NORTHWEST BIOTHERAPEUTICS INC - Quarter Report: 2015 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

OR

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______to _______

Commission File Number: 001-35737

NORTHWEST BIOTHERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

4800 Montgomery Lane, Suite 800, Bethesda, MD 20814

(Address of principal executive offices) (Zip Code)

(240) 497-9024

(Registrant's telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x  No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x  No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes  ¨  No  x

As of November 5, 2015, the total number of shares of common stock, par value $0.001 per share, outstanding was 92,358,087.

NORTHWEST BIOTHERAPEUTICS, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION 

NORTHWEST BIOTHERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share and per share amounts)

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

NORTHWEST BIOTHERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share amounts)

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

NORTHWEST BIOTHERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)

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

NORTHWEST BIOTHERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

(in thousands)

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

NORTHWEST BIOTHERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

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

NORTHWEST BIOTHERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

(Unaudited)

(in thousands)

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

NORTHWEST BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Organization and Description of Business and Recent Developments

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

The Company’s platform technology, DCVax®, is currently being tested for the treatment of certain types of cancers through clinical trials in the United States and Europe that are in various phases.

On August 21, 2015, the Company issued a press release announcing that over 300 of the total 348 planned patients had been recruited into the Phase III trial of DCVax®-L for Glioblastoma multiforme, that all of these patients are continuing to be treated in accordance with the trial protocol, and that new screening of patient candidates for additional recruitment has been temporarily suspended while the Company submits certain information from the trial for regulatory review. 

The Company received various shareholder inquiries, asking whether the 300 patients are actually enrolled and being treated in the trial, or were just screened for the trial. On Monday, August 24, the Company responded to these inquiries and filed an 8-K containing its answer confirming that the 300 patients are actually enrolled and being treated in the trial. The Company also noted that being enrolled in the trial means not being in the Information Arm, and not being in the pseudo-progression arm, each of which are parallel with the trial but outside the trial.

A shareholder inquiry also asked what information the Company is submitting to regulators. The 8-K also contained the answer that such submissions would not normally be discussed in the middle of a regulatory process or dialog, and that the Company plans to report when the process has been completed.

2. Liquidity and Financial Condition

During the nine months ended September 30, 2015, the Company used approximately $56.5 million of cash for its operations and for certain one-time payments (e.g., development work and related patent costs, engineering, legal, regulatory, and other development costs related to the U.K. facility). The Company incurred a net loss (cash and non-cash combined) of $90.7 million for the nine months ended September 30, 2015, including $26.2 million of non-cash charges associated with a mark to market charge for the change in the fair value of its derivative liability and other non-cash charges. This net loss was comparable to the (combined cash and non-cash) net loss of $92.9 million for the nine months ended September 30, 2014

During the three months ended September 30, 2015, the Company used approximately 11.8 million of cash for its operations and for certain one-time payments. The Company had cash and cash equivalents of $5.4 million and a working capital deficiency (cash and non-cash liabilities combined) of approximately $80.2 million at September 30, 2015 (with $56.0 million of the $80.2 million deficit comprised of non-cash derivative liabilities). The Company owes an aggregate of $7.3 million of trade liabilities and convertible notes to related parties. 

Because of recurring operating losses, net operating cash flow deficits, and an accumulated deficit there is substantial doubt about the Company’s ability to continue as a going concern. The 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 might become necessary should the Company be able to continue as a going concern.

3. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated interim financial statements include the accounts of the Company and its subsidiaries. All material intercompany balances and transactions have been eliminated.

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and on the same basis as the Company prepares its annual audited consolidated financial statements. The condensed consolidated balance sheet as of September 30, 2015, condensed consolidated statements of operations for the three months and nine months ended September 30, 2015 and 2014, condensed consolidated statements of comprehensive income (loss) for the three months and nine months ended September 30, 2015 and 2014, condensed consolidated statement of stockholders’ equity (deficit) for the nine months ended September 30, 2015, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2015 and 2014 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented. The results for the three months and nine months ended September 30, 2015 are not necessarily indicative of results to be expected for the year ending December 31, 2015 or for any future interim period. The condensed balance sheet at December 31, 2014 has been derived from audited financial statements; however, it does not include all of the information and notes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2014, and notes thereto included in the Company’s annual report on Form 10-K, which was filed with the SEC on March 17, 2015.

Reclassifications

The Company reclassified debt issuance costs from other long-term assets to long-term debt, net on the condensed consolidated balance sheets for all periods presented pursuant to early adoption of Accounting Standards Update ("ASU") No. 2015-03 - Simplifying the Presentation of Debt Issuance Costs.

Use of Estimates

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

Environmental Remediation Liabilities

The Company records environmental remediation liabilities for properties acquired. The environmental remediation liabilities are initially recorded at fair value. The liability is reduced for actual costs incurred in connection with the clean-up activities for each property. Upon completion of the clean-up, the environmental remediation liability is adjusted to equal the fair value of the remaining operation, maintenance and monitoring activities to be performed for the property. The amount of the liability resulting from the completion of the clean-up, if any, would be included in other income (expense). As of September 30, 2015, the Company estimated that the total environmental remediation costs associated with the purchase of the UK Facility will be approximately $6.2 million. Contamination clean-up costs that improve the property from its original acquisition state are capitalized as part of the property’s overall development costs. The Company engaged a third party specialist to conduct certain surveys of the condition of the property which included, among other things, a preliminary analysis of potential environmental remediation exposures. The Company determined, based on information contained in the specialist’s report, that it would be required to estimate the fair value of an unconditional obligation to remediate specific ground contamination at an estimated fair value of approximately $6.2 million. The Company computed the fair value of this obligation using a probability weighted approach that measures the likelihood of the following two potential outcomes: (i) a higher probability requirement of erecting a protective barrier around the affected area at an estimated cost of approximately $4.5 million, and (ii) a lower probability requirement of having to excavate the affected area at an estimated cost of approximately $32.0 million. The Company’s estimate is preliminary and therefore subject to change as further studies are conducted, and as additional facts come to the Company’s attention. Environmental remediation efforts are complex, technical and subject to various uncertainties. Accordingly, it is at least reasonably possible that any changes in the Company’s estimate could materially differ from the management’s preliminary discussed herein.      

Research and Development Costs

Research and development costs are charged to operations as incurred and consist primarily of clinical trial costs for the Company’s Phase III and Phase I/II clinical trials, related party manufacturing costs, consulting costs, contract research and development costs, and compensation costs.

