 patients as announced in December 2016.
The Company plans to conduct
Phase II trials of DCVax-L in combination with other agents, such as checkpoint inhibitors, as resources permit. Such combination
trials may include DCVax-L and Pembrolizumab (Keytruda) for colorectal cancer, as the Company has previously reported. Certain
preparatory work will be required and regulatory approvals will have to be obtained for these trials, in addition to financing.
“Information Arm” Outside the
Phase III Trial
In parallel with the Phase
III trial of DCVax-L for GBM, we accepted a total of 55 patients into an “Information Arm” outside of the trial, who
failed to meet the eligibility requirements for the trial. Most of these patients were actual or potential “rapid progressors”
(patients in whom the brain cancer is already appearing to re-grow by the time the patient finishes the 6 weeks of daily radiotherapy
and daily chemotherapy following surgical removal of the tumor). These patients were generally treated with the same DCVax-L product
as in the Phase III trial, on the same treatment schedule, at the same medical centers, in the same time period, and the data were
collected and maintained by the same Contract Research Organization (CRO) as is managing the trial. Among these patients, about
20 of them apparently met the “progression” (tumor re-growth) criteria at two-time points, both at the end of the 6
weeks of daily radiation and chemotherapy and 8 weeks later, and about 25 of the patients apparently met the “progression”
criteria at one of the two-time points.
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.
We did not undertake new Hospital Exemption patients while the Phase III trial enrollment was on partial hold. We do not plan to
undertake further Hospital Exemption patients, as we are focused on completing the accumulation of data events, and analysis and
reporting of the data, for the Phase III trial.
As previously reported,
we have also treated a substantial number of compassionate use patients, under an Expanded Access Protocol in the US. We have also
been considering other early access programs.
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, mainly during 2013-2015, and we are still following
patients from this trial. The patients enrolled in this trial had failed other treatments, and had multiple tumors and actively
progressing disease. In spite of this heavy disease burden, the treatment regimen in this first clinical trial was very conservative:
only one tumor was injected in each patient, and most of the patients received only 3 treatments over the course of 2 weeks, with
some receiving a 4
th
treatment at week 8 and beyond.
Despite these challenging
circumstances, clinical effects seen in various patients include examples of tumor necrosis (i.e., cell death) in the injected
tumors, shrinkage or stabilization in some non-injected tumors, stabilization of disease and survival times beyond what was expected.
We are continuing to collect follow-up data, and anticipate continuing to report on it.
This Phase I trial was
designed to be very informative: we treated numerous diverse types of cancers (sarcoma, pancreatic, colorectal, lung, melanoma
and others); we tested three different dose levels and various methods of image-guided administration; we collected both imaging
and biopsy data, and correlated them with clinical effects in patients; we evaluated both local effects in the injected tumors
and systemic effects in the non-injected tumors; we evaluated potential endpoints for future trials; and most importantly, we evaluated
safety.
In the Phase I stage of
the DCVax-Direct Phase I/II trial, the safety profile was excellent (as has also been the case over the years with DCVax-L). Typically,
patients develop a fever after the injections, to a limited extent and for a limited duration, and they do not generally experience
any significant toxicities.
Based upon the data
and experience to date, we are planning to proceed with at least two Phase II trials of DCVax-Direct in different cancers, if
resources permit. In the Phase II trials, we plan to inject multiple tumors, rather than just one tumor, and we plan to administer
more 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 UK and elsewhere.
Brain cancer
Brain cancers fall
into two broad categories: primary (meaning the cancer first originates in the brain) and metastatic (meaning the cancer first
appears elsewhere in the body, but subsequently metastasizes or spreads to the brain). In the U.S. alone, on an annual basis,
there are some 40,000 new cases of primary brain cancer (including about 12,000 cases of GBM, the most severe grade of primary
brain cancer), and 160,000 new cases of metastatic brain cancer. The incidence is similar in Europe, the UK 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.
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. Cognate BioServices has long specialized in the production
of cellular products, and has a leading track record with such products, and Advent BioServices was formerly part of Cognate.
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 contains substantial buildout expansion space in addition to the portions currently built out and in use.
The current manufacturing facilities are sufficient to produce DCVax for at least several thousand patients per year. The expansion
space could allow us to procure significantly increasing capacity when needed for commercial readiness. 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, 2017, we have over 150 issued patents and more than 60 pending patent applications worldwide, grouped into 12 patent families.
Of these, 148 issued patents and 60 pending patent applications relate to our DCVax products. In the United States and Europe,
some of our patents and applications relate to the composition and use of products, while other patents and applications relate
to other aspects such as manufacturing and quality control. For example, in the United States, we have four issued and seven pending
patent applications that relate to the composition and/or use of our DCVax products. We also have other U.S patents and applications
that cover, among other things, quality control for DCVax and an automated system which we believe will help enable the scale-up
of production for large numbers of patients on a cost-effective basis. Similarly, in Europe, we have five patents issued by and
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 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 2028. The expiration dates of the issued European patents
involved in our current business range from 2022 to 2028. For some of the earlier dates, we plan to seek extensions of the patent
life, and believe we have reasonable grounds for doing so.
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
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. Additionally, many companies are actively involved in the research and development of monoclonal antibody-based and
bi-specific antibody based cancer therapies. Currently, a substantial number of antibody-based drugs are approved for commercial
sale for cancer therapy, and a large number of additional ones are under development. Many other third parties compete with us
in developing alternative therapies to treat cancer, including: biopharmaceutical companies; biotechnology companies; pharmaceutical
companies; academic institutions; and other research organizations, as well as some medical device companies.
We face extensive competition
from companies developing new treatments for brain cancer. These include a variety of immune therapies, as mentioned above, as
well as a variety of small molecule drugs and biologics. There are also a number of existing drugs used for the treatment of brain
cancer that may compete with our product, including, Avastin® (Roche Holding AG), Gliadel® (Eisai Co. Ltd.), and Temodar®
(Merck & Co., Inc.), as well as the Optune electro-therapy device (Novocure) 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
.
Additionally, these reports may be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC
20549, on official business days during the hours of 10 a.m. and 3 p.m. Information on the operation of the Public Reference Room
may be obtained by calling the SEC at 1-800-SEC-0330.
Employees and Contractors
As of December 31, 2017,
we had 11 full-time and 1 part-time employee in the US, and 3 full-time and 1 part-time employee in Europe. We believe our employee
relations are positive.
In addition to our full-time
employees, a substantial number of contractors provide various services for our corporate operations. We have contract management
of our clinical trials and contract manufacturing of our products.
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, 2017,
we had net cash outflows flows from operations, since inception. We may never achieve or sustain profitability.
Our auditors have issued a “going
concern” audit opinion.
Our independent auditors
have indicated in their report on our December 31, 2017 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 although they did not result in any adjustments.
In connection with the
preparation of our financial statements for the year ended December 31, 2017, and prior years, our management and our independent
auditor identified certain internal control deficiencies that, in the aggregate, represent material weaknesses, including the following:
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Lack of controls in place, including those surrounding related party transactions, to ensure that
all material transactions and developments impacting the financial statements are reflected and properly recorded.
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Design deficiencies that do not meet stated control objectives that elevate the level of risk of
a material misstatement to our financial statements.
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Policies and procedures with respect to the review, supervision and monitoring of our accounting
operations throughout the organization were either not designed and in place or not operating effectively.
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Our ability to retain
or attract qualified individuals to serve on our Board and to take on key management or other roles within our Company is also
uncertain. Our failure to successfully complete the remediation of the existing weaknesses could lead to heightened risk for financial
reporting mistakes and irregularities, and/or lead to a loss of public confidence in our internal controls that could have a negative
effect on the market price of our common stock.
As a company with a novel technology
and unproven business strategy, an evaluation of our business and prospects is difficult.
We are still in the process
of developing our product candidates through clinical trials. Our technology is novel and involves mobilizing the immune system
to fight a patient’s cancer. Immune therapies have been pursued by many parties for decades, and have experienced many failures.
In addition, our technology involves personalized treatment products, a new approach to medical products that involves new product
economics and business strategies, which have not yet been shown to be commercially feasible or successful. We have not yet gone
through scale-up of our operations to commercial scale. The novelty of our technology, product economics, and business strategy,
and the limited scale of our operations to date, makes it difficult to assess our prospects for generating revenues commercially
in the future.
We will need to expand our management
and technical personnel as our operations progress, and we may not be able to recruit such additional personnel and/or retain existing
personnel.
As of December 31, 2017,
we had 11 full-time and 1 part-time employees in the US, and 3 full-time and 1 part-time employees in Europe. Of this group, only
five employees are considered Management. The rest of our personnel are retained on a consulting or contractor basis. Many biotech
companies would typically have a larger number of employees by the time they reach late stage clinical trials. Such trials and
other programs require extensive management capabilities, activities and skill sets, including scientific, medical, regulatory
(for FDA and foreign regulatory counterparts), manufacturing, distribution and logistics, site management, reimbursement, business,
financial, legal, public relations outreach to both the patient community and physician community, intellectual property, administrative,
regulatory (SEC), investor relations and other.
In order to fully perform
all these diverse functions, with trials and programs under way at many sites across the U.S. and in Europe, we may need to expand
our management, technical and other personnel. However, with respect to management and technical personal, the pool of such personnel
with expertise and experience with living cell products, such as our DCVax immune cell product, is very limited. In addition, we
are a small company with limited resources, our business prospects are uncertain and our stock price is volatile. For some or all
of such reasons, we may not be able to recruit all the management, technical and other personnel we need, and/or we may not be
able to retain all of our existing personnel. In such event, we may have to continue our operations with a small team of personnel,
and our business and financial results may suffer.
We rely at present on third-party contract
manufacturers. As a result, we may be at risk for capacity limitations and/or supply disruptions.
We currently rely upon
Cognate BioServices, Inc., or Cognate, to produce all of our DCVax product candidates in the U.S., and 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., one of our stockholders who is an affiliate. Advent continues to be owned by Toucan Capital Fund III. We
have an agreement in place with Cognate BioServices pursuant to which Cognate BioServices has agreed to provide manufacturing and
other services for the clinical trials and initial potential commercialization, in connection with our Phase III clinical trial
of DCVax-L in brain cancer, and other programs. The agreement requires us to make certain minimum monthly payments to Cognate BioServices
in order to have dedicated manufacturing capacity available for our products, irrespective of whether we actually order any DCVax
products. The agreement also specifies the amounts we must pay for Cognate BioServices’ manufacturing of DCVax products for
patients. We are in the process of finalizing an agreement with Advent, similar to the agreement with Cognate.
Due to the large expansion
of our Phase III trial with DCVax-L for brain cancer, and initiation of the trial in Europe, as well as initiation of our DCVax-Direct
program, and certain advanced product development work, additional services that are required for logistics, distribution and tracking,
and other pending programs, and the need for expanded manufacturing capacity, we entered into four new agreements with Cognate
BioServices in January, 2014, for our DCVax-L and DCVax-Direct programs, Ancillary Services and Manufacturing Expansion Services.
However, there can be no assurance that these expanded agreements will be sufficient. The agreements involved substantial upfront
payments and provided for payment of at least half of all invoices to be paid in common stock and warrants of the Company for a
limited period of time, and the remainder of the invoice amounts to be paid in cash. The stock and warrants were subject to a lock-up
period, and were originally subject to most favored nation treatment with respect to terms provided to other investors or creditors
(including with respect to any warrants), however, the most favored nation provisions were removed and the remaining lock-up was
terminated in 2016. The agreements may cover commercial as well as clinical activities, and will only be terminable early by either
party for uncured material breach by the other party, although we can also suspend or stop our program at any time, and pay a fee
under the agreements.
We have been in breach
of the services agreements with Cognate on numerous occasions, including as of December 31, 2017, 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.
We are in the process
of finalizing agreements with Advent BioServices for manufacturing of DCVax products in the U.K. Although Advent is owned by Toucan,
if we breach these agreements, 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. 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 spin off 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,
and/or other similar factors. Because manufacturing processes for our DCVax product candidates are highly complex, require specialized
facilities (dedicated exclusively to DCVax production) and personnel that are not widely available in the industry, involve equipment
and training with long lead times, and are subject to lengthy regulatory approval processes, alternative qualified production capacity
may not be available on a timely basis or at all. Also, 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 other parties in the industry have experience with
such scale-up.
As is the case with any
clinical trial, our Phase III clinical trial of DCVax-L for GBM involves a number of patients that is a small fraction of the number
of potential patients for whom DCVax-L may be applicable in the commercial market. The same will be true of our other clinical
programs with our other DCVax product candidates. If our DCVax-L, and/or other DCVax product candidates, are approved for commercial
sale, it will be necessary to greatly scale up the volume of manufacturing, far above the level needed for the trials. Neither
we nor our contract manufacturers have experience with such scale-up. In addition, there are very few consultants or advisors in
the industry who have such experience and can provide guidance or assistance, because active immune therapies such as DCVax are
a fundamentally new category of product in two major ways: these active immune therapy products consist of living cells, not chemical
or biologic compounds, and the products are personalized. To our knowledge, no such products have successfully completed the necessary
scale-up for commercialization without material difficulties. For example, Dendreon Corporation encountered substantial difficulties
trying to scale up the manufacturing of its Provenge® product for commercialization.
The necessary specialized facilities,
equipment and personnel may not be available or obtainable for the scale-up of manufacturing of our product candidates.
