UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2014
OR
| ¨ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______to _______
Commission File Number: 001-35737
NORTHWEST BIOTHERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or Other Jurisdiction of Incorporation or Organization) | 94-3306718 (I.R.S. Employer Identification No.) |
4800 Montgomery Lane, Suite 800, Bethesda, MD 20814
(Address of principal executive offices) (Zip Code)
(240) 497-9024
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ¨ | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company x |
| (do not check if a smaller reporting company) | |||
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x
As of May 14, 2014, the total number of shares of common stock, par value $0.001 per share, outstanding was 57,195,817.
NORTHWEST BIOTHERAPEUTICS, INC.
FORM 10-Q
TABLE OF CONTENTS
| PART I - FINANCIAL INFORMATION | ||
| Item 1. | Condensed Interim Financial Statements | |
Condensed Consolidated Balance Sheets as of March 31, 2014 (unaudited) and December 31, 2013 | 2 | |
| 3 | |
| 4 | |
| 5 | |
| 6-7 | |
| Unaudited Notes to Condensed Consolidated Financial Statements | 8 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 |
| Item 4. | Controls and Procedures | 18 |
| PART II-OTHER INFORMATION | ||
| Item 5. | Other Information | 19 |
| Item 6. Exhibits | 20 | |
| SIGNATURES | 21 | |
Part I – Financial Information
Item 1. Financial Statements
NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
| March 31, | December 31, | |||||||
| 2014 | 2013 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 12,230 | $ | 18,499 | ||||
| Prepaid expenses and other current assets | 147 | 147 | ||||||
| Total current assets | 12,377 | 18,646 | ||||||
| Property and equipment, net | 80 | 83 | ||||||
| Other non-current assets | 55 | 55 | ||||||
| Total assets | $ | 12,512 | $ | 18,784 | ||||
| LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable (includes related party of $1,055 and $3,619 as of March 31, 2014 and December 31, 2013, respectively) | $ | 6,620 | $ | 8,937 | ||||
| Accrued expenses (includes related party of $6 and $5 as of March 31, 2014 and December 31, 2013, respectively) | 756 | 842 | ||||||
| Convertible notes, net (includes related party of $50 and $50 as of March 31, 2014 and December 31, 2013, respectively) | 238 | 288 | ||||||
| Investor deposit | 1,400 | - | ||||||
| Notes payable - in dispute | 934 | 934 | ||||||
| Derivative liability associated with warrants | 33,624 | 8,688 | ||||||
| Total current liabilities | 43,572 | 19,689 | ||||||
| Redeemable common stock ($0.001 par value); 0 and 1,444,788 shares issued and outstanding as of March 31, 2014 and December 31, 2013, respectively | - | 8,913 | ||||||
| Stockholders' equity (deficit): | ||||||||
| Preferred stock ($0.001 par value); 40,000,000 shares authorized; 0 shares issued and outstanding as of March 31, 2014 and December 31, 2013, respectively | - | - | ||||||
| Common stock ($0.001 par value); 450,000,000 shares authorized; 54,818,410 and 45,666,315 shares issued and outstanding as of March 31, 2014 and December 31, 2013 , respectively | 55 | 46 | ||||||
| Additional paid-in capital | 400,003 | 375,213 | ||||||
| Deficit accumulated during the development stage | (430,928 | ) | (384,887 | ) | ||||
| Cumulative translation adjustment | (190 | ) | (190 | ) | ||||
| Total stockholders' equity (deficit) | (31,060 | ) | (9,818 | ) | ||||
| Total liabilities, redeemable common stock and stockholders' equity (deficit) | $ | 12,512 | $ | 18,784 | ||||
See accompanying notes to the unaudited condensed consolidated financial statements
| 2 |
NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
| Period from | ||||||||||||
| For the three months | March 18, 1996 | |||||||||||
| ended March 31, | (Inception) to | |||||||||||
| 2014 | 2013 | March 31, 2014 | ||||||||||
| Revenues: | ||||||||||||
| Research material sales | $ | - | $ | - | $ | 580 | ||||||
| Contract research and development from related parties | - | - | 1,128 | |||||||||
| Research grants and other | - | 137 | 2,642 | |||||||||
| Total revenues | - | 137 | 4,350 | |||||||||
| Operating costs and expenses: | ||||||||||||
| Cost of research material sales | - | - | 382 | |||||||||
| Research and development | 19,986 | 11,608 | 183,064 | |||||||||
| General and administration | 3,693 | 2,470 | 107,056 | |||||||||
| Depreciation and amortization | 3 | 3 | 2,392 | |||||||||
| Loss on facility sublease | - | - | 895 | |||||||||
| Asset impairment loss | - | - | 2,445 | |||||||||
| Total operating costs and expenses | 23,682 | 14,081 | 296,234 | |||||||||
| Loss from operations | (23,682 | ) | (13,944 | ) | (291,884 | ) | ||||||
| Other income (expense): | ||||||||||||
| Valuation of reclassified equity instruments | - | - | 16,071 | |||||||||
| Inducement expense | (5,251 | ) | - | (43,187 | ) | |||||||
| Accretion of redeemable securities | - | - | (2,073 | ) | ||||||||
| Change in fair value of derivatives | (16,984 | ) | - | (14,444 | ) | |||||||
| Gain on sale of intellectual property and property and equipment | - | - | 3,664 | |||||||||
| Foreign exchange gain or loss | (2 | ) | - | (3 | ) | |||||||
| Interest expense | (122 | ) | (450 | ) | (55,970 | ) | ||||||
| Interest income and other | - | - | 1,707 | |||||||||
| Net loss | $ | (46,041 | ) | $ | (14,394 | ) | $ | (386,119 | ) | |||
| Issuance of common stock in connection with elimination of Series A and Series A-1 preferred stock preferences | - | - | (12,349 | ) | ||||||||
| Modification of Series A preferred stock warrants | - | - | (2,306 | ) | ||||||||
| Modification of Series A-1 preferred stock warrants | - | - | (16,393 | ) | ||||||||
| Series A preferred stock dividends | - | - | (334 | ) | ||||||||
| Series A-1 preferred stock dividends | - | - | (917 | ) | ||||||||
| Warrants issued on Series A and Series A-1 preferred stock dividends | - | - | (4,664 | ) | ||||||||