For the three months ended September 30, 2015 and 2014, the Company made cash payments of approximately $7.1 million (with invoices generally being paid all in cash) and $1.4 million (with invoices generally being paid half in cash and half in stock), respectively, to Cognate BioServices, Inc. (“Cognate”) For the nine months ended September 30, 2015 and 2014, the Company made cash payments of approximately $28.4 million (with invoices generally being paid all in cash) and $12.8 million (with invoices generally being paid half in cash and half in stock), respectively, to Cognate.  At September 30, 2015 and December 31, 2014, the Company owed Cognate $7.2 million and $5.7 million, respectively, for unpaid invoices for services performed by Cognate (including manufacturing for both the Phase III and Phase I/II clinical trials, ongoing product and process development, expansion of several company programs and services related to expansion of manufacturing capacity).

For the nine months ended September 30, 2015 and 2014, the Company incurred non-cash equity based compensation (restricted common stock and warrants) for the ongoing vesting (in equal monthly installments over 3 years) of the one-time initiation payments of shares and warrants under the four agreements the Company entered into with Cognate in January 2014. The vesting amounts during the nine months ended September 30, 2015 and 2014 were $9.4 million (comprising 1.3 million shares per nine months) and $6 million (comprising 1.2 million shares per nine months), respectively. The value of the monthly vesting amounts was higher in the nine months ended September 2015 than the period ended September 2014 because the price per share of the Company’s stock has risen to $6.25 as of September 30, 2015. For the three months ended September 30, 2015 and 2014, the vesting amounts were a credit to stock based compensation expense of $(6.4) million and $0.9 million. The fair value calculation of these shares was determined using the market price for tradable shares; however the shares issued to Cognate were unregistered restricted shares.  The ongoing installments also included lock-up warrants (for a 3-year lock-up of Cognate shares) and most favored nation shares and warrants.  

Foreign Currency Translation and Transactions

The Company has operations in Germany, the United Kingdom and Canada, in addition to the U.S. Assets and liabilities are translated into U.S. dollars using end of period exchange rates and revenues and expenses are translated into U.S. dollars using weighted average rates. Foreign currency translation adjustments are reported as a separate component of accumulated other comprehensive income (loss) within stockholders’ equity (deficit).

During the nine months ended September 30, 2015, the Company recorded $0.1 million of foreign currency translation gain primarily due to the strengthening of the U.S. dollar relative to the euro and British pound sterling.

Foreign currency transaction losses are recognized in the Consolidated Statements of Operations as incurred.

Significant Accounting Policies

There have been no material changes in the Company’s significant accounting policies to those previously disclosed in the 2014 Annual Report.

Recent Accounting Pronouncements

In April 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03), which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. ASU 2015-03 is effective for the interim and annual periods ending after December 15, 2015, but early adoption is permitted. The Company early adopted ASU 2015-03 and such adoption resulted in debt issuance costs for all periods presented to be reclassified to long-term debt, net.

4. Fair Value Measurements

The following table classifies the Company’s liabilities measured at fair value on a recurring basis into the fair value hierarchy as of September 30, 2015 and December 31, 2014 (in thousands):

There were no transfers between Level 1, 2 or 3 during the nine month period ended September 30, 2015.

The following table presents changes in Level 3 liabilities measured at fair value for the nine month period ended September 30, 2015. Both observable and unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level 3 category. Unrealized gains and losses associated with liabilities within the Level 3 category include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long- dated volatilities) inputs (in thousands).

The Company’s warrant liabilities are measured at fair value using the Monte Carlo simulation valuation methodology. A summary of weighted average (in aggregate) about significant unobservable inputs (Level 3 inputs) used in measuring the Company’s warrant liabilities that are categorized within Level 3 of the fair value hierarchy for the nine months ended September 30, 2015 is as follows:

During fiscal 2015 approximately 184,000 warrants classified as liabilities were exercised as both cash and cashless exercises.  The warrants were marked to market through other income (expense) and the balances were reclassified as stockholder’ equity (deficit) at the point of exercise.  A summary of weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring warrant exercises through the nine months ended September 30, 2015 is as follows:

The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s management.

5. Stock-based Compensation- Non-Employees

Related Party

Stock based payment expense (restricted common stock and warrants) to Cognate for the ongoing vesting over 3 years of one-time initiation payments under the four agreements that were entered into in January 2014 for Cognate services was $9.4 million (comprising 1.3 million shares per nine months) and $6 million (comprising 1.2 million shares per nine months) for the nine months ended September 30, 2015 and 2014, respectively. For the three months ended September 30, 2015 and 2014, the vesting amounts were a credit to stock based compensation expense of $(6.4) million and $0.9 million. Approximately $2.8 million in compensation costs per calendar quarter may be recognized over the next 1.3 years based on the fair market value of stock of $6.25 as of September 30, 2015.

The Company issued 318,116 shares of common stock for services to Cognate’s designee in partial satisfaction of amounts owed to Cognate for manufacturing services, which resulted in compensation expense of $2.7 million for the nine month period ended September 30, 2015.

Other

The Company issued 85,228 shares of common stock for the nine months period ended September 30, 2015, which resulted in share based compensation of approximately $0.7 million. 

6. Property, Plant and Equipment

Property and equipment consist of the following at September 30, 2015 and December 31, 2014 (in thousands):

Depreciation expense was approximately $44,000 and $352,000 for the nine months ended September 30, 2015 and 2014, respectively, $29,000 and $346,000 for the three months ended September 30, 2015 and 2014, respectively.

7. Notes Payable

2014 Convertible Senior Notes

The 2014 Convertible Senior Notes are due on August 15, 2017 and have a conversion price of $6.60.

The Company has remaining $1.2 million in escrowed interest payments, which is sufficient to fund, when due, the total aggregate amount of the six scheduled semi-annual interest payments during the term of the notes, excluding additional interest, if any.

During the nine months ended September 30, 2015, $6.5 million of the 2014 Convertible Senior Notes were converted into common stock of the Company on the terms set forth in the agreement. Pursuant to the exchange, on the terms set forth in the Notes, the investors received 1,023,535 shares of the Company’s common stock, which includes accelerated interest. The Company also accelerated the remaining portion of deferred offering cost upon the conversion of the Senior Notes and recorded as additional interest expense.

The following table shows the details of interest expenses related to 2014 Convertible Senior Notes for the three and nine months ended September 30, 2015 (in thousands):

Mortgage Loan

On February 13, 2015, the Company entered into a mortgage loan agreement (the “Mortgage”) with Lancashire Mortgage Corporation Limited in the UK to expand the facility to $12 million (£7.75 million). The Mortgage has a 1.5 year term with a 12% annual interest rate. The Company received gross proceeds of approximately $5 million (£3.25 million), and this amount was netted by approximately $0.1 million of a related financing charge, which was capitalized as deferred financing cost that is being amortized over the term of the Mortgage.

