10-Q 1 v359280_10q.htm QUARTERLY REPORT

 

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 September 30, 2013

 

OR

 

¨

TRANSITION REPORT PURSUANT TO 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 94-3306718
(State or other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)

 

4800 Montgomery Lane, Suite 800 20814
Bethesda, Maryland (Zip Code)
(Address of Principal Executive Offices)  

 

(240) 497-9024

(Registrant’s Telephone Number, Including Area Code)

 

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 November 12, 2013, the total number of shares of common stock, par value $0.001 per share, outstanding was 38,507,675.

 

 
 

 

TABLE OF CONTENTS

 

  Page
PART I - FINANCIAL INFORMATION  
   
Item 1. Condensed Interim Financial Statements  
   
Condensed Consolidated Balance Sheets as of September 30, 2013 (unaudited) and December 31, 2012 3
   
Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2013 and 2012 and the period from March 18, 1996 (inception) to September 30, 2013 4
   
Condensed Consolidated Statements of Comprehensive Loss (unaudited) for the three and nine months ended September 30, 2013 and 2012 and the period from March 18, 1996 (inception) to September 30, 2013  5
   
Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2013 and 2012 and the period from March 18, 1996 (inception) to September 30, 2013 6
   
Notes to Consolidated Financial Statements 8
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
   
Item 4. Controls and Procedures 23
   

PART II - OTHER INFORMATION 

  
   
Item 5. Other Information 24
   
Item 6. Exhibits 24
   
SIGNATURES 25

 

2
 

 

Part I. Financial Information

Item 1. Financial Statements

NORTHWEST BIOTHERAPEUTICS, INC

(A Development Stage Company)

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

 

   September 30,
2013		   December 31, 
   (Unaudited)   2012 
ASSETS          
Current assets:          
Cash and cash equivalents  $2,857   $7,346 
Prepaid expenses and other current assets   138    112 
Cash in custody account   4,500    - 
Total current assets   7,495    7,458 
Property and equipment, net   140    95 
Other non-current assets   -    17 
Total assets  $7,635   $7,570 
           
LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS' DEFICIT          
Current liabilities:          
Accounts payable (includes related party of $5,602 and $3,397 as of September 30, 2013 and December 31, 2012, respectively)  $10,936   $8,165 
Accrued expenses (includes related party of $5 and $28 as of September 30, 2013 and December 31, 2012, respectively)   1,170    589 
Convertible notes, net (includes related party of $407 and $50 as of September 30, 2013 and December 31, 2012, respectively)   667    1,056 
Notes Payable - in dispute   934    934 
Warrant liability   3,513    - 
Total current liabilities   17,220    10,744 
           
Non-current liabilities:          
Shares payable to related party   4,722    - 
Convertible notes payable, net   -    1,882 
Total non-current liabilities   4,722    1,882 
           
Total liabilities   21,942    12,626 
Redeemable common stock ($0.001 par value); 1,828,103 and 1,869,770 shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively   10,777    11,017 
           
Stockholders' deficit:          
Preferred stock ($0.001 par value); 40,000,000 shares authorized; 0 shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively   -    - 
Common stock ($0.001 par value); 450,000,000 shares authorized; 36,638,961 and 24,676,058 shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively   37    25 
Additional paid-in capital   343,065    303,190 
Deficit accumulated during the development stage   (367,996)   (319,098)
Cumulative translation adjustment   (190)   (190)
Total stockholders' deficit   (25,084)   (16,073)
Total liabilities, redeemable common stock and stockholders' deficit  $7,635   $7,570 

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

3
 

 

NORTHWEST BIOTHERAPEUTICS, INC

(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)

 

         Period from 
   Three Months Ended
September 30,		   Nine Months Ended
September 30,		   March 18, 1996
(Inception) to		 
   2013   2012   2013   2012   September 30, 2013 
Revenues:                         
Research material sales  $-   $-   $-   $-   $580 
Contract research and development from related parties   -    -    -    -    1,128 
Research grants and other   400    120    809    450    2,642 
Total revenues   400    120    809    450    4,350 
Operating costs and expenses:                         
Cost of research material sales   -    -    -    -    382 
Research and development   12,794    9,944    32,785    20,533    151,957 
General and administration   3,055    3,913    8,815    8,152    99,814 
Depreciation and amortization   3    5    9    10    2,386 
Loss on facility sublease   -    -    -    -    895 
Asset impairment loss   -    -    -    -    2,445 
Total operating costs and expenses   15,852    13,862    41,609    28,695    257,879 
Loss from operations   (15,452)   (13,742)   (40,800)   (28,245)   (253,529)
Other income (expense):                         
Valuation of reclassified equity instruments   -    -    -    491    16,071 
Inducement expense   (7,451)   -    (7,451)   -    (34,788)
Accretion of redeemable securities   -    -    -    -    (2,042)
Change in fair value of derivatives   63    35    63    583    1,446 
Gain on sale of intellectual property and property and equipment   -    -    -    -    3,664 
Foreign Exchange Gain or Loss   (4)   -    (4)   -    (4)
Interest expense   (66)   (2,788)   (706)   (9,626)   (55,712)
Interest income and other   -    -    -    -    1,707 
Net loss  $(22,910)  $(16,495)  $(48,898)  $(36,797)  $(323,187)
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  $(22,910)  $(16,495)  $(48,898)  $(36,797)  $(367,996)
                          
Net loss per share applicable to common stockholders - basic  $(0.65)  $(1.50)  $(1.60)  $(3.59)     
Weighted average shares used in computing basic loss per share   35,275    11,029    30,605    10,258      

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

4
 

 

NORTHWEST BIOTHERAPEUTICS, INC

(A Development Stage Company)

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited) 

(in thousands)  

 

         Period from 
   Three Months Ended
September 30,		   Nine Months Ended
September 30,		   March 18, 1996
(Inception) to		 
   2013   2012   2013   2012   September 30, 2013 
                     
Net loss  $(22,910)  $(16,495)  $(48,898)  $(36,797)  $(323,187)
Other comprehensive loss                         
Foreign currency translation adjustment   -    -    -    (40)   (190)
Total comprehensive loss  $(22,910)  $(16,495)  $(48,898)  $(36,837)  $(323,377)

 

See accompanying notes to the unaudited condensed consolidated financial statement

 

5
 

 

NORTHWEST BIOTHERAPEUTICS, INC

(A Development Stage Company)

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands) 

 