| Accretion of Series A preferred stock mandatory redemption obligation | - | - | (1,872 | ) | ||||||||
| Series A preferred stock redemption fee | - | - | (1,700 | ) | ||||||||
| Beneficial conversion feature of Series D preferred stock | - | - | (4,274 | ) | ||||||||
| Net loss applicable to common stockholders | $ | (46,041 | ) | $ | (14,394 | ) | $ | (430,928 | ) | |||
| Net loss per share applicable to common stockholders - basic | $ | (0.88 | ) | $ | (0.54 | ) | ||||||
| Weighted average shares used in computing basic loss per share | 52,377 | 26,710 | ||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements
| 3 |
NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(in thousands)
| Period from | ||||||||||||
| March 18, 1996 | ||||||||||||
| For the three months ended | (Inception) | |||||||||||
| March 31, | to March 31, | |||||||||||
| 2014 | 2013 | 2014 | ||||||||||
| Net loss | $ | (46,041 | ) | $ | (14,394 | ) | $ | (386,119 | ) | |||
| Other comprehensive loss | ||||||||||||
| Foreign currency translation adjustment | - | - | (190 | ) | ||||||||
| Total comprehensive loss | $ | (46,041 | ) | $ | (14,394 | ) | $ | (386,309 | ) | |||
See accompanying notes to the unaudited condensed consolidated financial statements
| 4 |
NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
(Unaudited)
(in thousands)
| Common Stock | Additional Paid- | Accumulated | Cumulative Translation | Total stockholders' | ||||||||||||||||||||
| Shares | Amount | in Capital | Deficit | adjustment | equity (deficit) | |||||||||||||||||||
| Balance December 31, 2013 | 45,666 | $ | 46 | 375,213 | $ | (384,887 | ) | $ | (190 | ) | $ | (9,818 | ) | |||||||||||
| Issuance of common stock in exchange for services | 5,340 | 5 | 4,022 | - | - | 4,027 | ||||||||||||||||||
| Issuance of common stock for cash | 32 | - | 224 | - | - | 224 | ||||||||||||||||||
| Conversion of accounts payable to common stock and warrants | 1,482 | 2 | 8,725 | - | - | 8,727 | ||||||||||||||||||
| Conversion of note payable and accrued interest to common stock | 70 | - | 217 | - | - | 217 | ||||||||||||||||||
| Proceeds from warrants exercises | 722 | 1 | 2,691 | - | - | 2,692 | ||||||||||||||||||
| Cashless warrants exercises | 41 | - | - | - | - | - | ||||||||||||||||||
| Redemption of redeemable securities | 1,445 | 1 | 8,912 | - | - | 8,913 | ||||||||||||||||||
| Adjustment for issuance of common stock in 2012 | 20 | - | - | - | - | - | ||||||||||||||||||
| Offering costs | - | - | (1 | ) | - | - | (1 | ) | ||||||||||||||||
| Net loss | - | - | - | (46,041 | ) | - | (46,041 | ) | ||||||||||||||||
| Balance as of March 31. 2014 | 54,818 | $ | 55 | 400,003 | $ | (430,928 | ) | $ | (190 | ) | $ | (31,060 | ) | |||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements
| 5 |
NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
| Period from | ||||||||||||
| For the three months ended March 31, | March 18, 1996 (Inception) to | |||||||||||
| 2014 | 2013 | March 31, 2014 | ||||||||||
| Cash Flows from Operating Activities: | ||||||||||||
| Net Loss | $ | (46,041 | ) | $ | (14,394 | ) | $ | (386,119 | ) | |||
| Reconciliation of net loss to net cash used in operating activities: | - | |||||||||||
| Depreciation and amortization | 3 | 3 | 2,391 | |||||||||
| Amortization of deferred financing costs | - | - | 320 | |||||||||
| Amortization of debt discount and accretion on redeemable securities | - | 368 | 44,776 | |||||||||
| Change in fair value of derivatives | 16,984 | - | 14,444 | |||||||||
| Accrued interest converted to common stock | 76 | - | 336 | |||||||||
| Accreted interest on convertible promissory note | - | - | 1,484 | |||||||||
| Stock-based compensation costs | - | 609 | 24,412 | |||||||||
| Stock and warrants issued for services | 9,528 | 883 | 35,823 | |||||||||
| Inducement expense | 5,251 | - | 35,234 | |||||||||
| Valuation of reclassified equity contracts | - | - | (16,070 | ) | ||||||||
| Asset impairment loss and gain on sale of properties | - | - | (936 | ) | ||||||||
| Loss on facility sublease | - | - | 895 | |||||||||
| Increase (decrease) in cash resulting from changes in assets and liabilities: | ||||||||||||
| Prepaid expenses and other current assets | - | 73 | 563 | |||||||||
| Accounts payable and accrued expenses | 277 | 299 | 8,766 | |||||||||
| Related party accounts payable and accrued expenses | 3,363 | 5,085 | 45,261 | |||||||||
| Deposits and other non-current assets | - | - | (39 | ) | ||||||||
| Accrued loss on sublease | - | - | (265 | ) | ||||||||
| Deferred rent | - | - | 411 | |||||||||
| Net Cash used in Operating Activities | (10,559 | ) | (7,074 | ) | (188,314 | ) | ||||||
| Cash Flows from Investing Activities: | ||||||||||||
| Purchase of property and equipment, net | - | - | (5,123 | ) | ||||||||
| Proceeds from sale of property and equipment | - | - | 258 | |||||||||
| Proceeds from sale of intellectual property | - | - | 1,816 | |||||||||
| Proceeds from sale of marketable securities | - | - | 2,000 | |||||||||
| Refund of security deposit | - | - | (3 | ) | ||||||||
| Transfer of restricted cash | - | - | (1,035 | ) | ||||||||
| Net Cash used in Investing Activities | - | - | (2,087 | ) | ||||||||
| Cash Flows from Financing Activities: | ||||||||||||
| Proceeds from issuance of redeemable securities | - | - | 5,302 | |||||||||
| Repayment on redeemable securities | - | - | (240 | ) | ||||||||
| Proceeds from Investor deposit | 1,400 | - | 1,400 | |||||||||
| Proceeds from issuance of notes payable | - | 400 | 7,980 | |||||||||
| Valuation of reclassified equity contracts | ||||||||||||
| Proceeds from issuance of convertible notes payable | - | - | 38,414 | |||||||||
| Proceeds from issuance of notes payable to related parties | - | - | 12,880 | |||||||||
| Repayment of note payable to related parties | - | - | (9,655 | ) | ||||||||
| Repayment of convertible promissory note | (25 | ) | - | (3,786 | ) | |||||||
| Borrowing under line of credit, Northwest Hospital | - | - | 2,834 | |||||||||