Interest expense related to the February 13, 2015 and November 17, 2014 mortgage loans amounted to $0.5 million and $1.4 million for the three and nine months ended September 30, 2015, respectively, which included $0.4 million and $1.0 million related to the 12% coupon and $0.1 million and $0.4 million related to the amortization of deferred offering financing costs on the mortgage loan.

Other Notes Payable

Notes payable consist of the following at September 30, 2015 and December 31, 2014 (in thousands):

(1) This $0.934 million note, which was originally due in July 2011 is currently under dispute with the creditor as to the validity of the note payable balance, which the Company believes has already been paid in full and is not outstanding.

(2) This $0.135 million note as of September 30, 2015 consists of two separate 6% notes in the amounts of $0.110 million and $0.025 million. In regard to the $0.110 million note, the Company has made ongoing attempts to locate the creditor to repay or convert this note, but has been unable to locate the creditor to date. In regard to the $0.025 million note, the holder has elected to convert these notes into equity, the Company has delivered the applicable conversion documents to the holder, and the Company is waiting for the holder to execute and return the documents.

(3) This $0.053 million note was due May 25, 2014, and is currently past due.

(4) This $0.050 million demand note as of September 30, 2015 is held by an officer of the Company. The holder has made no demand for payment, but reserves the right to make a demand at any time.

8. Net Earnings (Loss) Per Share

Basic and diluted earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share includes the determinants of basic net income per share and, in addition, gives effect to the potential dilution that would occur if securities or other contracts to issue common stock were exercised, vested or converted into common stock, unless they are anti-dilutive. Diluted weighted average common shares include common stock potentially issuable under our convertible notes, vested and unvested stock options and unvested RSUs. 

The following table sets forth the computation of earnings (loss) per share (amounts in thousands except per share data):

For the periods where we reported losses, all common stock equivalents are excluded from the computation of diluted earnings (loss) per share, since the result would be anti-dilutive. Common stock equivalents not included in the calculations of diluted earnings (loss) per share because to do so would have been anti-dilutive, include the following (amounts in thousands): 

9. Related Party Transactions

Cognate BioServices, Inc.

Under the January 17, 2014 DCVax®-L Manufacturing Services Agreement and the DCVax®-Direct Agreement, if the Company, in breach of the Agreements, shuts down or suspends its DCVax®-L program or DCVax®-Direct program with Cognate, the Company will be liable for certain fees in addition to any other remedies. The fees are based on the stage at which the shut down or suspension occurs:

For the nine months ended September 30, 2015 and September 30, 2014, respectively, the Company made net disbursements to Cognate of approximately $28.4 million (with invoices generally being paid all in cash rather than half in cash and half in stock), versus $12.8 million (with invoices generally being paid half in cash and half in stock) including charges relating to manufacturing for both the Phase III and Phase I/II clinical trials, ongoing product and process development, and expansion of several Company programs under these service agreements.

For the three months ended September 30, 2015 and September 30, 2014, respectively, the Company made net disbursements to Cognate of approximately $7.1 million (with invoices generally being paid all in cash rather than half in cash and half in stock), versus $1.4 million With the substantial expansion of recruitment in the Phase III DCVax-L trial during this period, patient volume has exceeded the maximum amount contracted for, and as a result the disbursements have included excess production costs. In addition, the disbursements have included preparatory work for multiple Phase II clinical trials, as well as development work connected with new intellectual property and certain regulatory requirements. The disbursements have also included substantial one-time services related to manufacturing expansion in Europe.

As of September 30, 2015 and December 31, 2014, the Company owed Cognate (including third party sub-contract amounts) approximately $7.2 million and $5.7 million, respectively. These amounts are included in accounts payable to related party in the condensed consolidated balance sheets.

The Company issued 318,116 common shares to Cognate’s designee in partial satisfaction of the 8.1 million shares that were approved by the Company’s Board in November 2014 to satisfy certain payment obligations for unpaid invoices for manufacturing and related services, and certain anti-dilution obligations to Cognate under the most favored nation provisions in the Company’s agreements with Cognate. The Company recorded a $2.7 million charge to stock based compensation based upon the fair value of the common shares on the date of issuance. The 8.1 million shares were issued on October 19, 2015. Additionally, in connection with the Woodford Financing, the Company issued 681,884 shares of common stock to Cognate, on the same terms as the Shares issued to Woodford, to satisfy approximately $3.8 million of current obligations for unpaid invoices for manufacturing and related services by Cognate.

10. Stockholders’ Equity (Deficit)

Common Stock Issuances

First Quarter 2015

During the quarter ended March 31, 2015, the Company issued an aggregate of 888,187 shares of common stock from the exercise of warrants, receiving approximately $3.7 million of proceeds.

During the quarter ended March 31, 2015, the Company issued 80,068 shares of common stock to an individual investor as settlement of redemption of redeemable securities. The fair value of the settlement was $0.3 million and was recorded to offset derivative liabilities.

During the quarter ended March 31, 2015, the Company issued an aggregate of 385,000 shares of common stock to an individual investor from the cashless exercise of warrants previously issued. The warrants were classified as warrant liability. The fair value of the warrants on the date of exercise was $0.5 million.

Second Quarter 2015

On April 2, 2015, the Company entered into a stock purchase agreement (the “Agreement”) with Woodford Investment Management LLP as agent for the CF Woodford Equity Income Fund and other clients (collectively, “Woodford”). Pursuant to the Agreement, the Company agreed to sell, and Woodford agreed to purchase, 5,405,405 shares of the Company’s unregistered common stock, par value $0.001 per share (the “Shares”), at a purchase price of $7.40 per Share for an aggregate purchase price of $40 million. The sale of the Shares took place in two separate closings as follows: (i) 1,554,054 shares for a purchase price of $11.5 million which closed on April 8, 2015; and (ii) an additional 3,851,351 shares for a purchase price of $28.5 million which closed on May 1, 2015. There are no warrants, pre-emptive rights or other rights or preferences.

During the quarter ended June 30, 2015, the Company converted $4.5 million of the 2014 Convertible Senior Notes into common stock on the terms set forth in the agreement. Pursuant to the exchange, on the terms set forth in the Notes, the investors received 701,033 shares of the Company’s common stock, which included accelerated interest.

During the quarter ended June 30, 2015, the Company issued an aggregate of 723,422 shares of common stock from the exercise of warrants for total proceeds of $3.1 million. Of which 9,200 shares of common stock was related to extinguishment of warrant liabilities. The fair value of the warrant liabilities was $0.06 million on the date of exercise, which was recorded as a component of additional paid-in-capital.

