NORTHWEST BIOTHERAPEUTICS INC - Quarter Report: 2008 June (Form 10-Q)
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2008
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 000-33393
Northwest Biotherapeutics, Inc.
(Exact Name of Registrant as Specified in its Charter)
| Delaware | I.R.S. Employer Identification No. 94-3306718 | |
| (State or other Jurisdiction of Incorporation or Organization) |
7600 Wisconsin Avenue, Suite 750
Bethesda, Maryland 20814
(Address of Principal Executive Offices)
Bethesda, Maryland 20814
(Address of Principal Executive Offices)
(240) 497-9024
(Registrant’s Telephone Number, Including Area Code)
(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 þ No o
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 the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
| (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 o No þ
As of August 14, 2008, the total number of shares of common stock, par value $0.001 per share,
outstanding was 42,492,853.
TABLE OF CONTENTS
NORTHWEST BIOTHERAPEUTICS, INC.
TABLE OF CONTENTS
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| Exhibit 31.1 | ||||||||
| Exhibit 32.1 | ||||||||
2
Table of Contents
Part I — Financial Information
NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company)
(A Development Stage Company)
Condensed Consolidated Balance Sheets
(in thousands)
(in thousands)
| December 31, | June 30, | |||||||
| 2007 | 2008 | |||||||
| (Unaudited) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash |
$ | 7,861 | $ | 1,205 | ||||
Prepaid expenses and other current assets |
823 | 1,624 | ||||||
Total current assets |
8,684 | 2,829 | ||||||
Property and equipment: |
||||||||
Laboratory equipment |
29 | 29 | ||||||
Office furniture and other equipment |
94 | 104 | ||||||
Construction in progress |
— | 231 | ||||||
| 123 | 364 | |||||||
Less accumulated depreciation and amortization |
(104 | ) | (127 | ) | ||||
Property and equipment, net |
19 | 237 | ||||||
Deposit and other non-current assets |
3 | 3 | ||||||
Total assets |
$ | 8,706 | $ | 3,069 | ||||
Liabilities And Stockholders’ Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 846 | $ | 1,349 | ||||
Accounts payable, related party |
161 | 8 | ||||||
Accrued expenses |
1,006 | 597 | ||||||
Accrued expense, related party |
886 | 511 | ||||||
Note payable to related party, net of discount |
— | 4,069 | ||||||
Total liabilities |
2,899 | 6,534 | ||||||
Stockholders’ equity (deficit): |
||||||||
Preferred stock, $0.001 par value; 20,000,000 shares
authorized at December 31, 2007 and June 30, 2008 and
0 shares issued and outstanding at December 31, 2007
and June 30, 2008 |
||||||||
Common stock, $0.001 par value; 100,000,000 shares
authorized at December 31, 2007 and June 30, 2008 and
42,346,085 and 42,492,853 shares issued and
outstanding at December 31, 2007 and June 30, 2008,
respectively |
42 | 42 | ||||||
Additional paid-in capital |
148,064 | 150,503 | ||||||
Deficit accumulated during the development stage |
(142,295 | ) | (153,970 | ) | ||||
Cumulative translation adjustment |
(4 | ) | (40 | ) | ||||
Total stockholders’ equity (deficit) |
5,807 | (3,465 | ) | |||||
Total liabilities and stockholders’ equity |
$ | 8,706 | $ | 3,069 | ||||
See accompanying notes to condensed consolidated financial statements.
3
Table of Contents
NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company)
(A Development Stage Company)
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
(in thousands, except per share data)
(Unaudited)
| Period from | ||||||||||||||||||||
| Three Months Ended | Six Months Ended | March 18, 1996 | ||||||||||||||||||
| June 30, | June 30, | (inception) to | ||||||||||||||||||
| 2007 | 2008 | 2007 | 2008 | June 30, 2008 | ||||||||||||||||
Revenues: |
||||||||||||||||||||
Research material sales |
$ | — | $ | — | $ | — | $ | — | $ | 540 | ||||||||||
Contract research and development from
related parties |
— | — | — | — | 1,128 | |||||||||||||||
Research grants |
— | — | — | — | 1,061 | |||||||||||||||
Total revenues |
— | — | — | — | 2,729 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Cost of research material sales |
— | — | — | — | 382 | |||||||||||||||
Research and development |
2,158 | 3,143 | 3,469 | 6,205 | 50,827 | |||||||||||||||
General and administrative |
1,445 | 2,855 | 1,946 | 5,458 | 45,596 | |||||||||||||||
Depreciation and amortization |
6 | — | 16 | 22 | 2,344 | |||||||||||||||
Loss on facility sublease |
— | — | — | — | 895 | |||||||||||||||
Asset impairment loss |
— | — | — | — | 2,056 | |||||||||||||||
Total operating costs and expenses |
3,609 | 5,998 | 5,431 | 11,685 | 102,100 | |||||||||||||||
Loss from operations |
(3,609 | ) | (5,998 | ) | (5,431 | ) | (11,685 | ) | (99,371 | ) | ||||||||||
Other income (expense): |
||||||||||||||||||||
Warrant valuation |
— | — | — | — | 6,759 | |||||||||||||||
Gain on sale of intellectual property |
— | — | — | — | 3,656 | |||||||||||||||
Interest expense |
(4,733 | ) | (69 | ) | (4,864 | ) | (81 | ) | (21,411 | ) | ||||||||||
Interest income and other |
387 | 17 | 388 | 91 | 1,206 | |||||||||||||||
Net loss |
(7,955 | ) | (6,050 | ) | (9,907 | ) | (11,675 | ) | (109,161 | ) | ||||||||||
Issuance of common stock in connection
with elimination of Series A and Series
A-1 preferred stock preferences |
(12,349 | ) | — | (12,349 | ) | — | (12,349 | ) | ||||||||||||
Modification of Series A preferred stock
warrants |
(2,306 | ) | — | (2,306 | ) | — | (2,306 | ) | ||||||||||||
Modification of Series A-1 preferred
stock warrants |
(16,393 | ) | — | (16,393 | ) | — | (16,393 | ) | ||||||||||||
Series A preferred stock dividends |
(334 | ) | — | (334 | ) | — | (334 | ) | ||||||||||||
Series A-1 preferred stock dividends |
(917 | ) | — | (917 | ) | — | (917 | ) | ||||||||||||
Warrants issued on Series A and Series
A-1 preferred stock dividends |
(4,664 | ) | — | (4,664 | ) | — | (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 |
$ | (44,918 | ) | $ | (6,050 | ) | $ | (46,870 | ) | $ | (11,675 | ) | $ | (153,970 | ) | |||||
Net loss per share applicable to common
stockholders — basic and diluted |
$ | (5.56 | ) | $ | (0.14 | ) | $ | (7.53 | ) | $ | (0.28 | ) | ||||||||
Weighted average shares used in computing
basic and diluted net loss per share |
8,074 | 42,376 | 6,222 | 42,361 | ||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
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NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company)
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
(in thousands)
(Unaudited)
| Period from | ||||||||||||
| March 18, 1996 | ||||||||||||
| Six Months Ended | (Inception) to | |||||||||||
| June 30, | June 30, | |||||||||||
| 2007 | 2008 | 2008 | ||||||||||
Cash Flows from Operating Activities: |
||||||||||||
Net Loss |
$ | (9,907 | ) | $ | (11,675 | ) | $ | (109,161 | ) | |||
Reconciliation of net loss to net cash used in operating activities: |
||||||||||||
Depreciation and amortization |
16 | 22 | 2,344 | |||||||||
Amortization of deferred financing costs |
— | — | 320 | |||||||||
Amortization of debt discount |
5,253 | — | 17,996 | |||||||||
Accrued interest converted to preferred stock |
— | — | 260 | |||||||||
Accreted interest on convertible promissory note |
183 | — | 1,484 | |||||||||
Stock-based compensation costs |
4 | 2,214 | 6,005 | |||||||||
Gain on sale of intellectual property and royalty rights |
— | — | (3,656 | ) | ||||||||
Loss on sale of property and equipment |
— | — | 273 | |||||||||
Warrant valuation |
— | — | (6,759 | ) | ||||||||
Asset impairment loss |
— | — | 2,066 | |||||||||
Loss on facility sublease |
— | — | 895 | |||||||||
Increase (decrease) in cash resulting from changes in assets and
liabilities: |
||||||||||||
Accounts receivable |
3 | — | — | |||||||||
Prepaid expenses and other current assets |
(452 | ) | (576 | ) | (901 | ) | ||||||
Accounts payable and accrued expenses |
1,706 | 94 | 1,684 | |||||||||
Related party accounts payable and accrued expenses |
— | (459 | ) | 773 | ||||||||
Accrued loss on sublease |
— | — | (265 | ) | ||||||||
Deferred rent |
— | — | 410 | |||||||||
Net Cash used in Operating Activities |
(3,194 | ) | (10,380 | ) | (86,232 | ) | ||||||
Cash Flows from Investing Activities: |
||||||||||||
Purchase of property and equipment, net |
(11 | ) | (240 | ) | (4,845 | ) | ||||||
Proceeds from sale of property and equipment |
— | — | 250 | |||||||||
Proceeds from sale of intellectual property |
— | — | 1,816 | |||||||||
Proceeds from sale of marketable securities |
— | — | 2,000 | |||||||||
Refund of security deposit |
— | — | (3 | ) | ||||||||
Transfer of restricted cash |
— | — | (1,035 | ) | ||||||||
Net Cash used in Investing Activities |
(11 | ) | (240 | ) | (1,817 | ) | ||||||
Cash Flows from Financing Activities: |
||||||||||||
Proceeds from issuance of note payable to stockholder |
2,600 | 4,000 | 9,750 | |||||||||
Repayment of note payable to stockholder |
(225 | ) | — | (6,700 | ) | |||||||
Proceeds from issuance of convertible promissory note and warrants,
net of issuance costs |
— | — | 13,099 | |||||||||
Borrowing under line of credit, Northwest Hospital |
— | — | 2,834 | |||||||||
Repayment of line of credit, Northwest Hospital |
— | — | (2,834 | ) | ||||||||
Repayment of convertible promissory note |
— | — | (119 | ) | ||||||||
Payment on capital lease obligations |
(2 | ) | — | (323 | ) | |||||||
Payments on note payable |
— | — | (420 | ) | ||||||||
Payment of preferred stock dividends |
— | — | (1,251 | ) | ||||||||
Proceeds from issuance of Series A cumulative preferred stock, net |
— | — | 28,708 | |||||||||
Proceeds from exercise of stock options and warrants |
25,918 | — | 227 | |||||||||
Proceeds from issuance of common stock, net |
— | — | 48,343 | |||||||||
Mandatorily redeemable Series A preferred stock redemption fee |
— | — | (1,700 | ) | ||||||||
Deferred financing costs |
— | — | (320 | ) | ||||||||
Net Cash provided by Financing Activities |
28,291 | 4,000 | 89,294 | |||||||||
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| Period from | ||||||||||||
| March 18, 1996 | ||||||||||||
| Six Months Ended | (Inception) to | |||||||||||
| June 30, | June 30, | |||||||||||
| 2007 | 2008 | 2008 | ||||||||||
Effect of exchange rates on cash |
— | (36 | ) | (40 | ) | |||||||
Net increase (decrease) in cash |
25,086 | (6,656 | ) | 1,205 | ||||||||
Cash at beginning of period |
307 | 7,861 | — | |||||||||
Cash at end of period |
$ | 25,393 | $ | 1,205 | $ | 1,205 | ||||||
Supplemental disclosure of cash flow information — Cash paid during
the period for interest |
$ | — | $ | 12 | $ | 1,883 | ||||||
Supplemental schedule of non-cash financing activities: |
||||||||||||
Issuance of common stock in connection with elimination of Series A
and Series A-1 preferred stock preferences |
$ | 12,349 | $ | — | $ | 12,349 | ||||||
Modification of Series A preferred stock warrants |
2,306 | — | 2,306 | |||||||||
Modification of Series A-1 preferred stock warrants |
16,393 | — | 16,393 | |||||||||
Warrants issued on Series A and Series A-1 preferred stock dividends |
4,664 | — | 4,664 | |||||||||
Issuance of common stock for right to acquire license (prepaid expense) |
225 | — | 225 | |||||||||
Equipment acquired through capital leases |
— | — | 285 | |||||||||
Common stock warrant liability |
— | — | 11,841 | |||||||||
Accretion of mandatorily redeemable Series A preferred stock
redemption obligation |
— | — | 1,872 | |||||||||
Beneficial conversion feature of convertible promissory notes |
— | — | 7,242 | |||||||||
Conversion of convertible promissory notes and accrued interest to
Series D preferred stock |
— | — | 5,324 | |||||||||
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
common stock |
— | — | 269 | |||||||||
Issuance of Series C preferred stock warrants in connection with lease
agreement |
— | — | 43 | |||||||||
Issuance of common stock for license rights |
— | — | 4 | |||||||||
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 | |||||||||
Stock subscription receivable |
— | — | 480 | |||||||||
Financing of prepaid insurance through note payable |
— | — | 491 | |||||||||
See accompanying notes to condensed consolidated financial statements.
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Northwest Biotherapeutics, Inc.
(A Development Stage Company)
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
(unaudited)
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of
Northwest Biotherapeutics, Inc. and its subsidiary, NW Bio Europe Sarl (collectively, the “Company”
“we”, “us”, “our”). All material intercompany balances and transactions have been eliminated. The
accompanying unaudited condensed consolidated financial statements should be read in conjunction
with the financial statements included in our Annual Report on Form 10-K for the year ended
December 31, 2007. The year-end condensed balance sheet data was derived from audited financial
statements, but does not include all disclosures required by accounting principles generally
accepted in the United States of America (“GAAP”). All normal recurring adjustments which are
necessary for the fair presentation of the results for the interim periods are reflected herein.
Operating results for the three and six month periods ended June 30, 2008 and 2007 are not
necessarily indicative of results to be expected for a full year.
The independent registered public accounting firm’s report on the financial statements for the
fiscal year ended December 31, 2007 states that because of recurring operating losses, net
operating cash flow deficits, and a deficit accumulated during the development stage, there is
substantial doubt about the Company’s ability to continue as a going concern. A “going concern”
opinion indicates that the financial statements have been prepared assuming the Company will
continue as a going concern and do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
2. Summary of Significant Accounting Policies
The significant accounting policies used in the preparation of the Company’s condensed
consolidated financial statements are disclosed in Note 3 to our consolidated financial statements
included in our Annual Report on Form 10-K for the year ended December 31, 2007.
During the quarter ended June 30, 2008 we adopted a new policy for accounting for construction
in progress. Construction in progress represents the cost of placing two clean rooms into service
at the facility of our contract manufacturer. Upon completion of these clean rooms, depreciation
will commence and be recognized over the estimated useful life of seven years.
Recent Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 141(R), Business Combinations (“SFAS 141(R)”). SFAS
141(R) expands the scope of acquisition accounting to all transactions under which control of a
business is obtained. Among other things, SFAS 141(R) requires that contingent consideration as
well as contingent assets and liabilities be recorded at fair value on the acquisition date, that
acquired in-process research and development be capitalized and recorded as intangible assets at
the acquisition date, and also requires transaction costs and costs to restructure the acquired
company be expensed. SFAS 141(R) is effective on a prospective basis as of January 1, 2009 for the
Company. The Company is assessing the impact of the adoption of this standard on its financial
position and results of operations.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements — an amendment of ARB No. 51 (“SFAS 160”). The statement changes how
noncontrolling interests in subsidiaries are measured to initially be measured at fair value and
classified as a separate component of equity. SFAS 160 establishes a single method of accounting
for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation.
No gains or losses will be recognized on partial disposals of a subsidiary where control is
retained. In addition, in partial acquisitions, where control is obtained, the acquiring company
will recognize and measure at fair value all of the assets and liabilities, including goodwill, as
if the entire target company had been acquired. The statement is to be applied prospectively for
fiscal years beginning on or after December 15, 2008. We will adopt the statement on January 1,
2009. We are currently evaluating the impact the adoption of this statement will have, if any, on
our consolidated financial position or results of operations.
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In December 2007, the FASB ratified the consensus reached by the Emerging Issues Task Force
(“EITF”) on Issue No. 07-1 (“EITF 07-1”), Accounting for Collaborative Arrangements. EITF 07-1 is
effective for the Company beginning January 1, 2009 and
will be applied retrospectively to all prior periods presented for all collaborative
arrangements existing as of the effective date. EITF 07-1 defines collaborative arrangements and
establishes reporting requirements for transactions between participants in a collaborative
arrangement and between participants in the arrangement and third parties. The Company is assessing
the impact of adoption of EITF 07-1 on its financial position and results of operations.
On January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (“SFAS 157”),
which clarifies the definition of fair value, establishes a framework for measuring fair value, and
expands the required disclosures on fair value measurements. In February 2008, the FASB issued
Staff Position 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”), that deferred the
effective date of SFAS 157 for one year for nonfinancial assets and liabilities recorded at fair
value on a non-recurring basis. The effect of adoption of SFAS 157 for financial assets and
liabilities recognized at fair value on a recurring basis did not have a material impact on the
Company’s financial position and results of operations (See Note 3). The Company is assessing the
impact of the adoption of SFAS 157 for nonfinancial assets and liabilities on the Company’s
financial position and results of operations.
On January 1, 2008, the Company adopted SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, including an amendment of FASB Statement No. 115 (“SFAS 159”).
SFAS 159 permits companies to irrevocably elect to measure certain financial assets and financial
liabilities at fair value. Unrealized gains and losses on items for which the fair value option has
been elected are reported in earnings at each subsequent reporting date. The Company did not elect
the fair value option under SFAS 159 for any of its financial assets or liabilities upon adoption.
On January 1, 2008, the Company adopted EITF Issue No. 07-3, Accounting for Advance Payments
for Goods or Services Received for Use in Future Research and Development Activities (“EITF 07-3”),
which is being applied prospectively for new contracts. EITF 07-3 addresses nonrefundable advance
payments for goods or services that will be used or rendered for future research and development
activities. EITF 07-3 requires these payments be deferred and capitalized and recognized as an
expense as the related goods are delivered or the related services are performed. The effect of
adoption of EITF 07-3 on the Company’s financial position and results of operations was not
material.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities (“SFAS 161”), which is effective January 1, 2009 for the Company. SFAS 161
requires enhanced disclosures about derivative instruments and hedging activities to allow for a
better understanding of their effects on an entity’s financial position, financial performance, and
cash flows. Among other things, SFAS 161 requires disclosure of the fair values of derivative
instruments and associated gains and losses in a tabular format. Since SFAS 161 requires only
additional disclosures about the Company’s derivatives and hedging activities, the adoption of SFAS
161 will not affect the Company’s financial position or results of operations, should the Company
acquire derivatives in the future.