| Repayment of line of credit, Northwest Hospital | - | - | (2,834 | ) | ||||||||
| Payment on capital lease obligations | - | - | (323 | ) | ||||||||
| Payments on note payable | - | (289 | ) | (420 | ) | |||||||
| Proceeds from issuance preferred stock, net | - | - | 28,708 | |||||||||
| Proceeds from exercise of stock options and warrants | 2,692 | - | 3,515 | |||||||||
| Proceeds from issuance common stock and warrants, net | 224 | - | 126,182 | |||||||||
| Proceeds from sale of stock warrant | - | - | 90 | |||||||||
| Payment of preferred stock dividends | - | - | (1,251 | ) | ||||||||
| Series A preferred stock redemption fee | - | - | (1,700 | ) | ||||||||
| Deferred financing costs | (1 | ) | (10 | ) | (4,275 | ) | ||||||
| Net Cash provided by Financing Activities | 4,290 | 101 | 202,821 | |||||||||
| Effect of exchange rates on cash and cash equivalents | - | - | (190 | ) | ||||||||
| Net increase (decrease) in cash and cash equivalents | (6,269 | ) | (6,973 | ) | 12,230 | |||||||
| Cash and cash equivalents at beginning of period | 18,499 | 7,346 | - | |||||||||
| Cash and cash equivalent at end of period | $ | 12,230 | $ | 373 | $ | 12,230 | ||||||
See accompanying notes to the unaudited condensed consolidated financial statements
| 6 |
NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
| For the three months ended March 31, | Period from March 18, 1996 (Inception) to | |||||||||||
| 2014 | 2013 | March 31, 2014 | ||||||||||
| Supplemental disclosure of cash flow information - Cash paid during the period for interest | $ | - | $ | - | $ | 1,879 | ||||||
| Supplemental schedule of non-cash financing activities: | ||||||||||||
| Equipment acquired through capital leases | - | - | 285 | |||||||||
| Issuance of common stock in connection with elimination of Series A and Series A-1 preferred stock preferences | - | - | 12,349 | |||||||||
| Issuance of common stock in connection with conversion of notes payable and accrued expenses | 140 | - | 62,192 | |||||||||
| Issuance of common stock and warrants in connection with conversion of accounts payable | 5,926 | - | 22,894 | |||||||||
| Issuance of redeemable common stock in connection with conversion of liabilities | - | 934 | 3,673 | |||||||||
| Warrants issued on Series A and Series A-1 preferred stock dividends | - | - | 4,664 | |||||||||
| Reclass of redeemable security to equity | 8,913 | - | 10,777 | |||||||||
| Reclass of warrants to warrant liability | - | - | 217 | |||||||||
| Warrant liability recorded in connection with issuance of common stock | - | - | 5,602 | |||||||||
| Liability for reclassified equity contracts | - | 41,253 | ||||||||||
| Accretion of mandatorily redeemable Series A preferred stock redemption obligation | - | - | 1,872 | |||||||||
| Debt discount on promissory notes | - | 27,414 | ||||||||||
| Issuance of Series C preferred stock warrants in connection with lease agreement | - | - | 43 | |||||||||
| Issuance of common stock to settle accounts payable | - | - | 4 | |||||||||
| Liability for and issuance of common stock and warrants to Medarex | - | - | 840 | |||||||||
| Issuance of common stock to landlord | - | - | 35 | |||||||||
| Deferred compensation on issuance of stock options and restricted stock grants | - | - | 759 | |||||||||
| Cancellation of options and restricted stock | - | - | 849 | |||||||||
| Financing of prepaid insurance through note payable | - | - | 491 | |||||||||
| Stock subscription receivable | - | - | 480 | |||||||||
| Modification of Series A preferred stock warrants | - | - | 2,306 | |||||||||
| Modification of Series A-1 preferred stock warrants | - | - | 16,393 | |||||||||
| Conversion of convertible promissory notes and accrued interest to Series A-1 preferred stock | - | - | 7,707 | |||||||||
| Conversion of convertible promissory notes and accrued interest to Series D preferred stock | - | - | 5,324 | |||||||||
| Conversion of debt to accounts payable | - | 1,428 | ||||||||||
| Conversion of convertible promissory notes and accrued interest to stock | - | - | 269 | |||||||||
See accompanying notes to the unaudited condensed consolidated financial statements
| 7 |
NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| 1. | Organization and Description of Business and Recent Developments |
Northwest Biotherapeutics, Inc. and its wholly owned subsidiaries NW Bio Europe S.A.R.L and NW Bio Gmbh (collectively, the “Company”, “we”, “us” and “our”) were organized to discover and develop innovative immunotherapies for cancer.
The Company’s platform technology, DCVax, is currently being tested for the treatment of certain types of cancers through clinical trials in the United States and Europe that are in various phases. The Company is considered to be a development stage company and, as such, the Company’s financial statements are prepared in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 915 “Development Stage Entities.” The Company is subject to all of the risks and uncertainties associated with development stage biotech companies.
Recent Developments
On January 17, 2014, the Company entered into the following agreements (collectively, the “Cognate Agreements” or the “Agreements”) with Cognate BioServices, Inc. (“Cognate”) for manufacturing and related services for our DCVax® products:
· a DCVax®-L Manufacturing and Services Agreement;
· a DCVax®-Direct Manufacturing and Services Agreement;
· an Ancillary Services Agreement; and
a Manufacturing Expansion Services Agreement.
Together, these Agreements provide for substantial expansion of the manufacturing capacity for the Company’s programs, in multiple regions, as well as development of the necessary systems and logistics, and other near-term and long-term preparations, for large scale scale-up of the Company’s programs. These Agreements include most favored nation treatment with respect to the terms provided to any other investors or creditors (including with respect to any warrants).