During the quarter ended June 30, 2015, the Company issued an aggregate of 183,895 shares of common stock to multiple investors from the cashless exercise of warrants previously issued.

During the quarter ended June 30, 2015, the Company issued an aggregate of 85,228 shares of common stock to an individual investor as stock based compensation. The fair value of the stock on the issuance date was $0.7 million.

During the quarter ended June 30, 2015, the Company issued an aggregate of 318,116 shares of common stock to Cognate’s designee in partial satisfaction of the 8.1 million shares that were approved by the Company’s Board last November to satisfy certain payment obligations for unpaid invoices for manufacturing and related services, and certain anti-dilution obligations to Cognate under the most favored nation provisions in the Company’s agreements with Cognate, and were reported by the Company last November, but had not yet been issued. 

Third Quarter 2015

During the quarter ended September 30, 2015, the Company issued an aggregate of 116,675 shares of common stock from the exercise of warrants for total proceeds of $0.8 million, of which 57,500 shares of common stock were related to extinguishment of warrant liabilities. The fair value of the warrant liabilities was $0.2 million on the date of exercise, which was recorded as a component of additional paid-in-capital.

During the quarter ended September 30, 2015, the Company issued an aggregate of 2,566 shares of common stock to multiple investors from the cashless exercise of warrants previously issued.

During the quarter ended September 30, 2015, the Company converted $2 million of the 2014 Convertible Senior Notes into common stock on the terms set forth in the agreement. Pursuant to the exchange, on the terms set forth in the Notes, the investors received 322,502 shares of the Company’s common stock, which includes accelerated interest.

Stock Purchase Warrants

The following is a summary of warrant activity for the nine months ended September 30, 2015 (in thousands, except per share data):

*The warrants contain “down round protection” and the Company classifies these warrant instruments as liabilities measured at fair value and re-measures these instruments at fair value each reporting period.

** Approximately 14,323,003 warrants issued to Cognate, during the 8-year period from 2008 through 2015, with a weighted average exercise price and remaining contractual term of $3.3 and 4.2 years, respectively. The weighted average exercise price gives effect to adjustments related to the most favored nation clause in these warrants.

11. Contingencies

In 2014, as previously reported, the Company received demand letters from three purported individual shareholders seeking to inspect our corporate books and records pursuant to Section 220 of the Delaware General Corporation Law. The demand letters were all substantially similar, and claimed that their purpose is to investigate possible mismanagement and breaches of fiduciary duty by the Company’s directors and officers.  They requested a range of documents.  On November 13, 2014, one of the purported shareholders filed a complaint in the Delaware Court of Chancery seeking to enforce her books and records demand. The Company reached negotiated agreements and provided limited records, under confidentiality agreements. On July 16, 2015, the parties filed, and the court entered, a stipulation dismissing the case.

On June 19, 2015, two of the purported shareholders filed a complaint purportedly suing on behalf of a class of similarly situated shareholders and derivatively on behalf of the Company in the Delaware Court of Chancery.  The lawsuit names Cognate BioServices, Inc. (“Cognate”), Toucan Partners, Toucan Capital Fund III, our CEO Linda Powers and the Company’s Board of Directors as defendants, and names the Company as a “nominal defendant” with respect to the derivative claims.  The complaint generally objects to certain transactions between the Company and Cognate and the Toucan entities, in which Cognate and the Toucan entities provided services and financing to the Company, or agreed to conversion of debts owed to them by the Company into equity.  The complaint seeks unspecified monetary relief for the Company and the plaintiffs, and various forms of equitable relief, including disgorgement of allegedly improper benefits, rescission of the challenged transactions, and an order forbidding similar transactions in the future.  On September 1, the Company and other named defendants filed motions to dismiss.  In response, the plaintiffs filed an amended complaint on November 6. The Company disputes the allegations in the complaint and has not accrued for them. The Company intends to vigorously defend the case. However, there can be no assurance as to what the outcome of these claims will be, nor assurance that the outcome of these claims will not have a material adverse effect on the Company’s financial position and results from operations. 

On August 26, 2015, a purported shareholder of the Company filed a complaint purportedly suing on behalf of a class of similarly situated shareholders in the District Court for the District of Maryland.  The lawsuit names the Company and Ms. Powers as defendants.  The complaint generally claims that the defendants violated Section 10(b) and Section 20(a) of the Securities Exchange Act by making misleading statements and/or omissions on a variety of subjects, including the trial results for DCVax-Direct, the promotion of the Company’s stock, and information requests from German regulators.  The complaint seeks unspecified damages, attorneys’ fees, and costs. On October 26, 2015, two purported shareholders of the Company filed a motion seeking appointment as lead plaintiff. The Company disputes the allegations in the complaint and has not accrued for them. The Company intends to vigorously defend the case. However, there can be no assurance as to what the outcome of these claims will be, nor assurance that the outcome of these claims will not have a material adverse effect on the Company’s financial position and results from operations.

As previously reported, the Company previously received demand letters from two purported individual shareholders alleging “short swing” profits under Section 16(b) of the Exchange Act arising from Cognate awarding to some of its own employees some of the Company shares that Cognate owned, and arising from a convertible debt financing transaction in which the unrelated investor chose to convert the debt into shares of the Company stock owned by Cognate rather than being repaid in cash.  However, prior to either of these demand letters, the Company had already filed a Form 8-K on December 19, 2014, in which it already disclosed this same information (which had been found in the course of a joint review by Cognate and the Company), already agreed with Cognate on the disgorgement of those deemed profits ($448,681) by Cognate and resolved the matter.  The Company believes that the payment by Cognate fully resolved the matters, and so informed the purported shareholders who sent the demand letters.

In April, 2015, one of those purported individual shareholders filed a complaint against the Company and Cognate in the District Court for the Southern District of New York.  The same plaintiff had previously filed such a complaint and then withdrew it to amend it.  The complaint seeks to force disgorgement of a larger amount, which the plaintiff alleges is unknown but is estimated to be approximately $1.4 million, reduced by the payment already made.  The Company and Cognate disputed the plaintiff’s claim for further disgorgement, and filed an Answer denying such liability.  

On September 23, 2015, the parties entered a Stipulation of Settlement and filed it with the Court.  Under the terms of the Stipulation of Settlement, which is subject to the Court’s approval, the plaintiff shall dismiss the action with prejudice against Cognate and fully and finally release Cognate from all claims that were or could have been asserted in the action, and Cognate shall pay to the Company the amount of $500,000 less the attorney’s fees and expenses awarded by the Court to plaintiff’s counsel, which the parties have agreed to in the amount of $125,000.  In the event that the Court awards fees to plaintiff’s counsel in an amount less than $125,000, the settlement amount owed by Cognate to the Company shall increase by the amount of such diminution so that Cognate will pay $500,000 in total.