In May 2008, the FASB issued Staff Position No. APB 14-1, Accounting for Convertible Debt
Instruments that may be Settled in Cash upon Conversion (Including Partial Cash Settlement ) (“FSP
APB 14-1”). FSP APB 14-1 states that convertible debt instruments that may be settled in cash upon
conversion (including partial cash settlement) are not addressed by paragraph 12 of Accounting
Principles Board Opinion No. 14 and that issuers of such instruments should account separately for
the liability and equity components of the instrument in a manner that will reflect the entity’s
nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB
14-1 is effective for financial statements issued for fiscal years beginning after December 15,
2008, and must be applied retrospectively to all periods presented. The Company is assessing the
impact of the adoption of this standard on its financial position and results of operations.
8
Table of Contents
3. Fair Value Measurements
As discussed in Note 2 above, effective January 1, 2008, the Company adopted SFAS 157 for all
financial assets and liabilities and for nonfinancial assets and liabilities recognized or
disclosed at fair value in the consolidated financial statements on a recurring basis (at least
annually). SFAS 157 defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the measurement date.
The standard also establishes a fair value hierarchy which requires an entity to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring fair value. SFAS
157 describes three levels of inputs that may be used to measure fair value:
Level 1
|
Quoted market prices in active markets for identical assets or liabilities. | |
Level 2
|
Observable market based inputs or unobservable inputs that are corroborated by market data. | |
Level 3
|
Unobservable inputs that are not corroborated by market data. |
If the inputs used to measure the financial assets and liabilities fall within the different
levels described above, the categorization is based on the lowest level input that is significant
to the fair value measurement of the instrument.
As of June 30, 2008, the Company did not hold any financial assets and liabilities which were
required to be measured at fair value on a recurring basis.
9
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4. Stock-Based Compensation Plans
The Company has share-based compensation plans under which employees and non-employee
directors may be granted options to purchase shares of Company common stock at the fair market
value at the time of grant. Stock-based compensation cost is measured by the Company at the grant
date, based on the fair value of the award, over the requisite service period. For options and
warrants issued to non-employees, the Company recognizes stock compensation costs utilizing the
fair value methodology prescribed in SFAS 123 (revised 2004), Share Based Payment (“SFAS 123(R)”),
over the related period of benefit.
The stock-based compensation expense related to stock-based awards under SFAS 123(R) totaled
approximately $1,117,200 and $4,000 for the three months ended June 30, 2008 and 2007,
respectively. The stock-based compensation expense related to stock-based awards under SFAS 123(R)
totaled approximately $2,213,900 and $4,000 for the six months ended June 30, 2008 and 2007,
respectively. As of June 30, 2008, the Company had $8.7 million of total unrecognized compensation
cost related to non-vested stock-based awards granted under all equity compensation plans.
Options to purchase 870,000 shares of the Company’s common stock were granted to new employees
in April and May 2008. No options to purchase the Company’s common stock were granted during the six
month period ended June 30, 2007. The fair value of each option grant is estimated on the grant
date using the Black-Scholes option pricing model.
Stock Option Plans
The Company established a stock option plan, which became effective on June 22, 2007 (the
“2007 Stock Option Plan”). In April 2008, the Company increased the number of shares reserved for
issuance under the 2007 Stock Option Plan by 519,132 shares of its common stock for an aggregate of
6,000,000 shares of its common stock, par value $0.001 per share (“Common Stock”), reserved for
issue in respect of options granted under the plan. The plan provides for the grant to employees of
the Company, its parents and subsidiaries, including officers and employee directors, of “incentive
stock options” within the meaning of Section 422 of the U.S. Internal Revenue Code of 1986, as
amended, and for the grant of non-statutory stock options to the employees, officers, directors,
including non-employee directors, and consultants of the Company, its parents and subsidiaries. To
the extent an optionee would have the right in any calendar year to exercise for the first time one
or more incentive stock options for shares having an aggregate fair market value, under all of the
Company’s plans and determined as of the grant date, in excess of $100,000, any such excess options
will be treated as non-statutory options.
5. Liquidity
The Company has experienced recurring losses from operations, and, as of June 30, 2008, had a
working capital deficit of $3.7 million and a deficit accumulated during the development stage of
$154 million.
Since 2004, the Company has undergone a significant recapitalization pursuant to which Toucan
Capital Fund II, L.P. (“Toucan Capital”) loaned the Company an aggregate of $6.75 million and
Toucan Partners, LLC (“Toucan Partners”) loaned the Company an aggregate of $4.825 million
(excluding $225,000 in proceeds from a demand note that was received on June 13, 2007 and repaid on
June 27, 2007). The Board’s Chairperson is the managing director of Toucan Capital and the managing
member of Toucan Partners. During this period of time, the Company also borrowed funds from certain
members of management. In addition, the Company raised capital in March 2006 through a closed
equity financing with unrelated investors (the “PIPE Financing”), in June 2007 sold shares of
Common Stock to foreign institutional investors and in May 2008 borrowed $4 million from Al Rajhi
Holdings W.L.L. (“Al Rajhi”),which beneficially owns greater than 10% of our issued and outstanding
common stock.
Management Loans
On November 13, 2003, the Company borrowed an aggregate of $335,000 from certain members of
its management and issued warrants to acquire an aggregate of approximately 247,000 shares of
Common Stock at an exercise price of $0.60 per share, which enabled the Company to continue
operating into the first quarter of 2004. As of December 31, 2005, $111,000 of outstanding
principal balance and the related accrued interest was repaid to certain prior members of
management. On April 17, 2006, the final $224,000 of outstanding principal balance on these notes,
and the related accrued interest, was converted into 146,385 and 32,796 shares, respectively, of
our Common Stock, and in conjunction with the PIPE Financing, members of management exercised their
warrants (200% warrant coverage) on a net exercise basis for 126,365 and 28,311 shares of our
Common Stock, respectively. Accordingly, as of December 31, 2006, all of these loans were either
repaid or converted into Common Stock.
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During March and April 2006, warrants for the purchase of an aggregate of approximately
247,000 shares of Common Stock were exercised on a net exercise basis resulting in the issuance of
approximately 227,000 shares of Common Stock to current and prior members of management.
Two former members of the Company’s management, who had participated as lenders in the
Company’s management loans, have claimed that they are entitled to receive, for no additional cash
consideration, an aggregate of up to approximately 630,000 additional shares of Common Stock due to
the alleged triggering of an anti-dilution provision in the warrant agreements. The Company does
not believe that these claims have merit, and intends to vigorously defend such claims.
Toucan Capital and Toucan Partners
Toucan Capital loaned the Company an aggregate of $6.75 million during 2004 and 2005. On
January 26, 2005, the Company entered into a securities purchase agreement with Toucan Capital
pursuant to which it purchased 32.5 million shares of the Company’s Series A cumulative convertible
preferred stock (the “Series A Preferred Stock”) at a purchase price of $0.04 per share, for a net
purchase price of $1.276 million, net of offering related costs of approximately $24,000. In April
2006, the $6.75 million of notes payable plus all accrued interest due to Toucan Capital were
converted into shares of the Company’s Series A-1 cumulative convertible Preferred Stock (the
“Series A-1 Preferred Stock”).
Toucan Partners loaned the Company $4.825 million in a series of transactions. From November
14, 2005 through March 9, 2006, the Company issued three promissory notes to Toucan Partners,
pursuant to which Toucan Partners loaned the Company an aggregate of $950,000. In addition to the
$950,000 of promissory notes, Toucan Partners provided $3.15 million in cash advances from October
2006 through April 2007, which were converted into convertible notes (the “2007 Convertible Notes”)
and related warrants (the “2007 Warrants”) in April 2007. In April 2007, the three promissory notes
were amended and restated to conform to the 2007 Convertible Notes. Payment was due under the notes
upon written demand on or after June 30, 2007. Interest accrued at 10% per annum, compounded
annually, on a 365-day year basis. The principal amount of, and accrued interest on, these notes,
as amended, was convertible at Toucan Partners’ election into Common Stock on the same terms as the
2007 Convertible Notes.
The Company and Toucan Partners also entered into two promissory notes to fix the terms of two
additional cash advances provided by Toucan Partners to the Company on May 14, 2007 and May 25,
2007 in the aggregate amount of $725,000, and issued warrants to purchase shares of the Company’s
capital stock to Toucan Partners in connection with each such note. These notes and warrants are on
the same terms as the 2007 Convertible Notes and 2007 Warrants and the proceeds of these notes
enabled the Company to continue to operate and advance programs while raising additional equity
financing.
During the fourth quarter of 2007, the Company repaid $5.3 million of principal and related
accrued interest due to Toucan Partners pursuant to the convertible notes.
On August 19, 2008, the Company entered into a loan agreement with Toucan Partners, under
which Toucan Partners provided the Company with debt financing in the amount of $1.0 million (“the
“Toucan Loan”). Under the terms of the Toucan Loan, the Company received $1.0 million in return
for an unsecured promissory note in the principal amount of $1,060,000 (reflecting an original
issue discount of six percent, or $60,000). The Toucan Loan has a term of six months. The note may
be paid at any time without a prepayment penalty and the term may be extended in Toucan Partners
discretion upon the Company’s request. Toucan Partners may elect to have the original issue
discount amount paid at maturity in shares of common stock, at a price per share equal to the
average closing price of the Company’s common stock on the NASD Over-The-Counter Bulletin Board
during the ten trading days prior to the execution of the loan agreement. The intrinsic value of
the Toucan Loan did not result in a beneficial conversion feature.
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Conversion of Preferred Stock and Related Matters
On June 1, 2007, the Company issued to Toucan Capital a new warrant to purchase the Company’s
Series A-1 Preferred Stock (“Toucan Capital Series A-1 Warrant”) in exchange for the cancellation
of all previously issued warrants to purchase Series A-1 Preferred Stock (or, at the election of
Toucan Capital, any other equity or debt security of the Company) held by Toucan Capital. The new
Toucan Capital Series A-1 Warrant was exercisable for 6,471,333 shares of Series A-1 Preferred
Stock plus shares of Series A-1 Preferred Stock attributable to accrued dividends on the shares of
Series A-1 Preferred Stock held by Toucan Capital (with each such Series A-1 Preferred Share
convertible into 2.67 shares of Common Stock at $0.60 per share), compared to the 3,062,500 shares
of Series A-1 Preferred Stock (with each such Series A-1 Preferred Share convertible into 2.67
shares of Common Stock at $0.60 per share) that were previously issuable to Toucan Capital upon
exercise of the warrants being cancelled.
Also on June 1, 2007, the Company and Toucan Capital amended Toucan Capital’s warrant to
purchase Series A Preferred Stock (the “Toucan Capital Series A Warrant”) to increase the number of
shares of Series A Preferred Stock that are issuable upon exercise of the warrant to 32,500,000
shares of Series A Preferred Stock (plus shares of Series A Preferred Stock attributable to accrued
dividends on the shares of Series A Preferred Stock held by Toucan Capital) from 13,000,000 shares
of Series A Preferred Stock.
In connection with the modifications of the Series A and Series A-1 Preferred Stock warrants,
the Company recognized reductions in earnings applicable to common stockholders in June 2007 of
$2.3 million and $16.4 million, respectively. The fair value of the warrant modifications were
determined using the Black-Scholes option pricing model with the following assumptions: expected
dividend yield of 0%, risk-free interest rate of 5.0% volatility of 398%, and a contractual life of
seven years.
On June 15, 2007, the Company, Toucan Capital, and Toucan Partners entered into a conversion
agreement (“Conversion Agreement”) which became effective on June 22, 2007 upon the admission of
the Company’s Common Stock to trade on Alternative Investment Market (“AIM”) of the London Stock
Exchange (“Admission”).
Pursuant to the terms of the Conversion Agreement (i) Toucan Capital agreed to convert and has
converted all of its shares of the Company’s Series A Preferred Stock and Series A-1 Preferred
Stock (in each case, excluding any accrued and unpaid dividends) into Common Stock and agreed to
eliminate a number of rights, preferences and protections associated with the Series A Preferred
Stock and Series A-1 Preferred Stock, including the liquidation preference entitling Toucan Capital
to certain substantial cash payments and (ii) Toucan Partners agreed to eliminate all of its
existing rights to receive Series A-1 Preferred Stock under certain notes and warrants (and
thereafter to receive shares of Common Stock rather than shares of Series A-1 Preferred Stock), and
the rights, preferences and protections associated with the Series A-1 Preferred Stock, including
the liquidation preference that would entitle Toucan Partners to certain substantial cash payments.
In return for these agreements, the Company issued to Toucan Capital and Toucan Partners 4,287,851
and 2,572,710 shares of Common Stock, respectively. In connection with the issuance of these
shares, the Company recognized a further reduction of earnings applicable to common stockholders of
$12.3 million in June 2007.
Under the terms of the Conversion Agreement (i) the Toucan Capital Series A Warrant is
exercisable for 2,166,667 shares of Common Stock rather than shares of Series A Preferred Stock
(plus shares of Common Stock, rather than shares of Series A Preferred Stock, attributable to
accrued dividends on the shares of Series A Preferred Stock previously held by Toucan Capital that
were converted into Common Stock upon Admission, subject to the further provisions of the
Conversion Agreement as described below) and (ii) the Toucan Capital Series A-1 Warrant became
exercisable for an aggregate of 17,256,888 shares of Common Stock rather than shares of Series A-1
Preferred Stock (plus shares of Common Stock, rather than shares of Series A-1 Preferred Stock,
attributable to accrued dividends on the shares of Series A-1 Preferred Stock previously held by
Toucan Capital that were converted into Common Stock upon Admission), subject to further provisions
of the Conversion Agreement as described below.
As noted above, the 32,500,000 shares of Series A Preferred Stock held by Toucan Capital
converted, in accordance with their terms, into 2,166,667 shares of Common Stock and the 4,816,863
shares of Series A-1 Preferred Stock held by Toucan Capital converted, in accordance with their
terms, into 12,844,968 shares of Common Stock.
Under the terms of the Conversion Agreement, Toucan Capital also agreed to temporarily defer
receipt of the accrued and unpaid dividends on its shares of Series A Preferred Stock and Series
A-1 Preferred Stock of an amount equal to $334,340 and $917,451, respectively, until not later than
September 30, 2007. In September 2007, the Company paid these dividends in full to Toucan Capital.
As a result of the financings described above, as of June 30, 2008, Toucan Capital held:
| • | an aggregate of 19,299,486 shares of Common Stock; |
||
| • | warrants to purchase 14,150,732 shares of Common Stock at an exercise price of $0.60 per
share; and |
||
| • | warrants to purchase 7,884,357 shares of Common Stock at an exercise price of $0.15 per
share. |
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As a result of the financings described above, as of June 30, 2008, Toucan Partners held:
| • | an aggregate of 2,572,710 shares of Common Stock; and |
||
| • | warrants to purchase 8,832,541 shares of Common Stock at an exercise price of $0.60 per
share. |
The investments made by Toucan Capital and Toucan Partners were made pursuant to the terms and
conditions of a Recapitalization Agreement originally entered into on April 26, 2004 with Toucan
Capital (the “Recapitalization Agreement”). The Recapitalization Agreement originally contemplated
the investment of up to $40 million through the issuance of new securities to Toucan Capital and a
syndicate of other investors to be determined.
We and Toucan Capital amended the Recapitalization Agreement in conjunction with each
successive loan agreement. The amendments generally (i) updated certain representations and
warranties of the parties made in the Recapitalization Agreement, and (ii) made certain technical
changes in the Recapitalization Agreement in order to facilitate the bridge loans described
therein.
As of June 30, 2008, Toucan Capital, including the holdings of Toucan Partners, held
21,872,196 shares of our capital stock, representing approximately 51.5% of our outstanding Common
Stock. Further, as of June 30, 2008, Toucan Capital, including the holdings of Toucan Partners,
beneficially owned (including unexercised warrants) 52,739,826 shares of our capital stock,
representing a beneficial ownership interest of approximately 71.9%.
Private Placement
On March 30, 2006, the Company entered into a securities purchase agreement (the “Purchase
Agreement”) with a group of accredited investors pursuant to which the Company agreed to sell an
aggregate of approximately 2.6 million shares of its Common Stock, at a price of $2.10 per share,
and to issue, for no additional consideration, warrants to purchase up to an aggregate of
approximately 1.3 million shares of the Company’s Common Stock. The PIPE Financing closed and stock
was issued to the new investors in early April and the Company received gross proceeds of
approximately $5.5 million, before cash offering expenses of approximately $442,000. The total cost
of the offering recorded, including both cash and non-cash costs, was approximately $837,000. The
relative fair value of the Common Stock was estimated to be approximately $3.7 million and the
relative fair value of the warrants was estimated to be $1.8 million as determined based on the
relative fair value allocation of the proceeds received. The warrants were valued using the
Black-Scholes option pricing model.
In connection with the securities purchase agreement, the Company issued approximately 67,000
warrants to its investment bank valued at approximately $395,000. The fair value of the warrants
issued to the investment bank was determined using the Black-Scholes option pricing model based on
the following assumptions: risk free interest rate of 4.8%, contractual life of five years,
expected volatility of 382% and a dividend yield of 0%.
The warrants expire five years after issuance, and are initially exercisable at a price of
$2.10 per share, subject to adjustments under certain circumstances.
Placement of Common Stock with Foreign Institutional Investors
On June 22, 2007, we placed 15,789,473 shares of our Common Stock with foreign institutional
investors at a price of £0.95 per share. The gross proceeds from the placement were approximately
£15.0 million, or $29.9 million, while net proceeds from the offering, after deducting commissions
and expenses, were approximately £13.0 million, or $25.9 million. The net proceeds from the
placement were used to fund clinical trials, product and process development, working capital needs
and repayment of certain existing debt.