The Company also entered into a Lock-Up Agreement with Cognate on January 17, 2014, under which Cognate agreed to have all of the shares that are issued as part of the milestone and initiation payments and the invoice conversions under the Cognate Agreements (collectively, the “Lock-Up Shares”) locked up for up to 36 months, in return for 15% warrant coverage for each 6-month period of lock-up, on the same terms as the warrants in the Cognate Agreements. During the lock-up, the Lock-Up Shares may not be sold or traded on the market. These lock-up terms are subject to the same most favored nation treatment as provided in the Cognate Agreements as described above.
| 2. | Liquidity and Financial Condition |
The Company used approximately $10.6 million of cash in its operating activities for the three months ended March 31, 2014 and has used $188.3 million of cash in its operating activities since inception. The Company incurred a $46.0 million aggregate combined cash and non-cash loss for the three months ended March 31, 2014, including $35.4 million of net aggregate non-cash charges associated with stock based compensation, a mark to market charge for the change in the fair value of its derivative liability, and inducement expenses related to the exchange of Cognate BioServices, Inc. (“Cognate”) accounts payable for common stock and warrants.
The Company had cash and cash equivalents of $12.2 million as of March 31, 2014, and current assets less accounts payable and accrued expenses and notes payable of approximately $3.8 million at March 31, 2014. The Company owes an aggregate of $1.1 million of trade liabilities and convertible notes to related parties.
On April 9, 2014, the Company entered into a Securities Purchase Agreement with a single institutional investor for the sale of 2,272,727 shares of common stock at a purchase price of $6.60 per share, for a total purchase price of $15.0 million. Additionally, from the date of the closing until one year after the closing date, the investor has a non-transferable Overallotment Right to purchase up to 2,272,727 additional shares of common stock at a price per share of $7.50, for an additional subscription amount of up to $17.05 million. See Note 11.
| 8 |
Because of recurring operating losses, net operating cash flow deficits, and a deficit accumulated during the development stage, there is substantial doubt about the Company’s ability to continue as a going concern. The financial statements have been prepared assuming the Company will continue as a going concern and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
| 3. | Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying unaudited condensed consolidated interim financial statements include the accounts of the Company and its subsidiaries. All material intercompany balances and transactions have been eliminated.
The accompanying unaudited condensed financial statements as of March 31, 2014 and for the three months then ended have been prepared in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and on the same basis as the Company prepares its annual audited consolidated financial statements. The condensed consolidated balance sheet as of March 31, 2014, condensed consolidated statements of operations and condensed consolidated statements of comprehensive loss for the three months ended March 31, 2014 and 2013, condensed consolidated statement of stockholders’ equity (deficit) for the three months ended March 31, 2014, and the condensed consolidated statements of cash flows for the three months ended March 31, 2014 and 2013 and period from March 18, 1996 (inception) to March 31, 2014 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented. The results for the three months ended March 31, 2014 are not necessarily indicative of results to be expected for the year ending December 31, 2014 or for any future interim period. The condensed balance sheet at December 31, 2013 has been derived from audited financial statements; however, it does not include all of the information and notes required by U.S. GAAP for complete financial statements. The accompanying condensed financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2013, and notes thereto included in the Company’s annual report on Form 10-K, which was filed with the SEC on April 1, 2014.
Use of Estimates
In preparing financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of expenses during the reporting period. Due to inherent uncertainty involved in making estimates, actual results reported in future periods may be affected by changes in these estimates. On an ongoing basis, the Company evaluates its estimates and assumptions. These estimates and assumptions include valuing equity securities in share-based payment arrangements, estimating the fair value of equity instruments recorded as derivative liabilities, and estimating the useful lives of depreciable assets and whether impairment charges may apply.
Research and Development Costs
Research and development costs are charged to operations as incurred and consist primarily of clinical trial costs, related party manufacturing cost, consulting costs, contract research and development costs, and compensation costs. For the three months ended March 31, 2014 and 2013 the Company recognized $20.0 million and $11.6 million, respectively, of research and development costs (cash and non-cash combined).
Significant Accounting Policies
There have been no material changes in the Company’s significant accounting policies to those previously disclosed in the 2013 Annual Report.
| 9 |
4. Fair Value Measurements
The following table classifies the Company’s liabilities measured at fair value on a recurring basis (primarily reflecting an increase in stock price per share) into the fair value as of March 31, 2014 and December 31, 2013 (in thousands):
| Fair value measured at March 31, 2014 | ||||||||||||||
| Total carrying | Quoted prices in active | Significant other | Significant | |||||||||||
| value at March 31, | markets | observable inputs | unobservable inputs | |||||||||||
| 2014 | (Level 1) | (Level 2) | (Level 3) | |||||||||||
| Warrant liability | $ | 33,624 | $ | - | $ | - | $ | 33,624 | ||||||
| Fair value measured at December 31, 2013 | ||||||||||||||
| Total carrying | Quoted prices in active | Significant other | Significant | |||||||||||
| value at December 31, | markets | observable inputs | unobservable inputs | |||||||||||
| 2013 | (Level 1) | (Level 2) | (Level 3) | |||||||||||
| Warrant liability | $ | 8,688 | $ | - | $ | - | $ | 8,688 | ||||||
There were no transfers between Level 1, 2 or 3 during the three months ended March 31, 2014.
The following table presents changes in Level 3 liabilities measured at fair value from the period ended December 31, 2013 through March 31, 2014. Both observable and unobservable inputs are 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.