The manufacture of living
cells requires specialized facilities, equipment and personnel which are entirely different than what is required for the manufacturing
of chemical or biologic compounds. Scaling up the manufacturing of living cell products to volume levels required for commercialization
will require enormous amounts of these specialized facilities, equipment and personnel - especially where, as in the
case of our DCVax product candidates, the product is personalized and must be made for each patient individually. Since living
cell products are so new, and have barely begun to reach commercialization, the supply of the specialized facilities, equipment
and personnel needed for them has not yet developed. It may not be possible for us or our manufacturers to obtain all of the specialized
facilities, equipment and personnel needed for commercialization of our DCVax product candidates. This could delay or halt our
commercialization.
Our technology is novel, involves complex
immune system elements, and may not prove to be effective.
Data already obtained,
or in the future obtained, from pre-clinical studies and clinical trials do not necessarily predict the results that will be obtained
from later pre-clinical studies and clinical trials. Over the course of several decades, there have been many different immune
therapy product designs - and many product failures and company failures. To our knowledge, to date, only one active
immune therapy, Provenge, has been approved by the FDA. The human immune system is complex, with many diverse elements, and the
state of scientific understanding of the immune system is still limited. Some immune therapies previously developed by other parties
showed surprising and unexpected toxicity in clinical trials. Other immune therapies developed by other parties delivered promising
results in early clinical trials, but failed in later stage clinical trials.
To date, we have only
completed early stage trials with our first product (DCVax-L) in limited numbers of patients. Although we believe the results of
those trials were quite positive, those results may not be achieved in our later stage clinical trials, such as the 331-patient
Phase III trial we are now conducting for GBM, and our product candidates may not ultimately be found to be effective. Further,
although the safety profile of our DCVax-L product was excellent in the early stage clinical trials, toxicity may be seen as we
treat larger numbers of patients in late stage clinical trials. If such toxicity occurs, it could limit, delay or stop further
clinical development or commercialization of our DCVax-L product.
We have only conducted
the Phase I portion of our first-in-man Phase I/II clinical trial with our DCVax Direct product, after prior early stage trials
with DCVax-L and DCVax-Prostate. Although the early results have not indicated any significant toxicity, we do not yet know what
efficacy or toxicity DCVax-Direct may show in a larger sample of human patients. This product may not ultimately be found to be
effective, and/or it may be found to be toxic, which could limit, delay or stop clinical development or commercialization of DCVax-Direct.
Clinical trials for our product candidates
are expensive and time consuming, and their outcome is uncertain.
The process of obtaining
and maintaining regulatory approvals for new therapeutic products is expensive, lengthy and uncertain. Costs and timing of clinical
trials may vary significantly over the life of a project owing to any or all of the following non-exclusive reasons:
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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 a timely
manner;
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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 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 approval such as our Hospital Exemption approval in Germany and/or
our reimbursement eligibility determination in Germany), the product and the manufacturer are subject to continual review, including
the review of adverse experiences and clinical results that are reported after our products are made available to patients, and
there can be no assurance that such approval will not be withdrawn or restricted. Regulators may also subject approvals to restrictions
or conditions, or impose post-approval obligations on the holders of these approvals, and the regulatory status of such products
may be jeopardized if such obligations are not fulfilled. If post-approval studies are required, such studies may involve significant
time and expense.
The manufacturer and manufacturing
facilities we use to make any of our products will also be subject to periodic review and inspection by the FDA or EMA, as applicable.
The discovery of any new or previously unknown problems with the product, manufacturer or facility may result in restrictions on
the product or manufacturer or facility, including withdrawal of the product from the market. We will continue to be subject to
the FDA or the European Medicines Agency, or EMA, requirements, as applicable, governing the labeling, packaging, storage, advertising,
promotion, recordkeeping, and submission of safety and other post-market information for all of our product candidates, even those
that the FDA or EMA, as applicable, had approved. If we fail to comply with applicable continuing regulatory requirements, we may
be subject to fines, suspension or withdrawal of regulatory approval, product recalls and seizures, operating restrictions and
other adverse consequences.
Our Operations under early access programs,
such as the hospital exemption in Germany, may not be successful.
There is not much accumulated
or available experience, information or precedents in regard to early access programs such hospital exemption programs and/or similar
programs, especially for new types of treatments such as immune therapies. Our DCVax-L product for glioma brain cancers is one
of the first products to receive a Hospital Exemption approval in Germany. Establishing operations under this Hospital Exemption
will require us to establish and implement new operational, contractual, financial and other arrangements with physicians, hospitals,
patients and others. We may not be successful in establishing and implementing such arrangements, and/or such arrangements may
not be financially satisfactory or viable.
We may not be successful in negotiating
reimbursement.
The reimbursement eligibility
determination that we have received in Germany for our DCVax-L product for brain cancer allows us to negotiate reimbursement arrangements
on a case by case basis, but does not ensure a positive outcome. We must negotiate with hospitals and Sickness Funds on a patient
by patient basis. Reimbursement prior to commercial approval (the current stage of our DCVax-L programs) is rare, and we do not
have substantial precedents to refer to. Our DCVax-L product involves a different cost structure than traditional drugs and may
require different reimbursement arrangements. The reimbursement arrangements also may be applied on a patient by patient basis.
We may not be successful in negotiating or obtaining reimbursement, or obtaining it on acceptable or viable terms.
Our product candidates will require a
different distribution model than conventional therapeutic products, and this may impede commercialization of our product candidates.
Our DCVax product candidates
consist of living human immune cells. Such products are entirely different from chemical or biologic drugs, and require different
handling, distribution and delivery than chemical or biologic drugs. One crucial difference is that the biomaterial ingredients
(immune cells and tumor tissue) from which we make DCVax products and the finished DCVax products themselves are subject to time
constraints in the shipping and handling. The biomaterial ingredients come from the medical centers to the manufacturing facility
fresh and unfrozen, and must arrive within a certain time and in usable condition. Performance failures by the medical center or
the courier company can result in biomaterials that are not usable, in which case it may not be possible to make DCVax product
for the patient involved. The finished DCVax products are frozen, and must remain frozen throughout the process of distribution
and delivery to the medical center or physician’s office, until the time of administration to the patient, and cannot be
handled at room temperature until then. In addition, our DCVax product candidates are personalized and they involve ongoing treatment
cycles over several years for each patient. Each product shipment for each patient must be tracked and managed individually. For
all of these reasons, among others, we will not be able to simply use the distribution networks and processes that already exist
for conventional drugs. It may take time for shipping companies, hospitals, pharmacies and physicians to adapt to the requirements
for handling, distribution and delivery of these products, which may adversely affect our commercialization.
Our product candidates will require different
marketing and sales methods and personnel than conventional therapeutic products. Also, we lack sales and marketing experience.
These factors may result in significant difficulties in commercializing our product candidates.
The commercial success
of any of our product candidates will depend upon the strength of our sales and marketing efforts. We do not have a marketing or
sales force and have no experience in marketing or sales of products like our lead product, DCVax-L for GBM. To fully commercialize
our product candidates, we will need to recruit and train marketing staff and a sales force with technical expertise and ability
to manage the distribution of our DCVax-L for GBM. As an alternative, we could seek assistance from a corporate partner or a third-party
services firm with a large distribution system and a large direct sales force. However, since our DCVax products are living cell,
immune therapy products, and these are a fundamentally new and different type of product than are on the market today, we would
still have to train such partner’s or such services firm’s personnel about our products, and would have to make changes
in their distribution processes and systems to handle our products. We may be unable to recruit and train effective sales and marketing
forces or our own, or of a partner or a services firm, and/or doing so may be more costly and difficult than anticipated. Such
factors may result in significant difficulties in commercializing our product candidates, and we may be unable to generate significant
revenues.
The availability and amount of potential
reimbursement for our product candidates by government and private payers is uncertain and may be delayed and/or inadequate.
The availability and extent
of reimbursement by governmental and/or private payers is essential for most patients to be able to afford expensive treatments,
such as cancer treatments. In the United States, the principal decisions about reimbursement for new medicines are typically made
by the Centers for Medicare & Medicaid Services, or CMS, an agency within the U.S. Department of Health and Human Services,
as CMS decides whether and to what extent a new medicine will be covered and reimbursed under Medicare. Private payers tend to
follow CMS to a substantial degree. It is difficult to predict what CMS will decide with respect to reimbursement for fundamentally
novel products such as ours, as there is no body of established practices and precedents for these new products. To date, we are
aware of only one active immune therapy that has reached the stage of a reimbursement decision (Provenge). Although CMS approved
coverage and reimbursement for Provenge, and private payers followed suit, there remain substantial questions and concerns about
reimbursement for Provenge, and such questions and concerns appear to be impeding sales.
Reimbursement agencies
in Europe can be even more conservative than CMS in the U.S. A number of cancer drugs which have been approved for reimbursement
in the U.S. have not been approved for reimbursement in certain European countries, and/or the level of reimbursement approved
in Europe is lower than in the U.S.
Various factors could
increase the difficulties for our DCVax products to obtain reimbursement. Costs and/or difficulties associated with the reimbursement
of Provenge could create an adverse environment for reimbursement of other immune therapies, such as our DCVax products. Approval
of other competing products (drugs and/or devices) for the same disease indications could make the need for our products and the
cost-benefit balance seem less compelling. The cost structure of our product is not a typical cost structure for medical products,
as the majority of our costs are incurred up front, when the manufacturing of the personalized product is done. Our atypical cost
structure may not be accommodated in any reimbursement for our products. If we are unable to obtain adequate levels of reimbursement,
our ability to successfully market and sell our product candidates will be adversely affected.
The manner and level at
which reimbursement is provided for services related to our product candidates (e.g., for administration of our product to patients)
are also important. If the reimbursement for such services is inadequate, that may lead to physician resistance and adversely affect
our ability to market or sell our products.
The methodology under
which CMS makes coverage and reimbursement determinations is subject to change, particularly because of budgetary pressures facing
the Medicare program. For example, the Medicare Prescription Drug, Improvement, and Modernization Act, or Medicare Modernization
Act, enacted in 2003, provided for a change in reimbursement methodology that has reduced the Medicare reimbursement rates for
many drugs, including oncology therapeutics. The Affordable Care Act may also result in changes in reimbursement arrangements that
adversely affect the prospects for reimbursement of our products.
In markets outside the
U.S., the prices of medical products are subject to direct price controls and/or to reimbursement with varying price control mechanisms,
as part of national health systems. In general, the prices of medicines under such systems are substantially lower than in the
U.S. Some jurisdictions operate positive and/or negative list systems under which products may only be marketed once a reimbursement
price has been agreed. Other countries allow companies to fix their own prices for medicines, but monitor and control company profits.
The downward pressure on health care costs in general, particularly prescription drugs, has become very intense. As a result, increasingly
high barriers are being erected to the entry of new products. Accordingly, in markets outside the U.S., the reimbursement for our
products may be reduced compared with the U.S. and may be insufficient to generate commercially reasonable revenues and profits.
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 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. In addition, our Phase
III trial of DCVax-L was placed on a partial clinical hold for new screening for enrollment in 2015. Although the FDA lifted its
hold in February 2017 as previously reported by the Company, the Company had already closed enrollment with 331 of the planned
348 patients. Since we did not enroll the last 17 of the planned 348 patients, this could adversely affect the statistical and
other analyses of our Phase III trial results, and could make it more difficult to seek product approval or more likely that further
trials could be required. In addition, a rapidly growing number of products are under development for brain cancer, including immunotherapies
such as checkpoint inhibitor drugs and T cell based therapies, and some (e.g., NovoCure’s device) have been approved in the
U.S. It is possible that the standard of care for brain cancer could change while our Phase III trial is still under way. This
could necessitate further clinical trials with our DCVax-L product candidate for brain cancer.
Changes in manufacturing methods for
DCVax-L could require us to conduct equivalency studies and/or additional clinical trials.
With biologics products,
“the process is the product”: i.e., the manufacturing process is considered to be as integral to the product as is
the composition of the product itself. If any changes are made in the manufacturing process, and such changes are considered material
by the regulatory authorities, the company sponsor may be required to conduct equivalency studies to show that the product is equivalent
under the changed manufacturing processes as under the original manufacturing processes, and/or the company sponsor may be required
to conduct additional clinical trials. In addition, if there are multiple manufacturing locations, equivalency studies may be required
to show that the products produced in the respective facilities are substantially the same. Our manufacturing processes have undergone
some changes during the early clinical trials, and we have multiple manufacturing locations. Accordingly, we may be required to
conduct equivalency studies, and/or additional clinical trials, before we can obtain product approval, unless the regulatory authorities
are satisfied that the changes in processes do not affect the quality, efficacy or safety of the product, and satisfied that the
products made in each manufacturing location are substantially the same.
We may not receive regulatory approvals
for our product candidates or there may be a delay in obtaining such approvals.
Our products and our ongoing
development activities are subject to regulation by regulatory authorities in the countries in which we and our collaborators and
distributors wish to test, manufacture or market our products. For instance, the FDA will regulate the product in the U.S. and
equivalent authorities, such as the EMA will regulate in Europe. Regulatory approval by these authorities will be subject to the
evaluation of data relating to the quality, efficacy and safety of the product for its proposed use, and there can be no assurance
that the regulatory authorities will find our data sufficient to support product approval of DCVax-L or DCVax-Direct. In addition,
the endpoint against which the data is measured must be acceptable to the regulatory authorities. The primary endpoint of our Phase
III trial of DCVax-L is progression free survival. Sometimes regulators have accepted this endpoint, and sometimes not. There can
be no assurance that the regulatory authorities will find this to be an approvable endpoint for Glioblastoma multiforme cancer.