Shareholder Loan
On May 12, 2008, the Company entered into a loan agreement with Al Rajhi, under which Al Rajhi
provided the Company with debt financing in the amount of $4.0 million (the “Loan”). Under the
terms of the Loan, the Company received $4.0 million in return for an unsecured promissory note in
the principal amount of $4,240,000 (reflecting an original issue discount of six percent, or
$240,000). The Loan has a term of six months. The note may be paid at any time without a prepayment
penalty and the term may be extended in Al Rajhi’s discretion upon the Company’s request. At June
30, 2008, the carrying value of the Loan was $4,069,000, net of unamortized discount of $171,000.
The Company amortizes the discount using the effective interest method over the term of the Loan.
During the three months ended June 30, 2008, the Company recorded interest expense related to the
amortization of the discount of $69,000. Al Rajhi may elect to have the original issue discount
amount paid at maturity in shares of Common Stock, at a price per share equal to the average
closing price of the Company’s Common Stock on the NASD Over-The-Counter Bulletin Board during the
ten trading days prior to the execution of the Loan agreement. The intrinsic value of the Loan did
not result in a beneficial conversion feature.
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Liability For Potentially Dilutive Securities in Excess of Authorized Number of Common Shares
In accordance with EITF 00-19, the Company accounts for potential shares that can be converted
to Common Stock, that are in excess of authorized shares, as a liability that is recorded at fair
value. Total potential outstanding Common Stock exceeded the Company’s authorized shares as of
December 31, 2005 when the Company entered into another convertible promissory note and warrant
agreement with Toucan Partners on December 30, 2005. The fair value of the warrants in excess of
the authorized shares at December 31, 2005 totaling approximately $604,000 was recognized as a
liability on December 31, 2005. This liability was required to be remeasured at each reporting date
with any change in value included in other income/expense until such time as enough shares were
authorized to cover all potentially convertible instruments. Accordingly, during the first quarter
of 2006, the Company recognized a loss totaling $2.1 million with respect to the revaluation of
this warrant liability. Further, during March 2006, the Company issued an additional warrant to
Toucan Partners, along with a convertible promissory note. The fair value of the warrants in excess
of the authorized shares was approximately $6.7 million and was recognized as an additional
liability as of March 31, 2006. During April 2006, the Company sold Common Stock to outside
investors in the Pipe Financing. In addition, members of management and Toucan Capital elected to
convert their promissory notes and related accrued interest into Common Stock and Series A-1
Preferred Stock, respectively. As a result, the fair value of the potential Common Stock in excess
of the authorized shares was $24.4 million and was recognized as an additional liability during
April 2006.
Effective May 25, 2006, the number of authorized common shares was increased to 800 million.
The liability for potential shares in excess of total authorized shares was revalued at that date.
This valuation resulted in a gain of approximately $7.1 million during 2006, due to the net
decreases in the net fair value of the related warrants on the date the authorized shares were
increased. This gain is included in the 2006 consolidated statement of operations as a warrant
valuation.
Going Concern
As of August 19, 2008, we had approximately $1.1 million of cash on hand. We estimate that our
available cash is sufficient to support our day to day operations through the end of September
2008. We need to raise additional capital to fund our clinical trials and other operating
activities and repay our indebtedness under the Loan and the Toucan Loan described in Note 10
“Subsequent Events”. The amount of additional funding required will depend on many factors,
including the speed with which we are able to identify and hire people to fill key positions, the
speed of patient enrollment in our
DCVax®-Brain cancer trial, and the potential adoption of
DCVax®-Brain in the selected hospitals in Switzerland, and unanticipated developments, including
adverse developments in pending litigation matters. However, without additional capital, we will
not be able to complete our DCVax®-Brain clinical trial or move forward with any of our other
product candidates for which investigational new drug applications have been cleared by the U.S.
Food and Drug Administration, or FDA. We will also not be to develop our second generation
manufacturing processes, which offer substantial product cost reductions.
We
will require additional funding before we achieve profitability. We
are in late stage discussions with several parties in regard to
additional financing transactions, which we hope to complete later in
the year. There can be no
assurance that our efforts to seek such funding will be successful. We may raise additional funds
by issuing additional common stock or securities (equity or debt) convertible into shares of Common
Stock, in which case, the ownership interest of our stockholders will be diluted. Any debt
financing, if available, is likely to include restrictive covenants that could limit our ability to
take certain actions. Further, we may seek funding from Toucan Capital or Toucan Partners or their
affiliates or other third parties. Such parties are under no obligation to provide us any
additional funds, and any such funding may be dilutive to stockholders and may contain restrictive
covenants. We currently are exploring additional financings with several other parties; however,
there can be no assurance that we will be able to complete any such financings, or that the terms
of such financings will be attractive to us. If our capital raising efforts are unsuccessful, our
inability to obtain additional cash as needed could have a material adverse effect on our financial
position, results of operations and our ability to continue our existence. Our independent
registered public accounting firm has indicated in its report on our consolidated financial
statements included in the Annual Report on Form 10-K for the year ended December 31, 2007 that
there is substantial doubt about our ability to continue as a going concern.
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6. Net Income (Loss) Per Share Applicable to Common Stockholders
Effective June 19, 2007, all shares of Common Stock issued and outstanding were combined and
reclassified on a one-for-fifteen basis (the “Reverse Stock Split”). The effect of the Reverse
Stock Split has been retroactively applied to all periods presented in the accompanying condensed
consolidated financial statements and notes thereto.
For the three months ended June 30, 2008 and 2007, respectively, options to purchase 5,600,000
and 51,000 shares of Common Stock and warrants to purchase 32 million shares of Common Stock were
not included in the computation of diluted net loss per share because they were antidilutive. For
the six months ended June 30, 2008 and 2007, respectively, options to purchase 5,600,000 and
51,000 shares of Common Stock and warrants to purchase 32 million shares of Common Stock were not
included in the computation of diluted net loss per share because they were antidilutive.
7. Related Party Transactions
Cognate Agreement
On July 30, 2004, the Company entered into a service agreement with Cognate Therapeutics, Inc.
(now known as Cognate BioServices, Inc., or Cognate), a contract manufacturing and services
organization in which Toucan Capital has a majority interest. In addition, two of the principals of
Toucan Capital are members of Cognate’s board of directors and, on May 17, 2007, the managing
director of Toucan Capital was appointed to serve as a director of the Company and to serve as the
non-executive Chairperson of the Company’s Board of Directors. Under the service agreement, the
Company agreed to utilize Cognate’s services for an initial two-year period, related primarily to
manufacturing DCVax® product candidates, regulatory advice, research and development preclinical
activities and managing clinical trials. The agreement expired on July 30, 2006; however, the
Company continued to utilize Cognate’s services under the same terms as set forth in the expired
agreement. On May 17, 2007, the Company entered into a new service agreement with Cognate pursuant
to which Cognate will provide certain consulting and, when needed, manufacturing services to the
Company for its DCVax®-Brain Phase II clinical trial. Under the terms of the new contract, the
Company paid a non-refundable contract initiation fee of $250,000 and committed to pay budgeted
monthly service fees of $400,000, subject to quarterly true-ups, and monthly facility fees of
$150,000. The Company may terminate this agreement with 180 days notice and payment of all
reasonable wind-up costs and Cognate may terminate the contract in the event that the brain cancer
clinical trial fails to complete enrollment by July 1, 2009. However, if such termination by the
Company occurs at any time prior to the earlier of the submission of an FDA biological license
application/new drug application on the Company’s brain cancer clinical trial or July 1, 2010 or,
such termination by Cognate results from failure of the brain cancer clinical trial to complete
patient enrollment by July 1, 2009, the Company is obligated to make an additional termination fee
payment to Cognate equal to $2 million.
During the three months ending June 30, 2008 and 2007, the Company recognized approximately
$2.3 million and $1.7 million, respectively, of research and development costs related to these
service agreements. During the six months ending June 30, 2008 and 2007, respectively, the Company
recognized approximately $4.1 million and $2.4 million of research and development costs related to
these service agreements. As of June 30, 2008 and December 31, 2007, the Company owed Cognate
approximately $283,000 and $0, respectively.
Toucan Capital Management
In accordance with a recapitalization agreement dated April 26, 2004 between the Company and
Toucan Capital, as amended and restated on July 30, 2004 and further amended ten times between
October 22, 2004 and November 14, 2005, pursuant to which Toucan Capital agreed to recapitalize the
Company by making loans to the Company, the Company accrued and paid certain legal and other
administrative costs on Toucan Capital’s behalf. Pursuant to the terms of the Conversion Agreement
discussed above, the recapitalization agreement was terminated on June 22, 2007. Subsequent to the
termination of the recapitalization agreement, Toucan Capital continues to incur costs on behalf of
the Company. These costs primarily relate to consulting costs and travel expenses incurred in
support of the Company’s international expansion efforts. In addition, since July 1, 2007, the
Company has paid and recorded rent expense due to Toucan Capital Corporation, an affiliate of
Toucan Capital and Toucan Partners, for its office space in Bethesda, Maryland.
During the three months ending June 30, 2008 and 2007, respectively, the Company recognized
approximately $148,000 and $540,000 of general and administrative costs related to the
recapitalization agreement, rent expense, as well as legal, travel and other costs incurred by
Toucan Capital on the Company’s behalf. During the six months ending June 30, 2008 and 2007,
respectively, the Company recognized approximately $298,000 and $558,000 of general and
administrative costs related to the recapitalization agreement, rent expense, as well as legal,
travel and other costs incurred by Toucan Capital on the Company’s behalf. At June 30, 2008 and
December 31, 2007, accrued expense payable to Toucan Capital amounted to $50,000 and $900,000,
respectively, and are included in the accompanying consolidated balance sheets.
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On August 19, 2008, the Company entered into a loan agreement with Toucan Partners, under
which Toucan Partners provided the Company with debt financing in the amount of $1.0 million (“the
“Toucan Loan”). Under the terms of the Toucan Loan, the Company received $1.0 million in return
for an unsecured promissory note in the principal amount of $1,060,000 (reflecting an original
issue discount of six percent, or $60,000). The Toucan Loan has a term of six months. The note may
be paid at any time without a prepayment penalty and the term may be extended in Toucan Partners
discretion upon the Company’s request. Toucan Partners may elect to have the original issue
discount amount paid at maturity in shares of common stock, at a price per share equal to the
average closing price of the Company’s common stock on the NASD Over-The-Counter Bulletin Board
during the ten trading days prior to the execution of the loan agreement. The intrinsic value of
the Toucan Loan did not result in a beneficial conversion feature.
Al Rajhi
See “Shareholder Loan” in Note 5 above.
8. Contingencies
Private Placement
On March 30, 2006, the Company entered into a securities purchase agreement (the “Purchase
Agreement”) with a group of accredited investors pursuant to which the Company sold an aggregate of
approximately 2.63 million shares of its Common Stock, at a price of $2.10 per share (the “PIPE
Shares”), and issued, for no additional consideration, warrants to purchase up to an aggregate of
approximately 1.3 million shares of Company’s Common Stock (the “Warrant Shares”).
Under the Purchase Agreement, the Company agreed to register for resale under the Securities
Act of 1933, as amended (the “Securities Act”), both the PIPE Shares and the Warrant Shares. The
Company also agreed to other customary obligations regarding registration, including matters
relating to indemnification, maintenance of the registration statement, payment of expenses, and
compliance with state “blue sky” laws. The Company may be liable for liquidated damages if the
registration statement (after being declared effective) ceases to be effective in a manner, and for
a period of time, that violates the Company’s obligations under the Purchase Agreement. The amount
of the liquidated damages payable to the investors is, in aggregate, one percent (1%) of the
aggregate purchase price of the shares per month, subject to a cap of ten percent (10%) of the
aggregate purchase price of the shares.
As of April 30, 2008, the Company’s registration statement ceased to be effective. The Company
filed a post-effective amendment to the registration statement on April 29, 2008 which was declared
effective by the SEC on May 7, 2008. Therefore, liquidated damages accrued for the period between
May 1, 2008 and May 6, 2008. In addition, liquidated damages were accrued for the period from
April 30, 2007 to February 8, 2008 when the Company’s registration statement ceased to be
effective. As of June 30, 2008, the Company has accrued liquidated damages amounting to an
aggregate of approximately $180,000, $12,353 of which was expensed during the six months ended June
30,2008.
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Legal Proceedings
Soma Arbitration
The Company signed an engagement letter, dated October 15, 2003, with Soma Partners, LLC, or
Soma, a New Jersey-based investment bank, pursuant to which the Company engaged them to locate
potential investors. Pursuant to the terms of the engagement letter, any disputes arising between
the parties would be submitted to arbitration in the New York metropolitan area. A dispute arose
between the parties. Soma filed an arbitration claim against us with the American Arbitration
Association in New York, NY claiming unpaid commission fees of $186,000 and seeking declaratory
relief regarding potential fees for future transactions that may be undertaken by us with Toucan Capital. We vigorously disputed Soma’s claims on multiple grounds. We
contended that we only owed Soma approximately $6,000.
Soma subsequently filed an amended arbitration claim, claiming unpaid commission fees of
$339,000 and warrants to purchase 6% of the aggregate securities issued to date, and seeking
declaratory relief regarding potential fees for future financing transactions which may be
undertaken by us with Toucan Capital and others, which could potentially be in excess of $4
million. Soma also requested the arbitrator award its attorneys’ fees and costs related to the
proceedings. We strongly disputed Soma’s claims and defended ourselves.
The arbitration proceedings occurred from March 8-10, 2005 and on May 24, 2005, the arbitrator
ruled in our favor and denied all claims of Soma. In particular, the arbitrator decided that we did
not owe Soma the fees and warrants sought by Soma, that we would not owe Soma fees in connection
with future financings, if any, and that we had no obligation to pay any of Soma’s attorneys’ fees
or expenses. The arbitrator agreed with us that the only amount we owed Soma was $6,702.87, which
payment we made on May 27, 2005.
On August 29, 2005, Soma filed a notice of petition to vacate the May 24, 2005 arbitration
award with the Supreme Court of the State of New York. On December 30, 2005, the Supreme Court of
the State of New York dismissed Soma’s petition.
On February 3, 2006, Soma filed another notice of appeal with the Supreme Court of the State
of New York. On December 6, 2006, we filed our brief for this appeal and on December 12, 2006, Soma
filed its reply brief. On June 19, 2007, the Appellate Division, First Department of the Supreme
Court of the State of New York, reversed the December 30, 2005 decision and ordered a new
arbitration proceeding. On July 26, 2007, we filed a Motion for Leave to Appeal with the Court of
Appeals of the State of New York and on August 3, 2007 Soma filed its reply brief. On October 16,
2007, the Court of Appeals of the State of New York denied our motion to appeal. We intend to
continue to vigorously defend ourselves against Soma’s claims.
Lonza Patent Infringement Claim
On July 27, 2007, Lonza Group AG (“Lonza”) filed a complaint against us in the U. S. District
Court for the District of Delaware alleging patent infringement relating to recombinant DNA
methods, sequences, vectors, cell lines and host cells. The complaint sought temporary and
permanent injunctions enjoining us from infringing Lonza’s patents and unspecified damages. We
strongly disputed all of the claims in Lonza’s complaint, sought dismissal of the complaint and
also filed counterclaims against Lonza for damages. On November 27, 2007, the complaint was
dismissed by the U.S. District Court for the District of Delaware. Also on November 27, 2007, a new
complaint was filed by Lonza in the U.S. District Court for the District of Maryland alleging the
same patent infringement relating to recombinant DNA methods, sequences, vectors, cell lines and
host cells by the Company’s DCVax® product candidates. On December 13, 2007, Lonza withdrew all
claims relating to all of our products other than our DCVax®-Prostate product. our continued to
dispute these remaining claims and seek dismissal of them. On April 14, 2008, we and Lonza entered
into a binding agreement to settle the dispute. Under the terms of the settlement, we did not pay
any monetary or other consideration to Lonza nor did we acquire any license from Lonza. The only
action to which we agreed was to destroy any recombinant modified prostate specific membrane
antigen or cell lines using Lonza’a GS Expression System currently in our possession which had been
manufactured by and purchased from Medarex Inc. more than six years ago, as well as any
documentation received from Medarex on know–how regarding the use of the GS Expression System and
cell lines. On May 14, 2008 the parties filed a Joint Stipulation of Dismissal of the Lawsuit with
Prejudice, including all claims and counterclaims therein.
Stockholder Class Action Lawsuits
On August 13, 2007, a complaint was filed in the U.S. District Court for the Western District
of Washington naming the Company, the Chairperson of its Board of Directors, Linda F. Powers, and
its Chief Executive Officer, Alton L. Boynton, as defendants in a class action for violation of
federal securities laws. After this complaint was filed, five additional complaints were filed in
other jurisdictions alleging similar claims. The complaints were filed on behalf of purchasers of
the Company’s Common Stock between July 9, 2007 and July 18, 2007 and allege violations of Section
10(b) of the Exchange Act and Rule 10b-5 thereunder. The complaints seek unspecified compensatory
damages, costs and expenses. On December 18, 2007, a consolidated complaint was filed in the U.S.
District Court for the Western District of Washington consolidating the stockholder actions
previously filed. We dispute these claims and intend to vigorously defend these actions.
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SEC Inquiry
On August 13, 2007, we were notified that the SEC had initiated a non-public informal inquiry
regarding the events surrounding our application for Swiss regulatory approval and related press
releases dated July 9, 2007 and July 16, 2007. On March 3, 2008, the Company was notified that the
SEC had initiated a formal investigation regarding this matter. We have been cooperating with the
SEC in connection with the inquiry, and will continue to do so.
Management Warrants
On November 13, 2003, we borrowed an aggregate of $335,000 from certain members of our
management. As part of the consideration for this loan, the lenders received warrants exercisable
to acquire an aggregate of 0.25 million shares of our Common Stock. From March 2006 through May
2006, all of these warrants were exercised for Common Stock on a net exercise basis, pursuant to
the terms of the warrants.
Two former members of management who had participated as lenders in our management loans have
claimed that they are entitled to receive, for no additional cash consideration, an aggregate of up
to approximately 630,000 additional shares of our Common Stock due to the alleged triggering of an
anti-dilution provision in the warrant agreements. We do not believe that these claims have merit
and, in the event such claims are pursued, we intend to vigorously defend against them.
We have no other legal proceedings pending at this time.
9. Common Stock
During the six months ended June 30, 2008, the Company issued 24,578 shares of common stock
upon the cashless exercise of options to purchase 33,334 shares of common stock.
On June 17, 2008, the Company issued 122,190 shares of common stock pursuant to a letter
agreement under which we received an exclusive right to negotiate the terms of a potential
transaction in which we would obtain the rights, title and interest to and under a certain license
agreement. The fair value of the stock issued amounting to $225,000 is recorded as a prepaid
expense at June 30, 2008, since the license agreement is expected to benefit future periods.