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| Balance – December 31, 2013 | $ | 8,688 | ||
| 3,174,833 warrants issued during 1st quarter | 7,952 | |||
| Change in fair value of warrant liability | 16,984 | |||
| Balance – March 31, 2014 | $ | 33,624 |
The Company’s warrant liabilities are measured at fair value using the Monte Carlo simulation valuation methodology. A summary of quantitative information about significant unobservable inputs (Level 3 inputs) used in measuring the Company’s warrant liabilities that are categorized within Level 3 of the fair value hierarchy for the three months ended March 31, 2014 is as follows (dollars and shares in thousands):
| Warrants issuance date | January 6, 2014 | January 17, 2014 | January 31, 2014 | February 3, 2014 | February 28, 2014 | March 31, 2014 | Total | |||||||||||||||||||||
| Number of warrants issued | 139 | 2,434 | 143 | 119 | 195 | 145 | 3,175 | |||||||||||||||||||||
| Fair value of warrants at issuance date | $ | 308 | $ | 5,501 | $ | 383 | $ | 327 | $ | 844 | $ | 589 | $ | 7,952 | ||||||||||||||
| Date of valuation | January 6, 2014 | January 17, 2014 | January 31, 2014 | February 3, 2014 | February 28, 2014 | March 31, 2014 | ||||||||||||||||||
| Dividend yield (per share) | 0 | % | 0 | % | 0 | % | 0 | % | 0 | % | 0 | % | ||||||||||||
| Strike price | $ | 4.00 | $ | 4.00 | $ | 4.00 | $ | 4.00 | $ | 4.00 | $2.40 - $6.00 | |||||||||||||
| Volatility (annual) | 92.13 | % | 93.12 | % | 96.72 | % | 91.79 | % | 105.03 | % | 74.43%-88.03 | % | ||||||||||||
| Risk-free rate | 1.73 | % | 1.66 | % | 1.55 | % | 1.49 | % | 1.49 | % | 1.73 | % | ||||||||||||
| Expected life (years) | 5.0 | 5.0 | 5.00 | 5.00 | 5.00 | 4.33-4.85 | ||||||||||||||||||
The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s Management.
| 5. | Stock-based Compensation |
Stock Based Compensation to Non-employees
Stock-based compensation expense related to stock-based awards to non-employees is recognized as the stock-based awards are earned, generally through the provision of services. The Company believes that the fair value of the stock-based awards is more reliably measurable than the fair value of the services received. The fair value of the granted stock-based awards is calculated at each reporting date. On January 17, 2014, in connection with the Cognate Agreements, the Company issued 5,101,366 shares of common stock. The common stock will vest over thirty six months from the closing date. Stock-based compensation expense related to non-employee grants was $2.5 million for the three months ended March 31, 2014 and is anticipated to be a similar amount for each calendar quarter over the next three years.
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| 6. | Notes Payable |
During the three months ended March 31, 2014, the Company converted notes and relevant accrued interest of $0.1 million into approximately 0.07 million shares of common stock. During the three months ended March 31, 2013, $0.9 million of notes were converted into 0.4 million shares of common stock.
Notes payable consist of the following at March 31, 2014 and December 31, 2013 (in thousands):
| March 31, | December 31, | |||||||
| 2014 | 2013 | |||||||
| Notes payable - current | ||||||||
| 12% unsecured orginally due July 2011 - in dispute (1) | 934 | 934 | ||||||
| 934 | 934 | |||||||
| Convertible notes payable, net - current | ||||||||
| 6% unsecured (2) | 135 | 160 | ||||||
| 8% unsecured note due 2014 (3) | 53 | 53 | ||||||
| 188 | 213 | |||||||
| Convertible Notes payable related party, net - current | ||||||||
| 6% due on demand (4) | 50 | 75 | ||||||
| 50 | 75 | |||||||
| Total notes payable, net | $ | 1,172 | $ | 1,222 | ||||
(1) This $0.934 million note, which was originally due in July 2011 is currently under dispute with the creditor as to the validity of the note payable balance, which the Company believes has already been paid in full and is not outstanding.
(2) This $0.135 million note as of March 31, 2014 consists of two separate 6% notes in the amounts of $0.110 million and $0.025 million. In regard to the $0.110 million 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 $0.025 million 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.
(3) This $0.530 million note is due May 25, 2014.
(4) This $0.050 million demand note as of March 31, 2014 is held by an officer of the Company. The holder has made no demand for payment, and is not expected to make a demand any time in the near term.
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7. Net Loss Per Share Applicable to Common Stockholders
Options, warrants, and convertible debt outstanding were all considered anti-dilutive for the three months ended March 31, 2014, and 2013, due to net losses.
The following securities were not included in the diluted net loss per share calculation because their effect was anti-dilutive as of the periods presented (in thousands):
| For the three months ended | ||||||||
| March 31, | ||||||||
| 2014 | 2013 | |||||||
| Common stock options | 1,551 | 1,551 | ||||||
| Common stock warrants | 22,640 | 12,214 | ||||||
| Convertible notes | 81 | 102 | ||||||
| Excluded potentially dilutive securities | 24,272 | 13,867 | ||||||
8. Related Party Transactions
a. Cognate BioServices
Under the January 17, 2014 DCVax®-L Manufacturing Services Agreement and the DCVax-Direct Agreement, a modified set of provisions applies going forward to any shut down or suspension. Such shut down provisions have been included in all of the agreements with Cognate since 2005. Under the modified provisions, if the Company shuts down or suspends its DCVax-L program or DCVax-Direct program with Cognate in breach of the Agreement, the Company will be liable for certain fees in addition to any other remedies. The fees are based on the stage at which the shut down or suspension occurs:
| • | 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 the three months ended March 31, 2014 the Company recognized approximately $10.1 million was associated with one-time charges (including charges relating to start-up and substantial expansion of several Company programs) under the 2014 service agreements. In addition, the Company incurred recurring research and development charges, which, for the three months ended March 31, 2014 were $5.5 million. As of March 31, 2014 and December 31, 2013, the Company owed Cognate (including third party sub-contract amounts) approximately $1.0 million and $3.6 million, respectively.
Cognate Accounts Payable Conversions and inducement charge –First quarter 2014
Under the July 2013 Conversion and Lock-up Agreement $5.9 million in accounts payable due to Cognate was converted into common stock and warrants. 1.5 million shares of common stock were issued based on a $4.00 per share conversion price. 50% warrant coverage of the common stock issued resulted in 0.7 million warrants issued with an initial exercise price of $4.00. The shares and warrants are subject to most favored nation treatment with respect to the terms provided to any other investors or creditors subsequent to their issuance (including with respect to any warrants).
In accordance with ASC Topic 820, the fair value of the shares was recognized as approximately $8.7 million. The fair value of the warrants was based on the Monte Carlo simulation model, the inputs of which are disclosed in note 4 and was approximately $2.5 million. The Company recorded a $5.3 million of inducement expense in connection with these transactions.
The conversion shares are subject to a lock-up period of at least 18 months from the date of their issuance. Under the lock-up, the shares cannot be sold or traded on the market.
The Company classified the warrants as liabilities at their fair value and adjusts the instruments to fair value at each reporting period in the condensed consolidated statements of operations.