The time period required
to obtain regulatory approval varies between countries. In the U.S., for products without “Fast Track” status, it can
take up to 18 months after submission of an application for product approval to receive the FDA's decision. Even with Fast Track
status, FDA review and decision can take up to 12 months. At present, we do not have Fast Track status for our lead product, DCVax-L
for GBM. We plan to apply for Fast Track status, but there can be no assurance that FDA will grant us such status for DCVax-L.
Different regulators may
impose their own requirements and may refuse to grant, or may require additional data before granting, an approval, notwithstanding
that regulatory approval may have been granted by other regulators. Regulatory approval may be delayed, limited or denied for a
number of reasons, including insufficient clinical data, the product not meeting safety or efficacy requirements or any relevant
manufacturing processes or facilities not meeting applicable requirements as well as case load at the regulatory agency at the
time.
We may not obtain or maintain the benefits
associated with orphan drug status, including market exclusivity.
Although our lead product,
DCVax-L for GBM, has been granted orphan drug status in both the U.S. and the E.U., we may not receive the benefits associated
with orphan drug designation (including the benefit providing for market exclusivity for a number of years). This may result from
a failure to maintain orphan drug status, or result from a competing product reaching the market that has an orphan designation
for the same disease indication. Under U.S. and E.U. rules for orphan drugs, if such a competing product reaches the market before
ours does, the competing product could potentially obtain a scope of market exclusivity that limits or precludes our product from
being sold in the U.S. for seven years or from being sold in the E.U. for ten years. Also, in the E.U., even after orphan status
has been granted, that status is re-examined shortly prior to the product receiving any regulatory approval. The EMA must be satisfied
that there is evidence that the product offers a significant benefit relative to existing therapies, in order for the therapeutic
product to maintain its orphan drug status. Accordingly, our product candidates will have to re-qualify for orphan drug status
prior to any potential product approval in the E.U.
Our intellectual property rights may
be overturned, narrowed or blocked, and may not provide sufficient commercial protection for our product candidates, or third parties
may infringe upon our intellectual property.
The patent position of
biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions and has
in recent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial
value of our patent rights are highly uncertain. Patent laws afford only limited protection and may not protect our rights to the
extent necessary to sustain any competitive advantage we may have. In addition, the laws of some foreign countries do not protect
proprietary rights to the same extent as the laws of the United States, and we may encounter significant problems in protecting
our proprietary rights in those countries. Moreover, patents and patent applications relating to living cell products are relatively
new, involve complex factual and legal issues, and are largely untested in litigation - and as a result, are uncertain.
Our pending and future patent applications may not result in patents being issued which adequately protect our technology or products
or which effectively prevent others from commercializing the same or competitive technologies and products. As a result, we may
not be able to obtain meaningful patent protection for our commercial products, and our business may suffer as a result. Third
parties may challenge our existing patents, and such challenges could result in overturning or narrowing some of our patents. Even
if our patents are not challenged, third parties could assert that their patents block our use of technology covered by some or
all of our patents
As of December 31, 2017,
we had 148 issued patents and 60 pending patent applications worldwide relating to our product candidates and related matters such
as manufacturing processes. The issued patents expire at various dates from 2022 to 2028. Our issued patents may be challenged,
and such challenges may result in reductions in scope, cancellations or invalidations. Our pending patent applications may not
result in issued patents. Moreover, our patents and patent applications may not be sufficiently broad to prevent others from using
substantially similar technologies or from developing competing products. We also face the risk that others may independently develop
similar or alternative technologies, or design around our patented technologies. As a result, no assurance can be given that any
of our pending or future patent applications will be granted, that the scope of any patent protection currently granted or that
may be granted in the future will exclude competitors or provide us with competitive advantages, that any of the patents that have
been or may be issued to us will be held valid if subsequently challenged, or that other parties will not claim rights to or ownership
of our patents or other proprietary rights that we hold.
We have taken security
measures (including execution of confidentiality agreements) to protect our proprietary information, especially proprietary information
that is not covered by patents or patent applications. These measures, however, may not provide adequate protection for our trade
secrets or other proprietary information. In addition, others may independently develop substantially equivalent proprietary information
or techniques or otherwise gain access to our trade secrets.
We may be exposed to claims or lawsuits
that our products infringe patents or other proprietary rights of other parties.
Our commercial success
depends upon our ability and the ability of our collaborators to develop, manufacture, market and sell our product candidates and
use our proprietary technologies without infringing the proprietary rights of third parties. We have not conducted a comprehensive
freedom-to-operate review to determine whether our proposed business activities or use of certain of the technology covered by
patent rights owned by us would infringe patents issued to third parties.
There is a substantial
amount of litigation involving patent and other intellectual property rights in the biotechnology and biopharmaceutical industries
generally. The patent landscape is especially uncertain in regard to cell therapy products, as it involves complex legal and factual
questions for which important legal principles remain unresolved. We may become party to, or be threatened with, future adversarial
proceedings or litigation regarding intellectual property rights with respect to our products and technology, including interference
proceedings, Inter Partes Reexamination, or Post Grant Review before the U.S. Patent and Trademark Office. Third parties may assert
infringement claims against us based on existing patents or patents that may be granted in the future. If we are found to infringe
a third party’s intellectual property rights, we could be required to obtain a license from such third party to continue
developing and marketing our products and technology. However, we may not be able to obtain any required license on commercially
reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors
access to the same technologies licensed to us. We could be forced, including by court order, to cease commercializing the infringing
technology or product. In addition, we could be found liable for monetary damages. If the infringement is found to be willful,
we could be liable for treble damages. A finding of infringement could prevent us from commercializing our product candidates or
force us to cease some of our business operations, which could materially harm our business. Claims that we have misappropriated
the confidential information or trade secrets of third parties could have a similar negative impact on our business.
We have already been exposed
to one patent lawsuit by a large company, which we vigorously defended. Our defense resulted in the plaintiff withdrawing nearly
all of the claims it filed, and in settlement of the last claims without our paying the plaintiff anything. However, the litigation
was expensive and time consuming. We have recently also been exposed to claims (without a lawsuit) by a competitor asserting or
implying (and commentaries by third parties based on the claims by our competitor) that a patent issued to our competitor covers
our products. We believe these claims to be without merit. However, if a lawsuit for infringement were brought against us, there
can be no assurance that a judge or jury would agree with our position, and in any event such litigation would be expensive and
time consuming. In the future, we may again be exposed to claims by third parties - with or without merit - that our products infringe
their intellectual property rights.
Even if resolved in our
favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses,
and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public
announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors
perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation
or proceedings could substantially increase our operating losses and reduce the resources available for development activities
or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to adequately
conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings
more effectively than we can because of their greater financial resources. Uncertainties resulting from the initiation and continuation
of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.
DCVax is our only technology in clinical
development.
Unlike many pharmaceutical
companies that have a number of products in development and which utilize many different technologies, we are dependent on the
success of our DCVax platform technology. While the DCVax technology has a wide scope of potential use, and is embodied in several
different product lines for different clinical situations, if the core DCVax technology is not effective or is toxic or is not
commercially viable, our business could fail. We do not currently have other technologies that could provide alternative support
for us.
Risks Related to our Common Stock
The market price of our common stock
is volatile and can be adversely affected by several factors.
The share prices of publicly
traded biotechnology and emerging pharmaceutical companies, particularly companies without consistent product revenues and earnings,
can be highly volatile and are likely to remain highly volatile in the future. The price which investors may realize in sales of
their shares of our common stock may be materially different than the price at which our common stock is quoted, and will be influenced
by a large number of factors, some specific to us and our operations, and some unrelated to our operations. Such factors may cause
the price of our stock to fluctuate frequently and substantially. Such factors may include large purchases or sales of our common
stock, shorting of our stock, positive or negative events, commentaries or publicity relating to our company, management or products,
or other companies, management or products, including other immune therapies for cancer or immune therapies or cancer therapies
generally, positive or negative events relating to healthcare and the overall pharmaceutical and biotech sector, the publication
of research by securities analysts and changes in recommendations of securities analysts, legislative or regulatory changes, and/or
general economic conditions. In the past, shareholder litigation, including class action litigation, has been brought against other
companies that experienced volatility in the market price of their shares and/or unexpected or adverse developments in their business.
Whether or not meritorious, litigation brought against a company following such developments can result in substantial costs, divert
management’s attention and resources, and harm the company’s financial condition and results of operations.
Our Common Stock is considered a “penny
stock” and may be difficult to sell.
The Commission has adopted
regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00
per share or an exercise price of less than $5.00 per share, subject to specific exemptions. Historically, the price of our Common
Stock has fluctuated greatly. As of the date of this filing, the market price of our common stock is less than $5.00 per share,
and therefore is a “penny stock” according to Commission rules. The “penny stock” rules impose additional
sales practice requirements on broker-dealers who sell securities to persons other than established customers and accredited investors
(generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse).
For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of securities
and have received the purchaser’s written consent to the transaction before the purchase. Additionally, for any transaction
involving a penny stock, unless exempt, the broker-dealer must deliver, before the transaction, a disclosure schedule prescribed
by the Commission relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be
sent disclosing recent price information on the limited market in penny stocks. These additional burdens imposed on broker-dealers
may restrict the ability or decrease the willingness of broker-dealers to sell our common stock, and may result in decreased liquidity
for our common stock and increased transaction costs for sales and purchases of our common stock as compared to other securities.
Toucan Capital and its affiliates, including
Linda Powers and Cognate BioServices, are the principal holders of our shares of common stock, and this concentration of ownership
may have a negative effect on the market price of our common stock.
As of December 31, 2017,
Toucan Capital and its affiliates (which, at that time, included Cognate BioServices, Toucan Partners and Linda Powers, who also
serves as our Chief Executive Officer and Chairperson of the Board of Directors), collectively, beneficially owned a significant
percentage of our outstanding common stock on that date. This concentration of ownership could involve conflicts of interest, and
may adversely affect the trading price of our common stock because investors may perceive disadvantages in owning stock of companies
with controlling stockholders, including controlling stockholders who could have conflicts of interest. Toucan Capital and its
affiliates (including Linda Powers and including Cognate BioServices until February 2018), have the ability to exert substantial
influence over all matters requiring approval by our stockholders, including the election and removal of directors and any proposed
merger, consolidation or sale of all or substantially all of our assets, as well as over our business plans, strategies or operations.
This influence could have the effect of delaying, deferring or preventing a change in control, or impeding a merger or consolidation,
takeover or other business combination or action that could be favorable to investors. Since the management buyout of Cognate BioServices
in February 2018, Cognate BioServices is no longer an affiliate of Toucan Capital or Linda Powers; however, Cognate continues to
be the beneficial owner of a significant percentage of our outstanding common stock, and could affect our stock. In addition, due
in part to certain debt repayment to Ms. Powers by Cognate through assignment of NWBio stock held by Cognate, Ms Powers [has become][continues
to be] the beneficial owner of a material percentage of our common stock. These concentrations of ownership could result in adverse
effects on the Company and/or its stock.
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. While the company has spent significant
resources in remediating these 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 40,000,000 shares of preferred stock.
This preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by our Board
of Directors without further action by stockholders. The terms of any series of preferred stock may include voting rights (including
the right to vote as a series on particular matters), preferences as to dividend, liquidation, conversion and redemption rights
and sinking fund provisions. No preferred stock is currently outstanding. The issuance of any preferred stock could materially
adversely affect the rights of the holders of our common stock, and therefore, reduce the value of our common stock. In particular,
specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell our assets
to, a third party and thereby preserve control by the present management.
Provisions of our certificate
of incorporation and bylaws and Delaware law also could have the effect of discouraging potential acquisition proposals or tender
offers or delaying or preventing a change in control, including changes a stockholder might consider favorable. Such provisions
may also prevent or frustrate attempts by our stockholders to replace or remove our management. In particular, the certificate
of incorporation and bylaws and Delaware law, as applicable, among other things:
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provide the Board of Directors with the ability to alter
the bylaws without stockholder approval;
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establish staggered terms for board members;
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place limitations on the removal of directors; and
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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. In addition, as of December 31, 2017, 120,000,000 shares of our common stock are issuable upon exercise of outstanding
warrants and 7,964,000 shares of our common stock are issuable upon exercise of outstanding options.
We may have claims and lawsuits against
us that may result in adverse outcomes.
From time to time, we
may be subject to a variety of claims and lawsuits. As described more fully in “Item 3. Legal Proceedings,” of Part
I of this Form 10-K, 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.
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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. The monthly rent expense will be $27,000.
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 March 26, 2016, we
entered into a non-cancelable operating lease for 505 square feet of office space in London, which was set to expire on March 20,
2017. On December 19, 2016, we entered a renewal agreement to extend the office lease for additional 1 year until March 20, 2018.
No further renewal agreement was entered.
On July 1, 2017, Advent Bioservices entered into a manufacturing service agreement (the “MSA”)
with a third party. The minimum lease payments under the MSA where Advent Bioservices is the lessee in 2018 and 2019 was approximately
$0.7 million and $0.4 million, respectively. Although we are not a party to the MSA, Advent Bioservices is charging us its share
of the cost of this lease on a monthly basis and therefore we are including the minimum lease payments in our future minimum lease
payments.
As of December 31, 2017, obligations for future minimum lease payments under these leases, in aggregate over
the rest of the lease term, total approximately $1.6 million.