10. Subsequent Events
On August 19, 2008, the Company entered into a loan agreement with Toucan Partners, under
which Toucan Partners provided the Company with debt financing in the amount of $1.0 million (the
“Toucan Loan”). Under the terms of the Toucan Loan, the Company received $1.0 million in return
for an unsecured promissory note in the principal amount of $1,060,000 (reflecting an original
issue discount of six percent, or $60,000). The Toucan Loan has a term of six months. The note may
be paid at any time without a prepayment penalty and the term may be extended in Toucan Partners
discretion upon the Company’s request. Toucan Partners may elect to have the original issue
discount amount paid at maturity in shares of common stock, at a price per share equal to the
average closing price of the Company’s common stock on the NASD Over-The-Counter Bulletin Board
during the ten trading days prior to the execution of the loan agreement. The intrinsic value of
the Toucan Loan did not result in a beneficial conversion feature.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our unaudited condensed consolidated financial statements and
the notes to those statements included with this report. In addition to historical information,
this report contains forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of
1934, as amended (the “Exchange Act”). Such forward-looking statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from those projected. The
words “believe,” “expect,” “intend,” “anticipate,” and similar expressions are used to identify
forward-looking statements, but some forward-looking statements are expressed differently. Many
factors could affect our actual results, including those factors described under “Risk Factors”
elsewhere in this report. 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
Northwest Biotherapeutics, Inc. was formed in 1996 and incorporated in Delaware in July 1998.
We are a development stage biotechnology company focused on discovering, developing, and
commercializing immunotherapy products that safely generate and enhance immune system responses to
effectively treat cancer. Currently approved cancer treatments are frequently ineffective, can
cause undesirable side effects and provide marginal clinical benefits. Our approach in developing
cancer therapies utilizes our expertise in the biology of dendritic cells, which are a type of
white blood cell that activate the immune system. Our primary activities since incorporation have
been focused on advancing proprietary dendritic cell immunotherapies for prostate and brain cancer,
together with strategic and financial planning, and raising capital to fund our operations.
We have two basic technology platforms applicable to cancer therapeutics: dendritic cell-based
cancer vaccines, which we call DCVax®, and monoclonal antibodies for cancer therapeutics. DCVax® is
our registered trademark. Our DCVax® dendritic cell-based cancer vaccine program is our main
technology platform.
Our platform technology, DCVax®, uses a patient’s own dendritic cells, the starter engine of
the immune system. The dendritic cells are extracted from the body, loaded with tumor biomarkers or
“antigens,” thereby creating a personalized therapeutic vaccine. Injection of these cells back into
the patient initiates a potent immune response against cancer cells, resulting in delayed time to
progression and prolonged survival.
We are currently recruiting patients with newly diagnosed GBM in a 240 patient Phase II
DCVax®-Brain clinical trial. Subject to our receipt of sufficient funding to carry out the study
we plan to carry out the study at 40 to 50 clinical sites. The study was initially designed as a
141 patient randomized study, in which patients received either DCVax®-Brain in addition to standard
of care or standard of care alone. However, patients were reluctant to enroll in the study when
faced with a 33% chance of being randomized into the control arm of the study under which they
would receive standard of care alone. In order to address this issue we have redesigned the study
as a randomized, placebo controlled, double blinded study with a cross-over arm allowing control
patients to be treated with DCVax®-Brain in the event that their cancer progresses. As of August 4, 2008, 11 sites are active and a further 31 sites are
at various stages of the start-up process. Depending on trial results, we plan to seek product
approval in both the U.S. and the E.U.
DCVax®-Brain has been granted orphan drug status in the U.S., the European Union and
Switzerland. Such status will afford DCVax®-Brain 7 years of market exclusivity in the U.S. and 10
years in the European Union and Switzerland, if DCVax®-Brain is the first product of its type to
reach product approval.
We are also conducting a Phase I/II clinical trial using
DCVax®-L for recurrent ovarian cancer at The University of Pennsylvania Center for
Research on Early Detection and Cure of Ovarian Cancer and the Abramson Cancer Center. The trial
involves two sequential studies, and comprises an innovative combination of multiple treatment
modalities. DCVax®-L forms the cornerstone of the treatment regimen, and is
complemented by administration of low doses of certain existing approved drugs to help
improve the immune system environment, as well as by adoptive transfer of patients’
DCVax®-L primed T cells. The funding for the study is being provided by the Ovarian
Cancer Vaccine Initiative (a private philanthropic organization).
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In February 2007, we, through our legal representative, applied to the Bundesamt für
Gesundheit (“BAG” or “Office Fédéral de la Santé Publique”) in Switzerland for an Authorization for
Use (“Autorisation”). In June 2007, we, through our legal representative, received such
Autorisation from the BAG to make DCVax®-Brain available at limited selected medical centers in
Switzerland, as well as an authorization (“Autorisation pour activités transfrontalières avec des
transplants”) to export patients’ cells and tissues from Switzerland, for vaccine manufacturing in
the United States, and to import patients’ DCVax®-Brain finished vaccines into Switzerland. These
authorizations are conditional upon certain implementation commitments which must be fulfilled to
the satisfaction of Swissmedic (“Institut Suisse des Agents Thérapeutiques”) before the product may
be made available (e.g., finalizing our arrangements for a clean-room suite for processing of
patients’ immune cells). We believe we have fulfilled these commitments and are awaiting Swissmedic
confirmation.
In the BAG’s processing of and decision on our application and data with respect to the
authorizations described above, Swissmedic conducted an inspection of our facilities. A
comprehensive evaluation of DCVax®-Brain will be conducted by Swissmedic during its processing of
our Marketing Authorization Application (“MAA”) which we filed with Swissmedic in December 2007.
The assessment by Swissmedic of our MAA will include a full review by Swissmedic of the safety and
efficacy data generated in our DCVax®-Brain clinical studies to date. This review is currently
underway and we are addressing enquiries from Swissmedic concerning our application. This review
is likely to take at least one year from our submission in December 2008. Until such a Market
Authorization is granted, and assuming we complete our implementation commitments to the
satisfaction of Swissmedic, DCVax®-Brain may only be made available at the selected Medical Centers
in Switzerland under the Autorisation granted by the BAG. The term of the BAG Autorisation is five
years from June 2007.
We completed an initial public offering of our common stock on the NASDAQ Stock Market
(“NASDAQ”) in December 2001 and an initial public offering of our common stock on the Alternative
Investment Market (“AIM”) of the London Stock Exchange in June 2007.
As described in further detail elsewhere in this report, since 2004 we have undergone a
significant recapitalization pursuant to which (i) Toucan Capital Fund II, L.P. (“Toucan Capital”)
loaned us an aggregate of $6.75 million, which notes payable and accrued interest thereon were
converted into shares of our Series A-1 cumulative convertible preferred stock (the “Series A-1
Preferred Stock”) in April 2006 and subsequently converted into common stock in June 2007; and (ii)
Toucan Partners, LLC (“Toucan Partners”) loaned us an aggregate of $4.825 million (excluding
$225,000 in proceeds from a demand note that was received on June 13, 2007 and repaid on June 27,
2007), which borrowings have, in a series of transactions, been converted into convertible notes
with an aggregate outstanding principal of $4.825 million and related warrant coverage. In the
fourth quarter of 2007, we repaid all of the remaining outstanding principal and accrued interest
pursuant to these convertible notes in the aggregate amount of $5.3 million to Toucan Partners.
In addition, on January 26, 2005, Toucan Capital purchased 32.5 million shares of our Series A
cumulative convertible preferred stock (the “Series A Preferred Stock”) at a purchase price of
$0.04 per share, for a net purchase price of $1.276 million, net of offering related costs of
approximately $24,000. In June 2007, this Series A Preferred Stock was converted into common stock.
On March 30, 2006, we sold approximately 2.6 million shares of common stock at a purchase
price of $2.10 per share and raised aggregate gross proceeds of approximately $5.5 million in a
closed equity financing with unrelated investors (the ”PIPE Financing”) The total cost of the
offering recorded, including both cash and non-cash costs, was approximately $837,000.
On June 22, 2007, we placed 15,789,473 shares of our common stock with foreign institutional
investors at a price of £0.95 per share. The gross proceeds from the placement were approximately
£15.0 million, or $29.9 million, while net proceeds from the offering, after deducting commissions
and expenses, were approximately £13.0 million, or $25.9 million.
On May 12, 2008, the Company entered into a loan agreement with Al Rajhi Holdings W.L.L. (“Al
Rajhi”) under which Al Rajhi provided the Company with debt financing in the amount of $4.0 million
(”the “Loan”). Under the terms of the Loan, the Company received $4.0 million in return for an
unsecured promissory note in the principal amount of $4,240,000 (reflecting an original issue
discount of six percent, or $240,000). The Loan has a term of six months. The note may be paid at
any time without a prepayment penalty and the term may be extended in Al Rajhi’s discretion upon
the Company’s request. At June 30, 2008, the carrying value of the Loan was $4,069,000, net of
unamortized discount of $171,000. The Company amortizes the discount using the effective interest
method over the term of the Loan. During the three months ended June 30, 2008 the Company recorded
interest expense related to the
amortization of the discount of $69,000. Al Rajhi may elect to have the original issue
discount amount paid at maturity in shares of common stock, at a price per share equal to the
average closing price of the Company’s Common Stock on the NASD Over-The-Counter Bulletin Board
during the ten trading days prior to the execution of the Loan agreement. The intrinsic value of
the Loan did not result in a beneficial conversion feature.
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On August 19, 2008, the Company entered into a loan agreement with Toucan Partners, under
which Toucan Partners provided the Company with debt financing in the amount of $1.0 million (the
“Toucan Loan”). Under the terms of the Toucan Loan, the Company received $1.0 million in return
for an unsecured promissory note in the principal amount of $1,060,000 (reflecting an original
issue discount of six percent, or $60,000). The Toucan Loan has a term of six months. The note may
be paid at any time without a prepayment penalty and the term may be extended in Toucan Partners’
discretion upon the Company’s request. Toucan Partners may elect to have the original issue
discount amount paid at maturity in shares of common stock, at a price per share equal to the
average closing price of the Company’s common stock on the NASD Over-The-Counter Bulletin Board
during the ten trading days prior to the execution of the loan agreement. The intrinsic value of
the Toucan Loan did not result in a beneficial conversion feature.
As of August 19, 2008, we had approximately $1.1 million of cash on hand. We estimate that our
available cash is sufficient to support our day to day operations through the end of September
2008. We need to raise additional capital to fund our clinical trials and other operating
activities and to repay our indebtedness under the Loan and the
Toucan Loan. We are in late stage discussions with several parties in
regard to additional financing transactions with several other parties, which we hope to complete later this
year. However, there can be no assurance that we will be able to complete any of the financings, or
that the terms for such financings will be favorable to us. Our independent auditors have indicated
in their report on our December 31, 2007 financial statements that there is substantial doubt about
our ability to continue as a going concern. See “ — Liquidity and Capital Resources” for additional
information regarding our liquidity, cash flow and financings.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon
our financial statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses and related disclosure of contingent assets and liabilities. The critical accounting
policies that involve significant judgments and estimates used in the preparation of our financial
statements are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2007.
Recent Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 141(R), Business Combinations (“SFAS 141(R)”). SFAS
141(R) expands the scope of acquisition accounting to all transactions under which control of a
business is obtained. Among other things, SFAS 141(R) requires that contingent consideration as
well as contingent assets and liabilities be recorded at fair value on the acquisition date, that
acquired in-process research and development be capitalized and recorded as intangible assets at
the acquisition date, and also requires transaction costs and costs to restructure the acquired
company be expensed. SFAS 141(R) is effective on a prospective basis as of January 1, 2009. We are
assessing the impact of the adoption of this standard on our financial position and results of
operations.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements — an amendment of ARB No. 51 (“SFAS 160”). The statement changes how
noncontrolling interests in subsidiaries are measured to initially be measured at fair value and
classified as a separate component of equity. SFAS 160 establishes a single method of accounting
for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation.
No gains or losses will be recognized on partial disposals of a subsidiary where control is
retained. In addition, in partial acquisitions, where control is obtained, the acquiring company
will recognize and measure at fair value all of the assets and liabilities, including goodwill, as
if the entire target company had been acquired. The statement is to be applied prospectively for
fiscal years beginning on or after December 15, 2008. We will adopt the statement on January 1,
2009. We are currently evaluating the impact the adoption of this statement will have, if any, on
our consolidated financial position or results of operations.
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In December 2007, the FASB ratified the consensus reached by the Emerging Issues Task Force
(“EITF”) on Issue No. 07-1 (“EITF 07-1”), Accounting for Collaborative Arrangements. EITF 07-1 is
effective for the Company beginning January 1, 2009 and will be applied retrospectively to all
prior periods presented for all collaborative arrangements existing as of the effective date. EITF
07-1 defines collaborative arrangements and establishes reporting requirements for transactions
between participants in a collaborative arrangement and between participants in the arrangement and
third parties. W e are assessing the impact of adoption of EITF 07-1 on our financial position and
results of operations.
On January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (“SFAS 157”),
which clarifies the definition of fair value, establishes a framework for measuring fair value, and
expands the required disclosures on fair value measurements. In February 2008, the FASB issued
Staff Position 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”), that deferred the
effective date of SFAS 157 for one year for nonfinancial assets and liabilities recorded at fair
value on a non-recurring basis. The effect of adoption of SFAS 157 for financial assets and
liabilities recognized at fair value on a recurring basis did not have a material impact on the
Company’s financial position and results of operations (See Note 3). The Company is assessing the
impact of the adoption of SFAS 157 for nonfinancial assets and liabilities on the Company’s
financial position and results of operations.
On January 1, 2008, the Company adopted SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, including an amendment of FASB Statement No. 115 (“SFAS 159”).
SFAS 159 permits companies to irrevocably elect to measure certain financial assets and financial
liabilities at fair value. Unrealized gains and losses on items for which the fair value option has
been elected are reported in earnings at each subsequent reporting date. The Company did not elect
the fair value option under SFAS 159 for any of its financial assets or liabilities upon adoption.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities (“SFAS 161”), which is effective January 1, 2009. SFAS 161 requires enhanced
disclosures about derivative instruments and hedging activities to allow for a better understanding
of their effects on an entity’s financial position, financial performance, and cash flows. Among
other things, SFAS 161 requires disclosure of the fair values of derivative instruments and
associated gains and losses in a tabular format. Since SFAS 161 requires only additional
disclosures about our derivatives and hedging activities, the adoption of SFAS 161 will not affect
our financial position or results of operations should we acquire derivatives in the future.
In May 2008, the FASB issued Staff Position No. APB 14-1, Accounting for Convertible Debt
Instruments that may be Settled in Cash upon Conversion (Including Partial Cash Settlement ) (“FSP
APB 14-1”). FSP APB 14-1 states that convertible debt instruments that may be settled in cash upon
conversion (including partial cash settlement) are not addressed by paragraph 12 of Accounting
Principles Board Opinion No. 14 and that issuers of such instruments should account separately for
the liability and equity components of the instrument in a manner that will reflect the entity’s
nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB
14-1 is effective for financial statements issued for fiscal years beginning after December 15,
2008, and must be applied retrospectively to all periods presented. We are assessing the impact of
the adoption of this standard on our financial position and results of operations.
Results of Operations
Operating expenses:
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
general and administrative expenses.
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.
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. We shifted our focus, starting in 2002, from discovering, developing, and
commercializing immunotherapy products to conserving cash and primarily concentrating on securing new working
capital to re-activate our two DCVax® clinical trial programs.
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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 June 30, 2007 and 2008
We recognized a net loss of $6.1 million for the three months ended June 30, 2008 compared to
a net loss of $8.0 million for the three months ended June 30, 2007. The decrease in net loss was
primarily attributable to a decrease in interest expense for the three months ended June 30, 2008
as compared to the same period in 2007, offset by an increase in research and development and
general and administrative expenses for the three months ended June 30, 2008 compared to the same
period in 2007.
Research and Development Expense. Research and development expense increased from $2.2 million
for the three months ended June 30, 2007 to $3.1 million for the three months ended June 30, 2008.
This increase was primarily due to:
| • | increased monthly contract manufacturing costs for our DCVax® product; |
||
| • | increased costs in
Switzerland relating to the Authorization for Use, and the
application for Marketing Authorization, relating to
DCVax®-Brain; |
||
| • | increased support costs related to the development of a clinical trial program and
potential compassionate use/named patient programs in certain
countries outside the U.S.; |
||
| • | increased clinical trials
costs in the U.S. due to the initiation of additional clinical sites and screening
and enrollment of patients in our Phase II DCVax®-Brain clinical trial; and |
||
| • | increased personnel costs as we build our clinical organization. |
General and Administrative Expense. General and administrative expense increased from $1.4
million for the three months ended June 30, 2007 to $2.9 million for the three months ended June
30, 2008. This increase was primarily due to:
| • | costs associated with our AIM listing in the United Kingdom; |
||
| • | potentially non-recurring start-up costs (mainly consulting and travel costs) for
international programs, locations such as in Switzerland, Spain and Israel; |
||
| • | higher staffing costs
associated with expansion of our business activities in the U.S. and internationally; |
||
| • | legal costs associated with ongoing litigation; |
||
| • | additional rent expense related to our new headquarters located in Bethesda, Maryland;
and |
||
| • | SFAS 123(R) expense associated with stock option grants to executives. |
Depreciation and Amortization. Depreciation and amortization decreased from $6,000 during the
three months ended June 30, 2007 to $0 for the three months ended June 30, 2008. The decrease in
the quarter was due to a true-up adjustment of cumulative depreciation at June 30, 2008.
Total Other Income (Expense), Net. Interest expense decreased from $4.7 million for the three
months ended June 30, 2007 to approximately $69,000 for the three months ended June 30, 2008.
Interest expense for the three-month period ended June 30, 2007 was primarily related to the debt
discount and interest accretion associated with our then-outstanding convertible promissory notes
and related warrants. As of December 31, 2007, all of the related notes were repaid. Accordingly,
we did not accrue interest expense on those notes during the three months ended June 30, 2008.