9. Redeemable Common Stock
During the first quarter of 2014, the redemption provision on all 1.4 million redeemable shares outstanding as of December 31, 2013 lapsed and $8.9 million was transferred from redeemable common stock to stockholders’ equity (deficit).
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10. Stockholders’ Deficit
a. Common Stock Issuances
First Quarter 2014
During the quarter ended March 31, 2014 the Company issued in aggregate 5,339,862 shares of common stock in exchange for consulting services. In accordance with ASC Topic 718, the fair value of the vested portion of the common stock was recognized as $4.0 million.
During the quarter ended March 31, 2014 the Company issued in aggregate 32,000 shares of common stock for cash. The fair value of the common stock recognized was $0.2 million.
During the quarter ended March 31, 2014, the Company converted accounts payable due to Cognate of approximately $5.9 million into 1,481,644 shares. The Company recorded $2.8 million of inducement expense associated with the issuance of the common shares. In addition, as noted in footnote 10b the Company issued warrants that were valued at $2.5 million at the date of issuance related to the conversion of accounts payable. Total inducement charge was $5.3 million.
During the quarter ended March 31, 2014, the Company converted notes and relevant accrued interest, based upon the original terms, of $0.2 million into approximately 0.07 million shares of common stock.
During the quarter ended March 31, 2014, the Company issued an aggregate of 721,827 shares of common stock from the exercise of warrants previously issued. The Company received proceeds of approximately $2.7 million from the exercise of these warrants.
During the quarter ended March 31, 2014, 1,444,788 redeemable shares with a carrying value of $8.9 million were no longer redeemable and were reclassed to stockholders’ equity.
b. Stock Purchase Warrants
The following is a summary of warrant activity for the three months ended March 31, 2014 (in thousands):
| Number of | Weighted Average | |||||||
| Warrants | Exercise Price | |||||||
| Outstanding as of December 31, 2013 | 20,266 | $ | 5.23 | |||||
| Warrants issued in connection with conversion of Cognate accounts payable* | 741 | 4.00 | ||||||
| Warrants issued in exchange for services | 2,434 | 4.00 | ||||||
| Warrants exercised on a cashless basis | (73 | ) | - | |||||
| Warrants exercised for cash | (722 | ) | 3.66 | |||||
| Expired in first quarter of 2014 | (6 | ) | 9.54 | |||||
| Outstanding as of March 31, 2014 | 22,640 | $ | 5.12 | |||||
*The warrants contain “down round protection” and the Company classifies these warrant instruments as liabilities at fair value and remeasures these instruments to fair value each reporting period. The Company recorded a $2.5 million charge to inducement expense related to these warrants. The fair value of the warrants was based upon a Monte Carlo Simulation as more fully discussed in Note 4.
11. Subsequent Events
Securities Purchase Agreement - $15.0 million in procceds
On April 15, 2014, the Company sold to a single institutional investor 2,272,727 shares of common stock at a purchase price of $6.60 per share, for a total purchase price of $15.0 million. Additionally, from the date of the closing until one year after the closing date, the investor has a non-transferable Overallotment Right to purchase up to 2,272,727 additional shares of common stock at a price per share of $7.50, for an additional subscription amount of up to $17.05 million. In connection with the sale, the Company paid H.C. Wainwright, the sole placement agent in the offering, fees of approximately $1.05 million, and issued to H.C. Wainwright a warrant to purchase 113,636 shares, which was equal to 5% of the shares sold to the investor in the financing, with an exercise price of $8.25 (which is equal to 125% of the price per share for the shares sold to the investor).
If the investor exercises any portion of the Overallotment Right, the Company will issue to H.C. Wainwright a warrant to purchase shares in an amount equal to 5% of the shares purchased by the investor, with an exercise price of $9.375 (equal to 125% of the price per share for the Overallotment Right shares, if any). The warrants will be exercisable until February 5, 2018.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes to those statements included with this report. In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. The words “believe,” “expect,” “intend,” “anticipate,” and similar expressions are used to identify forward-looking statements, but some forward-looking statements are expressed differently. Many factors could affect our actual results, including those factors described under “Risk Factors” in our Form 10-K for the year ended December 31, 2013. These factors, among others, could cause results to differ materially from those presently anticipated by us. You should not place undue reliance on these forward-looking statements.
Overview
We are a development stage biotechnology company focused on developing immunotherapy products to treat cancers more effectively than current treatments, without toxicities of the kind associated with chemotherapies, and, through a proprietary batch manufacturing process, on a cost-effective affordable basis initially in both the United States and Europe.
We have developed a platform technology, DCVax, which uses activated dendritic cells to mobilize a patient's own immune system to attack their cancer. The DCVax technology is expected to be applicable to all solid tumor cancers, and is embodied in several distinct product lines. One of the product lines (DCVax-L) is designed to cover all solid tumor cancers in which the tumors can be surgically removed. Another product line (DCVax-Direct) is designed for all solid tumor cancers which are considered inoperable and cannot be surgically removed. We believe the broad applicability of DCVax to many cancers provides multiple opportunities for commercialization and partnering.
Our DCVax platform technology involves dendritic cells, the master cells of the immune system, and is designed to reinvigorate and educate the immune system to attack cancers. The dendritic cells are able to mobilize the overall immune system, including T cells, B cells and antibodies, natural killer cells and many others. Such mobilization of the overall immune system provides a broader attack on the cancer than mobilizing just a particular component, such as T cells alone, or a particular antibody alone. Likewise, our DCVax technology is designed to attack the full set of biomarkers, or antigens on a patient’s cancer, rather than just a particular selected target or several targets. Clinical experience indicates that when just one or a few biomarkers on a cancer are targeted by a drug or other treatment, sooner or later the cancer usually develops a way around that drug, and the drug stops working. We believe that mobilizing all agents of the immune system, and targeting all biomarkers on the patient’s cancer, contributes to the effectiveness of DCVax.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenues and expenses.
On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and stock-based compensation. We based our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the reported amounts of revenues and expenses that are not readily apparent from other sources. Actual results may differ from these estimates.
Our critical accounting policies and significant estimates are detailed in our Annual Report on Form 10-K for the year ended December 31, 2013. Our critical accounting policies and significant estimates have not changed substantially from those previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.