           Period from 
   Nine Months Ended September 30,  

March 18, 1996

(Inception) to

 
   2013   2012   September 30, 2013 
Cash Flows from Operating Activities:               
Net Loss  $(48,898)  $(36,797)   (323,187)
Reconciliation of net loss to net cash used in operating activities:               
Depreciation and amortization   9    10    2,386 
Amortization of deferred financing costs   -    -    320 
Amortization of debt discount and accretion on redeemable securities   497    8,692    44,742 
Change in fair value of derivatives   (63)   (583)   (1,446)
Accrued interest converted to stock   -    -    260 
Accreted interest on convertible promissory note   61    -    1,545 
Stock-based compensation costs   1,350    2,574    24,412 
Stock and warrants issued for services   1,625    1,714    25,579 
Inducement expense   7,319    -    26,837 
Valuation of reclassified equity contracts   -    (491)   (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   (26)   (92)   572 
Accounts payable and accrued expenses   1,119    10,485    8,842 
Related party accounts payable and accrued expenses   13,791    -    41,935 
Deposits and other non-current assets   17    (17)   16 
Accrued loss on sublease   -    -    (265)
Deferred rent   -    -    410 
Net Cash used in Operating Activities   (23,199)   (14,505)   (163,153)
Cash Flows from Investing Activities:               
Purchase of property and equipment, net   (54)   (31)   (5,178)
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)
Cash in custody account   (4,500)   -    (4,500)
Transfer of restricted cash   -    -    (1,035)
Net Cash used in Investing Activities   (4,554)   (31)   (6,642)
Cash Flows from Financing Activities:               
Proceeds from issuance of redeemable securities   -    -    5,302 
Repayment on redeemable securities   (240)   -    (240)
Proceeds from issuance of notes payable   -    -    7,980 
Proceeds from issuance of convertible notes payable   -    13,181    38,414 
Proceeds from issuance of notes payable to related parties   1,005    -    12,255 
Repayment of note payable to related parties   (605)   -    (8,655)
Repayment of convertible promissory note   (209)   -    (3,471)
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   (688)   -    (1,108)
Proceeds from issuance preferred stock, net   -    -    28,708 
Proceeds from exercise of stock options and warrants   -    -    228 
Proceeds from issuance common stock and warrants, net   24,001    1,482    97,724 
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   -    -    (1,111)
Net Cash provided by Financing Activities   23,264    14,663    172,842 
Effect of exchange rates on cash and cash equivalents   -    (40)   (190)
Net increase (decrease) in cash and cash equivalents   (4,489)   87    2,857 
                
Cash and cash equivalents at beginning of period   7,346    24    - 
Cash and cash equivalent at end of period  $2,857   $111    2,857 

 

See accompanying notes to the unaudited condensed consolidated financial statement

 

6
 

 

NORTHWEST BIOTHERAPEUTICS, INC

(A Development Stage Company)

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) 

(in thousands)

 

   Nine Months Ended September 30,   Period from
March 18, 1996
(Inception) to		 
   2013   2012   September 30, 2013 
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   2,335    7,785    60,601 
Issuance of common stock in connection with conversion of accounts payable   10,302    -    10,302 
Shares payable to related party   1,307    -    1,307 
Issuance of redeemable common stock in connection with conversion of liabilities   -    -    3,673 
Warrants issued on Series A and Series A-1 preferred stock dividends   -    -    4,664 
Liability for reclassified equity contracts   -    29,412    41,253 
Accretion of mandatorily redeemable Series A preferred stock redemption obligation   -    -    1,872 
Debt discount on promissory notes   -    7,885    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 statement

 

7
 

  

1. Organization and Description of Business

 

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 Unites States and Europe that are in various phases of approval. The Company is considered to be a development stage company and, as such, the Company’s financial statements are prepared in accordance with the 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.

 

2. Liquidity and Financial Condition

 

The Company has experienced recurring losses from operations.  Net cash outflows from operations were approximately $23.2 million for the nine months ended September 30, 2013. The Company had a working capital deficit of $9.7 million at September 30, 2013 (excluding redeemable common stock amounting to $10.8 million). The combined cash and non-cash net loss was $48.9 million for the nine months ended September 30, 2013.

 

Since inception of the Company, the accumulated cash deficit is $163.2 million and non-cash deficit is $204.8 million, for a combined total deficit accumulated during the development stage of $368.0 million at September 30, 2013.

 

The Company has raised capital by issuing common stock and debt securities, including issuances to related parties. As of September 30, 2013, the Company had approximately $7.5 million of current assets and had current liabilities of $17.2 million (of which approximately $5.6 million or 33% was owed to a related party vendor) and redeemable common stock of $10.8 million. The Company will need to raise additional capital in the near future to continue to fund its clinical trials and other operating activities and there can be no assurance that its efforts to seek such funding will be successful. The Company may seek funding from Toucan Capital or Toucan Partners or their affiliates, or other third parties (“Toucan”). Toucan is controlled by Ms. Linda Powers, the Company’s CEO. Such parties are under no obligation to provide the Company with any additional funds, and any such funding may be dilutive to stockholders and may contain restrictive covenants. There can be no assurance that the Company will be able to complete any such financing or that the terms of such financing will be attractive to the Company. If the Company’s capital raising efforts are unsuccessful, its inability to obtain additional cash as needed could have a material adverse effect on the Company’s financial position, results of operations and the Company’s ability to continue its existence.

 

In April 2013, the Company entered into an agreement with one healthcare-dedicated institutional investor for a registered direct placement of $10.0 million of common stock at the closing market price of $3.90 per share. The number of shares of common stock issued was 2,564,103. The Company issued to the investor warrants exercisable for 1,025,641 shares of common stock. The Company also issued to the placement agent warrants exercisable for 128,205 shares of common stock. The warrants have an exercise price of $4.29 per share and are exercisable beginning six months after closing, with a term of five years after closing. Net proceeds to the Company amounted to $9.2 million after deducting deal related costs.

 

On August 8, 2013, the Company entered into a securities purchase agreement with institutional investors for the sale of an aggregate of $15.0 million of units in a registered direct offering. Each unit consists of one share of common stock, one long-term warrant to purchase 0.25 of a share of common stock and one over-allotment warrant to purchase 0.25 of a share of common stock. The Company issued to the investors 4,477,612 shares of common stock and long-term warrants exercisable for 1,119,403 shares of common stock, with an exercise price of $4.00 per share, excisable six months after closing with a term of five years after they are first exercisable. The Company also issued to investors over-allotment warrants exercisable for 1,119,403 shares of common stock, with an exercise price of $3.35 per share and exercisable immediately with a term of one year. Net proceeds to the Company amounted to $13.8 million.

 

In order to continue with the Company’s current activities under the DCVax®-L program, the Company will have to obtain substantial amounts of further funding, as described in the Risk Factors section in the Company’s annual report on Form 10-K/A for the year ended December 31, 2012. The Company’s ongoing funding requirements will depend on many factors, including the extent to which the Company realizes and draws 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 the Company for the DCVax-L clinical trial and manufacturing in Germany. The Company anticipates beginning to draw upon the grant in the next several months.