On October 23, 2015, the plaintiff submitted to the Court an unopposed motion in support of the Stipulation of Settlement.  The Court has ordered that all other case events are suspended pending its review of the proposed settlement.

The Company expects the Court to approve the settlement. However, there can be no assurance of that outcome nor assurance that the outcome of these claims will not have a material adverse effect on the Company’s financial position and results from operation.

From time to time, the Company is a party to legal proceedings arising in the ordinary course of business. We are not currently a party to any other legal proceedings that we believe could have a material adverse effect on financial condition or results of operations.

12. Subsequent Events

Private Investment in Public Equity 

Effective October 2015, the Company entered into a stock purchase agreement (the “Agreement”) with Woodford Investment Management LLP as agent for the CF Woodford Equity Income Fund and other clients (collectively, “Woodford”). Pursuant to the Agreement, the Company issued 5,454,545 shares of common stock, par value $0.001 per share (the “Shares”), at a purchase price of $5.50 per share for an aggregate purchase price of $30 million (the “Woodford Financing”). The Company has agreed to register the Shares in a registration statement with the U. S. Securities and Exchange Commission.

Additionally, in connection with the Woodford Financing, the Company issued 681,884 shares of common stock to Cognate, on the same terms as the Shares issued to Woodford, to satisfy $3.8 million of current obligations for unpaid invoices for manufacturing and related services by Cognate. The Company also completed the issuance of approximately 8.1 million shares of common stock to Cognate which had been approved by the Board in November 2014 and reported by the Company at that time, but had not yet been issued, to satisfy obligations for unpaid invoices for manufacturing and related services.

Demand Loans

On October 8, 2015, Leslie J. Goldman, an officer of the Company, loaned the Company $400,000 pursuant to a Demand Promissory Note (the “Goldman Note”). The Goldman Note bears interest at the rate of 8% per annum, and will be payable upon demand, with 7 days’ prior written notice by Mr. Goldman to the Company. The Goldman Note also bears 35% warrant coverage on the repayment amount if the Note is not repaid within 30 days of issuance.

On October 22, 2015, Cognate loaned the Company $1,000,000 pursuant to a Demand Promissory Note on the same terms as the Goldman Note.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes to those statements included with this report. In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. The words “believe,” “expect,” “intend,” “anticipate,” and similar expressions are used to identify forward-looking statements, but some forward-looking statements are expressed differently. Many factors could affect our actual results, including those factors described under “Risk Factors” in our Form 10-K for the year ended December 31, 2014 and in Part II Item 1A of 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

We are a biotechnology company focused on developing immunotherapy products to treat cancers more effectively than current treatments, without toxicities of the kind associated with chemotherapies, and, through a proprietary batch manufacturing process, on a cost-effective basis, initially in the United States, Canada and Europe.

We have developed a platform technology, DCVax®, which uses activated dendritic cells to mobilize a patient's own immune system to attack their cancer. The DCVax technology is expected to be applicable to all solid tumor cancers, and is embodied in several distinct product lines. One of the product lines (DCVax®-L) is designed to cover all solid tumor cancers in which the tumors can be surgically removed. Another product line (DCVax®-Direct) is designed for all solid tumor cancers which are considered inoperable and cannot be surgically removed. We believe the broad applicability of DCVax to many cancers provides multiple opportunities for commercialization and partnering.

Our DCVax platform technology involves dendritic cells, the master cells of the immune system, and is designed to reinvigorate and educate the immune system to attack cancers. The dendritic cells are able to mobilize the overall immune system, including T cells, B cells and antibodies, natural killer cells and many others. Such mobilization of the overall immune system provides a broader attack on the cancer than mobilizing just a particular component, such as T cells alone, or a particular antibody alone. Likewise, our DCVax technology is designed to attack the full set of biomarkers, or antigens, on a patient’s cancer, rather than just a particular selected target or several targets. Clinical experience indicates that when just one or a few biomarkers on a cancer are targeted by a drug or other treatment, sooner or later the cancer usually develops a way around that drug, and the drug stops working. We believe that mobilizing the overall immune system, and targeting the full set of biomarkers on the patient’s cancer, contributes to the effectiveness of DCVax.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenues and expenses.

On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and stock-based compensation. We based our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the reported amounts of revenues and expenses that are not readily apparent from other sources. Actual results may differ from these estimates.

Our critical accounting policies and significant estimates are detailed in our Annual Report on Form 10-K for the year ended December 31, 2014. Our critical accounting policies and significant estimates have not changed substantially from those previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.

Results of Operations

Operating costs:

Operating costs and expenses consist primarily of research and development expenses, including clinical trial expenses which increase when we are actively participating in clinical trials and are especially high when we are in a large ongoing international Phase III trial (as we now are), as well as preparing for multiple parallel Phase II trials. Such costs have increased and will continue to increase as we expand and accelerate these programs, and bring on additional clinical trial programs and additional intellectual property development, and general and administrative expenses. Such expenses will also increase as we undertake preparations for eventual commercialization, which involves extensive work for process optimization, validation and scale-up. The associated administrative expenses also increase as such operating activities grow.

Research and development expense was $9.2 million for the three months ended September 30, 2015 versus $22.7 million for the three months ended September 30, 2014.

Our operating costs include ongoing development work relating to the DCVax-Direct product and its manufacturing, such as the development, testing and optimization of different product preparations and methods, the design, engineering, sourcing, production, testing, modification and validation of the manufacturing automation systems, disposable sets to be used with the manufacturing automation systems, and manufacturing processes, product ingredients, product release assays, and other matters, as well as development of standard operating procedures (SOPs), batch production records, and other necessary materials.

Our operating costs also include the costs of expansion of our clinical trial programs including the Phase III trial in the US, UK, Germany and Canada (with DCVax-L for brain cancer), early access programs in Europe, and preparations for multiple Phase II trials (with DCVax-Direct for inoperable solid tumor cancers). The preparation costs include process development, upfront payments to the clinical trial sites and the CROs managing the trials and other service providers, and legal, regulatory and expert expenses related to regulatory approvals, institutional approvals and clinical trial agreements with each site, database development, training of medical and other site personnel, trial supplies and other. Additional substantial costs relate to the expansion of manufacturing facilities and capacity, in both the US and Europe.