Recent Accounting Pronouncements
Management does not believe that any recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements.
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Results of Operations
Operating costs:
Operating costs and expenses consist primarily of research and development expenses, including clinical trial expenses which increase when we are actively participating in clinical trials and are especially high when we are in a large ongoing international phase III trial (as we now are) and when we also have an additional clinical trial program under way in parallel (as we have with our 60-patient Phase I/II trial with DCVax-Direct for all types of inoperable solid tumors), and general and administrative expenses.
Our operating costs include ongoing development work relating to the DCVax-Direct product and its manufacturing, such as the design, engineering, sourcing, production, testing, modification and validation of the manufacturing automation equipment, disposable sets to be used with the manufacturing automation equipment, manufacturing processes, product ingredients, product release assays, and other matters, as well as development of standard operating procedures (SOPs), batch production records, and other necessary materials.
Our operating costs also include the costs of preparations for the launch of new or expanded clinical trial programs including the Phase III trial in the UK and Germany (with DCVax-L for brain cancer) and the Phase I/II trial (with DCVax-Direct for all inoperable solid tumor cancers). The preparation costs include upfront payments to the clinical trial sites and the CROs managing the trials and other service providers, and expenses related to institutional approvals, training of medical and other site personnel, trial supplies and other.
Research and development:
Discovery and preclinical research and development expenses include costs for both internal and substantial external scientific personnel, technical and regulatory advisers, and others, costs of laboratory supplies used in our internal research and development projects, travel, regulatory compliance, and expenditures for preclinical and clinical trial operation and management when we are actively engaged in clinical trials.
Because we are a development stage company, we do not allocate research and development costs on a project basis. We adopted this policy, in part, due to the unreasonable cost burden associated with accounting at such a level of detail and our limited number of financial and personnel resources.
General and administrative:
General and administrative expenses include administrative personnel related salary and benefit expenses, cost of facilities, insurance, travel, legal support, property and equipment and amortization of stock options and warrants.
Three Months Ended March 31, 2014 and 2013
We recognized a net loss of $10.6 million in cash outlays and $35.4 million in non-cash accounting charges (i.e. increase in stock-based compensation, inducement expense and the issuance of warrants etc.), for a combined (cash and non-cash) total net loss of $46.0 million for the three months ended March 31, 2014 compared to a net loss of $14.4 million for the three months ended March 31, 2013.
Research and Development Expense. Research and development expense was a combined (cash and non-cash) total of $20.0 million for the three months ended March 31, 2014 compared to $11.6 million for the three months ended March 31, 2013. The increase was primarily attributable to the DCVax-Direct manufacturing and product development work and the preparation costs for the launch of two clinical trial programs, one in the US and one in the UK, as well as expansion of the ongoing Phase III trial in the US, and increased manufacturing of DCVax®-L for the Phase III trial.
As of March 31, 2014 we had over 51 clinical trial sites in operation in the US and UK in our Phase III trial with DCVax-L, compared to approximately 40 clinical trial sites in the US only at March 31, 2013. At March 31, 2014, we also had substantially expanded other clinical trial related operations compared with March 31, 2013 including, for example, extensive preparations and launch of the Phase III DCVax-L clinical trial in the UK as described above, and launch of the Phase I/II DCVax-Direct trial in the US as described above, in addition to costs related to fully operational and approved manufacturing in Germany, cost of an established wholly owned German subsidiary, manufacturing activity in the UK and preparations in regard to nearly 30 clinical trial sites in the UK and Germany.
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General and Administrative Expense. General and administrative expense included $2.2 million of cash expenses, and $1.5 of non-cash charges (i.e. amortization of previously issued stock based compensation and restricted stock and warrants issued for services), for a combined cash and non-cash total of $3.7 million for the three months ended March 31, 2014 compared to $2.5 million for the three months ended March 31, 2013. The increase in general and administrative expenses from the prior period is as a result of increase in consulting expenses of $1.4 million and increase in legal expenses of $0.4 million due to the expansion of our platform, offset by a $0.6 million decrease in stock based compensation expense.
Change in fair value of derivatives. During the three months ended March 31, 2014 and March 31, 2013 we recognized a non-cash loss on derivative liabilities of $17.0 million and $0 million, respectively, due primarily to the change in value of the warrants issued to Cognate in connection with the extinguishment of accounts payable.
Inducement expense. During the three months ended March 31, 2014 and March 31, 2013 we recognized an inducement expense of $5.3 million and $0 million, respectively. This inducement expense during the three months ended March 31, 2014 was related to the conversion of accounts payable to common stock and warrants to Cognate in connection with the extinguishment of accounts payable.
Interest (Expense). Interest expense (including non-cash elements such as amortization of debt discount) decreased to $0.1 million for the three months ended March 31, 2014 from $0.5 million for the three months ended March 31, 2013. The decrease in interest expense is primarily related to the retirement of $1.8 million in notes payable during 2013.
Liquidity and Capital Resources
We have experienced recurring losses from operations. Net cash outflows from operations were $10.6 million for the three months ended March 31, 2014.
At March 31, 2014, current assets totaled $12.4 million, compared to $18.6 million at December 31, 2013. Working capital excluding the warrant liability was of $2.4 million at March 31, 2014, compared to a deficit of $1.0 million at December 31, 2013 (excluding redeemable common stock amounting to $8.9 million). The working capital deficit decrease as of March 31, 2014 as compared to December 31, 2013 is primarily related to the conversion of $5.9 million of accounts payable to Cognate to common stock and warrants.
On a going forward basis, commencing with August 2013, and continuing throughout the lock-up period (up to 36 months), we and Cognate agreed to establish an arrangement for regular ongoing payment of at least half of all invoices in common stock of our company, and the remainder in cash, at $4.00 per share subject to a most favored nation treatment with respect to terms provided to other investors or creditors (including with respect to any warrants). The arrangement will continue for 18 months from the execution of the Cognate agreements or until terminated by mutual agreement. The contracts implementing these agreements are the Cognate Agreements that were executed in January 2014.