 

8
 

 

On July 31, 2013, Cognate BioServices (“Cognate”), a related party supplier (see Note 9), agreed to convert an aggregate of $11.6 million in accounts payable into shares of common stock (“Conversion Transaction”) at a conversion price of $4.00 per share, which resulted in the issuance in August, 2013, of 2.9 million shares of common stock, subject to most favored nation treatment with respect to terms provided to other investors or creditors (including with respect to any warrants). The conversion shares are subject to a lock-up period of 18 months from the date of their issuance, on market based terms. Under the lock-up, the shares cannot be sold or traded on the market. The conversions and the lock-up terms are subject to most favored nation treatment with respect to terms provided to other investors. The contracts implementing these agreements are in process. The fair value of the common stock on the date of this transaction was $10.3 million. Prior to this Conversion Transaction, Cognate had been entitled to receive 4.2 million shares of NW Bio common stock and 2.1 million warrants in exchange for the $11.6 million in payables owed to Cognate, and entitled to most favored nation treatment on its conversions with respect to terms provided to other investors or creditors (including with respect to any warrants); however, Cognate agreed to defer the warrants and the most favored nation treatment until the parties negotiated new or revised agreements to cover the expanded scope of manufacturing and related services needed for the Company’s expanded DCVax-L clinical program, DCVax-Direct clinical program and other programs. These new or revised agreements are in process. Because the 2.1 million warrants and 1.3 common shares were not contingently issuable as of September 30, 2013, the Company recorded a shares payable to related party liability of $4.7 million and a $3.6 million warrant liability in accordance with the guidance contained in ASC 815-40-15-7D, "Contracts in Entity's Own Equity" whereby under that provision they do not meet the criteria for equity treatment and must be recorded as a liability. Accordingly, the Company classifies the warrant instrument as a liability at its fair value and adjusts the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company's statements of operations. As a result of this Conversion Transaction, the Company recorded a $7.0 million non-cash charge to inducement expense and a $0.07 million derivative valuation gain from the date of the Conversion Transaction through September 30, 2013.

 

On a going forward basis, commencing with August, 2013, and continuing throughout the lock-up period (18 months), the Company and Cognate agreed to establish a regular ongoing arrangement for payment of at least half of all invoices in common stock of the 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 or until terminated by mutual agreement. The contracts implementing these agreements are in process.

 

The Company has experienced recurring operating losses, net operating cash flow deficits, and has a substantial deficit accumulated during the development stage. These conditions combined with the uncertainties of being a development stage enterprise create substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements 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 might be necessary should the Company be unable to continue as a going concern.

 

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 September 30, 2013 and for the three and nine 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 balance sheet as of September 30, 2013, condensed statements of comprehensive loss for the three and nine months ended September 30, 2013 and 2012 and the condensed statements of cash flows for the nine months ended September 30, 2013 and 2012 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented. The results for the three and nine months ended September 30, 2013 are not necessarily indicative of results to be expected for the year ending December 31, 2013 or for any future interim period. The condensed balance sheet at December 31, 2012 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, 2012, and notes thereto included in the Company’s annual report on Form 10-K, which was filed with the SEC on April 8, 2013.

 

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 payments, estimating fair value of equity instruments recorded as derivative liabilities, estimating the useful lives of depreciable assets and whether impairment charges may apply.

 

9
 

  

Research and Development Costs

 

Research and development costs are charged to operations as incurred and consist primarily of consulting costs, related party contract research and development costs, and compensation costs. For the three and nine months ended September 30, 2013 and for the period from March 18, 1996 (inception) through September 30, 2013, the Company recognized $12.8 million, $32.8 million and $152.0 million, respectively, of research and development costs (cash and non-cash combined). For the three and nine months ended September 30, 2012, the Company recognized $9.9 million and $20.5 million, respectively, of research and development costs.

 

Fair Value – Definition and Hierarchy

 

In accordance with U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction in the principal or most advantageous market between market participants at the measurement date.

 

In determining fair value, the Company uses various valuation approaches. In accordance with U.S. GAAP, a fair value hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs reflect the Company’s assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The valuation techniques are consistent with the market, cost or income approaches to measuring fair value. If more than one valuation technique is used to measure fair value, the results are evaluated considering the reasonableness of the range of values indicated by those results. The fair value hierarchy is categorized into three levels based on the inputs as follows:

 

Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 securities. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.

 

Level 2 - Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

 

Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

 

The availability of valuation techniques and observable inputs can vary from security to security and is affected by a wide variety of factors including, the type of security, whether the security is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined. Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the securities existed. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for securities categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement.

 

Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Company uses prices and inputs that are current as of the measurement date, including periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many securities. This condition could cause a security to be reclassified to a lower level within the fair value hierarchy.

 

The Company considers transfers between the levels within the fair value hierarchy when circumstances surrounding the fair value for a particular security conform to a different level of the fair value hierarchy than as previously reported. Whenever circumstances occur, whereby there is a transfer within the fair value hierarchy, the Company considers the date the event or change in circumstances occurred which caused the transfer.

  

10
 

 

Warrant Liability

 

The Company accounts for the 2,116,064 common stock warrants granted in connection with the Conversion Transaction in accordance with the guidance contained in ASC 815-40-15-7D, "Contracts in Entity's Own Equity" whereby under that provision they do not meet the criteria for equity treatment and must be recorded as a liability. Accordingly, the Company classifies the warrant instrument as a liability at its fair value and adjusts the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company's statements of operations. The fair value of the warrants issued by the Company in connection the Conversion Transaction has been estimated using a Monte Carlo simulation.

 

Subsequent Events

 

The Company follows the provisions of ASC Topic 855-10, “Subsequent Events,” relating to subsequent events.  This guidance establishes principles and requirements for subsequent events.  This guidance defines the period after the balance sheet date during which events or transactions that may occur would be required to be disclosed in a company’s financial statements.  The Company has evaluated subsequent events up to the date of issuance of this report.

 

4.  Cash in Custody Account

 

In September, 2013, the Company and Cognate jointly considered acquiring certain intellectual property that involved biologics and did not involve dendritic cells. The Company and Cognate established a custodial account to hold funds for the potential acquisition while they pursued further information and analyses. The Company provided $4.5 million for the account (under which it is free to withdraw its funds at any time before completing the acquisition, in its sole discretion). Cognate provided nearly $2 million for the account, and also incurred nearly $1 million of due diligence costs, legal and consulting fees, and other expenses relating to the potential acquisition. As of September 30, 2013, the parties were still analyzing the information about the intellectual property and the costs involved both currently and going forward, and the Company had not yet decided whether it would ultimately proceed with participation in the acquisition. Thereafter, in October, 2013, based upon the further information and analyses obtained relating to the scope and condition of the assets, and the amount of additional funding, development work and time that will be required to develop the assets, as well as the current funding needs of the Company’s existing DCVax programs, the Company decided not to proceed with participation in the acquisition. Instead, the Company used its funds to pay payables (including $4.5 million of the payables owed to Cognate) relating to its existing DCVax programs. Cognate decided to continue proceeding. All costs and expenses were borne by Cognate and the Company did not incur any costs.

 

5. Stock-based Compensation

 

Compensation expense for all stock-based awards is measured on the grant date based on the fair value of the award and is recognized as an expense, on a straight-line basis, over the employee's requisite service period (generally the vesting period of the equity award). The fair value of each option award is estimated on the grant date using a Black-Scholes option valuation model. Stock-based compensation expense is recognized only for those awards that are expected to vest using an estimated forfeiture rate. The Company estimates pre-vesting option forfeitures at the time of grant and reflects the impact of estimated pre-vesting option forfeitures in compensation expense recognized. For options and warrants issued to non-employees, the Company recognizes stock compensation costs utilizing the fair value methodology over the related period of benefit.