Research and development:

Discovery and preclinical research and development expenses include costs for substantial external scientific personnel, technical and regulatory advisers, and others, costs of laboratory supplies used in our internal research and development projects, travel, regulatory compliance, and expenditures for preclinical and clinical trial operation and management when we are actively engaged in clinical trials.

Because we are a pre-revenue company, we do not allocate research and development costs on a project basis. We adopted this policy, in part, due to the unreasonable cost burden associated with accounting at such a level of detail and our limited number of financial and personnel resources.

General and administrative:

General and administrative expenses include both cash and non-cash measures. The non-cash expenses include stock-based compensation and depreciation. The cash expenses include administrative personnel related salary and benefit expenses, cost of facilities, insurance, travel, legal support, property and equipment and amortization of stock options and warrants.

Three Months Ended September 30, 2015 and 2014

For the three months ended September 30, 2015 and 2014, we recognized a net income of $22.6 million and a net loss of $21.0 million, respectively. The increase in net income is mainly due to a non-cash gain in fair value of derivative liability of $36.5 million recorded during the 3^rd quarter of 2015.

Research and Development Expense

Research and development expense was $9.2 million for the three months ended September 30, 2015 versus $22.7 million for the three months ended September 30, 2014. The decrease was primarily due to decreased non-cash manufacturing costs.

For the three months ended September 30, 2015 and 2014, we made cash payments for the two periods, respectively, of approximately $7.1 million (with the invoices generally being paid all in cash), and $1.4 million (with the invoices generally being paid half in cash and half in stock ) to Cognate. At September 30, 2015 and 2014, we owed Cognate $7.2 million and $2.3 million, respectively, for unpaid invoices for services performed by Cognate (including manufacturing for both the Phase III and Phase I/II clinical trials, ongoing product and process development, expansion of several company programs and services related to expansion of manufacturing capacity).

For the three months ended September 30, 2015 and 2014, we incurred non-cash equity based benefit and expense (restricted common stock and warrants) for the ongoing vesting (in equal monthly installments over 3 years) of the one-time initiation payments of shares and warrants under the four agreements the Company entered into with Cognate in January 2014. The vesting amounts during the three months ended September 30, 2015 and 2014 were negative $6.4 million (comprising 0.4 million shares per three months) and $0.9 million (comprising 0.4 million shares per three months), respectively. The fair value calculation of these shares was determined using the market price for tradable shares; however the shares issued to Cognate were unregistered restricted shares. The ongoing installments also included lock-up warrants (for a 3-year lock-up of Cognate shares) and most favored nation warrants.

General and Administrative Expense

General and administrative expense was $4.3 million (cash and non-cash expenses combined) for the three months ended September 30, 2015 versus $4.5 million for the three months ended September 30, 2014. The decrease in general and administrative expenses can be mainly attributed to a decrease of consulting expenses.

Change in fair value of derivatives

During the three months ended September 30, 2015 and 2014 we recognized a non-cash gain on derivative liabilities of $36.5 million and $14 million, respectively, due primarily to the change in value of the warrants, due to a decrease in our stock price comparing with the prior quarter, issued to Cognate in connection with the extinguishment of accounts payable.

Inducement expense

During the three months ended September 30, 2015 there was no inducement expense versus inducement expense of $8.2 million for the three months ended September 30, 2014. The inducement expense for the three months ended September 30, 2014 was related to the conversion of accounts payable to common stock and warrants to Cognate in connection with the extinguishment of accounts payable.

Interest Expense

Interest expense (including non-cash elements such as amortization of debt discount and debt issuance cost) increased to $1.0 million for the three months ended September 30, 2015 from $0.3 million for the three months ended September 30, 2014. The increase in interest expense is primarily related to the conversion of senior convertible notes. We also accelerated the remaining portion of deferred offering cost upon the conversion of the Senior Notes and recorded as additional interest expense during the three months ended September 30, 2015.

Nine Months Ended September 30, 2015 and 2014

We recognized a (combined cash and non-cash) net loss of $90.7 million for the nine months ended September 30, 2015 which was comparable to the (combined cash and non-cash) net loss of $92.9 million for the nine months ended September 30, 2014.

Research and Development Expense

Research and development expense was $58.3 million for the nine months ended September 30, 2015 versus $64.2 million for the nine months ended September 30, 2014.

For the nine months ended September 30, 2015 and 2014, we made cash payments for the two periods, respectively, of approximately $28.4 million (with invoices generally being paid in all cash), and $12.8 million (with invoices generally being paid half in cash and half in stock) to Cognate. With the substantial expansion of recruitment in the Phase III DCVax-L trial, patient volume exceeded the maximum amount contracted for, and as a result, the payments have included excess production costs. In addition, the payments have included preparatory work for multiple different Phase II clinical trials, as well as development work connected with new intellectual property and certain regulatory requirements. The payments have also included substantial one-time services related to manufacturing expansion in Europe.

As of September 30, 2015 and 2014, we owed Cognate $7.2 million and $5.7 million, respectively, for unpaid invoices for services performed by Cognate.

For the nine months ended September 30, 2015 and 2014, we incurred non-cash equity based payment (restricted common stock and warrants) expense for the ongoing vesting (in equal monthly installments over 3 years) of the one-time initiation payments of shares and warrants under the four agreements the Company entered into with Cognate in January 2014. The vesting amounts during the nine months ended September 30, 2015 and 2014 were $9.4 million (comprising 1.3 million shares per nine months) and $6 million (comprising 1.2 million shares per nine months), respectively. The value of the monthly vesting amounts was higher in the nine months ended September 2015 than the period ended September 2014 because the price per share of the Company’s stock has risen. The fair value calculation of these shares was determined using the market price for tradable shares; however the shares issued to Cognate were unregistered restricted shares. The ongoing installments also included lock-up warrants (for a 3-year lock-up of Cognate shares) and most favored nation warrants.

General and Administrative Expense

General and administrative expense (cash and non-cash expenses combined) was $17.5 million for the nine months ended September 30, 2015 versus $12.1 million for the nine months ended September 30, 2014. The increase in general and administrative expenses were mainly from an increase of approximately $2.4 million in legal fees, and non-cash stock based compensation (318,116 shares) issued to Cognate’s designee in partial satisfaction of the 8.1 million shares that were approved by the Company’s Board last November to satisfy certain anti-dilution obligations to Cognate, and were reported by the Company last November, but had not yet been issued.

Change in fair value of derivatives

During the nine months ended September 30, 2015 and 2014 we recognized a non-cash loss and gain on derivative liabilities of $12.4 million and a $1.7 million, respectively, due primarily to the change in value of the warrants, due to an increase in our stock price, previously issued to Cognate in connection with the extinguishment of accounts payable.