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Six Months Ended June 30, 2007 and 2008
We recognized a net loss of $11.7 million for the six months ended June 30, 2008 compared to a
net loss of $9.9 million for the six months ended June 30, 2007. The increase in net loss was
primarily attributable to an increase in research and development and general and administrative
expenses for the six months ended June 30, 2008 compared to the same period in 2007, offset by a
decrease in interest expense for the six months ended June 30, 2008 as compared to the same period
in 2007.
Research and Development Expense. Research and development expense increased from $3.5 million
for the six months ended June 30, 2007 to $6.2 million for the six months ended June 30, 2008. This
increase was primarily due to:
| • | increased monthly contract manufacturing costs for our DCVax® product; |
||
| • | increased costs in
Switzerland relating to the Authorization for Use, and the
application for Marketing Authorization, relating to
DCVax®-Brain; |
||
| • | increased support costs related to the development of a clinical trial program and
potential compassionate use/named patient programs in certain
countries outside the U.S.; |
||
| • | increased clinical trial costs due to the initiation of additional clinical sites and screening
and enrollment of patients in our Phase II DCVax®-Brain clinical trial; and |
||
| • | increased personnel costs as we build our clinical organization. |
General and Administrative Expense. General and administrative expense increased from $1.9
million for the six months ended June 30, 2007 to $5.5 million for the six months ended June 30,
2008. This increase was primarily due to:
| • | costs associated with our AIM listing in the United Kingdom; |
||
| • | potentially non-recurring start-up costs (mainly consulting and travel costs) for
international programs, locations such as in Switzerland, Spain and Israel; |
||
| • | higher staffing costs associated with expansion of our business activities in the United
States and internationally; |
||
| • | legal costs associated with ongoing litigation; |
||
| • | additional rent expense related to our new headquarters located in Bethesda, Maryland;
and |
||
| • | SFAS 123(R) expense associated with stock option grants to executives. |
Depreciation and Amortization. Depreciation and amortization increased from $16,000 during the
six months ended June 30, 2007 to $22,000 for the six months ended June 30, 2008.
Total Other Income (Expense), Net. Interest expense decreased from $4.9 million for the six
months ended June 30, 2007 to approximately $81,000 for the six months ended June 30, 2008.
Interest expense for the six-month period ended June 30, 2007 was primarily related to the debt
discount and interest accretion associated with our then-outstanding convertible promissory notes
and related warrants. As of December 31, 2007, all of the related notes were repaid. Accordingly,
we did not accrue interest expense on those notes during the six months ended June 30, 2008.
Liquidity and Capital Resources
Toucan Capital and Toucan Partners
Since 2004, we have undergone a significant recapitalization pursuant to which Toucan Capital
loaned us an aggregate of $6.75 million and Toucan Partners loaned us an aggregate of $4.825
million (excluding $225,000 in proceeds from a demand note that was received on June 13, 2007 and
repaid on June 27, 2007). Our Chairperson is the managing director of Toucan Capital and the
managing member of Toucan Partners.
On January 26, 2005, we entered into a securities purchase agreement with Toucan Capital
pursuant to which it purchased 32.5 million shares of our Series A Preferred Stock at a purchase
price of $0.04 per share, for a net purchase price of $1.276 million, net of offering related costs
of approximately $24,000. In April 2006, the $6.75 million of notes payable plus all accrued
interest due to Toucan Capital were converted into shares of the Company’s Series A-1 Preferred
Stock.
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Simultaneously with Toucan Capital’s notes payable conversion, our President and Chief
Executive Officer, and our Chief Technical Officer, each elected to convert the principal and
accrued interest on certain convertible promissory notes held by each of them into 146,385 and
32,796 shares, respectively, of our common stock. In conjunction with the PIPE Financing, our
President and Chief Executive Officer and our Chief Technical Officer exercised certain warrants
held by each of them on a net exercise basis for 126,365 and 28,311 shares of our common stock,
respectively.
The $4.825 million loaned to us by Toucan Partners was advanced in a series of transactions.
From November 14, 2005 through March 9, 2006, we issued three promissory notes to Toucan Partners,
pursuant to which Toucan Partners loaned us an aggregate of $950,000. In addition to the $950,000
of promissory notes, Toucan Partners provided $3.15 million in cash advances from October 2006
through April 2007, which were converted into convertible notes (the “2007 Convertible Notes”) and
related warrants (the “2007 Convertible Warrants”) in April 2007. In April 2007, the three
promissory notes were amended and restated to conform to the 2007 Convertible Notes. Payment was
due under the notes upon written demand on or after June 30, 2007. Interest accrued at 10% per
annum, compounded annually, on a 365-day year basis. The principal amount of, and accrued interest
on, these notes, as amended, was convertible at Toucan Partners’ election into common stock on the
same terms as the 2007 Convertible Notes.
Toucan Partners also entered into two promissory notes with us to fix the terms of two
additional cash advances provided by Toucan Partners to us on May 14, 2007 and May 25, 2007 in the
aggregate amount of $725,000, and we issued warrants to purchase shares of our common stock to
Toucan Partners in connection with each such note. These notes and warrants are on the same terms
as the 2007 Convertible Notes and 2007 Warrants and the proceeds of these notes enabled us to
continue to operate and advance programs while raising additional equity financing.
During the fourth quarter of 2007, we repaid the entire $5.3 million in principal and related
accrued interest due to Toucan Partners pursuant to the convertible notes.
Conversion of Preferred Stock and Related Matters
On June 1, 2007, we issued to Toucan Capital a new warrant to purchase our Series A-1
Preferred Stock (“Toucan Capital Series A-1 Warrant”) in exchange for the cancellation of all
previously issued warrants to purchase Series A-1 Preferred Stock (or, at the election of Toucan
Capital, any other equity or debt security of ours) held by Toucan Capital. The Toucan Capital
Series A-1 Warrant was exercisable for 6,471,333 shares of Series A-1 Preferred Stock plus shares
of Series A-1 Preferred Stock attributable to accrued dividends on the shares of Series A-1
Preferred Stock held by Toucan Capital (with each such Series A-1 Preferred Share convertible into
2.67 shares of common stock at $0.60 per share), compared to the 3,062,500 shares of Series A-1
Preferred Stock (with each such Series A-1 Preferred Share convertible into 2.67 shares of common
stock at $0.60 per share) that were previously issuable to Toucan Capital upon exercise of the
warrants being cancelled.
Also on June 1, 2007, we and Toucan Capital amended Toucan Capital’s warrant to purchase
Series A Preferred Stock (the “Toucan Capital Series A Warrant”) to increase the number of shares
of Series A Preferred Stock that were issuable upon exercise of the warrant to 32,500,000 shares of
Series A Preferred Stock (plus shares of Series A Preferred Stock attributable to accrued dividends
on the shares of Series A Preferred Stock held by Toucan Capital) from 13,000,000 shares of Series
A Preferred Stock.
In connection with the modifications of the Series A and Series A-1 Preferred Stock warrants,
we recognized reductions in earnings applicable to common stockholders in June 2007 of $2.3 million
and $16.4 million, respectively. The fair value of the warrant modifications were determined using
the Black-Scholes option pricing model with the following assumptions: expected dividend yield of
0%, risk-free interest rate of 5.0% volatility of 398%, and a contractual life of seven years.
On June 15, 2007, we, Toucan Capital, and Toucan Partners entered into a conversion agreement
(“Conversion Agreement”) which became effective on June 22, 2007 upon the admission of our common
stock to trade on AIM (“Admission”).
Pursuant to the terms of the Conversion Agreement (i) Toucan Capital agreed to convert and has
converted all of its shares of the Company’s Series A Preferred Stock and Series A-1 Preferred
Stock (in each case, excluding any accrued and unpaid dividends) into common stock and agreed to
eliminate a number of rights, preferences and protections associated with the Series A Preferred
Stock and Series A-1 Preferred Stock, including the liquidation preference entitling Toucan Capital
to certain substantial cash payments and (ii) Toucan Partners agreed to eliminate all of its
existing rights to receive Series A-1 Preferred Stock under certain notes and warrants (and
thereafter to receive shares of common stock rather than shares of Series A-1 Preferred Stock), and
the rights, preferences and protections associated with the Series A-1 Preferred Stock, including
the liquidation preference that would entitle Toucan Partners to
certain substantial cash payments. In return for these agreements, we issued to Toucan Capital
and Toucan Partners 4,287,851 and 2,572,710 shares of common stock, respectively. In connection
with the issuance of these shares, we recognized a further reduction of earnings applicable to
common stockholders of $12.3 million in June 2007.
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Under the terms of the Conversion Agreement (i) the Toucan Capital Series A Warrant became
exercisable for 2,166,667 shares of common stock rather than shares of Series A Preferred Stock
(plus shares of common stock, rather than shares of Series A Preferred Stock, attributable to
accrued dividends on the shares of Series A Preferred Stock previously held by Toucan Capital that
were converted into common stock upon Admission, subject to the further provisions of the
Conversion Agreement as described below) and (ii) the Toucan Capital Series A-1 Warrant became
exercisable for an aggregate of 17,256,888 shares of common stock rather than shares of Series A-1
Preferred Stock (plus shares of common stock, rather than shares of Series A-1 Preferred Stock,
attributable to accrued dividends on the shares of Series A-1 Preferred Stock previously held by
Toucan Capital that were converted into common stock upon Admission), subject to further provisions
of the Conversion Agreement as described below.
As noted above, the 32,500,000 shares of Series A Preferred Stock held by Toucan Capital
converted, in accordance with their terms, into 2,166,667 shares of common stock and the 4,816,863
shares of Series A-1 Preferred Stock held by Toucan Capital converted, in accordance with their
terms, into 12,844,968 shares of common stock.
Under the terms of the Conversion Agreement, Toucan Capital also agreed to temporarily defer
receipt of the accrued and unpaid dividends on its shares of Series A Preferred Stock and Series
A-1 Preferred Stock of an amount equal to $334,340 and $917,451, respectively, until not later than
September 30, 2007. In September 2007, we paid these dividends in full to Toucan Capital.
As a result of the financings described above, as of June 30, 2008, Toucan Capital held:
| • | an aggregate of 19,299,486 shares of common stock; |
||
| • | warrants to purchase 14,150,732 shares of common stock at an exercise price of $0.60 per
share; and |
||
| • | warrants to purchase 7,884,357 shares of common stock at an exercise price of $0.15 per
share. |
As a result of the financings described above, as of June 30, 2008, Toucan Partners held:
| • | an aggregate of 2,572,710 shares of common stock; and |
||
| • | warrants to purchase 8,832,541 shares of common stock at an exercise price of $0.60 per
share. |
The investments made by Toucan Capital and Toucan Partners were made pursuant to the terms and
conditions of a Recapitalization Agreement originally entered into on April 26, 2004 with Toucan
Capital (the “Recapitalization Agreement”). The Recapitalization Agreement originally contemplated
the investment of up to $40 million through the issuance of new securities to Toucan Capital and a
syndicate of other investors to be determined.
We and Toucan Capital amended the Recapitalization Agreement in conjunction with each
successive loan agreement. The amendments generally (i) updated certain representations and
warranties of the parties made in the Recapitalization Agreement, and (ii) made certain technical
changes in the Recapitalization Agreement in order to facilitate the bridge loans described
therein.
In accordance with the Recapitalization Agreement, we accrued and paid certain legal and other
administrative costs on Toucan Capital’s behalf. During the three months ending June 30, 2008 and
2007, respectively, the Company recognized approximately $148,000 and $540,000 of general and
administrative costs related to the recapitalization agreement, rent expense, as well as legal,
travel and other costs incurred by Toucan Capital on the Company’s behalf. During the six months
ending June 30, 2008 and 2007, respectively, the Company recognized approximately $298,000 and
$558,000 of general and administrative costs related to the recapitalization agreement, rent
expense, as well as legal, travel and other costs incurred by Toucan Capital on the Company’s
behalf.
As of June 30, 2008, Toucan Capital and Toucan Partners collectively, held 21,872,196 shares
of our common stock, representing approximately 51.5% of our outstanding common stock. Further, as
of June 30, 2008, Toucan Capital and Toucan Partners collectively, beneficially owned (including
unexercised warrants) 52,739,826 shares of our common stock, representing a beneficial ownership
interest of approximately 71.9%.
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Other Financings
On November 13, 2003, we borrowed an aggregate of $335,000 from certain members of our current
and former management. These notes were either been repaid or converted into common stock prior to
December 31, 2006.
On March 30, 2006, we completed the PIPE Financing pursuant to which we raised aggregate gross
proceeds of approximately $5.5 million.
On June 22, 2007, we placed 15,789,473 shares of our common stock with foreign institutional
investors at a price of £0.95 per share. The gross proceeds from the placement were approximately
£15.0 million, or $29.9 million, while net proceeds from the offering, after deducting commissions
and expenses, were approximately £13.0 million, or $25.9 million. The net proceeds from the
placement are being used to fund clinical trials, product and process development, working capital
needs and repayment of certain existing debt.
On May 12, 2008, the Company entered into a loan agreement with Al Rajhi, which beneficially
owns more than 10 percent of our common stock, under which Al Rajhi provided the Company with debt
financing in the amount of $4.0 million. (See”- Overview” above.)
On August 19, 2008, the Company entered into a loan agreement with Toucan Partners, under
which Toucan Partners provided the Company with debt financing in the amount of $1.0 million. (See
“- Overview” above).
As of August 19, 2008, we had approximately $1.1 million of cash on hand. We estimate that our
available cash is sufficient to support our day to day operations through the end of September 2008. We need to raise additional
capital to fund our clinical trials and other operating activities.
We are in late stage discussions with several parties in regard to additional
financing transactions with several other parties, which we hope to complete later this year.
However, there can be no assurance that we will be able to complete any of the financings, or that
the terms for such financings will be favorable to us.
We are seeking additional funds through all the capital channels available to us, including
the issuance of additional common stock or other securities (equity or debt) convertible into
shares of common stock, which could dilute the ownership interest of our stockholders. We may seek
funding from Toucan Capital or Toucan Partners or their affiliates or other third parties. Such
parties are under no obligation to provide us any additional funds, and any such funding may be
dilutive to stockholders and may contain restrictive covenants that could limit our ability to take
certain actions. If our capital raising efforts are unsuccessful, our inability to obtain
additional cash as needed could have a material adverse effect on our financial position, results
of operations and our ability to continue our existence. Our independent registered public
accounting firm has indicated in its report on our financial statements included in the Annual
Report on Form 10-K for the year ended December 31, 2007 that there is substantial doubt about our
ability to continue as a going concern.
Sources of Cash
During the six months ending June 30, 2007, we received $2.375 million in cash advances from
Toucan Partners, which were converted into the 2007 Convertible Notes and 2007 Warrants discussed
above. Additionally, we received $225,000 from Toucan Partners on June 13, 2007 in the form of a
$225,000 demand note bearing interest of 10% (“Demand Note”). The Demand Note was repaid on June
27, 2007.
On June 22, 2007, we placed 15,789,473 shares of our Common Stock with foreign institutional
investors at a price of £0.95 per share. The gross proceeds from the placement were approximately
£15.0 million, or $29.9 million, while net proceeds from the offering, after deducting commissions
and expenses, were approximately £13.0 million, or $25.9 million.
During the six months ended June 30, 2008, we received a $4.0 million unsecured loan from Al
Rajhi.
On August 19, 2008, we received a $1.0 million unsecured loan from Toucan Partners.
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Uses of Cash
We used $10.4 million in cash for operating activities during the six months ended June 30,
2008, compared to $3.2 million for the six months ended June 30, 2007. The increase in cash used in
operating activities was a result of the significant increase in development activities, including increased staffing and consulting support related to manufacturing
start-up, conducting the Phase II clinical trial for DCVax®-Brain, progressing preparations for the
commercialization of DCVax®-Brain in Switzerland, exploring compassionate use/named patient
programs outside of the United States, and payments of accounts payable and accrued liability
balances at June 30, 2008.
We utilized $241,000 in cash for investing activities during the six months ended June 30,
2008 compared to $11,000 used in investing activities during the six months ended June 30, 2007.
The cash utilized during the six-month periods ended June 30, 2007 and 2008 consisted of purchases
of property and equipment primarily for computer and other equipment and acquisition of property
and equipment required to expand production capacity.
On March 21, 2008, we executed a sublease agreement with Toucan Capital Corporation, an
affiliate of Toucan Capital and Toucan Partners, for our corporate headquarters located at 7600
Wisconsin Avenue, Suite 750, Bethesda, Maryland 20814. This sublease agreement was effective as of
July 1, 2007 and expires on October 31, 2016, unless sooner terminated according to its terms.
Previously, we had been occupying our Bethesda headquarters under an oral arrangement with Toucan
Capital Corporation, whereby we were required to pay base rent of $32,949 per month through
December 31, 2007. Under the sublease agreement, we are required to pay base rent of $34,000 per
month during 2008, which monthly amount increases by $1,000 on an annual basis, to a maximum of
$42,000 per month during 2016, the last year of the term of the lease. In addition to monthly base
rent, we are obligated to pay operating expenses allocable to the subleased premises under Toucan
Capital Corporation’s master lease. During the six months ended June 30, 2008, we paid
approximately $404,000 to Toucan Capital Corporation pursuant to this sublease agreement.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Interest Rate Risk
Our exposure to market risk is presently limited to the interest rate sensitivity of our cash
which is affected by changes in the general level of U.S. and Swiss interest rates. We are exposed
to interest rate changes primarily as a result of our investment activities. The primary objective
of our investment activities is to preserve principal while at the same time maximizing the income
we receive without significantly increasing risk. To minimize risk, we maintain our cash in
interest-bearing instruments, primarily money market funds. Due to the short-term nature of our
cash, we believe that our exposure to market interest rate fluctuations is minimal. A hypothetical
10% change in short-term interest rates from those in effect at June 30, 2008 would not have a
significant impact on our financial position or our expected results of operations. Our interest
rate risk management objective with respect to our borrowings is to limit the impact of interest
rate changes on earnings and cash flows. Our debt is carried at a fixed 12% annual rate of
interest. We do not have any foreign currency or other derivative financial instruments.
Foreign Currency Exchange Rate Risk
As a corporation with contractual arrangements overseas, we are exposed to changes in foreign
exchange rates. These exposures may change over time and could have a material adverse impact on
our financial results. At this time we do not have a program to hedge this exposure.