 

Stock-based compensation expense was as follows for the three and nine months ended September 30, 2013 and 2012 (in thousands): 

  

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2013   2012   2013   2012 
Research and development  $53   $91   $203   $380 
General and administration   78    586    1,147    2,194 
Total stock-based compensation expense  $131   $677   $1,350   $2,574 

 

Stock Option Plans

 

The Company’s stock option plans are administered by the Board of Directors, which determines the terms and conditions of the options granted, including exercise price, number of options granted and vesting period of such options.

 

11
 

 

Stock Option Activity

 

A summary of stock option activity for the nine months ended September 30, 2013 is as follows (shares in thousands):

 

   Number of
Options		   Weighted
Average Exercise
Price		   Weighted
Average Grant
Date Fair Value		   Average
Remaining
Contractual Life		   Average Intrinsic
Value		 
Outstanding at December 31, 2012   1,551   $10.56   $10.56    6.60   $- 
Granted   -    -    -    -    - 
Expired   -    -    -    -    - 
Forfeited   -    -    -    -    - 
Outstanding at September 30, 2013   1,551   $10.56   $10.56    5.60   $- 
Exercisable as of September 30, 2013   1,146              7.27      

 

Additional information regarding stock options outstanding and exercisable at September 30, 2013 is as follows (in thousands, except option price and weighted average exercise price):

 

   Options Outstanding   Options Exercisable 
Range of Exercise Prices  Number
Outstanding		   Weighted
Average
Remaining
Contractual Life
(Years)		   Weighted
Average Exercise
Price		   Number
Exercisable		   Weighted
Average Exercise
Price		 
$ 8.80 - 9.60   105    5.89   $8.80    60   $8.96 
$ 9.76 - 33.60   1,446    7.75    10.72    1,086    10.72 
Total   1,551    7.27   $10.56    1,146   $10.72 

 

Options granted under the plans are generally priced at or above the estimated fair market value of the Company’s common stock on the date of grant and generally vest between four and nine years. Compensation expense, if any, is charged over the period of vesting. All options, if not previously exercised or canceled, expire ten years from the date of grant, or the expiration date specified in the individual option agreement, if earlier.

 

The Company granted no options during the nine months ended September 30, 2013.

 

There were no exercises of options during the nine months ended September 30, 2013. The Company’s policy, in the event of exercise, is to issue new shares to fulfill the requirements for options that are exercised.

 

The aggregate fair value of options vested during the nine months ended September 30, 2013 and September 30, 2012 was $1.4 million and $2.6 million, respectively.

 

As of September 30, 2013 the total unrecognized compensation expense related to unvested stock option awards was $0.3 million which is expected to be recognized over a weighted average term of approximately 1.3 years.

 

6. Fair Value Measurements

 

The Company’s assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy as described in the Company’s significant accounting policies in Note 3.

 

The following table presents information about the Company’s liabilities measured at fair value on a recurring basis and the Company’s estimated level within the fair value hierarchy of those assets and liabilities as of September 30, 2013 and December 31, 2012 (in thousands):

 

12
 

  

   Fair value measured at September 30, 2013 
   Total carrying
value at September
30,		   Quoted prices in active
markets		   Significant other
observable inputs		   Significant
unobservable inputs		 
   2013   (Level 1)   (Level 2)   (Level 3) 
Warrant liability  $3,513   $-   $-   $3,513 

 

    Fair value measured at December 31, 2012 
    

Total carrying

value at December 31,

    

Quoted prices in active

markets

    

Significant other

observable inputs

    

Significant

unobservable inputs

 
    2012    (Level 1)    (Level 2)    (Level 3) 
Warrant liability  $-   $-   $-   $- 

 

There were no transfers between Level 1, 2 or 3 during the nine months ended September 30, 2013.

 

The following table presents additional information about Level 3 assets and liabilities measured at fair value. Both observable and unobservable inputs may be used to determine the fair value of positions that the Company has classified within the Level 3 category. As a result, the unrealized gains and losses for assets and liabilities within the Level 3 category may 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.

 

Changes in Level 3 liabilities measured at fair value for the period ended June 30, 2013 and at December 31, 2012 were as follows (dollars in thousands):

 

 

Balance – December 31, 2012   - 
2,116,064 warrant issued on July 31, 2013   3,576 
Change in fair value of warrant liability from July 31, 2013 to September 30, 2013   (63)
Balance – September 30, 2013   3,513 

 

A summary of quantitative information with respect to valuation methodology and significant unobservable inputs used for the Company’s warrant liabilities that are categorized within Level 3 of the fair value hierarchy as of September 30, 2013 and December 31, 2012 is as follows:

 

Date of Valuation  July 31, 2013   September 30, 2013 
Stock Price  $1.69   $1.66 
Volatility (Annual)   80.26%   81.94%
Number of assumed financings   3    3 
Number of reset warrants   2,116,064    2,116,064 
Total warrants outstanding   15,242,717    17,554,348 
Total shares outstanding   30,795,614    38,467,064 
Strike Price  $4.00   $4.00 
Risk-free Rate   1.39%   1.40%
Maturity Date   July 31, 2018    July 31, 2018 
Expected Life   5 years    5 years 

 

7. Notes Payable

 

The Company issues notes from which the proceeds were used to finance operations. The notes contain conversion features and were issued with warrants to purchase common stock. For convertible notes, the Company allocates the proceeds received between convertible notes payable and warrants on a relative fair value basis or the residual method, whichever is applicable. The resulting discount for the warrants is amortized using the effective interest method over the life of the debt instrument. After allocating a portion of the proceeds to the warrants, the effective conversion price of the convertible note payable can be determined. If the effective conversion price is lower than the market price of the Company's common stock on the date of issuance, a beneficial conversion feature is recorded as an additional discount to the convertible notes payable. The beneficial conversion feature discount is also amortized using the effective interest method over the life of the debt instrument. The amortization is recorded as interest expense on the condensed consolidated statements of operations. During the nine months ended September 30, 2013 and September 30, 2012, the Company received proceeds from the issuance of notes of $1.0 million and $13.2 million, respectively. The notes are payable on various dates through May 2015 and have interest rates between 0% and 12%. During the nine months ended September 30, 2013 and September 30, 2012, the Company recorded a debt discount related to the beneficial conversion feature for convertible notes and detachable warrants of $0 million and $0.5 million, respectively.

 

13
 

 

During the nine months ended September 30, 2013, the Company converted notes and accounts payable of $13.9 million into approximately 3.96 million shares of common stock. During the nine months ended September 30, 2012, $7.8 million of notes were converted into 2.0 million shares of common stock.

 

During the nine months ended September 30, 2013, the Company repaid $1.5 million of notes payable.