Inducement expense

During the nine months ended September 30, 2015 there was no inducement expense versus inducement expense of $18.5 million for the nine months ended September 30, 2014. The inducement expense for the nine months ended September 30, 2014 was related to the conversion of accounts payable to common stock and warrants to Cognate in connection with the extinguishment of accounts payable, and the fair value of the common stock and warrants of marketable, tradable shares of the Company’s common stock..

Interest Expense

Interest expense (including non-cash elements such as amortization of debt discount and debt issuance cost) increased to $3.5 million for the nine months ended September 30, 2015 from $0.4 million for the nine months ended September 30, 2014. The increase in interest expense is primarily related to the conversion of senior convertible notes. We accelerated the remaining portion of deferred offering cost upon the conversion of the Senior Notes and recorded as additional interest expense during the three months ended September 30, 2015.

Liquidity and Capital Resources

We have experienced recurring losses from operations. During the nine months ended September 30, 2015, net cash outflows for operations and for one-time expenses was $56.5 million.

At September 30, 2015, current assets totaled $7.1 million, compared to $14.6 million at December 31, 2014. Current assets less current liabilities produces working capital deficit (cash and non-cash liabilities combined) in the amount of $80.2 million at September 30, 2015 (with $56 million of the $80.2 million deficit comprised of non-cash derivative liabilities), compared to a deficit of $54.2 million at December 31, 2014, as described above.

Operating Activities

During the nine months ended September 30, 2015, we used $56.5 million in cash for operating activities.

Investing Activities

During the nine months ended September 30, 2015 and 2014, we used $4 million and $25 million in cash related to capitalized costs related to the UK facility and UK facility purchase, respectively.

Financing Activities

During the nine months ended September 30, 2015, our financing activities provided net proceeds after expenses of $52.6 million, consisting of $5 million in net mortgage loan proceeds, proceeds of $7.4 million from the exercise of warrants, and proceeds of $40.0 million from issuance of common stock.

Our financial statements indicate there is substantial doubt about our ability to continue as a going concern as we are dependent on our ability to obtain ongoing financing and ultimately to generate sufficient cash flow to meet our obligations on a timely basis.  We can give no assurance that our plans and efforts to achieve the above steps will be successful.

Other factors affecting our ongoing funding requirements include the number of staff we employ, the number of sites and pace of patient enrollment in our Phase III brain cancer trial and our Phase II clinical trials with DCVax-Direct, the costs of further development work relating to DCVax-Direct, the costs of expansion of manufacturing of both DCVax-L and DCVax-Direct, the cost of developing our Hospital Exemption program in Germany, and unanticipated developments. The extent of resources available to us will determine the pace at which we can move forward with both our DCVax-L program and our DCVax-Direct program.

Off-Balance Sheet Arrangements

Since our inception, we have not engaged in any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of loss that may result from the change in value of financial instruments due to fluctuations in its market price. Market risk is inherent in all financial instruments. Market risk may be exacerbated in times of trading illiquidity when market participants refrain from transacting in normal quantities and/or at normal bid-offer spreads. Our exposure to market risk is directly related to derivatives, debt and equity linked instruments related to our financing activities.

Our assets and liabilities are overwhelmingly denominated in U.S. dollars. We do not use foreign currency contracts or other derivative instruments to manage changes in currency rates. We do not now, nor do we plan to, use derivative financial instruments for speculative or trading purposes. However, these circumstances might change.

The primary quantifiable market risk associated with our financial instruments is sensitivity to changes in interest rates. Interest rate risk represents the potential loss from adverse changes in market interest rates. We use an interest rate sensitivity simulation to assess our interest rate risk exposure. For purposes of presenting the possible earnings effect of a hypothetical, adverse change in interest rates over the 12-month period from our reporting date, we assume that all interest rate sensitive financial instruments will be impacted by a hypothetical, immediate 100 basis point increase in interest rates as of the beginning of the period. The sensitivity is based upon the hypothetical assumption that all relevant types of interest rates that affect our results would increase instantaneously, simultaneously and to the same degree. We do not believe that our cash and equivalents have significant risk of default or illiquidity.

The sensitivity analyses of the interest rate sensitive financial instruments are hypothetical and should be used with caution. Changes in fair value based on a 1% or 2% variation in an estimate generally cannot be extrapolated because the relationship of the change in the estimate to the change in fair value may not be linear. Also, the effect of a variation in a particular estimate on the fair value of financial instruments is calculated independent of changes in any other estimate; in practice, changes in one factor may result in changes in another factor, which might magnify or counteract the sensitivities. In addition, the sensitivity analyses do not consider any action that we may take to mitigate the impact of any adverse changes in the key estimates.

Based on our analysis, as of September 30, 2015, the effect of a 100+/- basis point change in interest rates on the value of our financial instruments and the resultant effect on our net loss are considered immaterial.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Since 2012, our Company’s finance and accounting functions have been performed by an external firm on a contract services basis.  This firm specializes in providing financing and accounting functions for biotech companies, and the founders and senior managers are highly experienced former partners of national accounting firms. Together with this external firm, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. 

Based on the evaluation of our controls and procedures, our principal executive, financial and accounting officer concluded that during the period covered by this report, our Company’s processes for internally reporting material information in a systematic manner to allow for timely filing of material information were improving compared with prior periods, but were not yet fully effective, due to inherent limitations from being a small company and insufficient personnel for segregation of duties, and there remain material weaknesses in our oversight over the financial reporting that contribute to the weaknesses in our disclosure controls and procedures.  We have been working together with the external firm who performs the Company’s finance and accounting functions to address the weaknesses and enable increased segregation of duties and oversight, as described below.

Changes in Internal Control over Financial Reporting

We have been taking steps to remediate the weaknesses identified above, which continue to exist as of the end of the period covered by this report.  Specifically, we have expanded the personnel resources allocated to our Company’s work, and the activities performed for our Company, by the external firm.  We have also recruited additional personnel to enable increased segregation of duties and increased oversight. We plan to continue taking steps to improve our internal control system and to address remaining deficiencies, but the timing of such steps is uncertain and our ability to retain or attract qualified individuals to undertake these functions is also uncertain.  Aside from these changes, there has been no change in our internal controls over financial reporting that occurred during the fiscal quarter ended September 30, 2015, that has materially affected, or is reasonable expected to materially affect, our internal controls over financial reporting.