U.K. Facility
On August 19, 2014, we
completed the acquisition of a facility and property in Sawston, U.K (“UK Facility”). The purchase price was £13
million ($20.8 million at the then current exchange rate, excluding professional fees of $1.5 million associated with the purchase
of the U.K Facility). 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 65,000 square feet which we are re-purposing and developing for manufacturing of DCVax products
for the European market. Such re-purposing requires approval of the applicable Planning Commission. If re-purposing is approved,
then the specific design and engineering of the proposed build out will also have to be approved. In addition to the facility,
the acquisitions included about 25 acres of potentially developable land (as well as non-developable land). Any future development
for business use will require removal of certain existing structures, permission from the Planning Commission for the intended
purpose, and then permission from the Planning Commission for the specific designs and engineering. In addition, future use
for manufacturing of DCVax products will require regulatory approval from the MHRA (the U.K. regulatory authority).
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.
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ITEM 3.
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LEGAL PROCEEDINGS
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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
named 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 named the Company as a nominal defendant. The complaint generally
challenged 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 asserted 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 agreed to settle the
Yonemura
case along with the
Tharp
case.
On November 22, 2017, the parties submitted a joint stipulation of voluntary dismissal, and on November 27, 2017, the court entered
an order dismissing the case.
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. Cty. filed Nov. 28, 2016), claiming to sue derivatively on behalf of the Company.
The complaint named 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 named the Company
as a nominal defendant. The complaint largely challenged the same transactions disputed in the two cases discussed above, claiming
that the Company overcompensated Cognate and Toucan for certain services and loans. It asserted 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 claimed that the individual
defendants are liable to the Company for misleading its investors and financiers. The complaint claimed 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 sought 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 January 3, 2018, the court entered a final order and judgment approving the settlement.
Therefore, all the foregoing litigation is
now concluded.
U.S. Securities and Exchange Commission
As previously
reported, the Company has received a number 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 planned publication of interim clinical trial data. 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.
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 asserts claims sounding in unjust enrichment, quantum
meruit, and breach of contract, and seeks 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; Chardan filed its opposition brief on January 19, 2018;
and the Company filed its reply brief on February 26, 2018. The Company’s motion to dismiss remains pending.
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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, 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 former Cognate affiliate in the UK (which was formerly part of Cognate BioServices, and is
now known as Advent BioServices, a related party relationship to the Company) is preparing for production of DCVax-L products there. The Company and Advent BioServices
are in the process of developing contract arrangements for manufacturing and related services for the U.K. and Europe.
On February 20, 2018, Cognate BioServices transferred 2.9 million shares of Series A convertible preferred
stock and 29.4 million warrants with exercise price of $0.22 to Linda Powers, the Company’s chief executive officer and president
to partially repay an outstanding debt owed by Cognate to Ms. Powers, as Cognate was unable to repay any of the debt in cash. Cognate,
however, remains a related party due to its ownership of common and preferred stock along with common stock purchase warrants.
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.
Liquidity, Financial Condition and Management Plans
The Company used approximately $36.5 million
of cash in its operating activities for the year ended December 31, 2017. 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.
During the year ended December 31, 2017, the
Company raised approximately $39.5 million in equity and debt securities to fund its operations, and raised an additional $5.0
million from a third party who retired the 2014 Notes on the Company’s behalf. As expected for a company that is pre-revenue,
the Company incurred a net loss of $73.1 million for the year ended December 31, 2017. The Company had current assets of $1.4 million
and a working capital deficit of approximately $86.3 million at December 31, 2017. The Company owed an aggregate of $5.4 million
of trade liabilities and accrued expenses to certain related parties as of December 31, 2017 (after waiver by such related parties
of $3.75 million related to certain payables, which was owed to them by the Company).
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.
NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
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
Cash consists of funds deposited in checking
accounts. Accounts at each institution are insured by the Federal Deposit Insurance Corporation ("FDIC") up to $250,000.
The management believes that no material credit or market risk exposure exists due to the high credit quality of the institutions
that have checking accounts of the Company’s funds. The Company has not incurred any losses on such accounts.
Restricted Cash
The Company records cash held in an escrow
account to secure certain debt interest obligations as restricted cash. As of December 31, 2017 and 2016, the Company had $0 and
$0.7 million of restricted cash, respectively.
Property, Plant and Equipment
Property and equipment are stated at cost.
Depreciation and amortization are provided for using straight-line methods, in amounts sufficient to charge the cost of depreciable
assets to operations over their estimated service lives. Repairs and maintenance costs are charged to operations as incurred. For
more details see Note 6.
The Company assesses its long-lived assets
for impairment whenever facts and circumstances indicate that the carrying amounts may not be fully recoverable. To analyze recoverability,
the Company projects undiscounted net future cash flows over the remaining lives of such assets. If these projected undiscounted
net future cash flows are less than the carrying amounts, an impairment loss would be recognized, resulting in a write-down of
the assets with a corresponding charge to earnings. The impairment loss is measured based upon the difference between the carrying
amounts and the fair values of the assets. Assets to be disposed of are reported at the lower of the carrying amounts or fair value
less cost to sell. Management determines fair value using the discounted cash flow method or other accepted valuation techniques.
Accordingly, during the years ended
December 31, 2017 and 2016, 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 UK to provide a valuation of its UK 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, 2017 and 2016. Of course, it is possible that the estimate of
undiscounted cash flows could change at some time in the future, resulting in a need at that time to write down such assets
to fair value.
NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
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.
The carrying amount of the Company’s
financial instruments, including cash and cash equivalents and accounts payable approximate their fair values. As of December 31,
2017, the carrying amount of the notes payable approximate fair value as its interest rate approximates current market rates.
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.
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 (expense). As of December 31, 2017, the Company estimates that the
total environmental remediation costs associated with the purchase of the UK Facility will amount to approximately $6.2
million. Contamination clean-up costs that improve the property from its original acquisition state are capitalized as part
of the property’s overall development costs. The Company engaged a third-party specialist to conduct certain surveys of
the condition of the property which included, among other things, a preliminary analysis of potential environmental
remediation exposures. The Company determined, based on information contained in the specialist’s report, that it would
be required to estimate the fair value of an unconditional obligation to remediate specific ground contamination at an
estimated fair value of approximately $6.2 million. The Company computed its preliminary estimate of the fair value of
this obligation using a probability weighted approach that measures the likelihood of the following two potential outcomes:
(i) a higher probability requirement of erecting a protective barrier around the affected area at an estimated cost of
approximately $4.6 million, and (ii) a lower probability requirement of having to excavate the affected area at an estimated
cost of approximately $33.4 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.
NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
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).
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 recognizes income taxes on an accrual
basis based on tax positions taken or expected to be taken in its tax returns. A tax position is defined as a position in a previously
filed tax return or a position expected to be taken in a future tax filing that is reflected in measuring current or deferred income
tax assets and liabilities. Tax positions are recognized only when it is more likely than not (i.e., likelihood of greater than
50%), based on technical merits, that the position would be sustained upon examination by taxing authorities. Tax positions that
meet the more likely than not threshold are measured using a probability-weighted approach as the largest amount of tax benefit
that is greater than 50% likely of being realized upon settlement. Income taxes are accounted for using an asset and liability
approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events
that have been recognized in our financial statements or tax returns. A valuation allowance is established to reduce deferred tax
assets if all, or some portion, of such assets will more than likely not be realized. Should they occur, our policy is to classify
interest and penalties related to tax positions as income tax expense. Since our inception, no such interest or penalties have
been incurred, however prior to 1998 the Company was a limited liability company and the Company’s tax losses and credits
generally flowed directly to the members.
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. See Note
13.
On December 22, 2017, the SEC staff issued
Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of GAAP in situations when a registrant does
not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the
accounting for certain income tax effects of the Tax Reform Act. The Company has recognized the provisional tax impacts related
to the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements for
the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among
other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance
that may be issued, and actions the Company may take as a result of the Tax Act. The accounting is expected to be complete when
the 2017 U.S. corporate income tax return is filed in 2018.
NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
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 remeasures 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.
The fair value of restricted stock units is
determined based on the number of shares granted and the quoted market price of the Company's common stock on the date of grant.
The fair value of restricted stock units with performance conditions deemed probable of being achieved and vesting are amortized
to expense over the requisite service period using the straight-line method of expense recognition.
Effective on January 1, 2017, the Company elected
to account for forfeited awards as they occur as permitted by Accounting Standards Update ("ASU") 2016-09. 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.
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.
NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
Segments
The Company operates in one reportable segment
and, accordingly, no segment disclosures have been presented herein.
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 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.
Recognition and Measurement of Financial
Assets and Financial Liabilities
In January 2016, 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 guidance did not have a significant impact on
the operating results when adopted.
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.
NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
Recent Accounting Pronouncements to Be Adopted
Revenue from Contracts with Customer
In May 2014, the FASB issued ASU No. 2014-09,
“Revenue from Contracts with Customers (Topic 606)” (ASU 2014-09) as modified by ASU No. 2015-14, “Revenue from
Contracts with Customers (Topic 606): Deferral of the Effective Date,” ASU 2016-08, “Revenue from Contracts with Customers
(Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU No. 2016-10, “Revenue
from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,” and ASU No. 2016-12, “Revenue
from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.” The revenue recognition principle
in ASU 2014-09 is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition,
new and enhanced disclosures will be required. Companies may adopt the new standard either using the full retrospective approach,
a modified retrospective approach with practical expedients, or a cumulative effect upon adoption approach. The Company will continue
to book revenue under its current method. The Company plans to apply ASC 606 revenue recognition once revenue from contracts with
customers is material.
Leases
In February 2016, FASB issued ASU No. 2016-02,
Leases (Topic 842)
which supersedes FASB ASC Topic 840,
Leases (Topic 840)
and provides principles for the recognition,
measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual
approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively
a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective
interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use
asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with
a term of twelve months or less will be accounted for similar to existing guidance for operating leases. The standard will be effective
for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. The Company is currently
evaluating the impact that ASU 2016-02 will have on its consolidated financial statements and related disclosures.
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. 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 consolidated financial statements and disclosures, but does not expect it to have a significant impact.
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
will be evaluating the impact of adopting this standard on the consolidated financial statements and disclosures.
In February 2018, the FASB issued ASU 2018-02,
Income Statement - Reporting Comprehensive Income, (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other
Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded
tax effects resulting from the newly enacted federal corporate income tax rate under the Tax Cuts and Jobs Act. The amount of the
reclassification would be the difference between the historical corporate income tax rate and the newly enacted 21% corporate income
tax rate. The new standard is effective for fiscal years, including interim periods within those fiscal years, beginning after
December 15, 2018 with early adoption in any interim period permitted. The Company is currently evaluating the effect that
the updated standard will have on its consolidated financial statements and related disclosures.
4.
Fair Value Measurements
Derivative Warrants Granted in 2017 &
2016
During the years ended December 31, 2017 and
2016, the Company issued approximately 362 million and 31 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 (expense) on the
consolidated statements of operations and disclosed in the financial statements.
NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
A summary of weighted average (in aggregate)
significant unobservable inputs (Level 3 inputs) used in measuring warrants granted during the years ended December 31, 2017 and
2016 is as follows:
|
|
2017 Warrants Granted Associated with
|
|
|
|
|
|
|
|
|
|
|
|
|
Modification/
|
|
|
|
Public and Private
|
|
|
Debt
|
|
|
|
|
|
Extinguishment of
|
|
|
|
Offering
|
|
|
Conversion
|
|
|
Issuance of Debt
|
|
|
Warrant Liabilities
|
|
Strike price
|
|
$
|
0.34
|
|
|
$
|
0.44
|
|
|
$
|
0.19
|
|
|
$
|
0.25
|
|
Contractual term (years)
|
|
|
2.2
|
|
|
|
2.6
|
|
|
|
2.0
|
|
|
|
3.7
|
|
Volatility (annual)
|
|
|
112
|
%
|
|
|
107
|
%
|
|
|
113
|
%
|
|
|
107
|
%
|
Risk-free rate
|
|
|
2
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
2
|
%
|
Dividend yield (per share)
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
2016 Warrants Granted Associated with
|
|
|
|
Public and Private
|
|
|
Debt
|
|
|
|
|
|
|
Offering
|
|
|
Conversion
|
|
|
Issuance of Debt
|
|
Strike price
|
|
$
|
0.36
|
|
|
$
|
0.48
|
|
|
$
|
0.35
|
|
Contractual term (years)
|
|
|
5.0
|
|
|
|
5.5
|
|
|
|
2.2
|
|
Volatility (annual)
|
|
|
99
|
%
|
|
|
137
|
%
|
|
|
84
|
%
|
Risk-free rate
|
|
|
2
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
Dividend yield (per share)
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Embedded Conversion Features in 2017
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 year ended December 31, 2017 is as follows:
Conversion price
|
|
$
|
0.41
|
|
Contractual term (years)
|
|
|
1.9
|
|
Volatility (annual)
|
|
|
97
|
%
|
Risk-free rate
|
|
|
1
|
%
|
Dividend yield (per share)
|
|
|
0
|
%
|
The following table classifies the Company’s
liabilities measured at fair value on a recurring basis into the fair value hierarchy as of December 31, 2017 and 2016 (in thousands):
|
|
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
|
|
|
|
Fair value measured at December 31, 2016
|
|
|
|
|
|
|
Quoted prices in active
|
|
|
Significant other
|
|
|
Significant
|
|
|
|
Fair value at
|
|
|
markets
|
|
|
observable inputs
|
|
|
unobservable inputs
|
|
|
|
December 31, 2016
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Warrant liability
|
|
$
|
4,862
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,862
|
|
Share-settled debt (in default)
|
|
|
5,200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,200
|
|
Total fair value
|
|
$
|
10,062
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10,062
|
|
There were no transfers between Level 1, 2
or 3 during the years ended December 31, 2017 and 2016.
NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
The following table presents changes in Level
3 liabilities measured at fair value for the years ended December 31, 2017 and 2016. Both observable and unobservable inputs
were used to determine the fair value of positions that the Company has classified within the Level 3 category. Unrealized
gains and losses associated with liabilities within the Level 3 category include changes in fair value that
were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-
dated volatilities) inputs (in thousands).
|
|
|
|
|
Embedded
|
|
|
Share-settled
|
|
|
|
|
|
|
Warrant
|
|
|
Conversion
|
|
|
Debt
|
|
|
|
|
|
|
Liability
|
|
|
Feature
|
|
|
(in Default)
|
|
|
Total
|
|
Balance – January 1, 2016
|
|
$
|
27,982
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
27,982
|
|
Extinguishment of derivative liabilities related to Cognate
|
|
|
(10,131
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,131
|
)
|
Extinguishment of warrant liabilities related to warrants exercised for cash
|
|
|
(415
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(415
|
)
|
Warrants granted
|
|
|
5,317
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,317
|
|
Share-settled debt assumed from Cognate
|
|
|
-
|
|
|
|
-
|
|
|
|
5,680
|
|
|
|
5,680
|
|
Conversion of share-settled debt
|
|
|
-
|
|
|
|
-
|
|
|
|
(480
|
)
|
|
|
(480
|
)
|
Change in fair value
|
|
|
(17,891
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(17,891
|
)
|
Balance – December 31, 2016
|
|
|
4,862
|
|
|
|
-
|
|
|
|
5,200
|
|
|
|
10,062
|
|
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
|
|
Sub-total
|
|
|
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
|
|
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, 2017 and 2016 is as follows:
|
|
As of December 31, 2017
|
|
|
As of December 31, 2016
|
|
|
|
Warrant
|
|
|
Embedded
|
|
|
Warrant
|
|
|
|
Liability
|
|
|
Conversion Feature
|
|
|
Liability
|
|
Strike price
|
|
$
|
0.31
|
|
|
$
|
0.50
|
|
|
$
|
0.60
|
|
Contractual term (years)
|
|
|
2.6
|
|
|
|
2.5
|
|
|
|
4.7
|
|
Volatility (annual)
|
|
|
110
|
%
|
|
|
102
|
%
|
|
|
98
|
%
|
Risk-free rate
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
2
|
%
|
Dividend yield (per share)
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
5. Stock-based Compensation
Common Stock issued to Related
Party
The Company issued 175,000
shares of common stock for services to Cognate debt holders in partial satisfaction of amounts owed to Cognate for manufacturing
services, which resulted in compensation expense of $86,000 for the year ended December 31, 2016. No shares were granted to
Cognate for services compensation during the year ended December 31, 2017.
NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
Stock Options
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 were 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 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
activity for the Company’s option plans during the year ended December 31, 2017. There is no stock option activity during
the year ended December 31, 2016 (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 December 31, 2016
|
|
|
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
|
|
|
|
-
|
|
Options vested and exercisable
|
|
|
7,964
|
|
|
$
|
1.38
|
|
|
|
4.0
|
|
|
$
|
-
|
|
The following assumptions were used to compute
the fair value of stock options granted during the year ended December 31, 2017:
|
|
For the Year
|
|
|
|
Ended
|
|
|
|
December 31, 2017
|
|
Exercise price
|
|
$
|
0.25
|
|
Expected term (years)
|
|
|
2.8
|
|
Expected stock price volatility
|
|
|
96
|
%
|
Risk-free rate of interest
|
|
|
2
|
%
|
The weighted average grant date fair value was approximately $0.7 million.
As
of December 30, 2017, there was approximately $0.2 million of total unrecognized compensation expense related to 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 1.5 years.
The Company recorded stock-based compensation
expense of approximately $0.8 million and $13.6 million, which was included as part of research and development expenses for the
years ended December 31, 2017 and 2016, respectively.
6. Property, Plant and Equipment
Property, plant and equipment consist of the
following at December 31, 2017 and 2016 (in thousands):
NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
|
|
December 31,
|
|
|
December 31,
|
|
|
Estimated
|
|
|
2017
|
|
|
2016
|
|
|
Useful Life
|
Leasehold improvements
|
|
$
|
81
|
|
|
$
|
69
|
|
|
Lesser of lease term or estimated useful life
|
Office furniture and equipment
|
|
|
25
|
|
|
|
25
|
|
|
3 years
|
Computer equipment and software
|
|
|
622
|
|
|
|
626
|
|
|
3 years
|
|
|
|
728
|
|
|
|
720
|
|
|
|
Less: accumulated depreciation
|
|
|
(559
|
)
|
|
|
(405
|
)
|
|
|
Total property, plant and equipment, net
|
|
$
|
169
|
|
|
$
|
315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction in progress (property in the United Kingdom)*
|
|
$
|
47,604
|
|
|
$
|
44,559
|
|
|
15 years
|
Less: accumulated depreciation
|
|
|
(285
|
)
|
|
|
-
|
|
|
|
Total Construction in progress (property in the United Kingdom), net
|
|
$
|
47,319
|
|
|
$
|
44,559
|
|
|
|
* Construction in progress includes both the land acquisition costs and the building improvement costs.
Depreciation expense was approximately $439,000
and $189,000 for the years ended December 31, 2017 and 2016, respectively.
7. Notes Payable
The following table summarizes outstanding
debt as of December 31, 2017 and 2016, respectively (amount in thousands):
|
|
|
|
Stated
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Remaining
|
|
|
Fair Value of
|
|
|
|
|
|
|
|
|
Interest
|
|
|
Conversion
|
|
|
|
|
|
Debt
|
|
|
Debt
|
|
|
Embedded
|
|
|
Carrying
|
|
|
|
Maturity
Date
|
|
Rate
|
|
|
Price
|
|
|
Face
Value
|
|
|
Discount
|
|
|
Premium
|
|
|
Conversion
Option
|
|
|
Value
|
|
Short term convertible notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6% unsecured (1)
|
|
Due
|
|
|
6
|
%
|
|
$
|
3.09
|
|
|
$
|
135
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
135
|
|
10% unsecured (2)
|
|
Due*
|
|
|
10
|
%
|
|
$
|
0.16
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
135
|
|
Short term notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8% unsecured (3)
|
|
9/3/2018 and 12/5/2018
|
|
|
8
|
%
|
|
|
N/A
|
|
|
|
2,007
|
|
|
|
-
|
|
|
|
355
|
|
|
|
-
|
|
|
|
2,362
|
|
8% unsecured (4)
|
|
6/30/2018
|
|
|
8
|
%
|
|
|
N/A
|
|
|
|
1,655
|
|
|
|
(103
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
1,552
|
|
10% unsecured (5)
|
|
On Demand
|
|
|
10
|
%
|
|
|
N/A
|
|
|
|
650
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
650
|
|
12% unsecured (6a)
|
|
On Demand
|
|
|
12
|
%
|
|
|
N/A
|
|
|
|
440
|
|
|
|
(82
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
358
|
|
8% unsecured (6b)
|
|
On Demand
|
|
|
8
|
%
|
|
|
N/A
|
|
|
|
2,200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,952
|
|
|
|
(185
|
)
|
|
|
355
|
|
|
|
-
|
|
|
|
7,122
|
|
Short term notes payable - related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10% unsecured - Related Parties (7)
|
|
On Demand
|
|
|
10
|
%
|
|
|
N/A
|
|
|
|
1,071
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,071
|
|
12% unsecured - Related Parties (7)
|
|
On Demand
|
|
|
12
|
%
|
|
|
N/A
|
|
|
|
50
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,121
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-settled debt, at fair value (8)
|
|
In Default
|
|
|
18
|
%
|
|
$
|
0.24
|
|
|
|
3,308
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term mortgage loan (9)
|
|
8/16/2018
& 11/16/18
|
|
|
12
|
%
|
|
|
N/A
|
|
|
|
11,629
|
|
|
|
(403
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
11,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term convertible notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12% secured convertible notes (10)
|
|
6/21/2020
|
|
|
12
|
%
|
|
$
|
0.50
|
|
|
|
5,350
|
|
|
|
(1,948
|
)
|
|
|
-
|
|
|
|
2,608
|
|
|
|
6,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8% unsecured (11)
|
|
6/20/2019
|
|
|
8
|
%
|
|
|
N/A
|
|
|
|
2,880
|
|
|
|
(373
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
2,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance as of December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31,375
|
|
|
$
|
(2,909
|
)
|
|
$
|
355
|
|
|
$
|
2,608
|
|
|
$
|
31,429
|
|
* Fully paid back as of December 31, 2017
NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
|
|
|
|
Stated
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
Interest
|
|
|
Conversion
|
|
|
|
|
|
Debt
|
|
|
Carrying
|
|
|
|
Maturity Date
|
|
Rate
|
|
|
Price
|
|
|
Face Value
|
|
|
Discount
|
|
|
Value
|
|
Short term convertible notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6% unsecured (1)
|
|
Due
|
|
|
6
|
%
|
|
$
|
3.09
|
|
|
$
|
135
|
|
|
$
|
-
|
|
|
$
|
135
|
|
5% 2014 Senior convertible notes (10)
|
|
8/15/2017
|
|
|
5
|
%
|
|
$
|
6.60
|
|
|
|
11,000
|
|
|
|
(175
|
)
|
|
|
10,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,135
|
|
|
|
(175
|
)
|
|
|
10,960
|
|
Short term notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10% unsecured (2)
|
|
11/4/2017
|
|
|
10
|
%
|
|
|
N/A
|
|
|
|
2,450
|
|
|
|
-
|
|
|
|
2,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term notes payable - related parties (7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10% unsecured - Related Parties
|
|
On Demand
|
|
|
10
|
%
|
|
|
N/A
|
|
|
|
50
|
|
|
|
-
|
|
|
|
50
|
|
12% unsecured - Related Parties
|
|
On Demand
|
|
|
12
|
%
|
|
|
N/A
|
|
|
|
260
|
|
|
|
-
|
|
|
|
260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
310
|
|
|
|
-
|
|
|
|
310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-settled debt, at fair value (8)
|
|
In Default
|
|
|
18
|
%
|
|
$
|
0.35
|
|
|
|
5,200
|
|
|
|
-
|
|
|
|
5,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loan (9)
|
|
11/16/17 & 8/13/17
|
|
|
12
|
%
|
|
|
N/A
|
|
|
|
10,156
|
|
|
|
(365
|
)
|
|
|
9,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term note payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8% unsecured note (4)
|
|
6/30/2018
|
|
|
8
|
%
|
|
|
N/A
|
|
|
|
3,310
|
|
|
|
(310
|
)
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance as of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,561
|
|
|
$
|
(850
|
)
|
|
$
|
31,711
|
|
|
(1)
|
This $135,000 note as of December 31, 2017 and 2016 consists of two separate 6% notes in the amounts
of $110,000 and $25,000. In regard to the $110,000 note, the Company has made ongoing attempts to locate the creditor to repay
or convert this note, but has been unable to locate the creditor to date. In regard to the $25,000 note, the holder has elected
to convert these notes into equity, the Company has delivered the applicable conversion documents to the holder, and the Company
is waiting for the holder to execute and return the documents.
|
|
(2)
|
On November 4, 2016, the Company entered into three promissory notes agreements (“the November
2016 Notes”) with an individual investor (“the Holder”) for an aggregate amount of $2.45 million. The Notes bore
interest at the rate of 10% with 1 year term.
|
On March 3, 2017, the Company entered
into a series of promissory notes (the “March 2017 Notes”) with unrelated third parties in the original principal amount
of $1,450,000 with an original issuance discount of 3% for aggregate net proceeds of $1.4 million with no stated interest rate.
On April 12, 2017, the Company made
a repayment of $258,000 to one of the March 2017 Notes holders.
During the year ended December 31,
2017, the Company entered into multiple amendments (the “Amendment”) to the November 2016 Notes and March 2017 Notes.
The Company recorded an approximate $2.4 million debt extinguishment loss from the Amendment, which was part of the embedded conversion
features. The Company also recorded approximately $407,000 additional debt premium pursuant to the Amendment.
During the year ended December 31,
2017, the Company induced the holders of the November 2016 Notes and March 2017 Notes to convert approximately $4.2 million of
principal, debt premium and accrued interest into approximately 24.7 million shares of common stock at a fair value of approximately
$5.8 million, and approximately 43.8 million warrants with weighted average exercise price of $0.53, at fair value of approximately
$4.6 million using Black-Scholes model. The Company also reversed approximately $5.2 million of embedded conversion features, which
was marked to market value as of the conversion date and was recorded as gain from debt extinguishment.
Overall, the Company recorded approximately $1.0 million
net debt extinguishment loss from this conversion.
NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
|
(3)
|
On March 3, 2017 and June 5, 2017, the Company entered into two promissory notes agreement (the
“Old Notes”) with the same investor for an aggregate principal amount of $2,310,000. The Old Notes bore interest at
8% per annum with a 6 month term. One of the Old Notes became in default as of September 3, 2017. The Old Notes carry an original
issue discount of $300,000 and $10,000 legal cost that was reimbursable to the investor.
|
On October 17, 2017 and November
8, 2017, the Company entered into two Exchange Agreement with the holder of the Old Notes to convert an aggregate $2,310,000 principal
and $100,000 accrued interest into two new promissory notes (the “New Notes”). The two New Notes had original principal
amount of $1,214,000 and $1,196,000, respectively. The New Notes bore interest at 8% per annum, and will be due on September 3,
2018 and December 5, 2018, respectively.