 

Notes payable consist of the following at September 30, 2013 and December 31, 2012 (in thousands):

 

   September 30,   December 31, 
   2013   2012 
Notes payable - current          
12% unsecured originally due July 2011 - in dispute (1)  $934   $934 
    934    934 
Convertible notes payable, net - current          
6% unsecured (2)   160    435 
8% unsecured due April 2013 (3)   100    71 
10% unsecured convertible note originally due November 2012 (net of discount of $0 in 2013 and $4 in 2012)   -    500 
    260    1,006 
Convertible Notes payable related party, net - current          
6% due on demand (4)   50    50 
8% unsecured note due 2014, net of discount of $31 in 2013 and $0 in 2012   357    - 
    407    50 
Long term convertible notes, net          
0% unsecured   -    53 
4% unsecured due September 2014 (net of discount of $0 in 2013 and $415 in 2012)   -    419 
8% unsecured due 2014 (net of discount of $620 in 2013 and  $114 in 2012)   -    1,410 
    -    1,882 
Total notes payable, net  $1,601   $3,872 

 

(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 $0.160 million consists of three separate 6% notes in the amounts of $0.110 million, $0.025 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 them to date. In regard to each of the two $0.025 million notes, the respective holder has elected to convert the note 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) In regard to this $0.100 million note, the holder elected to convert it in full into equity, and the Company has issued the shares to the holder, but the holder has not yet surrendered the note for cancellation. Until the note is surrendered and cancelled, the Company is continuing to reflect this note as outstanding.

 

(4) This $0.050 million demand note 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.

 

8. Net Loss per Share Applicable to Common Stockholders

 

Options, warrants, and convertible debt outstanding were all considered anti-dilutive for the nine months ended September 30, 2013, and 2012, due to net losses.

 

14
 

  

The following securities were not included in the diluted net income (loss) per share calculation because their effect was anti-dilutive as of the periods presented (in thousands):

  

   Nine months ended 
   September 30, 
   2013   2012 
Common stock options   1,551    1,574 
Common stock warrants   17,554    5,437 
Convertible notes   127    2,627 
Excluded potentially dilutive securities   19,232    9,638 

  

9. Related Party Transactions

 

a. Cognate BioServices

 

In April, 2011, the Company entered into a new service agreement with Cognate Bioservices, Inc. (“Cognate”), a contract manufacturing and services organization in which Toucan Capital is a substantial shareholder. In addition, two of the principals of Toucan Capital are members of Cognate’s board of directors and Linda Powers who is a director of Cognate and managing director of Toucan Capital is Chairperson of the Company’s Board of Directors and Chief Executive Officer of the Company. This agreement replaced the agreement dated May 17, 2007 between the Company and Cognate, which had expired. Under the service agreement, the Company agreed to continue to utilize Cognate’s services, for certain consulting and manufacturing services to the Company for its ongoing DCVax®-L Phase III clinical trial for GBM brain cancer. The types of services are comparable to the prior agreement, and the structure and process for payments are simplified. Under the terms of the 2011 agreement, the Company pays Cognate a monthly facility fee and a fixed fee (in lieu of cost-plus charges) for DCVax product made for each patient in the clinical trial, subject to a specified minimum number of patients per month, plus charges for certain patient and product data services if such services are requested by the Company, and charges for the processes of technology transfer to third parties, training of such parties’ personnel, drafting of standard operating Procedures (SOPs) tailored to such third parties, and collaboration to obtain regulatory approvals and certifications relating to the product and manufacturing. The current service agreement will expire on March 31, 2016. However, the Company’s DCVax-L program has greatly expanded, and for well over a year the Company has been requesting production levels for this program that are far in excess of the maximum manufacturing capacity for which the Company contracted in the 2011 agreement. In addition, during this period the Company has requested substantial development work on its DCVax-Direct product and has launched a large Phase I/II clinical trial with DCVax-Direct, which exceeds the scope previously contracted for. Accordingly, the Company plans to enter into revised or new agreements with Cognate to provide for the expanded programs and manufacturing capacity utilization.

  

During the nine months ended September 30, 2013, Cognate and third party sub-contractors carried out an intensive development program relating to the DCVax-Direct product, as requested by the Company. The program proceeded on accelerated timetables in connection with the launch of the Company’s Phase I/II clinical trial with DCVax-Direct for all solid tumor cancers. The development program included 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 SOPs, batch production records, and other necessary materials.

 

During the three months ended September 30, 2013 the Company recognized approximately $8.6 million of research and development costs under these service agreements for that three-month period as well as certain one-time charges (including charges relating to start-up and changes in the Company’s programs). During the three months ended September 30, 2012, the Company recognized approximately $3.9 million of research and development costs related to the service agreements. For the nine months ended September 30, 2013 and 2012, the Company recognized approximately $22.8 million and $9.9 million, respectively, of research and development costs related to these service agreements and certain one-time charges. As of September 30, 2013 and December 31, 2012, the Company owed Cognate (including third party sub-contract amounts) approximately $5.6 million and $1.8 million, respectively. 

 

15
 

 

On July 31, 2013, Cognate BioServices (“Cognate”) agreed to convert an aggregate of $11.6 million in accounts payable into shares of common stock at a conversion price of $4.00 per share, which resulted in the issuance in August, 2013, of an aggregate of 2.9 million shares of common stock, subject to most favored nation treatment with respect to terms provided to other investors or creditors (including with respect to any warrants). The conversion shares are subject to a lock-up period of 18 months from the date of their issuance, on market based terms. Under the lock-up, the shares cannot be sold or traded on the market. The conversions and the lock-up terms are subject to most favored nation treatment with respect to terms provided to other investors. The contracts implementing these agreements are in process. The fair value of the common stock on the date of this transaction was $10.3 million. Prior to this Conversion Transaction, Cognate had been entitled to receive 4.2 million shares of NW Bio common stock and 2.1 million warrants in exchange for the $11.6 million in payables owed to Cognate, and entitled to most favored nation treatment on its conversions with respect to terms provided to other investors or creditors (including with respect to any warrants); however, Cognate agreed to defer the warrants and the most favored nation treatment until the parties negotiated new or revised agreements to cover the expanded scope of manufacturing and related services needed for the Company’s expanded DCVax-L clinical program, DCVax-Direct clinical program and other programs. These new or revised agreements are in process. Because the 2.1 million warrants and 1.3 million common shares were not contingently issuable as of September 30, 2013, the Company recorded a shares payable to related party liability of $4.7 million and a $3.6 million warrant liability in accordance with the guidance contained in ASC 815-40-15-7D, "Contracts in Entity's Own Equity" whereby under that provision they do not meet the criteria for equity treatment and must be recorded as a liability. Accordingly, the Company classifies the warrant instrument as a liability at its fair value and adjusts the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company's statements of operations. As a result of this Conversion Transaction, the Company recorded a $7.0 million non-cash charge to inducement expense and a $0.07 million derivative valuation gain from the date of the Conversion Transaction through September 30, 2013.

 

On a going forward basis, commencing with August, 2013, and continuing throughout the lock-up period (18 months), the Company and Cognate agreed to establish a regular ongoing arrangement for payment of at least half of all invoices in common stock of the 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 or until terminated by mutual agreement. The contracts implementing these agreements are in process.

