NORTHWEST BIOTHERAPEUTICS INC - Quarter Report: 2018 September (Form 10-Q)

(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 every Interactive Data File required to be submitted 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 such files). Yes  x      No  ¨

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.         ¨

As of November 14, 2018, the total number of shares of common stock, par value $0.001 per share, outstanding was 513,359,936.

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 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

(Unaudited)

(in thousands)

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

NORTHWEST BIOTHERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED STATEMENTS

1. Organization and Description of Business

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

The Company is developing experimental dendritic cell vaccines using its platform technology known as DCVax®. DCVax is being tested in clinical trials for use in the treatment of certain types of cancers.

Cognate BioServices, Inc. (“Cognate BioServices”), a company which was related by common ownership until a management buyout of Cognate occurred on February 6, 2018, provides the Company with mission critical contract manufacturing services, research and development services, distribution and logistics, and related services, in compliance with the Company’s specifications and the applicable regulatory requirements for clinical grade cellular products for North America. Advent BioServices, Ltd (“Advent”) provides such services for the UK and Europe. Advent was formerly the UK branch of Cognate BioServices. Advent is a related party owned by Toucan Capital Fund III, who also owned Cognate BioServices prior to the management buyout. The Company and Cognate BioServices, and the Company and Advent BioServices, are currently parties to a series of contracts providing for these services as more fully described below. The Company is currently dependent on Cognate BioServices and Advent BioServcies to provide the manufacturing services, and any interruption of such services could potentially have a material adverse effect on the Company’s ability to proceed with its clinical trials.

2. Liquidity, Financial Condition and Management Plans

During the nine months ended September 30, 2018 the Company used approximately $20.4 million of cash in its operating activities. Management believes that the Company will be able to continue accessing capital resources through the sale of equity and debt financing arrangements. However, the Company has no assurance that such capital will be available at the times needed and/or on the terms desired.

During the nine months ended September 30, 2018, the Company raised approximately $21.7 million in equity and debt securities to fund its operations. The Company had current assets of $1.1 million and a working capital deficit of approximately $76.2 million at September 30, 2018. The Company owed an aggregate of $3.8 million of trade liabilities and accrued expenses to certain related parties as of September 30, 2018, of which $3.3 million was payable to Advent BioServices and Cognate Israel.

The Company has not yet generated any material revenue from the sale of its products and is subject to all of the risks and uncertainties that are typically faced by biotechnology companies that devote substantially all of their efforts to R&D and clinical trials and do not yet have commercial products. The Company expects to continue incurring losses for the foreseeable future. The Company’s existing liquidity is not sufficient to fund its operations, anticipated capital expenditures, working capital and other financing requirements until the Company reaches significant revenues.  Until that time, the Company will need to obtain additional equity and/or debt financing, especially if the Company experiences downturns in its business that are more severe or longer than anticipated, or if the Company experiences significant increases in expense levels resulting from being a publicly-traded company or from expansion of operations.  If the Company attempts to obtain additional equity or debt financing, the Company cannot assume that such financing will be available to the Company on favorable terms, or at all.

Because of recurring operating losses, net operating cash flow deficits, and an accumulated deficit, there is substantial doubt about the Company’s ability to continue as a going concern within one year from the date of this filing. The condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets, or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

3. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated interim financial statements include the accounts of the Company and its subsidiaries. All material intercompany balances and transactions have been eliminated. Certain immaterial reclassifications have been made to prior period amounts to conform to the current period presentation.

NORTHWEST BIOTHERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED STATEMENTS

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, 2018, condensed consolidated statements of operations for the three and nine months ended September 30, 2018 and 2017, condensed consolidated statements of comprehensive loss for the three and nine months ended September 30, 2018 and 2017, condensed consolidated statement of stockholders’ equity (deficit) for the nine months ended September 30, 2018, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2018 and 2017 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented. The results for the three and nine months ended September 30, 2018 are not necessarily indicative of results to be expected for the year ending December 31, 2018 or for any future interim period. The condensed consolidated balance sheet at December 31, 2017 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, 2017 and notes thereto included in the Company’s annual report on Form 10-K, which was filed with the SEC on April 17, 2018.

Use of Estimates

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

Significant Accounting Policies

There have been no material changes in the Company’s significant accounting policies to those previously disclosed in the 2017 Annual Report.

Adoption of Recent Accounting Standards 

Revenue from Contracts with Customer

In April 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-10 to clarify the implementation guidance on licensing and the identification of performance obligations consideration included in ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which is also known as ASC 606, was issued in May 2014 and outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. In March 2016, the FASB issued ASU 2016-08 to provide amendments to clarify the implementation guidance on principal versus agent considerations. The Company implemented the standard on the effective date of January 1, 2018 on a modified retrospective basis to contracts which were not completed as of this date. Adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements as we did not have any unrecognized transaction price, or any remaining performance obligations under the Company’s patient service contracts. Payments from patients are non-refundable, and are not dependent on the Company’s ongoing future performance. Due to potential collectability issues with patients, the Company has adopted a policy of recognizing these payments as revenue when received.

Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements; and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU 2016-01 will be effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company has adopted this guidance during the quarter ended March 31, 2018. The adoption of this update did not impact the Company’s condensed consolidated financial statements and related disclosures.

NORTHWEST BIOTHERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED STATEMENTS

Statement of Cash Flows

In August 2016, the FASB issued ASU No. 2016-15 Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments, which addresses specific cash flow classification issues where there is currently diversity in practice including debt prepayment and proceeds from the settlement of insurance claims. ASU 2016-15 is effective for annual periods beginning after December 15, 2017, with early adoption permitted. The Company adopted ASU No. 2016-15 as of January 1, 2018. The adoption of this update did not impact the Company’s condensed consolidated financial statements and related disclosures.

Recent Issued Accounting Pronouncements

Leases

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”) which supersedes ASC Topic 840, Leases. ASU 2016-02 requires lessees to recognize a right-of-use asset and a lease liability on their balance sheets for all the leases with terms greater than twelve months. Based on certain criteria, leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the income statement. For leases with a term of twelve months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements” that allows entities to apply the provisions of the new standard at the effective date (e.g. January 1, 2019), as opposed to the earliest period presented under the modified retrospective transition approach (January 1, 2017) and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The modified retrospective approach includes a number of optional practical expedients primarily focused on leases that commenced before the effective date of Topic 842, including continuing to account for leases that commence before the effective date in accordance with previous guidance, unless the lease is modified. The Company currently expects that most of its operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon its adoption of Topic 842, which will increase the total assets and total liabilities that the Company reports relative to such amounts prior to adoption.

Compensation-Stock Compensation

In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. It is effective prospectively for the annual period ending December 31, 2018 and interim periods within that annual period. Early adoption is permitted. The Company is currently evaluating the impact of adopting this standard on the condensed consolidated financial statements and disclosures, but does not expect it to have a significant impact.

Accounting for Certain Financial Instruments with Down Round Features

In July 2017, the FASB has issued a two-part ASU No. 2017-11, (i). Accounting for Certain Financial Instruments with Down Round Features and (ii) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception which simplifies the accounting for certain financial instruments with down round features, a provision in an equity-linked financial instrument (or embedded feature) that provides a downward adjustment of the current exercise price based on the price of future equity offerings. It is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company will be evaluating the impact of adopting this standard on its condensed consolidated financial statements and disclosures.

Improvements to Nonemployee Share-Based Payment Accounting

In June 2018, the FASB issued ASU 2018-07 “Improvements to Nonemployee Share-Based Payment Accounting”, which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company is currently evaluating the impact of the new standard on its condensed consolidated financial statements.

NORTHWEST BIOTHERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED STATEMENTS

SEC Disclosure Update and Simplification

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule was effective on November 5, 2018. The Company is evaluating the impact of this guidance on its condensed consolidated financial statements.

4. Fair Value Measurements

Derivative Warrants Granted in 2018

During the nine months ended September 30, 2018, the Company granted approximately 69.1 million warrants (the “Warrants”) to multiple investors (the “Holders”), including 11.7 million contingently issuable warrants to Linda F. Powers, the Company’s Chief Executive Officer. Since the Company’s adoption of a sequencing policy, the warrants were classified as liabilities and measured at fair value on the grant date, with changes in fair value recognized as other income on the statements of operations and disclosed in the financial statements.

A summary of weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring warrants granted during the nine months ended September 30, 2018 is as follows:

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, 2018 and December 31, 2017 (in thousands):

There were no transfers between Level 1, 2 or 3 during the nine-month period ended September 30, 2018.

The following table presents changes in Level 3 liabilities measured at fair value for the nine-month period ended September 30, 2018. 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).   

NORTHWEST BIOTHERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED STATEMENTS

A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring the Company’s warrant liabilities and embedded conversion feature that are categorized within Level 3 of the fair value hierarchy as of September 30, 2018 is as follows:

5. Property & Equipment

Property and equipment consist of the following at September 30, 2018 and December 31, 2017 (in thousands):

Depreciation expenses were approximately $341,000 and $41,000 for the three months ended September 30, 2018 and 2017 and were approximately $1,063,000 and $141,000 for the nine months ended September 30, 2018 and 2017.

6. Stock-based Compensation

During nine months ended September 30, 2018, the Company issued options thereunder to certain directors, officers and consultants, most of which options were previously approved by the Board (collectively, the “Options”).