The net book value of the Old notes
and fair value of the New Notes as of the exchange date were approximately $2,382,000 and $2,764,000, respectively. The company
recorded approximately $382,000 debt extinguishment loss from these exchanges.
During the year ended December 31,
2017, the Company converted approximately $403,000 principal and $16,000 accrued interest of the New Notes into approximately 3
million shares of common stock at fair value of $649,000. The Company recorded approximately $231,000 debt extinguishment loss
from this conversion.
|
(4)
|
On December 30, 2016, the Company entered into a note purchase agreement (the “Note”)
with an individual investor for an aggregate principal amount of $3.3 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,
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.
|
(5)
|
During the year ended December 31, 2017, the Company entered multiple promissory note agreement
(the “Notes”) with certain investors for an aggregate principal amount of $2.4 million. The Notes bore interest at
either 0%, 10% or 12% per annum, and were payable upon demand.
|
During the year ended December 31,
2017, the Company induced the holders to convert approximately $1.8 million principal and accrued interest of the Notes into approximately
10.6 million shares of common stock at fair value of approximately $1.9 million.
In addition, the Company issued
approximately 12.5 million warrants with an exercise price of $0.49 and a fair value of approximately $0.9 million.
The Company recorded debt extinguishment
of approximately $1.1 million for the year ended December 31, 2017.
|
(6a)
|
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 Company recorded $139,000 debt discount at the issuance date, which is the fair value of the
warrants.
|
|
(6b)
|
On December 29, 2017, the Company entered a promissory note agreements (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.
|
Goldman Notes
During the year ended December 31,
2017, Leslie J. Goldman, an officer of the Company, loaned the Company an aggregate amount of $1,335,000 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 year ended December 31,
2017, the Company made an aggregate principal payment of $1,230,000 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.
NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
The outstanding principal amount
for Goldman Notes was $414,000 as of December 31, 2017.
Toucan Notes
During the year ended December 31,
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 year ended December 31,
2017, the Company repaid approximately $764,000 of the Toucan Notes.
The outstanding principal amount
for Toucan Notes was $407,000 as of December 31, 2017.
Board of Directors Notes
During the year ended December 31,
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. No repayments have been made
on any of these notes. The full principal amounts remained outstanding as of December 31, 2017.
|
(8)
|
During the year ended December 31, 2017, the holder of the Company’s share-settled debt converted
approximately $1.9 million of outstanding share-settled debt.
|
|
(9)
|
The two mortgage loans were originally due in August 2017 and November 2017, and have been renewed for
additional one year until August 16, 2018
and November
16, 2018. The Company recorded $521,000 renewal fees during the year ended December 31, 2017.
|
|
(10)
|
2014 Senior Convertible Notes
|
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 year
ended December 31, 2017, through a series of transactions.
During the year ended December 31,
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 shares
of 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 year ended December 31,
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 December 31, 2017 was $5.4 million under the 2017
Secured Convertible Notes.
NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
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.
|
(11)
|
On December 20, 2017, the Company entered into a note purchase agreement (the “Note”)
with an individual investor for an aggregate principal amount of $2,880,000. The Note bore interest at 8% per annum with 2 years
term. The Note carries an original issue discount of $375,000 and $5,000 legal cost that was reimbursable to the investor.
|
The following table summarizes total interest
expenses related to senior convertible notes, share-settled debt, other notes and mortgage loan for years ended December 31, 2017
and 2016, respectively (in thousands):
|
|
For the years ended
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Interest expenses related to 2014 Senior convertible notes:
|
|
|
|
|
|
|
Contractual interest
|
|
$
|
424
|
|
|
$
|
551
|
|
Amortization of debt issuance costs
|
|
|
175
|
|
|
|
282
|
|
Total interest expenses related to senior convertible notes
|
|
|
599
|
|
|
|
833
|
|
Interest expenses related to other notes:
|
|
|
|
|
|
|
|
|
Contractual interest
|
|
|
1,924
|
|
|
|
1,152
|
|
Additional debt premium
|
|
|
407
|
|
|
|
-
|
|
Amortization of debt discount
|
|
|
846
|
|
|
|
-
|
|
Total interest expenses related to other notes
|
|
|
3,177
|
|
|
|
1,152
|
|
Interest expenses related to mortgage loan:
|
|
|
|
|
|
|
|
|
Contractual interest
|
|
|
1,263
|
|
|
|
1,259
|
|
Amortization of debt issuance costs
|
|
|
495
|
|
|
|
568
|
|
Total interest expenses on the mortgage loan
|
|
|
1,758
|
|
|
|
1,827
|
|
Other interest expenses
|
|
|
11
|
|
|
|
6
|
|
Total interest expense
|
|
$
|
5,545
|
|
|
$
|
3,818
|
|
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):
NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
|
|
For the years ended
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Series A convertible preferred stock
|
|
|
97,200
|
|
|
|
-
|
|
Series B convertible preferred stock
|
|
|
55,819
|
|
|
|
-
|
|
Common stock options
|
|
|
12,656
|
|
|
|
1,551
|
|
Common stock warrants - equity treatment
|
|
|
30,838
|
|
|
|
38,241
|
|
Common stock warrants - liability treatment
|
|
|
289,568
|
|
|
|
20,037
|
|
Share-settled debt and accrued interest, at fair value
|
|
|
18,211
|
|
|
|
15,429
|
|
Convertible notes and accrued interest
|
|
|
15,735
|
|
|
|
1,766
|
|
Potentially dilutive securities
|
|
|
520,027
|
|
|
|
77,024
|
|
9. Related Party Transactions
Cognate BioServices, Inc.
The Company and Cognate BioServices entered
into a DCVax-L Manufacturing Services Agreement and a DCVax-Direct Manufacturing Services Agreement, both effective January 17,
2014, and those Agreements followed and superseded Manufacturing Services Agreements in 2011 and 2007. The 2007 and 2011 Agreements
had provided for baseline charges to the Company per month for dedicated manufacturing capacity, and the 2014 DCVax-L and DCVax-Direct
Manufacturing Services Agreements also provide for such baseline charges. These minimum charges reflect the fact that the manufacturing
suites and capacity that are going to be used for production of the Company’s DCVax products 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.
|
NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
|
·
|
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, 2017, 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.
Nasdaq Remediation Plan
As previously reported, on April 26, 2016,
the Nasdaq Staff notified the Company that it had reviewed certain stock issuances by the Company to Cognate during 2014 and 2015,
and that the Staff had determined that those issuances should be aggregated for purposes of applying Nasdaq rules. Under Nasdaq
rules, for purposes of measuring against the limit of 20% of total shares outstanding, all of the stock issuances made by the Company
to Cognate during 2014 and 2015 were aggregated, and they were measured against only the shares outstanding in January 2014. Based
on the aggregation, the Nasdaq staff determined that certain issuances violated certain Nasdaq listing rules.
The Company proposed a remediation plan (the
“Remediation Plan”) that Cognate would surrender certain shares and warrants it had received in connection with the
Contracts, Cognate would accept an increase in the exercise price of certain warrants received in connection with the Contracts,
and the most favored nation anti-dilution provisions would be deleted from the Contracts.
The Remediation Plan was accepted by the Nasdaq
staff on August 30, 2016. Pursuant to the Remediation Plan:
(a) Cognate returned and the Company
canceled 8,052,092 restricted shares previously issued to Cognate under the most favored nation anti-dilution provisions of the
Contracts, and the most favored nation provisions were deleted from the Contracts. The Company debited par value and credited additional
paid in capital on August 30, 2016.
(b) Cognate returned and the Company
canceled warrants for 6,880,574 shares issued under the 2014 Agreements, and the Company issued to Cognate new warrants for 4,305,772
shares at a higher exercise price ($4.27) with 5 year term (see FN 4).
(c) Cognate returned and the Company
canceled 731,980 of the total of 5,101,330 restricted shares initially issued under the 2014 Agreements. The Company debit $732
to the par value and credit same amount to additional paid in capital.
The remaining portions of the multi-year lock-up
and vesting periods relating to shares and warrants held by Cognate were also cancelled.
The Nasdaq settlement does not affect other
obligations of the Company to Cognate, including for existing unpaid invoices, as the Company has previously reported.
Settlements of 2016 and 2017 Obligations
to Cognate;
As previously reported, 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 to
Cognate of 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.
NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
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
|
|
Cognate Expenses and Accounts Payable
As of December 31, 2017 and 2016, the
Company owed Cognate and Advent BioServices $5.2 million and $23.4 million, respectively, for unpaid invoices for
manufacturing capacity, product distribution, product and process development, and related services.
The following table shows a summary of research and development costs from Cognate and Advent BioServices
relating to the DCVax-L and DCVax-Direct programs, product and process development work and preparations for upcoming Phase II
trials for the years ended December 31, 2017 and 2016, respectively (in thousands):
|
|
For the years ended
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cognate and Advent BioServices research and development cost - services
|
|
$
|
16,227
|
|
|
$
|
34,665
|
|
Stock issued to and returned by Cognate
|
|
|
-
|
|
|
|
13,654
|
|
Research and development cost from Cognate settlement
|
|
|
8,395
|
|
|
|
-
|
|
Total
|
|
$
|
24,622
|
|
|
$
|
48,319
|
|
Share Based Payments
On September 7, 2016, under the Company’s
Remediation Agreement with Nasdaq, Cognate returned 8,052,092 vested shares to the Company. The Company cancelled them and recorded
this as a reduction in shares outstanding. Cognate also held 731,980 unvested shares at that time. Cognate returned those 731,980
shares to the Company and the Company cancelled them as well. At the time, the development expense associated with the 731,980
shares was $221,000.
Shares payable to related party - elimination
of most favored nation provision
Shares and warrants previously issued to Cognate
in partial payment of invoices for manufacturing services were under a 3-year lock-up, which had been in place since January 2014.
The lock-up prevented Cognate from selling the shares received. During the lock-up, if the Company entered into a transaction with
other investors or creditors on more favorable terms than Cognate received, the Company had an ongoing obligation, under the Manufacturing
Services Agreements, to conform the terms of Cognate’s shares and warrants to the same terms as the other investors or creditors,
under a most favored nation provision.
During the year ended December 31, 2016, the
Company entered into several financings with unrelated institutional investors that triggered the most favored nation provision.
However, these most favored nation shares were
never issued to Cognate. Under the Remediation Agreement, Cognate agreed to eliminate the most favored nation provisions, and to
forego these shares that had already been triggered. As a result of the elimination of the most favored nation, the Company reclassified
$22.5 million shares payable which resulted in an increase to additional paid in capital.
NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
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’ equity.
Cognate Organization
The Company is consolidating its manufacturing
arrangements for European region in the U.K. During 2017, the Cognate affiliates outside the US, in Germany and Israel ceased operations
and were closed. The Company was responsible for costs related to closing down the DCVax manufacturing programs in Germany and
Israel, including final payments to personnel, remaining lease payments and related costs, such as for legal and accounting services.
Approximately $4.2 million of the total research and development cost were related to Cognate entities outside the US and are included
in the overall amounts reported with respect to Cognate.
Other Related Parties
Jerry Jasinowski - Private Offering
On December 22, 2016, the Company issued
1,285,714 shares of common stock at $0.35 and warrants to purchase an additional 642,857 shares of Common Stock at an exercise
price of $0.35 per share with a five-year term to Jerry Jasinowski, who was appointed to the Board of Directors in April 2012.
The Company received proceeds of $450,000.
Leslie J. Goldman - Demand Loan
On October 8, 2015, Leslie J. Goldman,
an officer of the Company, loaned the Company $400,000 pursuant to a Demand Promissory Note (the “Goldman Note”). The
Goldman Note bore interest at the rate of 8% per annum, and was payable upon demand, with 7 days’ prior written notice by
Mr. Goldman to the Company. The Goldman Note would also bear 35% warrant coverage on the repayment amount if the Note were not
repaid within 30 days of issuance. On November 20, 2015, the Company made a payment of $403,858 to Mr. Goldman including the accrued
interest related to the coupon amount. The Company issued 28,384 warrants with a 5 year term and exercise price of $4.98 to Mr.
Goldman in connection with this transaction.
On November 28, 2016, Mr. Goldman loaned the Company $260,000 pursuant to a Demand Promissory Note (the
“Goldman Note”). The Goldman Note bore interest at the rate of 12% per annum, and was payable upon demand, with 5 days’
prior written notice by Mr. Goldman to the Company.
NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
During the year ended December 31, 2017, Mr.
Goldman loaned the Company an aggregate amount of $1,335,000 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 year ended December 31, 2017, the
Company made an aggregate principal payment of $1,230,000 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 $414,000 as of December 31, 2017.
Toucan Capital III Fund - Demand Loans
During the year ended December 31, 2017, Toucan
Capital Fund III (“Toucan”) 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 year ended December 31, 2017, the
Company repaid approximately $764,000 of the Toucan Notes.
The outstanding principal amount for Toucan
Notes was $407,000 as of December 31, 2017.
As of December 31, 2017, the Company owed Toucan
$60,000 related to certain payables.
Various Related Parties - Demand Loans
During the year ended December 31, 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. No repayments have been made on any of these notes.
The full principal amounts remained outstanding as of December 31, 2017.
10. 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, 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 (see FN 9)
|
|
|
2,941
|
|
|
|
6,919
|
|
Balance as of December 31, 2017
|
|
|
9,720
|
|
|
$
|
7,439
|
|
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 7,058,000 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 70,582,000 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.
NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
The Series A Shares will be 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 70,582,000 shares of common stock (the equivalent
of a conversion price of $0.17 per share of common stock). The Class D-1 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-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 Company determined that the Series A Shares
contain contingent redemption provisions allowing redemption by the holder upon certain defined events (“deemed liquidation
events”). As the event that may trigger the redemption 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, net
of a subscription receivable of $0.7 million.
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.
The Series A Shares are not currently redeemable and, as of December 31, 2017, it is not probable they will
become redeemable as redemption is contingent on a change of control event. As such, accretion of the remaining discount to the
Series A Share aggregate liquidation preference is not made until it is probable that the Series A Shares will become redeemable.
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.
Series B Convertible Preferred Stock
The following table summarizes the Company’s Series B Convertible
Preferred Stock activities for the year ended December 31, 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 (see FN 9)
|
|
|
5,201
|
|
|
|
12,235
|
|
Balance as of December 31, 2017
|
|
|
5,582
|
|
|
$
|
12,601
|
|
NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
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 3,811,000 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 will be 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 3,811,000 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 Company determined that the Series B Shares
contain contingent redemption provisions allowing redemption by the holder upon certain defined events (“deemed liquidation
events”). As the event that may trigger the redemption 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, net
of a subscription receivable of $7,000.
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.
The Series B Shares are not currently redeemable and, as of December 31, 2017, it is not probable they will
become redeemable as redemption is contingent on a change of control event. As such, accretion of the remaining discount to the
Series B Share aggregate liquidation preference is not made until it is probable that the Series B Shares will become redeemable.
11. 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.
NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
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.
NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
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.
NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
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.
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.
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.
Fourth Quarter of 2017
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.
Warrants Exercised for Cash
During the quarter 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.
Debt Conversions
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.
Share-settled Debt
During the quarter ended December 31, 2017,
the Company issued 4.5 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 December 31, 2017, the outstanding share-settled
debt was approximately $3.3 million.
Shares for Services
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.
NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
First Quarter of 2016
On February 29, 2016, the Company entered into
a Securities Purchase Agreement (the “Agreement”) with certain institutional investors (the “Purchasers”),
for a registered direct offering (the “Offering”) of 5,882,353 shares (the “Shares”) of the Company’s
Common Stock at the purchase price of $1.70 per share, and Series A Warrants (the “Series A Warrants”) to purchase
an additional 2,941,177 shares of Common Stock at an exercise price of $2.25 per share. The Series A Warrants will become exercisable
on the six-month anniversary of issuance and expire five years thereafter.
In addition, the Company granted the Purchasers
a sixty (60) day overallotment option in the form of Series B Warrants to purchase an additional 5,882,353 shares of Common Stock
at an exercise price of $3.00 per share (the “Series B Warrants”). The Series B Warrants were exercisable immediately
and were to expire within sixty (60) days. However, on May 2, 2016, the Company and the investors agreed to extend this warrant
exercise period by twenty-one (21) days, from May 2 to May 23, 2016. The Company and the Purchasers consummated the purchase and
sale of the Securities on March 3, 2016 (the “Closing”) and the Company raised gross proceeds of $10 million and net
proceeds of approximately $9.2 million, after deducting placement agent fees, attorneys’ fees and other expenses. Subsequent
to the reporting period, the Series B Warrants were extended an additional twenty-one (21) days to May 23, 2016.
Each Purchaser also received Series C Warrants
(the “Series C Warrants”) to purchase up to 2,941,177 shares of Common Stock. The Series C Warrants vest and become
exercisable only if, and to the extent that, the Series B Warrants held by such Purchaser are exercised. The Series C warrants
will be issuable and exercisable for one-half share of Common Stock per each Series B Warrant exercised. The Series C Warrants
have an exercise price of $4.00 per share, shall be exercisable on the six-month anniversary of issuance and will expire five years
thereafter.
In connection with the Offering and the concurrent
private placement, the Company agreed to pay the Placement Agent a cash placement fee equal to 7% of the aggregate purchase price
for the common stock sold in the registered offering. The Placement Agent also received Common Stock purchase warrants (the “Compensation
Warrants”) to purchase up to 294,118 shares of Common Stock, or 5% of the aggregate number of shares of common Stock sold
in the registered offering, at an exercise price of $2.125, or 125% of the public offering price per share in the registered offering,
which are exercisable six months following issuance and terminate on February 29, 2021.
Second Quarter of 2016
On May 15, 2016, the Company entered into an
agreement with a holder (the “Holder”) of the Company’s existing Series A, B and C Warrants, pursuant to which
the Holder agreed to exercise all of the Holder’s Series B Warrants to purchase 4,411,764 shares of Common Stock. In consideration,
the Company agreed to reduce the exercise price of the Series B Warrants to $0.96 per share, the Company’s closing price
on the prior trading day, for gross proceeds of approximately $4,235,000, and agreed to issue new Series D Common Stock Purchase
Warrants (the “Series D Warrants”) to purchase up to 2,205,882 shares of Common Stock at an exercise price of $1.00
per share (subject to customary adjustments such as for stock splits and dividends), with an exercise period of five years, commencing
six months after issuance.
The Holder’s exercise of the Series B
Warrants to purchase 4,411,764 shares of Common Stock triggered the existing outstanding Series C Warrants to become vested and
exercisable for up to 2,205,882 shares of Common Stock. The Company agreed to reset the exercise price of the Series A and Series
C Warrants to $1.00 per share.
In connection with the offering and the concurrent
private placement, the Company agreed to pay the Placement Agent a cash placement fee equal to 7% of the aggregate purchase price
for the common stock sold. The Placement Agent also received Common Stock purchase warrants (the "Compensation Warrants")
to purchase up to 220,588 shares of Common Stock, or 5% of the aggregate number of shares of common Stock sold, at an exercise
price of $1.20, or 125% of the public offering price per share, which are exercisable six months following issuance and terminate
on May 15, 2021.
The modification of the warrant exercise price
increased the value of the warrants by approximately $2.6 million. This cost was recorded as a deemed dividend in additional paid-in
capital due to the absence of retained earnings. This cost is included in modification of warrants and increased the net loss available
to common shareholders on the consolidated statements of operations.
Third Quarter of 2016
During the quarter ended September 30, 2016,
the Company issued 7,400,000 shares of common stock at $0.50 per share, and warrants to purchase an additional 3,700,000 shares
of Common Stock at an exercise price of $0.60 per share with five years term through a registered direct offering. The Company
received net proceeds of approximately $3.4 million, after deducting aggregate placement agent fees and attorneys’ fees of
approximately $321,000.
NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
During the quarter ended September 30, 2016,
the Company entered into multiple agreements with certain holders (the “Holders”) of the Company’s existing warrants,
pursuant to which the Holders agreed to exercise all of the Holders’ warrants to purchase 10,945,694 shares of common stock.
In consideration, the Company agreed to reduce the exercise price of the warrants to $0.35 per share, for net proceeds of approximately
$3.4 million, after deducting aggregate placement agent fees, attorneys’ fees and bank clearing fees of approximately $454,000,
and agreed to issue new common stock purchase warrants to purchase up to 10,945,694 shares of common stock at a weighted average
exercise price of $0.44 per share, with an exercise period of 5 years, commencing 6 months after issuance. In connection with the
registered direct offering, the Company granted 263,122 warrants at an exercise price of $0.44 to the placement agents. The placement
agent warrants are exercisable 6 months following issuance and terminate on February 22, 2022.
The modification of the warrant exercise price
increased the value of the warrants by approximately $3.0 million. This cost was recorded as a deemed dividend in additional paid-in
capital due to the absence of retained earnings. This cost is included in modification of warrants and increased the net loss available
to common shareholders on the consolidated statements of operations
During the quarter ended September 30, 2016,
the Company issued a total of 2,572,216 shares of Common stock at $0.36 per share to several angel investors for aggregate proceeds
of $0.9 million. The Company also issued 1,286,111 warrants at an exercise price of $0.42 per share, with an exercise period of
5 years.
On September 16, 2016, the Company converted
a note in dispute and relevant accrued interest of $1.0 million into 2,222,222 shares of common stock. The fair value
of the common shares on the issuance date was approximately $1.0 million. In addition, the Company issued 1,111,111 warrants at
an exercise price of $0.45 with an exercise period of 5 years, commencing 6 months after issuance. The fair value of the warrants
was approximately $0.4 million using a Black-Scholes model at the date of issuance related to the conversion of note and accrued
interest. The total loss on extinguishment of debt recorded on the statement of operations was approximately $0.4 million related
to this conversion.
Fourth Quarter of 2016
During the quarter ended December 31, 2016,
the Company issued 28,575,000 shares of common stock at $0.35 per share, and warrants to purchase an additional 14,287,500 shares
of Common Stock at an exercise price of $0.35 per share with five years term through a registered direct offering. The Company
received net proceeds of approximately $9.2 million, after deducting aggregate placement agent fees and attorneys’ fees of
approximately $0.8 million.
In October 2016 and November 2016, the Company
issued a total of 2,518,687 shares of Common stock at a weighted average price of $0.53 per share to several angel investors for
aggregate proceeds of $1.3 million. The Company also issued 1,259,345 warrants at a weighted average exercise price of $0.51 per
share, with an exercise period of 5 years.
On December 22, 2016, the Company issued 1,285,714
shares of common stock at $0.35 and warrants to purchase an additional 642,857 shares of Common Stock at an exercise price of $0.35
per share with a five-year term to Jerry Jasinowski, who was appointed to the Board of Directors in April 2012. The Company received
proceeds of $450,000.
Total warrants issued from direct offerings
and private placement have value of approximately $4.2 million, see FN 4 for more details regarding valuation.
During the quarter ended December 31, 2016,
the Company issued a total of 60,000 shares of Common stock at $0.49 per share to several scientific board members as share-based
compensation. The Company recorded the $29,400 expense in research and development for the year ended December 31, 2016.
During the quarter ended December 31, 2016,
the Company converted accrued interest associated with a note in dispute that was originally issued in 2011. The accrued interest
balance as of December 13, 2016 was $1.5 million. In order to extinguish this accrued interest liability, the Company issued 2,812,174
shares of common stock and 1,406,086 warrants at a weighted average exercise price of $0.50 with an exercise period of 5 years,
commencing 6 months after issuance. The fair value of the common shares on the issuance date was approximately $1.5
million. The fair value of the warrants on the issuance date was approximately $0.6 million using a Black-Scholes model, see FN
4 for more details regarding valuation.
The total loss on the extinguishment of accrued
interest was approximately $0.7 million during the three months ended December 31, 2016. This amount was recorded as a component
of loss from extinguishment of debt on the consolidated statements of operations.
During the quarter ended December 31, 2016,
the Company issued 1,000,000 shares of common stock to convert $480,000 debt which was assigned by Cognate.
NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
Stock Purchase Warrants
The following is a summary of warrant activity
for the years ended December 31, 2017 and 2016 (dollars in thousands, except per share data):
|
|
Number of
|
|
|
Weighted Average
|
|
|
Remaining
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
Outstanding as of January 1, 2016
|
|
|
27,267
|
|
|
$
|
4.40
|
|
|
|
2.70
|
|
Warrants granted in a registered direct offering
|
|
|
14,485
|
|
|
|
2.70
|
|
|
|
|
|
Warrants granted to Cognate
|
|
|
35,504
|
|
|
|
0.69
|
|
|
|
|
|
Warrants canceled by Cognate
|
|
|
(37,147
|
)
|
|
|
0.35
|
|
|
|
|
|
Warrants exercised for cash
|
|
|
(15,357
|
)
|
|
|
0.53
|
|
|
|
|
|
Warrants granted
|
|
|
35,287
|
|
|
|
0.43
|
|
|
|
|
|
Warrants expired and cancellation
|
|
|
(1,761
|
)
|
|
|
9.36
|
|
|
|
|
|
Outstanding as of December 31, 2016
|
|
|
58,278
|
|
|
|
1.78
|
|
|
|
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
|
|
* Approximately 200 million warrants were subject
to limitation on exercisability and were not exercisable as of December 31, 2017.
12. Variable Interest Entities
Variable Interest Entities (“VIEs”)
are entities in which equity investors lack the characteristics of a controlling financial interest. VIEs are consolidated
by the primary beneficiary. The primary beneficiary is the party who has both the power to direct the activities of a VIE
that most significantly impact the entity’s economic performance and an obligation to absorb losses of the entity or a right
to receive benefits from the entity that could potentially be significant to the entity.
After the assumption of $5.7 million in debt originally incurred by Cognate in October 2016 and the Company’s
reverse of $3.8 million of Cognate invoices that were previously paid in common stock and warrants in October 2016, the Company
has an implicit variable interest in Cognate to potentially fund Cognate’s losses (if Cognate incurs losses). The Company
determines whether it is the primary beneficiary of Cognate upon its initial involvement and the Company reassess whether it is
the primary beneficiary of Cognate on an ongoing basis. The determination of whether the Company is the primary beneficiary
of Cognate is based upon the facts and circumstances and requires significant judgment. The Company’s considerations
in determining Cognate’s most significant activities and whether the Company has power to direct those activities include,
but are not limited to, Cognate’s purpose and design and the risks passed through to investors, the voting interests of Cognate,
management, service and/or other agreements of Cognate, involvement in Cognate’s initial design and the existence of explicit
or implicit financial guarantees. As of December 31, 2016, the Company 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 Cognate. The Company has no current plans to provide any support
additional to that which is noted above. Therefore, the maximum exposure to loss from its implicit interest is limited to
$4.5 million as of December 31, 2017; which is the shutdown fee the Company must pay to terminate their relationship with Cognate.