 

Due to the large expansion of the Company’s Phase III trial with DCVax-L for brain cancer, and initiation of the trial in Europe, as well as initiation of the Company’s DCVax-Direct program, and certain advanced product development work, additional services that are required for logistics, distribution and tracking, and other pending programs, the Company and Cognate are in the process of substantially expanding their agreements. The agreements in process will cover manufacturing and related services for the DCVax-L program, the DCVax-Direct program, ancillary services and substantial manufacturing capacity expansion. The agreements will involve substantial upfront payments and will be subject to the parties’ July 31, 2013 agreement for payment of at least half of all invoices in common stock of the Company, and the remainder in cash, at $4.00 per share for an initial period in parallel with the lock-up period under the Conversion Transaction subject to a most favored nation treatment with respect to terms provided to other investors or creditors (including with respect to any warrants). 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.

 

In July 2013, the Company received a short-term loan of $0.6 million from Cognate. The short-term loan was paid-in-full during the third quarter of 2013.

 

b. Toucan Capital and Toucan Partners

 

In March 2013, the Company received a short-term loan of $0.2 million from Toucan. The short-term loan was paid-in-full during the second quarter of 2013.

 

c. Other Related Parties

 

In March 2013, the Company received a short-term loan of $0.2 million from an executive officer. The short-term loan was paid-in-full during the second quarter of 2013.

 

10.   Stockholders’ Deficit

 

a. Common Stock Issuances

 

Issuances of common stock during the three and nine months ended September 30, 2013 were as follows (shares and dollars in thousands):

 

16
 

 

       Purchase/   Fair Value/ 
   Shares   Conversion   Proceeds/ Debt 
   Issued   Price   Conversion 
Shares issued for consulting services   236   $3.75   $883 
Conversion of notes payable   359    2.6    934 
Total 1st Quarter 2013   595   $3.06   $1,817 
Shares issued for consulting services   179    3.62    645 
Shares issued for cash   282    3.55    1,000 
Shares issued for cash in financing transaction   2,564    3.9    10,000 
Conversion of notes payable   402    2.28    916 
Cashless warrants exercise   168    -    - 
Total 2nd Quarter 2013   3,595   $3.49   $12,561 
                
Shares issued for consulting services   14    6.80    97 
Shares issued in connection with extension of redeemable security redemption period   30    3.43    103 
Stock redemption   (42)   (5.76)   240 
Shares issued for cash in financing transaction   4,478    3.35    15,000 
Conversion of accounts payable   2,902    3.55    10,302 
Conversion of notes payable   349    1.38    482 
Total 3rd Quarter 2013   7,731   $3.39   $26,225 
                
Total Nine Months Ended September 30, 2013   11,921   $3.41   $40,603 

  

During the quarter ended March 31, 2013, the Company issued approximately 0.2 million shares of common stock to existing stockholders in connection with an agreement with the stockholders and a consultant. The shares of common stock were valued at the closing price of the Company’s common stock on the date issued and amounted to approximately $0.9 million.

 

In April 2013, the Company entered into an agreement with one healthcare-dedicated institutional investor for a registered direct placement of $10.0 million of common stock at the closing market price of $3.90 per share. The Company issued to the investor warrants exercisable for 1,025,641 shares of common stock. The warrants have an exercise price of $4.29 per share and are exercisable beginning six months after closing, with a term of five years after closing. The Company incurred offering costs amounting to $0.8 million in connection with this financing transaction.

 

During the quarter ended June 30, 2013, the Company issued total 178,504 shares of common stock in exchange for services. The fair value of the common stock on the date of this transaction was $0.6 million.

 

On August 8, 2013, the Company entered into a securities purchase agreement with institutional investors for the sale of an aggregate of $15.0 million of units in a registered direct offering. Each unit consists of one share of common stock, one long-term warrant to purchase 0.25 of a share of common stock and one over-allotment warrant to purchase 0.25 of a share of common stock. The Company issued to the investors 4,477,612 shares of common stock and long-term warrants exercisable for 1,119,403 shares of common stock, with an exercise price of $4.00 per share, excisable six months after closing with a term of five years after they are first exercisable. The Company also issued to the investors over-allotment warrants exercisable for 1,119,403 shares of common stock, with an exercise price of $3.35 per share and exercisable immediately with a term of one year. The Company incurred offering costs amounting to $1.2 million in connection with this financing transaction.

 

During the quarter ended September 30, 2013, the Company issued a total of 14,326 shares of common stock in exchange for services. The fair value of the common stock on the date of this transaction was $0.1 million.

 

During the quarter ended September 30, 2013, the Company issued a total of 30,000 shares of common stock in exchange for the extension of the redemption period of redeemable common stock. The fair value of the common stock on the date of this transaction was $0.1 million. 

 

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b. Stock Purchase Warrants

 

Through September 30, 2013, the Company has issued warrants to strategic partners, consultants and investors with exercise prices ranging from $2.40 to $51.84 and with terms generally ranging from three to five years. Each warrant is exercisable into one share of common stock. The following is a summary of warrant activity for the nine months ended September 30, 2013:

 

   Number of   Weighted Average 
   Warrants   Exercise Price 
Outstanding as of December 31, 2012   12,086,501   $6.81 
January 2013, warrants issued in exchange for services   109,035    6.40 
Expired in first quarter of 2013   (18,125)   15.45 
Outstanding as of March 31, 2013   12,177,411   $6.82 
April 2013, warrants issued in connection with registered direct offering   1,025,641    4.29 
April 2013, warrants issued to placement agent in connection with registered direct offering   128,205    4.29 
Exercised on a cashless basis in second quarter of 2013   (168,354)   5.60 
Expired in second quarter of 2013   (17,500)   12.00 
Outstanding as of June 30, 2013   13,145,403   $6.78 
July 2013, warrants issued in connection with conversion of Cognate accounts payable   2,116,064    4.00 
August 2013, warrants issued in connection with registered direct offering   2,238,806    4.00 
September 2013, warrants issued for extension of redeemable securities   72,825    4.00 
Expired in thrid quarter of 2013   (18,750)   12.00 
Outstanding as of September 30, 2013   17,554,348   $6.07 

 

11.  Redeemable Common Stock

 

In October and November 2012, the Company issued 1.9 million shares of redeemable common stock, at a purchase price of $4.80 per share to accredited investors (collectively, the “Investors”) in separate private placement transactions and as part of conversions of debt into redeemable common stock. Total cash received amounted to $5.3 million and total conversions of debt into redeemable common stock amounted to $4.6 million (out of more than $36 million of debt converted at that time). These transactions were completed pursuant to a Securities Purchase Agreement (the “Agreement”) which the Company entered into with each respective investor. The Agreements provide that such Investors can redeem the securities for cash at a premium to the original issuance ranging from 15% to 25%. The redemption provisions occurred within 9 months from the date of issuance.