Part II - Other Information

Item 1. Legal Proceedings

In 2014, as previously reported, the Company received demand letters from three purported individual shareholders seeking to inspect our corporate books and records pursuant to Section 220 of the Delaware General Corporation Law. The demand letters were all substantially similar, and claimed that their purpose is to investigate possible mismanagement and breaches of fiduciary duty by the Company’s directors and officers.  They requested a range of documents.  On November 13, 2014, one of the purported shareholders filed a complaint in the Delaware Court of Chancery seeking to enforce her books and records demand. The Company reached negotiated agreements and provided limited records, under confidentiality agreements. On July 16, 2015, the parties filed, and the court entered, a stipulation dismissing the case.

On June 19, 2015, two of the purported shareholders filed a complaint purportedly suing on behalf of a class of similarly situated shareholders and derivatively on behalf of the Company in the Delaware Court of Chancery.  The lawsuit names Cognate BioServices, Inc. (“Cognate”), Toucan Partners, Toucan Capital Fund III, our CEO Linda Powers and the Company’s Board of Directors as defendants, and names the Company as a “nominal defendant” with respect to the derivative claims.  The complaint generally objects to certain transactions between the Company and Cognate and the Toucan entities, in which Cognate and the Toucan entities provided services and financing to the Company, or agreed to conversion of debts owed to them by the Company into equity.  The complaint seeks unspecified monetary relief for the Company and the plaintiffs, and various forms of equitable relief, including disgorgement of allegedly improper benefits, rescission of the challenged transactions, and an order forbidding similar transactions in the future.  On September 1, the Company and other named defendants filed motions to dismiss.  In response, the plaintiffs filed an amended complaint on November 6. The Company intends to vigorously defend the case.

On August 26, 2015, a purported shareholder of the Company filed a complaint purportedly suing on behalf of a class of similarly situated shareholders in the District Court for the District of Maryland.  The lawsuit names the Company and Ms. Powers as defendants.  The complaint generally claims that the defendants violated Section 10(b) and Section 20(a) of the Securities Exchange Act by making misleading statements and/or omissions on a variety of subjects, including the trial results for DCVax-Direct, the promotion of the Company’s stock, and information requests from German regulators.  The complaint seeks unspecified damages, attorneys’ fees, and costs. On October 26, 2015, two purported shareholders of the Company filed a motion seeking appointment as lead plaintiff.  The Company intends to vigorously defend the case.

As previously reported, the Company previously received demand letters from two purported individual shareholders alleging “short swing” profits under Section 16(b) of the Exchange Act arising from Cognate awarding to some of its own employees some of the the Company shares that Cognate owned, and arising from a convertible debt financing transaction in which the unrelated investor chose to convert the debt into shares of the Company stock owned by Cognate rather than being repaid in cash.  However, prior to either of these demand letters, the Company had already filed a Form 8-K on December 19, 2014, in which it already disclosed this same information (which had been found in the course of a joint review by Cognate and the Company), already agreed with Cognate on the disgorgement of those deemed profits ($448,681) by Cognate and resolved the matter.  The Company believes that the payment by Cognate fully resolved the matters, and so informed the purported shareholders who sent the demand letters.

In April, 2015, one of those purported individual shareholders filed a complaint against the Company and Cognate in the District Court for the Southern District of New York.  The same plaintiff had previously filed such a complaint and then withdrew it to amend it.  The complaint seeks to force disgorgement of a larger amount, which the plaintiff alleges is unknown but is estimated to be approximately $1.4 million, reduced by the payment already made.  The Company and Cognate disputed the plaintiff’s claim for further disgorgement, and filed an Answer denying such liability.  

On September 23, 2015, the parties entered a Stipulation of Settlement for expediency, and filed it with the Court.  Under the terms of the Stipulation of Settlement, which is subject to the Court’s approval, the plaintiff shall dismiss the action with prejudice against Cognate and fully and finally release Cognate from all claims that were or could have been asserted in the action, and Cognate shall pay to the Company the amount of $500,000 less the attorney’s fees and expenses awarded by the Court to plaintiff’s counsel, which the parties have agreed to in the amount of $125,000.  In the event that the Court awards fees to plaintiff’s counsel in an amount less than $125,000, the settlement amount owed by Cognate to the Company shall increase by the amount of such diminution so that Cognate will pay $500,000 in total.

On October 23, 2015, the plaintiff submitted to the Court an unopposed motion in support of the Stipulation of Settlement.  The Court has ordered that all other case events are suspended pending its review of the proposed settlement.

From time to time, the Company is a party to legal proceedings arising in the ordinary course of business. We are not currently a party to any other legal proceedings that we believe could have a material adverse effect on financial condition or results of operations.

Item 1A. Risk Factors

The risk factors described in our most recent Annual Report on Form 10-K and other filings continue to apply as described therein.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the quarter ended September 30, 2015, the Company issued an aggregate of 116,675 shares of common stock from the exercise of warrants for total proceeds of $0.8 million. Of which 57,500 shares of common stock was related to extinguishment of warrant liabilities. The fair value of the warrant liabilities was $0.2 million on the date of exercise, which was recorded as a component of additional paid-in-capital.

During the quarter ended September 30, 2015, the Company issued an aggregate of 2,566 shares of common stock to multiple investors from the cashless exercise of warrants previously issued.

During the quarter ended September 30, 2015, the Company converted $2 million of the 2014 Convertible Senior Notes into common stock on the terms set forth in the agreement. Pursuant to the exchange, on the terms set forth in the Notes, the investors received 322,502 shares of the Company’s common stock, which includes accelerated interest.

All of the securities set forth above were issued by the Company pursuant to Section 4(2) of the Securities Act of 1933, as amended, or the provisions of Rule 504 of Regulation D promulgated under the Securities Act. All such shares issued contained a restrictive legend and the holders confirmed that they were acquiring the shares for investment and without intent to distribute the shares. All of the purchasers were friends or business associates of the Company’s management and all were experienced in making speculative investments, understood the risks associated with investments, and could afford a loss of the entire investment. The Company did not utilize an underwriter or a placement agent for any of these offerings of its securities.

Item 3. Defaults Upon Senior Securities

Not Applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

On October 8, 2015, Leslie J. Goldman, an officer of the Company loaned the Company $400,000 pursuant to a Demand Promissory Note (the “Goldman Note”). The Goldman Note bears interest at the rate of 8% per annum, and will be payable upon demand, with 7 days’ prior written notice by Mr. Goldman to the Company. The Goldman Note also bears 35% warrant coverage on the repayment amount if the Note is not repaid within 30 days of issuance.

On October 22, 2015, Cognate loaned the Company $1,000,000 pursuant to a Demand Promissory Note (the “Cognate Note”) on the same terms as the Goldman Note.

Item 6. Exhibits

* Filed herewith

** Furnished herewith

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.