Item 4. Controls and Procedures
Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the SEC’s rules
and forms and that such information is accumulated and communicated to our management, including
our President and Chief Executive Officer, as appropriate, to allow timely decisions regarding required disclosures. In
designing and evaluating these disclosure controls and procedures, management recognizes that any
controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, and management necessarily is required to
apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Evaluation of disclosure controls and procedures
Our President and Chief Executive Officer, after evaluating the effectiveness of our
“disclosure controls and procedures” (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)),
has concluded that as of June 30, 2008, our disclosure controls and procedures
were not effective due to the existence of several material weaknesses in our internal control
over financial reporting, as discussed below.
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Material Weaknesses Identified
In connection with the preparation of our financial statements for the year ended December 31,
2007, certain significant deficiencies in internal control became evident to management that, in
the aggregate, represent material weaknesses, including:
(i) Lack of a sufficient number of independent directors for our board and audit committee.
We currently do not have an independent director on our board, which is comprised of two
directors, and on our audit committee, which is comprised of one director. We are considered a
controlled company, whereby a group holds more than 50% of our voting power, and as such are not
required to have a majority of our board of directors be independent. However, it is our
intention to have a majority of our directors be independent in due course.
(ii) Lack of an audit committee financial expert on our audit committee. We currently do not
have an audit committee financial expert, as defined by SEC regulations, on our audit committee.
(iii) Insufficient segregation of duties in our finance and accounting functions due to
limited personnel. During the year ended December 31, 2007, we had one person on staff that
performed nearly all aspects of our financial reporting process, including, but not limited to,
having access to the underlying accounting records and systems, the ability to post and record
journal entries and responsibility for the preparation of the financial statements. This creates
certain incompatible duties and a lack of review over the financial reporting process that would
likely result in a failure to detect errors in spreadsheets, calculations, or assumptions used to
compile the financial statements and related disclosures filed with the SEC. These control
deficiencies could result in a material misstatement to our interim or annual consolidated
financial statements that would not be prevented or detected.
(iv) Insufficient corporate governance policies. Although we have a code of ethics which
provides broad guidelines for corporate governance, our corporate governance activities and
processes are not always formally documented. Specifically, decisions made by the board to be
carried out by management should be documented and communicated on a timely basis to reduce the
likelihood of any misunderstandings regarding key decisions affecting our operations and
management.
(v) Inadequate approval and control over transactions and commitments made on our behalf by
related parties. Specifically, during 2007, and continuing into 2008, certain related party
transactions were not effectively communicated to all internal personnel who needed to be
involved to account for and report the transaction in a timely manner. This resulted in material
adjustments during the quarterly reviews and annual audit, respectively, that otherwise would
have been avoided if effective communication and approval processes had been maintained.
As part of the communications by Peterson Sullivan, PLLC (“Peterson Sullivan”), with our Audit
Committee with respect to Peterson Sullivan’s audit procedures for fiscal 2007, Peterson Sullivan
informed the audit committee that these deficiencies constituted material weaknesses, as defined by
Auditing Standard No. 5, “An Audit of Internal Control Over Financial Reporting that is Integrated
with an Audit of Financial Statements and Related Independence Rule and Conforming Amendments,”
established by the Public Company Accounting Oversight Board.
Plan for Remediation of Material Weaknesses
We intend to take appropriate and reasonable steps to make the necessary improvements to
remediate these deficiencies. We intend to consider the results of our remediation efforts and
related testing as part of our year-end 2008 assessment of the effectiveness of our internal
control over financial reporting.
We have implemented certain remediation measures and are in the process of designing and
implementing additional remediation measures for the material weaknesses described above. Such
remediation activities include the following:
| • | We plan to recruit two or more additional independent board members to join our board of
directors in due course. Such recruitment will include at least one person who qualifies as
an audit committee financial expert to join as an independent board member and as an audit
committee member. |
||
| • | We have hired additional qualified and experienced accounting personnel to perform the
month-end review and closing processes as well as provide additional oversight and
supervision within the accounting department. In February 2008, we hired a full-time
controller who has assisted us in documenting the majority of our processes. We are in the
process of establishing more rigorous review procedures. In addition, we have changed our
accounting system to make it simpler and more appropriate for a company our size. |
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| • | We are initiating a formal commitment review process to establish and document the
accounting events and methodology at the time the transactions are entered into, so that
there is a clear understanding of what events will trigger an accounting event and establish
the amounts to be recognized for each event. |
||
| • | We are initiating a formal monthly reporting and approval process with our related
parties to ensure timely provision of information affecting our quarterly and annual
consolidated financial statements. |
In addition to the foregoing remediation efforts, we will continue to update the documentation
of our internal control processes, including formal risk assessment of our financial reporting
processes.
Changes in Internal Control over Financial Reporting
There were no changes in internal control over financial reporting during the second quarter
of 2008 that materially affected, or are reasonably likely to materially affect, our internal
control over financing reporting.
As part of a continuing effort to improve our business processes, management is evaluating our
internal controls and intends to update certain controls to accommodate modifications to our
business processes or accounting procedures.
Part II — Other Information
Item 1. Legal Proceedings
From time to time, we are involved in claims and suits that arise in the ordinary course of
our business. Although management currently believes that resolving any such claims against us will
not have a material adverse impact on our business, financial position or results of operations,
these matters are subject to inherent uncertainties and management’s view of these matters may
change in the future. In addition to any such claims and suits, we are involved in the following
legal proceedings.
SOMA Arbitration
We signed an engagement letter, dated October 15, 2003, with Soma Partners, LLC, or Soma, a
New Jersey-based investment bank, pursuant to which we engaged them to locate potential investors.
Pursuant to the terms of the engagement letter, any disputes arising between the parties would be
submitted to arbitration in the New York metropolitan area. A dispute arose between the parties.
Soma filed an arbitration claim against us with the American Arbitration Association in New York,
NY claiming unpaid commission fees of $186,000 and seeking declaratory relief regarding potential
fees for future transactions that may be undertaken by us with Toucan Capital. We vigorously
disputed Soma’s claims on multiple grounds. We contended that we only owed Soma approximately
$6,000.
Soma subsequently filed an amended arbitration claim, claiming unpaid commission fees of
$339,000 and warrants to purchase 6% of the aggregate securities issued to date, and seeking
declaratory relief regarding potential fees for future financing transactions which may be
undertaken by us with Toucan Capital and others, which could potentially be in excess of $4
million. Soma also requested the arbitrator award its attorneys’ fees and costs related to the
proceedings. We strongly disputed Soma’s claims and defended ourselves.
The arbitration proceedings occurred from March 8-10, 2005 and on May 24, 2005, the arbitrator
ruled in our favor and denied all claims of Soma. In particular, the arbitrator decided that we did
not owe Soma the fees and warrants sought by Soma, that we would not owe Soma fees in connection
with future financings, if any, and that we had no obligation to pay any of Soma’s attorneys’ fees
or expenses. The arbitrator agreed with us that the only amount we owed Soma was $6,702.87, which
payment we made on May 27, 2005.
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On August 29, 2005, Soma filed a notice of petition to vacate the May 24, 2005 arbitration
award with the Supreme Court of the State of New York. On December 30, 2005, the Supreme Court of
the State of New York dismissed Soma’s petition.
On February 3, 2006, Soma filed another notice of appeal with the Supreme Court of the State
of New York. On December 6, 2006, we filed our brief for this appeal and on December 12, 2006, Soma
filed its reply brief. On June 19, 2007, the Appellate Division, First Department of the Supreme
Court of the State of New York, reversed the December 30, 2005 decision and ordered a new
arbitration proceeding. On July 26, 2007, we filed a Motion for Leave to Appeal with the Court of
Appeals of the State of New York and on August 3, 2007 Soma filed its reply brief. On October 16,
2007, the Court of Appeals of the State of New York denied our motion to appeal. We intend to
continue to vigorously defend ourselves against the claims of Soma.
Lonza Patent Infringement Claim
On July 27, 2007, Lonza Group AG (“Lonza”) filed a complaint against us in the U. S. District
Court for the District of Delaware alleging patent infringement relating to recombinant DNA
methods, sequences, vectors, cell lines and host cells. The complaint sought temporary and
permanent injunctions enjoining us from infringing Lonza’s patents and unspecified damages. We
strongly disputed all of the claims in Lonza’s complaint, sought dismissal of the complaint and
also filed counterclaims against Lonza for damages. On November 27, 2007, the complaint was
dismissed by the U.S. District Court for the District of Delaware. Also on November 27, 2007, a new
complaint was filed by Lonza in the U.S. District Court for the District of Maryland alleging the
same patent infringement relating to recombinant DNA methods, sequences, vectors, cell lines and
host cells by the Company’s DCVax® product candidates. On December 13, 2007, Lonza withdrew all
claims relating to all of our products other than our DCVax®-Prostate product. We continued to
dispute these remaining claims and seek dismissal of them. On April 14, 2008, we and Lonza entered
into a binding agreement to settle the dispute. Under the terms of the settlement, we did not pay
any monetary or other consideration to Lonza nor did we acquire any license from Lonza. The only
action to which we agreed was to destroy any recombinant modified prostate specific membrane
antigen or cell lines using Lonza’a GS Expression System currently in our possession which had been
manufactured by and purchased from Medarex Inc. more than six years ago, as well as any
documentation received from Medarex on know–how regarding the use of the GS Expression System and
cell lines. On May 14, 2008 the parties filed a Joint Stipulation of Dismissal of the Lawsuit with
Prejudice, including all claims and counterclaims therein.
Stockholder Class Action Lawsuits
On August 13, 2007, a complaint was filed in the U.S. District Court for the Western District
of Washington naming the Company, the Chairperson of the Board, Linda F. Powers, and our Chief
Executive Officer, Alton L. Boynton, as defendants in a class action for violation of federal
securities laws. After this complaint was filed, five additional complaints were filed in other
jurisdictions alleging similar claims. The complaints were filed on behalf of purchasers of the
Company’s common stock between July 9, 2007 and July 18, 2007, and allege violations of Section
10(b) of the Exchange Act and Rule 10b-5 thereunder. The complaints seek unspecified compensatory
damages, costs and expenses. On December 18, 2007, a consolidated complaint was filed in the U.S.
District Court for the Western District of Washington consolidating the stockholder actions
previously filed. We dispute these claims and intend to vigorously defend these actions.
SEC Inquiry
On August 13, 2007, we were notified that the SEC had initiated a non-public informal inquiry
regarding the events surrounding our application for Swiss regulatory approval and related press
releases dated July 9, 2007 and July 16, 2007. On March 3, 2008 we were notified that the SEC had
initiated a formal investigation regarding this matter. We have been cooperating with the SEC in
connection with the inquiry, and will continue to do so.
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Management Warrants
On November 13, 2003, we borrowed an aggregate of $335,000 from certain members of our
management. As part of the consideration for this loan, the lenders received warrants exercisable
to acquire an aggregate of 0.25 million shares of our common stock.
From March 2006 through May 2006, all of these warrants were exercised for common stock on a
net exercise basis, pursuant to the terms of the warrants.
Two former members of management who had participated as lenders in our management loans have
claimed that they are entitled to receive, for no additional cash consideration, an aggregate of up
to approximately 630,000 additional shares of our common stock due to the alleged triggering of an
anti-dilution provision in the warrant agreements. We do not believe that these claims have merit
and, in the event such claims are pursued, we intend to vigorously defend against them.
We have no other legal proceedings pending at this time.
Item 1A. Risk Factors
Our business, operations and financial condition are subject to various risks and
uncertainties that should be considered by our stockholders and prospective investors. This section
discusses factors that, individually or in the aggregate, we think could cause our actual results
to differ materially from expected and historical results. You should carefully consider the risks
described below, together with all other information included in this Form 10-Q and those risk
factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2007. Our
business, operations or financial condition could be materially adversely affected by the
occurrence of any of these risks. In such case, you could lose all of your investment.
We will need to raise additional capital, which may not be available.
As of August 19, 2008, we had approximately $1.1 million of cash on hand. We estimate that our
available cash is sufficient to support our day to day operations through the end of September
2008. As noted above, on May 12, 2008, Al Rajhi, a beneficial owner of more than 10% of our common
stock, advanced to us $4.0 million pursuant to a loan agreement. On August 19, 2008, Toucan
Partners advanced to us $1.0 million pursuant to a loan agreement. Each of these loans has a term
of six months, which may be extended in the lender’s sole discretion. Despite these financings,
however, we need additional capital to support our ongoing operations, including to fund the
research, development and commercialization of our product candidates (specifically, to complete
our current DCVax®-Brain Phase II clinical trial), to fund our other operating activities and to
repay the Loan and the Toucan Loan. We may raise additional funds by issuing additional common
stock or securities (equity or debt) convertible into shares of common stock, in which case, the
ownership interest of our stockholders will be diluted. We do not currently have any established
third party bank credit arrangements. Any debt financing, if available, is likely to include
restrictive covenants that could limit our ability to take certain actions. Further, we may seek
additional funding from Toucan Capital or Toucan Partners or their affiliates or other third
parties. Such parties are under no obligation to provide us any additional funds, and any such
funding may be on unfavorable terms and dilutive to stockholders and may contain restrictive
covenants. We are in late stage discussions with several parties in
regard to additional financings; however,
there can be no assurance that we will be able to complete any such financings or that the terms of
such financings will be attractive to us. If we are unable to obtain additional funds on a timely
basis or on acceptable terms, we may be required to curtail or cease certain or all of our
operations.
We are likely to continue to incur substantial losses, and may never achieve profitability.
We have incurred net losses every year since our formation in March 1996 and had a deficit
accumulated during the development stage of approximately $154.0 million as of June 30, 2008. We
expect that these losses will continue and anticipate negative cash flows from operations for the
foreseeable future. Despite the receipt of approximately $4.0 million from the Loan discussed above
and $25.9 million of net proceeds from an offering of our common stock on AIM in June 2007, we need
additional funding, and over the medium term we will need to generate revenue sufficient to cover
operating expenses, clinical trial expenses and some research and development costs to achieve
profitability. We may never achieve or sustain profitability.
Our auditors have issued a “going concern” audit opinion.
Our independent auditors have indicated in their report on our December 31, 2007 financial
statements that there is substantial doubt about our ability to continue as a going concern. A
“going concern” opinion indicates that the financial statements have been prepared assuming we will
continue as a going concern and do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty. Therefore, you should not rely on
our consolidated balance sheet as an indication of the amount of proceeds that would be available
to satisfy claims of creditors, and potentially be available for distribution to stockholders, in
the event of liquidation.
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As a company in the early stage of development with an unproven business strategy, our limited
history of operations makes an evaluation of our business and prospects difficult.
We have had a limited operating history and we are at an early stage of development. We may
not be able to achieve revenue growth in the future. We have generated the following limited
revenues: $529,000 in 2003; $390,000 in 2004; $124,000 in 2005; $80,000 in 2006; and $10,000 in
2007. We have derived most of these limited revenues from the sale of research products to a single
customer, contract research and development for related parties, research grants and royalties from
licensing fees generated from a licensing agreement. Our limited operating history makes it
difficult to assess our prospects for generating revenues.
We may not be able to retain existing personnel.
We employ eight full-time employees. The uncertainty of our business prospects, limited access
to capital to sustain our business operations and the volatility in the price of our common stock
may create anxiety and uncertainty, which could adversely affect employee morale and cause us to
lose employees whom we would prefer to retain. To the extent that we are unable to retain existing
personnel, our business and financial results may suffer.
We may not be able to attract expert personnel.
In order to pursue our product development and marketing plans, we will need additional
management personnel and personnel with expertise in clinical testing, government regulation,
manufacturing and marketing. Attracting and retaining qualified personnel, consultants and advisors
will be critical to our success. There can be no assurance that we will be able to attract
personnel on acceptable terms given the competition for such personnel among biotechnology,
pharmaceutical and healthcare companies, universities and non-profit research institutions. The
failure to attract any of these personnel could impede the achievement of our development
objectives.
We rely on a single relationship with a third-party contract manufacturer, which will limit our
ability to control the availability of our product candidates in the near-term.
We rely upon a single contract manufacturer, Cognate. The majority owner of Cognate is Toucan
Capital, one of our majority stockholders. Cognate provides consulting services to us and is the
manufacturer of our product candidates. We have an agreement in place with Cognate pursuant to
which Cognate has agreed to provide manufacturing and other services in connection with our pivotal
Phase II clinical trial for DCVax®-Brain. The agreement requires us to make minimum monthly
payments to Cognate irrespective of whether any DCVax® products are manufactured. The agreement
does not extend to providing services in respect of commercialization of the DCVax®-Brain product,
nor for other clinical trials or commercialization of any of our other product candidates. If and
to the extent we wish to engage Cognate to manufacture our DCVax®-Brain for commercialization or
any of our other product candidates (including DCVax®-Prostate) for clinical trials or
commercialization, we will need to enter into a new agreement with Cognate or another third-party
manufacturer which might not be feasible on a timely or favorable basis. The failure to timely
enroll patients in our clinical trials will have an adverse impact on our financial results due, in
part, to the minimum monthly payments that we make to Cognate.
Problems with our contract manufacturer’s facilities or processes could result in a failure to
produce, or a delay in production, of adequate supplies of our product candidates. Any prolonged
interruption in the operations of our contract manufacturer’s facilities could result in
cancellation of shipments or a shortfall in availability of a product candidate. A number of
factors could cause interruptions, including the inability of a supplier to provide raw materials,
equipment malfunctions or failures, damage to a facility due to natural disasters, changes in FDA
regulatory requirements or standards that require modifications to our manufacturing processes,
action by the FDA or by us that results in the halting or slowdown of production of components or
finished products due to regulatory issues, the contract manufacturer going out of business or
failing to produce product as contractually required or other similar factors. Because
manufacturing processes are highly complex and are subject to a lengthy FDA approval process,
alternative qualified production capacity may not be available on a timely basis or at all.
Difficulties or delays in our contract manufacturer’s manufacturing and supply of components could
delay our clinical trials, increase our costs, damage our reputation and, if our product candidates
are approved for sale, cause us to lose revenue or market share if it is unable to timely meet
market demands.
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Our success partly depends on existing and future collaborators.
We work with scientists and medical professionals at academic and other institutions,
including UCLA, the University of Pennsylvania, M.D. Anderson Cancer Centre and the H. Lee Moffitt
Cancer Centre, among others, some of whom have conducted research for us or have assisted in
developing our research and development strategy. We do not employ these scientists and medical
professionals. They may have commitments to, or contracts with, other businesses or institutions
that limit the amount of time they have available to work with us. We have little control over
these individuals. We can only expect that they devote time to us as required by our license,
consulting and sponsored research agreements. In addition, these individuals may have arrangements
with other companies to assist in developing technologies that may compete with our products. If
these individuals do not devote sufficient time and resources to our programs, or if they provide
substantial assistance to our competitors, our business could be seriously harmed.