 

The Company first assessed the redeemable common stock to determine if the instrument should be accounted for as a liability in accordance with ASC 480. As the put option is optionally redeemable by the holder, the common stock was not required to be accounted for as a liability. Next, the Company assessed the put option within the redeemable common stock as a potential embedded derivative pursuant to the provisions of ASC 815, Derivatives and Hedging, and concluded that the put option did not meet the net settlement criteria within the definition of a derivative. Therefore, the Company has accounted for the common stock issued pursuant to the Agreement in accordance with ASC 480-10-S99-3A, Classification and Measurement of Redeemable Securities, which provides that securities that are optionally redeemable by the holder for cash or other assets are classified outside of permanent equity in temporary equity. The 1.9 million shares of common stock issued pursuant to the Agreement were recorded as redeemable common stock at an initial carrying value of $8.9 million. The Company elected to record the common stock at its redemption value of $11.0 million, as if it were currently redeemable, immediately and accordingly recorded accretion of $2.0 million to redeemable securities expense during the twelve months ended December 31, 2012.

 

During the third quarter of 2013, the Company entered into a series of extension agreements, with a counterparty owning 520,833 redeemable shares, to extend the redemption date to October 4, 2013. In connection with these extensions, the Company issued 72,825 warrants with an exercise price of $4.00 and a 5 year term, recorded a conversion inducement expense of approximately $0.2 million, and agreed to allow sales of the existing redeemable shares on a controlled roll out basis with sale limitations, and at the end of such sales provide for a convertible note to meet a shortfall, if any. The fair value of the warrants was determined using the Black-Scholes model with the following assumptions: risk free interest rate – 1.72%, volatility – 98.04%, expected term – 5 years, expected dividends– N/A. 

 

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During the third quarter of 2013, the Company entered into a series of extension agreements, with a counterparty owning 366,667 redeemable shares, to extend the redemption date to November 20, 2013. In connection with this extension, the Company issued 30,000 restricted shares and recorded a conversion inducement expense of approximately $0.1 million.

 

During the fourth quarter of 2013, the Company entered into a series of extension agreements, with a counterparty owning 520,833 redeemable shares, to extend the redemption dates to February 25, 2014. In connection with these extensions, the Company issued 68,750 restricted shares and 180,000 warrants with an exercise price of $4.00 and a 5 year term. Upon the expiration of the redemption period, the Company has the option of paying cash for the balance due, if any, or entering into a 2 year convertible note for the balance.

 

As of November 13, 2013, the Company has not received effective redemption notices from any counterparties. The Company is in the process of further restructuring agreements on the redeemable shares to extend the redemption dates. 

 

12.  Subsequent Events

 

During the fourth quarter of 2013, the Company entered into a series of extension agreements, with a counterparty owning 520,833 redeemable shares, to extend the redemption dates to February 25, 2014. In connection with these extensions, the Company issued 68,750 restricted shares and 180,000 warrants with an exercise price of $4.00 and a 5 year term. Upon the expiration of the redemption period, the Company has the option of paying cash for the balance due, if any, or entering into a 2 year convertible note for the balance.

 

In October 2013, the Company received a loan of $0.5 million from Cognate. The repayment terms were not finalized as of the date of this report.

 

 Management’s Evaluation of Subsequent Events

 

Management evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, management did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the consolidated financial statements.

 

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/A for the year ended December 31, 2012. 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. The broad applicability of DCVax to many cancers provides multiple opportunities for commercialization and partnering. As of September 30, 2013, our Phase III clinical trial in GBM is being conducted at over 50 sites across the United States and at one site in the U.K. We are also in the process of adding further U.S. sites and up to 30 European sites.

 

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In parallel with these developments in our Phase III brain cancer program, during the second quarter of 2013, we launched a large Phase I/II clinical trial with DCVax-Direct for all types of inoperable solid tumor cancers. The lead site is MDAnderson in Houston. MDAnderson in Orlando is also open and enrolling, and other sites are in process.

 

Our DCVax immunotherapies are based on a platform technology involving dendritic cells, the master cells of the immune system, and are designed to reinvigorate and educate the immune system to attack cancers. The dendritic cells are able to mobilize all parts of the immune system, including T cells, B cells and antibodies, natural killer cells and many others. Mobilizing 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/A for the year ended December 31, 2012. Our critical accounting policies and significant estimates have not changed substantially from those previously disclosed in our Annual Report on Form 10-K/A for the year ended December 31, 2012.

 

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.

 

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 the 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 scientific personnel-related salary and benefit expenses, 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.

 

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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 September 30, 2013 and 2012

 

We recognized a net loss of $7.9 million in cash outlays and $15.0 million in non-cash accounting charges (i.e. increase in stock-based compensation, inducement expense, issuance of warrants and debt discount charges etc.), for a combined (cash and non-cash) total net loss of $22.9 million for the three months ended September 30, 2013 compared to a net loss of $16.5 million for the three months ended September 30, 2012.

 

Research and Development Expense. Research and development expense was a combined (cash and non-cash) total of $12.8 million for the three months ended September 30, 2013 compared to $9.9 million for the three months ended September 30, 2012. The increase was primarily attributable to the DCVax-Direct manufacturing and product development work described above, and the preparation costs for the launch of two clinical trial programs, one in the US and one in the UK, as described above, 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 September 30, 2013 we had over 50 clinical trial sites in operation in the US and UK in our Phase III trial with DCVax-L, compared to 41 clinical trial sites in the US only at September 30, 2012. At September 30, 2013, we also had substantially expanded other clinical trial related operations compared with September 30, 2012 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 nearly 30 clinical trial sites in the UK and Germany in varying stages of preparation.

 

General and Administrative Expense. General and administrative expense included $2.6 million of cash expenses, and $0.5 million of non-cash charges (i.e. amortization of previously issued stock based compensation and restricted stock and warrants issued for services), for a combined total of $3.1 million for the three months ended September 30, 2013 compared to $3.9 million for the three months ended September 30, 2012. The decrease in general and administrative expenses from the prior period is as a result of decrease in administrative costs for the Company’s expanded product programs, and by a decrease in public relations and investor relations services and other consulting expenses of $0.8 million, and a $0.5 million decrease in stock based compensation expense.

 

Change in fair value of derivatives. During the three months ended September 30, 2013 and September 30, 2012 we recognized a gain on derivative liabilities of $0.06 million and $0.04 million due to the change in value of the warrants issued to Cognate in connection with the extinguishment of accounts payable, respectively.

   

Interest (Expense). Interest expense (including non-cash elements such as amortization of debt discount) decreased to $0.07 million for the three months ended September 30, 2013 from $2.8 million for the three months ended September 30, 2012. The decrease in interest expense is primarily related to the retirement of $27.8 million in notes payable during 2012.

 

Nine Months Ended September 30, 2013 and 2012

 

We recognized a (combined cash and non-cash) net loss of $48.9 million for the nine months ended September 30, 2013 compared to a (combined cash and non-cash) net loss of $36.8 million for the nine months ended September 30, 2012.

 

Research and Development Expense. Research and development expense was $32.8 million for the nine months ended September 30, 2013 compared to $20.5 million for the nine months ended September 30, 2012. The increase was primarily attributable to an increased number of clinical trial sites open and recruiting across the US in our ongoing Phase III clinical trial of DCVax®-L immune therapy for Glioblastoma multiform (GBM) brain cancer and initiation of this trial in Europe.