Since 2004, Toucan Capital Fund II, L.P. (“Toucan Capital”), Toucan Partners LLC (“Toucan Partners”), entities controlled by Ms. Linda Powers, our CEO and the managing director of Toucan Capital and managing member of Toucan Partners, and Ms. Linda Powers (collectively “Toucan”) have provided substantial funding to us. From 2004 to date, Toucan has provided ongoing financings to us through the purchase of common stock, preferred stock (which was all converted to common stock), loans and debt securities. Toucan (other than Cognate) held approximately 8% of common stock outstanding as of March 31, 2014.
Operating Activities
We used $10.6 million in cash for operating activities during the three months ended March 31, 2014, and used $7.1 million in cash for operating activities during the three months ended March 31, 2013. The increase in cash used in operating activities was primarily attributable to the DCVax-Direct manufacturing and product development work, the preparations for launch of the Phase I/II clinical trial with DCVax-Direct for solid tumor cancers, the increased manufacturing of DCVax®-L for the ongoing Phase III brain cancer trial at a growing number of sites across the US and the preparation costs for the launch of the 60-patient Phase I/II trial with DCVax-Direct in the U.S., and the Phase III trial with DC-Vax-L for brain cancer in the UK.
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As of March 31, 2014, we had over 51 clinical trial sites in operation in the US and UK in our Phase III trial with DCVax-L, compared to approximately 40 clinical trial sites at March 31, 2013, in the US only. At March 31, 2014, we also had substantially expanded other clinical trial related operations compared with March 31, 2013 including, for example, the launch of the Phase III DCVax-L clinical trial in the UK and approval for the trial in Germany, and launch of the Phase I/II DCVax-Direct trial in the U.S in addition to costs related to fully operational and approved manufacturing in Germany, an established wholly owned German subsidiary, clinical activity in the U.K. and preparations for up to 30 clinical trial sites in the U.K. and Germany.
Financing Activities
During the three months ended March 31, 2014, our financing activities primarily consisted of proceeds from an investor of $1.4 million, such shares have not been issued yet as of May 14, 2014, $2.7 million from the exercise of warrants and $0.2 million for the issuance of common stock with warrants; partially offset by the payment of $0.03 million of convertible promissory notes.
In order to continue with our current activities under our DCVax®-L and DCVax-Direct program, we will have to obtain substantial amounts of further funding, as described in the Risk Factors section in our annual report on Form 10-K for the year ended December 31, 2013. Our on-going funding requirements will depend on many factors, including the results of the reimbursement negotiations in Germany, the implementation of our Hospital Exemption approval in Germany, and the extent to which we realize and draw upon various sources of non-dilutive funding. One such source of non-dilutive funding is a $5.5 million German grant awarded on May 1, 2012, by the German government through its Saxony Development Bank. The grant will provide funding on a matching basis for up to 50% of the costs incurred by us for the DCVax-L clinical trial and manufacturing in Germany. We anticipate beginning to draw upon the grant in the next several months.
Other factors affecting our ongoing funding requirements include the number of staff we employ, the number of sites and pace of patient enrollment in our Phase III brain cancer trial and our Phase I/II clinical trial with DCVax-Direct, the costs of further development work relating to DCVax-Direct, the costs of expansion of manufacturing of both DCVax-L and DCVax-Direct, the cost of establishing clinical studies and compassionate use/named patient programs in other countries, and unanticipated developments. The extent of resources available to us will determine the pace at which we can move forward with both our DCVax-L program and our DCVax-Direct program.
As we are dependent on our ability to obtain short term financing and ultimately to generate sufficient cash flow to meet our obligations on a timely basis, as well as successfully obtain financing on favorable terms to fund our long term plans, our financial statements indicate there is substantial doubt about our ability to continue as a going concern. We can give no assurance that our plans and efforts to achieve the above steps will be successful.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive, financial and accounting officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive, financial and accounting officer concluded that as of the end of the period covered by this report, in light of certain material weaknesses in our internal control over financial reporting described in our annual report on Form 10-K for the year ended December 31, 2013, our disclosure controls and procedures were not effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to management, including our chief executive officer, financial and accounting officer, to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods prescribed by the SEC.
Based on management's evaluation as of December 31, 2013, our management identified the material weaknesses set forth below in our internal control over financial reporting:
| (i) | The Company's process for internally reporting material information in a systematic manner to allow for timely filing of material information is ineffective, due to its inherent limitations from being a small company, and there exist material weaknesses in internal control over financial reporting that contribute to the weaknesses in our disclosure controls and procedures. These weaknesses include: |
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| • | insufficient segregation of duties and oversight of work performed in our finance and accounting function due to limited personnel; and |
| • | lack of controls in place to ensure that all material transactions and developments impacting the financial statements are reflected. |
Our Company's management concluded that in light of the material weaknesses described above, our Company did not maintain effective internal control over financial reporting as of March 31, 2014 based on the criteria set forth in Internal Control—Integrated Framework—1992 issued by the COSO.
Changes in Internal Control over Financial Reporting
There has been no change in our internal controls over financial reporting that occurred during the fiscal quarter ended March 31, 2014, that has materially affected, or is reasonably expected to materially affect, our internal controls over financial reporting.
Part II - Other Information
none
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| 10.40* | DCVax®-L Manufacturing and Services Agreement, dated January 17, 2014, by and between Northwest Biotherapeutics, Inc. and Cognate BioServices, Inc. | |
| 10.41* | DCVax®-Direct Manufacturing and Services Agreement, dated January 17, 2014, by and between Northwest Biotherapeutics, Inc. and Cognate BioServices, Inc. | |
| 10.42* | Ancillary Services Agreement, dated January 17, 2014, by and between Northwest Biotherapeutics, Inc. and Cognate BioServices, Inc. | |
| 10.43* | Manufacturing Expansion Services Agreement, dated January 17, 2014, by and between Northwest Biotherapeutics, Inc. and Cognate BioServices, Inc. |
| 31.1 | Certification of President (Principal Executive Officer and Principal Financial and Accounting Officer), Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | Certification of President, Chief Executive Officer and Principal Financial and Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| * | Confidential treatment has been requested with respect to portions of this exhibit. Those portions have been omitted and filed separately with the SEC. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| NORTHWEST BIOTHERAPEUTICS, INC | |||
| Dated: May 15, 2014 | By: | /s/ Linda M. Powers | |
| Name: | Linda M. Powers | ||
| Title: | President and Chief Executive Officer | ||
| Principal Executive Officer | |||
| Principal Financial and Accounting Officer | |||
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