The success of our business strategy may partially depend upon our ability to develop and
maintain our collaborations and to manage them effectively. Due to concerns regarding our ability
to continue our operations or the commercial feasibility of our personalized DCVax® product
candidates, these third parties may decide not to conduct business with us or may conduct business
with us on terms that are less favorable than those customarily extended by them. If either of
these events occurs, our business could suffer significantly.
We may have disputes with our collaborators, which could be costly and time consuming. Failure
to successfully defend our rights could seriously harm our business, financial condition and
operating results. We intend to continue to enter into collaborations in the future. However, we
may be unable to successfully negotiate any additional collaboration and any of these
relationships, if established, may not be scientifically or commercially successful.
We are involved in legal proceedings that could result in an adverse outcome, or that could
otherwise harm our business. In addition, future litigation could be costly to defend or pursue and
uncertain in its outcome.
We are party to various legal actions, as more fully described above under Item 1. “Legal
Proceedings.” These pending legal proceedings include a dispute with Soma Partners, LLC, an
investment bank, regarding certain fees Soma claims it is entitled to under an engagement letter
with us; a consolidated class action complaint filed against us alleging violations of Section
10(b) of the Exchange Act, and Rule 10b-5 thereunder, based on certain of our public announcements
regarding the status of certain regulatory approvals for our DCVax®-Brain vaccine in Switzerland;
and a formal SEC investigation into the same matter. We can provide no assurances as to the outcome
of the foregoing legal proceedings.
The defense of these or future legal proceedings has and could continue to divert management’s
attention and resources from the needs of our business. We may be required to make substantial
payments or incur other adverse effects in the event of adverse judgments or settlements of any
such claims, investigations, or proceedings. Any legal proceeding, even if resolved in our favor, could
result in negative publicity or cause us to incur significant legal and other expenses. Actual
costs incurred in any legal proceedings may differ from our expectations and could exceed any
amounts for which we have made reserves.
Clinical trials for our product candidates are expensive and time-consuming and their outcome is
uncertain.
The process of obtaining and maintaining regulatory approvals for new therapeutic products is
expensive, lengthy and uncertain. It can vary substantially, based upon the type, complexity and
novelty of the product involved. Accordingly, any of our current or future product candidates could
take a significantly longer time to gain regulatory approval than we expect or may never gain
approval, either of which could reduce our anticipated revenues and delay or terminate the
potential commercialization of our product candidates.
We have limited experience in conducting and managing clinical trials.
We rely on third parties to assist us in managing and monitoring all our clinical trials. Our
reliance on these third parties may result in delays in completing, or failure to complete, these
trials if the third parties fail to perform under the terms of our agreements with them. We may not
be able to find a sufficient alternative supplier of these services in a reasonable time period, or
on commercially reasonable terms, if at all. If we were unable to obtain an alternative supplier of
these services, we might be forced to curtail our Phase II clinical trial for DCVax®-Brain.
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Our product candidates will require a different distribution model than conventional therapeutic
products.
The nature of our product candidates means that different systems and methods will need to be
followed for the distribution and delivery of the products than is the case for conventional
therapeutic products. The personalized nature of these products, the need for centralized storage,
and the requirement to maintain the products in frozen form may mean that we are not able to take
advantage of distribution networks normally used for conventional therapeutic products. If our
product candidates are approved, it may take time for hospitals and physicians to adapt to the
requirements for handling and storage of these products, which may adversely affect their sales.
We lack sales and marketing experience and as a result may experience significant difficulties
commercializing our research product candidates.
The commercial success of any of our product candidates will depend upon the strength of our
sales and marketing efforts. We do not have a sales force and have no experience in sales,
marketing or distribution. To fully commercialize our product candidates, we will need a
substantial marketing staff and sales force with technical expertise and the ability to distribute
these products. As an alternative, we could seek assistance from a third party with a large
distribution system and a large direct sales force. We may be unable to put either of these plans
in place. In addition, if we arrange for others to market and sell our products, our revenues will
depend upon the efforts of those parties. Such arrangements may not succeed.
Even if one or more of our product candidates is approved for marketing, if we fail to
establish adequate sales, marketing and distribution capabilities, independently or with others,
our business will be seriously harmed.
Competition in the biotechnology and biopharmaceutical industry is intense and most of our
competitors have substantially greater resources than us.
The biotechnology and biopharmaceutical industries are characterized by rapidly advancing
technologies, intense competition and a strong emphasis on proprietary products. Several companies,
such as Cell Genesys, Inc., Dendreon Corporation, Immuno-Designed Molecules, Inc., Celldex
Therapeutics, Inc., Ark Therapeutics plc, Oxford Biomedica plc, Argos Therapeutics, Inc. and
Antigenics, are actively involved in the research and development of immunotherapies or cell-based
cancer therapeutics. Of these companies, we believe that only Dendreon and Cell Genesys are
carrying-out Phase III clinical trials with a cell-based therapy. To our knowledge, no DC-based
therapeutic product is currently approved for commercial sale. Additionally, several companies,
such as Medarex, Inc., Amgen, Inc., Agensys, Inc., and Genentech, Inc., are actively involved in
the research and development of monoclonal antibody-based cancer therapies. Currently, at least
seven antibody-based products are approved for commercial sale for cancer therapy. Genentech is
also engaged in several Phase III clinical trials for additional antibody-based therapeutics for a
variety of cancers, and several other companies are in early stage clinical trials for such
products. Many other third parties compete with us in developing alternative therapies to treat
cancer, including: biopharmaceutical companies, biotechnology companies, pharmaceutical companies,
academic institutions, and other research organizations.
Most of our competitors have significantly greater financial resources and expertise in
research and development, manufacturing, pre-clinical testing, conducting clinical trials,
obtaining regulatory approvals and marketing than we do. In addition, many of these competitors are
actively seeking patent protection and licensing arrangements in anticipation of collecting
royalties for use of technology they have developed. Smaller or early-stage companies may also
prove to be significant competitors, particularly through collaborative arrangements with large and
established companies. These third parties compete with us in recruiting and retaining qualified
scientific and management personnel, as well as in acquiring technologies complementary to our
programs.
We expect that our ability to compete effectively will be dependent upon our ability to:
obtain additional funding, successfully complete clinical trials and obtain all requisite
regulatory approvals, maintain a proprietary position in our technologies and products, attract and
retain key personnel, and maintain existing or enter into new partnerships.
Our competitors may develop more effective or affordable products, or achieve earlier patent
protection or product marketing and sales. As a result, any products developed by us may be
rendered obsolete and non-competitive.
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Our intellectual property rights may not provide meaningful commercial protection for our research
products or product candidates, which could enable third parties to use our technology, or very
similar technology, and could reduce our ability to compete in the market.
We rely on patent, copyright, trade secret and trademark laws to limit the ability of others
to compete with us using the same or similar technology in the United States and other countries.
However, as described below, these laws afford only limited protection and may not adequately
protect our rights to the extent necessary to sustain any competitive advantage we may have. The
laws of some foreign countries do not protect proprietary rights to the same extent as the laws of
the United States, and we may encounter significant problems in protecting our proprietary rights
in these countries.
We have 28 issued and licensed patents (9 in the United States and 19 in other jurisdictions)
and 134 patent applications pending (17 in the United States and 117 in other jurisdictions) which
cover the use of dendritic cells in DCVax® as well as targets for either our dendritic cell or
fully human monoclonal antibody therapy candidates. The issued patents expire at various dates from
2015 to 2026.
We will only be able to protect our technologies from unauthorized use by third parties to the
extent that they are covered by valid and enforceable patents or are effectively maintained as
trade secrets. The patent positions of companies developing novel cancer treatments, including our
patent position, generally are uncertain and involve complex legal and factual questions,
particularly concerning the scope and enforceability of claims of such patents against alleged
infringement. Recent judicial decisions in the United States are prompting a reinterpretation of
the limited case law that exists in this area, and historical legal standards surrounding questions
of infringement and validity may not apply in future cases. A reinterpretation of existing U.S. law
in this area may limit or potentially eliminate our patent position and, therefore, our ability to
prevent others from using our technologies. The biotechnology patent situation outside the United
States is even more uncertain. Changes in either the patent laws or the interpretations of patent
laws in the United States and other countries may, therefore, diminish the value of our
intellectual property.
We own or have rights under licenses to a variety of issued patents and pending patent
applications. However, the patents on which we rely may be challenged and invalidated, and our
patent applications may not result in issued patents. Moreover, our patents and patent applications
may not be sufficiently broad to prevent others from using our technologies or from developing
competing products. We also face the risk that others may independently develop similar or
alternative technologies or design around our patented technologies.
We have taken security measures to protect our proprietary information, especially proprietary
information that is not covered by patents or patent applications. These measures, however, may not
provide adequate protection for our trade secrets or other proprietary information. We seek to
protect our proprietary information by entering into confidentiality agreements with employees,
partners and consultants. Nevertheless, employees, collaborators or consultants may still disclose
our proprietary information, and we may not be able to protect our trade secrets in a meaningful
way. In addition, others may independently develop substantially equivalent proprietary information
or techniques or otherwise gain access to our trade secrets.
Our success will depend substantially on our ability to operate without infringing or
misappropriating the proprietary rights of others.
Our success will depend to a substantial degree upon our ability to develop, manufacture,
market and sell our research products and product candidates without infringing the proprietary
rights of third parties and without breaching any licenses entered into by us regarding our product
candidates.
There is a substantial amount of litigation involving patent and other intellectual property
rights in the biotechnology and biopharmaceutical industries generally. Infringement and other
intellectual property claims, with or without merit, can be expensive and time-consuming to
litigate and can divert management’s attention from our core business. For example, we recently
entered into a settlement agreement with Lonza of its claims of patent infringement against us. In
addition, we may be exposed to future litigation by third parties based on claims that our products
infringe their intellectual property rights. This risk is exacerbated by the fact that there are
numerous issued and pending patents in the biotechnology industry and the fact that the validity
and breadth of biotechnology patents involve complex legal and factual questions for which
important legal principles remain unresolved.
Competitors may assert that our products and the methods we employ are covered by U.S. or
foreign patents held by them. In addition, because patents can take many years to issue, there may
be currently pending applications, unknown to us, which may later result in issued patents that our
products may infringe. There could also be existing patents of which we are not aware that one or
more of our products may inadvertently infringe.
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If we lose a patent infringement claim, we could be prevented from selling our research
products or product candidates unless we can obtain a license to use technology or ideas covered by
such patent or we are able to redesign our products to avoid infringement. A license may not be
available at all or on terms acceptable to us, or we may not be able to redesign our products to
avoid infringement. If we are not successful in obtaining a license or redesigning our products, we
may be unable to sell our products and our business could suffer.
We may not receive regulatory approvals for our product candidates or there may be a delay in
obtaining such approvals.
Our product candidates and our ongoing development activities are subject to regulation by
governmental and other regulatory authorities in the countries in which we or our collaborators and
distributors wish to test, manufacture or market our product candidates. For instance, the FDA will
regulate our product candidates in the U.S. and equivalent authorities, such as the European
Medicines Agency (“EMEA”), will regulate our product candidates in other jurisdictions. Regulatory
approval by these authorities will be subject to the evaluation of data relating to the quality,
efficacy and safety of each product candidate for its proposed use.
The time taken to obtain regulatory approval varies between countries. Different regulators
may impose their own requirements and may refuse to grant, or may require additional data before
granting, an approval, notwithstanding that regulatory approval may have been granted by other
regulators. Regulatory approval may be delayed, limited or denied for a number of reasons,
including insufficient clinical data, the product not meeting safety or efficacy requirements or
any relevant manufacturing processes or facilities not meeting applicable requirements.
Further trials and other costly and time-consuming assessments of our product candidates may be
required to obtain or maintain regulatory approval.
Medicinal products are generally subject to lengthy and rigorous pre-clinical and clinical
trials and other extensive, costly and time-consuming procedures mandated by regulatory
authorities. We may be required to conduct additional trials beyond those currently planned, which
could require significant time and expense. For example, the field of cancer treatment is evolving,
and the standard of care for a particular cancer could change while we are in the process of
conducting the clinical trials for our product candidates. Such a change in standard of care could
make it necessary for us to conduct additional clinical trials, which could delay our opportunities
to obtain regulatory approval of our product candidates.
As for all biological products, we may need to provide pre-clinical and clinical data
evidencing the comparability of products before and after any changes in manufacturing process both
during and after product approval. Regulators may require that we generate data to demonstrate that
products before or after any such change are of comparable safety and efficacy if we are to rely on
studies using earlier versions of the product. DCVax®-Brain has been the subject of process changes
during the early clinical phase of its development and regulators may require comparability data
unless they are satisfied that changes in process do not affect the quality, and hence efficacy and
safety, of the product.
We plan to rely on our current DCVax®-Brain Phase II clinical trial as a single study in
support of regulatory approval. However, to date, only six patients have enrolled in the clinical
trial, which is designed to include 240 patients. Given our current lack of funding, it is unclear
how quickly we will be able to increase enrollment, if at all. Further, while under certain
circumstances, both EMEA and the FDA will accept a Phase II study as a single study in support of
approval, it is not yet known whether they will do so in this case. If the regulators do not
consider the Phase II study adequate on its own to support a finding of efficacy, we may be
required to perform additional clinical trials in DCVax®-Brain. There is some possibility that
changes requested by the FDA could complicate the licensing application process. Only the data for
DCVax®-Brain has been discussed with European regulators. On an informal basis, a number of
European national regulators have indicated that additional pre-clinical and clinical data could be
required before the DCVax®-Brain product would be approved. However, it is not clear whether such
data will be required until formal scientific advice is sought from the EMEA, which is the
regulator that will ultimately review any application for approval of this product candidate.
Unless the EMEA grants a deferral or a waiver, we may also be obliged to generate clinical data in
pediatric populations.
The FDA previously identified a number of deficiencies regarding the design of our original
proposed Phase III clinical trial for DCVax®-Prostate. We believe we remedied these deficiencies in
the new trial design for a 600-patient Phase III clinical trial, which was cleared by the FDA in
January 2005. However, we now intend to split this single 600-patient Phase III trial into two
separate 300-patient Phase III trials. These revisions in trial design may cause delay in the
development process for DCVax®-Prostate. It is not yet known whether the FDA will consider the
two-trial design sufficient for marketing approval, or whether the agency will require us to design
and carry out additional studies. If, after the Phase III studies are carried out, the FDA is not
satisfied that its concerns were
adequately addressed, those studies could be insufficient to demonstrate efficacy and
additional clinical studies could be required at that time.
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Any delay in completing sufficient trials or other regulatory requirements, including from our
inability to fund these trials will delay our ability to generate revenue from product sales and we
may have insufficient capital resources to support its ongoing activities. Even if we do have
sufficient capital resources, our ability to generate meaningful revenues or become profitable may
be delayed.
Regulatory approval may be withdrawn at any time.
After regulatory approval has been obtained for medicinal products, the product and the
manufacturer are subject to continual review and there can be no assurance that such approval will
not be withdrawn or restricted. Regulators may also subject approvals to restrictions or
conditions, or impose post-approval obligations on the holders of these approvals, and the
regulatory status of such products may be jeopardized if we do not comply. Extensive post-approval
safety studies are likely to be a condition of the approval and will commit us to significant time
and expense.
We may fail to comply with regulatory requirements.
Our success will be dependent upon our ability, and our collaborative partners’ abilities, to
maintain compliance with regulatory requirements, including regulators’ current good manufacturing
practices (“cGMP”) and safety reporting obligations. The failure to comply with applicable
regulatory requirements can result in, among other things, fines, injunctions, civil penalties,
total or partial suspension of regulatory approvals, refusal to approve pending applications,
recalls or seizures of products, operating and production restrictions and criminal prosecutions.
We may be subject to sanctions if we are determined to be promoting our investigational products
prior to regulatory approval or for unapproved uses.
Laws in both the U.S. and Europe prohibit us from promoting any product candidate that has not
received approval from the appropriate regulator, or from promoting a product for an unapproved
use. If any regulator determines that we have engaged in such pre-approval, or off-label promotion,
through our website, press releases, or other communications, the authority could require us to
change the content of those communications and could also take regulatory enforcement action,
including the issuance of a warning letter, requirements for corrective action, civil fines, and
criminal penalties. In the event of a product liability lawsuit, materials that appear to promote a
product for unapproved uses may increase our product liability exposure.
We may not obtain or maintain orphan drug status and the associated benefits, including marketing
exclusivity.
We may not receive the benefits associated with orphan drug designation. This may result from
a failure to achieve or maintain orphan drug status or the development of a competing product that
has an orphan designation for the same indication. In Europe, the orphan status of DCVax®-Brain
will be reassessed shortly prior to the product receiving any regulatory approval. The EMEA will
need to be satisfied that there is evidence that DCVax®-Brain offers a significant benefit relative
to existing therapies for the treatment of glioma if DCVax®-Brain is to maintain its orphan drug
status.
New legislation may have an adverse effect on our business.
Changes in applicable legislation and/or regulatory policies may result in delays in bringing
products to market, the imposition of restrictions on the product’s sale or manufacture, including
the possible withdrawal of the product from the market, or may otherwise have an adverse effect on
our business.
The availability and amount of reimbursement for our product candidates and the manner in which
government and private payers may reimburse for our potential products is uncertain.
In many of the markets where we intend to operate, the prices of pharmaceutical products are
subject to direct price controls (by law) and to drug reimbursement programs with varying price
control mechanisms.
We expect that many of the patients in the United States who may seek treatment with our
products that may be approved for marketing will be eligible for coverage under Medicare, the
federal program that provides medical coverage for the aged and disabled. Other patients may be
covered by private health plans or may be uninsured. The Medicare program is administered by the
Centers for Medicare & Medicaid Services (“CMS”), an agency within the U.S. Department of Health
and Human Services. Coverage and reimbursement for products and services under Medicare are
determined pursuant to regulations promulgated by CMS and pursuant to
CMS’s subregulatory coverage and reimbursement determinations. It is difficult to predict how
CMS will apply those regulations and subregulatory determinations to novel products such as ours.