13. Commitments and Contingencies
Contingent Payment to Cognate BioServices
Under the January 17, 2014 DCVax®-L Manufacturing
Services Agreement and the DCVax-Direct Agreement, a new set of provisions apply going forward to any shut down or suspension.
Under these provisions, the Company will be contingently obligated to pay certain fees to Cognate BioServices (in addition
to any other remedies) if the Company shuts down or suspends its DCVax-L program or DCVax-Direct program. For a shut down
or suspension of the DCVax-L program, the fees will be as fol
l
ows:
|
·
|
Prior
to the last dose of the last patient enrolled in the Phase III trial for DCVax®-L
or After the last dose of the last patient enrolled in the Phase III clinical trial for
DCVax®-L but before any submission for product approval in any jurisdiction or after
the submission of any application for market authorization but prior to receiving a marketing
authorization approval: in any of these cases, the fee shall be $3 million.
|
|
·
|
At
any time after receiving the equivalent of a marketing authorization for DCVax®-L
in any jurisdiction, the fee shall be $5 million.
|
NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
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, 2017, no shut-down or suspension fees were triggered.
While our DCVax programs are ongoing, the
Company is required to pay certain fees for dedicated production suites or capacity reserved exclusively for DCVax production,
and pay for a certain minimum number of patients, whether or not we fully utilize the dedicated capacity and number of patients.
Operating Lease
On July 31, 2012, the Company entered into
a non-cancelable operating lease for 7,097 square feet of office space in Bethesda, Maryland, which expired on March 31, 2018.
Rent expense for 2017 and 2016 amounted to $0.3 million and $0.3 million, respectively. On March 30, 2018, the Company entered
a renewal agreement to extend the lease until March 31, 2019. The monthly rent expense will be $27,000.
On October 28, 2013, the Company entered into
a non-cancelable operating lease for 4,251 square feet of office space in Germany, which expires in December 2017. The lease contains
an option with 3 years extension, and a 6 month in advance notice is required. On November 15, 2017, the Company entered a renewal
agreement to extend the lease until December 31, 2018.
On December 30, 2017, the Company assumed Cognate Bioservices, GmbH lease agreement and entered a settlement
with its lessor. The Company agreed to pay lessor approximately $479,000
in
6 installment payment in 2018.
On March 26, 2016, the Company entered into
a non-cancelable operating lease for 505 square feet of office space in London, which expires in March, 2017. On December 19, 2016,
the Company entered a renewal agreement to extend the office lease for an additional 1 year until March, 2018. Rent expense in
the U.K. for the year ended December 31, 2017 and 2016 was approximately $151,000 and $120,000, respectively. The U.K. office lease
was ended on March 12, 2018 and no further renewal agreement was entered.
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.
The Company’s future minimum lease payments
are as follows as of December 31, 2017 (in thousands):
|
|
Office Leases
|
|
|
|
|
|
|
U.S.
|
|
|
Germany
|
|
|
U.K.(1)
|
|
|
Total
|
|
2018
|
|
$
|
325
|
|
|
$
|
21
|
|
|
$
|
765
|
|
|
$
|
1,111
|
|
2019
|
|
|
81
|
|
|
|
-
|
|
|
|
422
|
|
|
|
503
|
|
Total
|
|
$
|
406
|
|
|
$
|
21
|
|
|
$
|
1,187
|
|
|
$
|
1,644
|
|
|
(1)
|
Includes $723,000 and $422,000 of minimum lease payments
under
a lease where Advent is the lessee in 2018 and 2019, respectively. 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.
|
NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
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 named 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 named the Company as a nominal defendant. The complaint generally challenged 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 asserted 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 agreed to settle the
Yonemura
case along with the
Tharp
case. On November
22, 2017, the parties submitted a joint stipulation of voluntary dismissal, and on November 27, 2017, the court entered an order
dismissing the case.
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. Cty. filed Nov. 28, 2016), claiming to sue derivatively on behalf of the Company. The complaint named 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 named the Company as a nominal defendant.
The complaint largely challenged the same transactions disputed in the two cases discussed above, claiming that the Company overcompensated
Cognate and Toucan for certain services and loans. It asserted 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 claimed that the individual defendants are
liable to the Company for misleading its investors and financiers. The complaint claimed 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 sought 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 January 3, 2018, the court entered a final order and judgment approving the settlement.
Therefore, all the foregoing litigation is now concluded.
U.S. Securities and Exchange Commission
As previously reported, the Company has received
a number 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.
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 asserts claims sounding in unjust enrichment, quantum meruit, and breach
of contract, and seeks 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; Chardan filed its opposition brief on January 19, 2018; and the Company
filed its reply brief on February 26, 2018. The Company’s motion to dismiss remains pending.
NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
14. 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,
2017 and 2016 are comprised of the following (in thousands):
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred tax asset
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
153,415
|
|
|
$
|
204,106
|
|
Research and development credit carry forwards
|
|
|
15,426
|
|
|
|
14,911
|
|
Stock based compensation and other
|
|
|
9,814
|
|
|
|
17,106
|
|
Total deferred tax assets
|
|
|
178,655
|
|
|
|
236,123
|
|
Valuation Allowance
|
|
|
(178,655
|
)
|
|
|
(236,123
|
)
|
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, 2017, the Company had Federal and State net operating loss carry forwards for income tax purposes
of approximately $153.4 million and unused research and development tax credits of approximately $15.4 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 $26.2 million in various jurisdictions. The Company has not performed a detailed analysis to determine whether
an ownership change under Section 382 of the IRC has occurred. The effect of an ownership change would be the imposition of
an annual limitation on the use of net operating loss carryforwards attributable to periods before the change. Any limitation may
result in expiration of a portion of the NOL or research and development credit carryforwards before utilization. The tax years
2014 through 2017 remain open to examination by federal agencies and other jurisdictions in which the Company operates.
During 2016 the Company reevaluated the
pricing/deductibility of stock options granted and the value of warrants issued, resulting in the decrease in the potential future
tax deduction from those instruments.
In assessing the realization of deferred tax
assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in
which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected
future taxable income and taxing strategies in making this assessment. In case the deferred tax assets will not be realized in
future periods, the Company has provided a valuation allowance for the full amount of the deferred tax assets at December 31, 2017
and 2016.
The expected tax expense (benefit) based on
the U.S. federal statutory rate is reconciled with actual tax expense (benefit) as follows:
(dollars in thousands)
|
|
For the years ended
|
|
|
|
2017
|
|
|
2016
|
|
Statutory federal income tax rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State taxes, net of federal tax benefit
|
|
|
4.0
|
%
|
|
|
1.8
|
%
|
Tax rate differential on foreign income
|
|
|
-0.4
|
%
|
|
|
-2.3
|
%
|
Derivative gain or loss and other
|
|
|
-1.2
|
%
|
|
|
7.6
|
%
|
Cancellation of shares
|
|
|
0.2
|
%
|
|
|
-16.6
|
%
|
Cancellation of warrants
|
|
|
-0.2
|
%
|
|
|
-7.8
|
%
|
Other permanent items and true ups
|
|
|
-8.6
|
%
|
|
|
2.7
|
%
|
R&D Credit
|
|
|
-0.7
|
%
|
|
|
2.8
|
%
|
Change in rate
|
|
|
-107.0
|
%
|
|
|
0.0
|
%
|
Change in valuation allowance
|
|
|
78.6
|
%
|
|
|
-22.2
|
%
|
Income tax provision (benefit)
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
|
|
For the years ended
|
|
|
|
2017
|
|
|
2016
|
|
Federal
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
|
|
|
(59,454
|
)
|
|
|
(11,160
|
)
|
State
|
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
|
-
|
|
Deferred
|
|
|
2,911
|
|
|
|
(1,427
|
)
|
Foreign
|
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
|
-
|
|
Deferred
|
|
|
(924
|
)
|
|
|
(5,189
|
)
|
Change in valuation allowance
|
|
|
57,467
|
|
|
|
17,776
|
|
Income tax provision (benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
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.
15. Subsequent Events
Public and Private Offering
Between January and April 2018, the
Company sold approximately 0.3 million shares of Series A convertible preferred stock at a price of $1.70 per share and
issued approximately 2.9 million Class D-1 Warrants exercisable at $0.22 per share for a period of 2 years for an aggregate
of $0.5 million.
Between January and April 2018, the Company
sold approximately 1.2 million shares of Series B convertible preferred stock at a price of $2.30 per share and issued approximately
12 million Class D-2 Warrants exercisable at $0.30 per share for a period of 2 years for an aggregate of $2.8 million.
Conversion of Preferred Stock
An aggregate of 6.5 million
shares of Series A preferred stock and 0.4 million shares of Series B preferred stock were converted into approximately 69.6 million
shares of common stock.
Debt Conversion
Between January and April 2018, approximately
$1.7 million principal and $56,000 of accrued interest on certain notes were converted into approximately 5 million shares of common
stock.
Warrants Exercised for Cash
Between January and April 2018, the Company
issued approximately 6.8 million shares of common stock from the exercise of warrants with an exercise price from $0.22 to $0.30
for aggregate proceeds of $1.6 million.
Share-settled Debt
Between January and April 2018, the Company
issued 4.3 million shares of common stock to the holder of the Company’s share-settled debt as advance payment for future
debt conversion.
NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
Debt Offering to Related Parties
On March 14, 2018, the Company and its Chief
Executive Officer, Linda F. Powers, entered into a note and loan agreement for a loan of $4.0 million by Ms. Powers to the Company.
The Note is convertible into Series B Preferred Stock at $2.30 for one share of Series B Preferred Stock and ten Class D-2 Warrants
(the “Note”), 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. Accordingly, the Company is issuing
8,695,652 Class D-2 Warrants to Ms. Powers. The Note bears interest at a rate of 10% per annum, and is repayable upon 15 days'
notice from the holder (and no later than five years from the date of the Note). Each share of Series B Preferred Stock is convertible
into 10 shares of common stock when shares of common stock are authorized and available. The Class D-2 Warrants are not currently
exercisable, will expire five years after they become exercisable and have an exercise price of $0.30.
On March 19, 2018, the Company and Ms. Powers
entered into an additional note and loan agreement for an additional loan of $400,000 by Ms. Powers to the Company. This additional
note is convertible into Series B Preferred Stock and Class D-2 Warrants on the same terms as the Note issued on March 14, 2018.
Warrant Adjustments
The Company and certain investors agreed to
modify the terms of outstanding warrants held by such investors. Pursuant to the agreements, the investors agreed not to exercise
their warrants before a vote of the shareholders of the Company to increase the authorized capital stock of the Company is held
or a predetermined date of either June 1, 2018 or four months from the date of the agreement. The modifications generally provided
for a one-year extension to the expiration date of such warrants and a decrease in the exercise price of the warrants.
From March 1 through March 7, 2018, the Company
modified 92.9 million warrants, with new expiration dates ranging between September 15, 2018 and June 30, 2022 and new exercise
prices ranging between $0.24 and $2.50. Certain of the warrants retained their original exercise prices ranging as low as $0.175.
From March 7 through March 12, 2018, the Company
modified additional 31.1 million warrants, with new expiration dates not exceeding one additional year and ranging from April 16,
2019 to August 1, 2023, and new exercise prices ranging between $0.24 and $0.55.
Stock Options Granted
On January 14, 2018, the Board completed the
process for the implementation of option awards for management and employees exercisable for approximately 12% of the authorized
shares (the “January Options”). The January Options are subject to vesting requirements. 50% of the Options vested
on the grant date, in recognition of performance rendered during the previous 6 years, and 50% will vest over a succeeding 24-month
period in equal monthly installments, subject to acceleration upon the occurrence of certain achievement milestones.
The options awarded to Linda Powers will be
exercisable for up to 29.4 million Shares. The options awarded to Les Goldman will be exercisable for up to 19.6 million Shares.
In the aggregate, the Options for other Company personnel will be exercisable for up to approximately 9 million Shares. The January
Options will be exercisable at a price of $0.23 per share and have 10 years life.
On February 26, 2018, the disinterested members
of the Board approved option awards for the independent Directors, subject to shareholder approval at a Special Meeting (the “February
Options”). The February Options are not currently exercisable and will become exercisable only when shares of common stock
are available for issuance upon exercise.
NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
The February Options are subject to vesting
requirements. 50% of the Options will be vested on the grant date, in recognition of the directors’ performance on the Board
and Board Committees, as well as in helping to support the Company’s operations, over the previous 6 years in the case of
two of the independent directors, and over the previous 2 years in the case of the third independent director. The remaining 50%
of the Options will vest over a succeeding 24-month period in equal monthly installments, subject to acceleration upon the occurrence
of certain achievement milestones.
The independent directors’ Options will be exercisable at
a price of $0.30 per share: a price above the market price of the Company’s common stock at the time of the awards, above
the $0.23 price per share being paid during December through February for Series B preferred shares by unrelated investors (who
also received 100% warrants), and above the exercise price of $0.23 of the options awarded to Company management in January 2018
as previously reported. The exercise period will be 10 years from the date the Options become exercisable.
The options awarded to Mr. Jerry Jasinowski will be exercisable
for up to 4,900,000 shares of common stock. The Options awarded to Dr. Navid Malik will be exercisable for up to 9,065,000 shares
of common stock. The Options awarded to Ambassador Cofer Black will be exercisable for up to 1,715,000 shares of common stock.