 

General and Administrative Expense. General and administrative expense was $8.8 million for the nine months ended September 30, 2013 compared to $8.2 million for the nine months ended September 30, 2012. The increase was primarily due to an increase of $1.4 million in consulting expenses and an increase of $0.2 million in professional services offset by a decrease of $1.0 million in stock based compensation and a decrease of $0.7 in salary wages and related costs.

 

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Valuation of reclassified equity contracts. During the nine months ended September 30, 2013 and September 30, 2012, the Company recognized a non-cash gain amounting to $0 and $0.5 million from the decrease in value of reclassified equity contracts, respectively.

  

Change in fair value of derivatives. During the nine months ended September 30, 2013 and September 30, 2012 we recognized a gain on derivative liabilities of $0.06 million and $0.6 million due to the change in value of the financial instruments, respectively.

 

Interest (Expense). Interest expense decreased to $0.7 million for the nine months ended September 30, 2013 from $9.6 million for the nine months ended September 30, 2012. Interest expense decreased for the nine month period ended September 30, 2013 primarily related to the repayment or conversions of debt into equity that were initiated during the nine month period ended September 30, 2012.

 

Liquidity and Capital Resources

 

We have experienced recurring losses from operations. Net cash outflows from operations were $23.2 million for the nine months ended September 30, 2013.

 

At September 30, 2013, current assets totaled $7.5 million, compared to $7.5 million at December 31, 2012. Working capital was a deficit of $9.7 million at September 30, 2013, compared to a deficit of $3.3 million at December 31, 2012 (excluding redeemable common stock amounting to $10.8 million). The working capital deficit increase as of September 30, 2013 as compared to December 31, 2012 is primarily related to a warrant liability recorded in connection with the Cognate conversion of an aggregate of $11.6 million in accounts payable and a $2.2 million increase in related party accounts payable for expansion of manufacturing relating to DCVax-L, and development work and manufacturing relating to DCVax-Direct, including the work by third party sub-contractors.

 

On July 31, 2013, Cognate agreed to convert an aggregate of $11.6 million in accounts payable into shares of our common stock at a conversion price of $4.00 per share, which resulted in the issuance in August 2013 of an aggregate of 2.9 million shares of common stock subject to most favored nation treatment with respect to terms provided to other investors or creditors (including with respect to any warrants). The conversion shares are subject to a lock-up period of 18 months from the date of their issuance, on market based terms. Under the lock-up, the shares cannot be sold or traded. The conversions and the lock-up terms are subject to a most favored nation treatment with respect to terms provided to other investors or creditors (including with respect to any warrants). The contracts implementing these agreements are in process. Prior to this conversion transaction, Cognate had been entitled to receive 4.2 million shares of our common stock and 2.1 million warrants in exchange for the $11.6 million in payables owed to Cognate, and entitled to most favored nation treatment on its conversions with respect to terms provided to other investors or creditors (including with respect to any warrants); however, Cognate agreed to defer the warrants and the most favored nation treatment until the parties negotiated new or revised agreements to cover the expanded scope of manufacturing and related services needed for our expanded DCVax-L clinical program, DCVax Direct clinical program and other programs. These new or revised agreements are in process.

 

On a going forward basis, commencing with August 2013, and continuing throughout the lock-up period (18 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 or until terminated by mutual agreement. The contracts implementing these agreements are in process.

 

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 through September 30, 2013, Toucan provided ongoing financings to us through the purchase of common stock, preferred stock (which was all converted to common stock), and debt securities. Toucan (other than Cognate) held approximately 18.5% of common stock outstanding as of September 30, 2013.

 

Operating Activities

 

We used $23.2 million in cash for operating activities during the nine months ended September 30, 2013, and the Company used $14.5 million in cash for operating activities during the nine months ended September 30, 2012. The increase in cash used in operating activities was primarily attributable to the DCVax-Direct manufacturing and product development work described above, 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, as described above.

 

As of September 30, 2013, we had over 50 clinical trial sites in operation in the US and UK in our Phase III trial with DCVax-L, compared to 41 clinical trial sites at September 30, 2012, in the US only. At September 30, 2013, we also had substantially expanded other clinical trial related operations compared with September 30, 2012 including, for example, the launch of the Phase III DCVax-L clinical trial in the UK and approval for the trial in Germany, as described above, and launch of the Phase I/II DCVax-Direct trial in the U.S. as described above, 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.

 

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Financing Activities

 

During the nine months ended September 30, 2013, our financing activities primarily consisted of proceeds from the issuance of common stock and warrants amounting to $24 million offset by the repayment of $1.1 million of notes payable, redeemable securities and convertible promissory notes.

 

In April 2013, we entered into an agreement with one healthcare-dedicated institutional investor for a registered direct placement of $10.0 million of common stock at the closing market price of $3.90 per share. We issued to the investor warrants exercisable for 1,025,641 shares of common stock. The warrants have an exercise price of $4.29 per share and are exercisable beginning six months after closing, with an exercise period of five years.

 

On August 8, 2013, the Company entered into a securities purchase agreement with institutional investors for the sale of an aggregate of $15.0 million of units in a registered direct offering. Each unit consists of one share of common stock, one long-term warrant to purchase 0.25 of a share of common stock and one over-allotment warrant to purchase 0.25 of a share of common stock. The Company issued to the investors 4,477,612 shares of common stock and long-term warrants exercisable for 1,119,403 shares of common stock, with an exercise price of $4.00 per share, excisable six months after closing with a term of five years after they are first exercisable. The Company also issued to the investors over-allotment warrants exercisable for 1,119,403 shares of common stock, with an exercise price of $3.35 per share and exercisable immediately with a term of one year.

 

Our financial statements indicate there is substantial doubt about our ability to continue as a going concern 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.  We can give no assurance that our plans and efforts to achieve the above steps will be successful.

 

In order to continue with our current activities under our DCVax®-L 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/A for the year ended December 31, 2012. Our on-going funding requirements will depend on many factors, including 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.

 

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/A for the year ended December 31, 2012, 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, 2012, 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 December 31, 2012 based on the criteria set forth in Internal Control—Integrated Framework 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 September 30, 2013, that has materially affected, or is reasonably expected to materially affect, our internal controls over financial reporting.

 

Part II - Other Information

 

Item 5. Other Information

 

Our Board of Directors has set the 2013 Annual Meeting of Stockholders, on Friday December 20, 2013. The meeting will be held at our headquarters at 4800 Montgomery Lane, Suite 800, Bethesda, Maryland 20814. Only stockholders of record on November 15, 2013 will be entitled to vote at the meeting.

 

Item 6. Exhibits

 

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. 

 

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SIGNATURES

 

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: November 15, 2013 By: /s/ Linda F. Powers
    Name: Linda F. Powers
    Title: President and Chief Executive Officer
      Principal Executive Officer
      Principal Financial and Accounting Officer

 

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