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Moreover, the methodology under which CMS makes coverage and reimbursement determinations is
subject to change, particularly because of budgetary pressures facing the Medicare program. For
example, the Medicare Prescription Drug, Improvement, and Modernization Act (the “Medicare
Modernization Act”), enacted in 2003, provided for a change in reimbursement methodology that has
reduced the Medicare reimbursement rates for many drugs, including oncology therapeutics. Even if
our product candidates are approved for marketing in the U.S., if we are unable to obtain or retain
coverage and adequate levels of reimbursement from Medicare or from private health plans, our
ability to successfully market such products in the U.S. will be adversely affected. The manner and
level at which the Medicare program reimburses for services related to our product candidates
(e.g., administration services) also may adversely affect our ability to market or sell any of our
product candidates that may be approved for marketing in the U.S.
In the U.S., efforts to contain or reduce health care costs have resulted in many legislative
and regulatory proposals at both the federal and state level, and it is difficult to predict which,
if any, of these proposals will be enacted, and, if so, when. Cost control initiatives by
governments or third party payers could decrease the price that we receive for any one or all of
our potential products or increase patient coinsurance to a level that makes our product candidates
unaffordable for patients. In addition, government and private health plans are more persistently
challenging the price and cost-effectiveness of therapeutic products. If third-party payers were to
determine that one or more of our product candidates is not cost-effective, this could result in
refusal to cover those products or in coverage at a low reimbursement level. Any of these
initiatives or developments could prevent us from successfully marketing and selling any of our
product candidates.
In the E.U., governments influence the price of pharmaceutical products through their pricing
and reimbursement rules and control of national health care systems that fund a large part of the
cost of such products to consumers. The approach taken varies from member state to member state.
Some jurisdictions operate positive and/or negative list systems under which products may only be
marketed once a reimbursement price has been agreed. Other member states allow companies to fix
their own prices for medicines, but monitor and control company profits. The downward pressure on
health care costs in general, particularly prescription drugs, has become very intense. As a
result, increasingly high barriers are being erected to the entry of new products, as exemplified
by the role of the National Institute for Health and Clinical Excellence in the U.K. which
evaluates the data supporting new medicines and passes reimbursement recommendations to the
government. In addition, in some countries cross-border imports from low-priced markets (parallel
imports) exert commercial pressure on pricing within a country.
DCVax® is our only technology in clinical development.
Unlike many pharmaceutical companies that have a number of products in development and which
utilize many technologies, we are dependent on the success of our DCVax® platform and, potentially,
our CXCR4 antibody technology. While DCVax® technology has a number of potentially beneficial uses,
if that core technology is not commercially viable, we would have to rely on the CXCR4 technology,
which is at an early pre-clinical stage of development, for our success. If the CXCR4 technology
also fails, we currently do not have other technologies to fall back on and our business could
fail.
We may be prevented from using the DCVax® name in Europe.
The EMEA has indicated that DCVax® may not be an acceptable name because of the suggested
reference to a vaccine. Failure to obtain the approval for the use of the DCVax® name in Europe
would require us to market our product candidates in Europe under a different name which could
impair the successful marketing of our product candidates and may have a material adverse effect on
our results of operations and financial condition.
Competing generic medicinal products may be approved.
In the E.U., there exists a process for the approval of generic biological medicinal products
once patent protection and other forms of data and market exclusivity have expired. If generic
medicinal products are approved, competition from such products may reduce sales of our products
once our patent protection has expired. Other jurisdictions, including the U.S., are considering
adopting legislation that would allow the approval of generic biological medicinal products.
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We may be exposed to potential product liability claims, and insurance against these claims may not
be available to us at a reasonable rate in the future, if at all.
Our business exposes us to potential product liability risks that are inherent in the testing,
manufacturing, marketing and sale of therapeutic products. Our insurance coverage may not be
adequate to cover claims against us or may not be available to us at an acceptable cost, if at all.
Regardless of their merit or eventual outcome, product liability claims may result in decreased
demand for a product, injury to our reputation, withdrawal of clinical trial volunteers and loss of
revenues. Thus, whether or not we are insured, a product liability claim or product recall may
result in losses that could be material.
We use hazardous materials and must comply with environmental, health and safety laws and
regulations, which can be expensive and restrict how we do business.
We store, handle, use and dispose of controlled hazardous, radioactive and biological
materials in our business. Our current use of these materials generally is below thresholds giving
rise to burdensome regulatory requirements. Our development efforts, however, may result in our
becoming subject to additional requirements, and if we fail to comply with applicable requirements
we could be subject to substantial fines and other sanctions, delays in research and production,
and increased operating costs. In addition, if regulated materials were improperly released at our
current or former facilities or at locations to which we send materials for disposal, we could be
liable for substantial damages and costs, including cleanup costs and personal injury or property
damages, and incur delays in research and production and increased operating costs.
Insurance covering certain types of claims of environmental damage or injury resulting from
the use of these materials is available but can be expensive and is limited in its coverage. We
have no insurance specifically covering environmental risks or personal injury from the use of
these materials and if such use results in liability, our business may be seriously harmed.
Toucan Capital and Toucan Partners beneficially own a majority of our shares of common stock and,
as a result, the trading price for our common stock may be depressed and these stockholders can
take actions that may be adverse to the interests of other investors.
As of August 19, 2008, Toucan Capital and its affiliates, Toucan Partners and Linda F. Powers,
collectively owned an aggregate of 21,872,196 shares of our common stock, representing
approximately 51.5% of our outstanding common stock. In addition, as of August 14, 2008, Toucan
Capital may acquire an aggregate of approximately 22.0 million shares of common stock upon exercise
of warrants and Toucan Partners may acquire an aggregate of approximately 8.8 million shares of
common stock upon the exercise of warrants, constituting an aggregate beneficial ownership interest
of 71.9%, or 52,739,826 shares of common stock. This significant concentration of ownership may
adversely affect the trading price of our common stock because investors often perceive
disadvantages in owning stock in companies with controlling stockholders. Together, Toucan Capital,
Toucan Partners and Linda F. Powers have the ability to exert substantial influence over all
matters requiring approval by our stockholders, including the election and removal of directors and
any proposed merger, consolidation or sale of all or substantially all of our assets. In addition,
the managing director of Toucan Capital and the managing member of Toucan Partners is the
Chairperson of our Board. In light of the foregoing, Toucan Capital and Toucan Partners
collectively can significantly influence the management of our business and affairs. This
concentration of ownership could result in unfavorable future financing terms or have the effect of
delaying, deferring or preventing a change in control, or impeding a merger or consolidation,
takeover or other business combination that could be favorable to investors.
Our Certificate of Incorporation and Bylaws and stockholder rights plan may delay or prevent a
change in our management.
Our Seventh Amended and Restated Certificate of Incorporation, as amended (the “Certificate of
Incorporation”), Third Amended and Restated Bylaws (the “Bylaws”) and stockholder rights plan
contain provisions that could delay or prevent a change in our management team. Some of these
provisions:
| • | authorize the issuance of preferred stock that can be created and issued by the Board
without prior stockholder approval, commonly referred to as “blank check” preferred stock,
with rights senior to those of the common stock; |
| • | allow the Board to call special meetings of stockholders at any time but restrict the
stockholders from calling special meetings; |
| • | authorize the Board to issue dilutive common stock upon certain events; and |
| • | provide for a classified Board. |
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These provisions could allow our Board to affect the rights of an investor since the Board can
make it more difficult for holders of common stock to replace members of the Board. Because the
Board is responsible for appointing the members of the management team, these provisions could in
turn affect any attempt to replace the current management team.
There may not be an active, liquid trading market for our common stock.
Our common stock is currently traded on the Over-The-Counter Bulletin Board, or OTCBB, and on
AIM, which are generally recognized as being less active markets than NASDAQ, the stock exchange on
which our common stock previously was listed. You may not be able to sell your shares at the time
or at the price desired. There may be significant consequences associated with our stock trading on
the OTCBB rather than a national exchange. The effects of not being able to list our securities on
a national exchange include:
| • | limited release of the market price of our securities; |
| • | limited news coverage; |
| • | limited interest by investors in our securities; |
| • | volatility of our stock price due to low trading volume; |
| • | increased difficulty in selling our securities in certain states due to “blue sky”
restrictions; and |
| • | limited ability to issue additional securities or to secure additional financing. |
The resale, or the availability for resale, of the shares placed in the PIPE Financing could have a
material adverse impact on the market price of our common stock.
The PIPE Financing, completed in March 2006, included the private placement of an aggregate of
approximately 2.6 million shares of common stock and accompanying warrants to purchase an aggregate
of approximately 1.3 million shares of common stock. In connection with the PIPE Financing, we
agreed to register, and subsequently did register, the resale of the shares of common stock sold in
the PIPE Financing and the shares underlying the warrants issued in the PIPE Financing. The resale
of a substantial number of the shares placed in the PIPE Financing or even the availability of
these shares for resale, could have a material adverse impact on our stock price.
Because our common stock is subject to “penny stock” rules, the market for the common stock may be
limited.
Because our common stock is subject to the SEC’s “penny stock” rules, broker-dealers may
experience difficulty in completing customer transactions and trading activity in our securities
may be adversely affected. Under the “penny stock” rules promulgated under the Exchange Act,
broker-dealers who recommend such securities to persons other than institutional accredited
investors must:
| • | make a special written suitability determination for the purchaser; |
| • | receive the purchaser’s written agreement to a transaction prior to sale; |
| • | provide the purchaser with risk disclosure documents which identify certain risks
associated with investing in “penny stocks” and which describe the market for these “penny
stocks” as well as a purchaser’s legal remedies; and |
| • | obtain a signed and dated acknowledgment from the purchaser demonstrating that the
purchaser has actually received the required risk disclosure document before a transaction
in a “penny stock” can be completed. |
As a result of these rules, broker-dealers may find it difficult to effectuate customer
transactions and trading activity in our common stock may be adversely affected. As a result, the
market price of our common stock may be depressed, and stockholders may find it more difficult to
sell our common stock.
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The price of our common stock may be highly volatile.
The share price of publicly traded biotechnology and emerging pharmaceutical companies,
particularly companies without earnings and consistent product revenues, can be highly volatile and
are likely to remain highly volatile in the future. The price at which our common stock is quoted
and the price which investors may realize in sales of their shares of our common stock will be
influenced by a large number of factors, some specific to us and our operations and some unrelated
to our operating performance. These factors could include the performance of our marketing
programs, large purchases or sales of the shares, currency fluctuations, legislative changes and
general economic conditions. In the past, shareholder class action litigation has often been
brought against companies that experience volatility in the market price of their shares. Whether
or not meritorious, litigation brought against us following fluctuations in the trading price of
our common stock could result in substantial costs, divert management’s attention and resources and
harm our financial condition and results of operations.
The requirements of the Sarbanes-Oxley Act of 2002 and other U.S. securities laws reporting
requirements impose cost and operating challenges on us.
We are subject to certain of the requirements of the Sarbanes-Oxley Act of 2002 in the U.S.
and the reporting requirements under the Exchange Act. These laws require, among other things, an
attestation report of our independent auditor on the effectiveness of our internal control over
financial reporting, currently expected to begin with our annual report for the year ended December
31, 2008, as well as the filing of annual reports on Form 10-K, quarterly reports on Form 10-Q and
periodic reports on Form 8-K following the happening of certain material events. To meet these
compliance deadlines, we will need to have our internal controls designed, tested and operational
to ensure compliance with applicable standards. We initiated the process of documenting and
evaluating our internal controls and financial reporting procedures in early 2008. This process is
ongoing and likely will continue to be time consuming and will result in us having to significantly
change our controls and reporting procedures due to our small number of employees and lack of
governance controls. Most similarly-sized companies registered with the SEC have had to incur
significant costs to ensure compliance. Moreover, any failure by us to comply with such provisions
would be required to be disclosed publicly, which could lead to a loss of public confidence in our
internal controls and could harm the market price of our common stock.
Our management has identified significant internal control deficiencies, which management and our
independent auditor believe constitute material weaknesses.
In connection with the preparation of our financial statements for the year ended December 31,
2007, certain significant internal control deficiencies became evident to management that, in the
aggregate, represent material weaknesses, including:
| • | lack of a sufficient number of independent directors on our audit committee; |
| • | insufficient segregation of duties in our finance and accounting function due to limited
personnel; |
| • | insufficient corporate governance policies; and |
| • | inadequate approval and control over transactions and commitments made on our behalf by
related parties. |
As part of the communications by our independent auditors with our audit committee with
respect to audit procedures for the year ended December 31, 2007, our independent auditors informed
the audit committee that these deficiencies constituted material weaknesses, as defined by Auditing
Standard No. 5, “An Audit of Internal Control Over Financial Reporting that is Integrated with an
Audit of Financial Statements and Related Independence Rule and Conforming Amendments,” established
by the Public Company Accounting Oversight Board. We intend to take appropriate and reasonable
steps to make the necessary improvements to remediate these deficiencies but we cannot be certain
that we will have the necessary financing to address these deficiencies or that we will be able to
attract qualified individuals to serve on our Board and to take on key management roles within the
Company. Our failure to successfully remediate these issues could lead to heightened risk for
financial reporting mistakes and irregularities and a further loss of public confidence in our
internal controls that could harm the market price of our common stock.
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Our business could be adversely affected by animal rights activists.
Our business activities have involved animal testing. These types of activities have been the
subject of controversy and adverse publicity. Some organizations and individuals have attempted to
stop animal testing by pressing for legislation and regulation in these areas. To the extent the
activities of such groups are successful, our business could be adversely affected. Negative
publicity about us, our pre-clinical trials and our product candidates could have an adverse impact
on our sales and profitability.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On June 17, 2008, the Company issued 122,190 shares of common stock pursuant to a letter
agreement under which we received an exclusive right to negotiate the terms of a potential
transaction in which we would obtain the rights, title and interest to and under a certain license
agreement.
The Company claimed exemption from registration under the Securities Act for the issuance of
such shares of common stock under Section 4(2) of the Securities Act and/or Regulation D
thereunder, as a transaction not involving any public offering. The acquirer of the unregistered
shares for which the Company relied on Section 4(2) and/or Regulation D represented to the Company
that it was an accredited investor, as defined under the Securities Act. The Company claimed such
exemption on the basis that (i) the acquirer represented that it intended to acquire the shares for
investment only and not with a view to the distribution thereof and that it either received
adequate information about the Company or had access to such information and (ii) appropriate
legends were affixed to the stock certificates issued in such transaction.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company’s annual meeting of stockholders was held on June 13, 2008. The following are
the proposals voted upon at the meeting, and the number of votes cast for, against or withheld, as
well as the number of abstentions, as applicable, for each proposal:
Proposal 1: Election of R. Steve Harris as Class I Director for a term of three years
| For: 24,456,165 | Withheld 130,944 |
Proposal 2:
Approval of the 2007 Stock Option Plan
| For: 22,265,927 | Against: 45,387 | Abstain: 2,487 | Broker Non-Votes: 2,273,308 |
Linda F. Powers term
as a director will expire at the 2009 Annual Meeting of Stockholders and Alton L. Boynton and Anthony P. Deasey’s
terms will expire at the 2010 Annual Meeting of Stockholders. R Steve Harris and Anthony P. Deasey
have since resigned as directors on June 30, 2008 and August 12, 2008 respectively.
Item 5. Other Information
None
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Item 6. Exhibits
| 3.1 | Seventh Amended and Restated Certificate of Incorporation (3.1)(1) |
|||
| 3.2 | Third Amended and Restated Bylaws (3.1)(2) |
|||
| 3.3 | Amendment to the Seventh Amended and Restated Certificate of Incorporation (3.2)(2) |
|||
| 3.4 | Amendment to Seventh Amended and Restated Certificate of Incorporation (3.4)(3) |
|||
| 10.1 | Loan Agreement and Promissory Note, dated May 6, 2008, between the Company and Al Rajhi Holdings W.L.L.(4.5)(4) |
|||
| *31.1 | Certification
of President and Chief Executive Officer (Principal executive officer
and principal financial 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 and Chief Executive Officer (Principal executive officer
and principal financial officer) Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| (1) | Incorporated by reference to the exhibit shown in the preceding parentheses filed with the
Registrant’s Registration Statement on Form S-1 (File No. 333-67350) on July 17, 2006. |
|
| (2) | Incorporated by reference to the exhibit shown in the preceding parentheses filed with the
Registrant’s Current Report on Form 8-K on June 22, 2007. |
|
| (3) | Incorporated by reference to the exhibit shown in the preceding parentheses filed with the
Post-Effective Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 (File
No. 333-134320) on January 28, 2008. |
|
| (4) | Incorporated by reference to the exhibit shown in the preceding parentheses filed with the
Registrant’s Current Report on Form 8-K on May 15, 2008. |
|
| * | Filed herewith. |
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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: August 19, 2008 | By: | /s/ Alton L. Boynton | ||
| Alton L. Boynton | ||||
| President and Chief Executive Officer (Principal Executive, Financial and Accounting Officer) |
||||
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NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company)
(A Development Stage Company)
EXHIBIT INDEX
| 3.1 | Seventh Amended and Restated Certificate of Incorporation (3.1)(1) |
|||
| 3.2 | Third Amended and Restated Bylaws (3.1)(2) |
|||
| 3.3 | Amendment to the Seventh Amended and Restated Certificate of Incorporation (3.2)(2) |
|||
| 3.4 | Amendment to Seventh Amended and Restated Certificate of Incorporation (3.4)(3) |
|||
| 10.1 | Loan Agreement and Promissory Note, dated May 6, 2008, between the Company and Al Rajhi Holdings W.L.L. (4.5) (4) |
|||
| *31.1 | Certification
of President and Chief Executive Officer (Principal executive officer
and principal financial 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 and Chief Executive Officer (Principal executive officer
and principal financial officer) Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| (1) | Incorporated by reference to the exhibit shown in the preceding parentheses filed with the
Registrant’s registration statement Form S-1 (File No. 333-67350) on July 17, 2006. |
|
| (2) | Incorporated by reference to the exhibit shown in the preceding parentheses filed with the
Registrant’s Current Report on Form 8-K on June 22, 2007. |
|
| (3) | Incorporated by reference to the exhibit shown in the preceding parentheses filed with the
Post-Effective Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 on
January 28, 2008. |
|
| (4) | Incorporated by reference to the exhibit shown in the preceding parentheses filed with the
Registrant’s Current Report on Form 8-K on May 15, 2008. |
|
| * | Filed herewith. |
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