The Options included 71,576,000 options for officers, 15,680,000 options to independent directors, and 1,500,000 to an individual consultant. The Options are subject to vesting requirements. 50% of the Options are vested on the grant date, and the remaining 50% of the Options are vesting monthly over a period of 24 months following the Board approvals of the Options, subject to acceleration upon the occurrence of certain achievement milestones as reported in an 8-K filed on June 1, 2018. A performance milestone was achieved and the Company accelerated vesting on 25% of these outstanding Options.  As a result, the Company recorded an additional charge to stock-based compensation of $1.0 million during the nine months ended September 30, 2018.

NORTHWEST BIOTHERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED STATEMENTS

Modification of Stock Options

In January 2018, the Board also approved extension of the term of options that were granted to Dr. Alton Boyton and Dr. Marnix Bosch on June 13, 2017, from 5 years to 10 years to conform to the term of other employee options. The Company accounted for the modification as a Type I (probable-to-probable) modification and the incremental cost was approximately $0.3 million.

The following table summarizes stock option activities for the Company’s option plans for the nine months ended September 30, 2018 (amount in thousands, except per share number):

The following weighted average assumptions were used to compute the fair value of stock options granted during the nine months ended September 30, 2018:

The following table summarizes stock-based compensation expense related to stock options for the three and nine months ended September 30, 2018 and 2017 (in thousands):

The weighted average grant date fair value was approximately $16.3 million, including the incremental fair value of $0.3 million resulting from the modification of Dr. Alton Boyton’s and Dr. Marnix Bosch’s options, which is being recognized over the new vesting period of 1.5 years. The total unrecognized compensation cost was approximately $2.4 million as of September 30, 2018 and will be recognized over the next 2.0 years.

NORTHWEST BIOTHERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED STATEMENTS

7. Outstanding Debt

The following table summarizes outstanding debt as of September 30, 2018 and December 31, 2017, respectively (amount in thousands, except per share data): 

NORTHWEST BIOTHERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED STATEMENTS

The principal and interest of the Convertible Notes are convertible into Series B Preferred Stock at conversion price of $2.30 per share, and each share of Series B Preferred Stock is convertible into 10 shares of common stock. Additionally, the Convertible Notes carry Class D-2 Warrants, with half of the Class D-2 Warrants due and issuable when the loan was provided, and half of the Class D-2 Warrants due on a proportional basis in the event of conversion of some or all of the Note. The Class D-2 Warrants have five-year term.

The Company issued 23.5 million Class D-2 Warrants with an exercise price of $0.30, including 11.7 million contingently issuable warrants. The fair value of the warrants was approximately $4.2 million, which was recorded as debt discount at the issuance date.

The Company recorded $4.2 million interest expense as amortization on the debt discount immediately due to the term of the Convertible Notes, which are on demand.

The accrued interest associated with the Convertible Notes were approximately $314,000 as of September 30, 2018.

Due to the events of default, the holder is entitled to convert all or any amount of the outstanding principal amount and interest into shares of the common stock of the Company without restrictive legend of any nature. The Company recorded $351,000 interest expenses related to embedded derivative liabilities as of the maturity date of the Secured Note and revalued at $338,000 as of September 30, 2018.

NORTHWEST BIOTHERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED STATEMENTS

The accrued interest associated with the Secured Note was approximately $53,000 as of September 30, 2018.

During the nine months ended September 30, 2018, the Company converted approximately $2.7 million principal and $0.2 million accrued interest into approximately 15.5 million shares of common stock at fair value of $3.7 million. The Company recorded an approximate $1.0 million debt extinguishment loss from this conversion.

During the nine months ended September 30, 2018, the Company entered into multiple exchange agreement with the Note holder to convert approximately $1.7 million principal and $33,000 accrued interest into approximately 6.8 million shares of common stock at fair value of $1.8 million. The Company recorded an approximate $0.1 million debt extinguishment loss from this conversion.

During the nine months ended September 30, 2018, the Company agreed to take the proceeds from the $500,000 note and $12,000 accrued interest to offset certain Series A convertible preferred stock subscription receivable.

During the nine months ended September 30, 2018, the Company made full repayment to the Note holder in the amount of $2.2 million, including $9,000 related to accrued interest.

Goldman Notes

In 2017, Leslie J. Goldman, an officer of the Company, loaned the Company an aggregate amount of $1.3 million pursuant to certain Demand Promissory Note Agreements. On January 3, 2018, Mr. Leslie loaned the Company an additional $30,000 (collectively the “Goldman Notes”). Approximately $0.5 million of the Goldman Notes bear interest at the rate of 12% per annum, and $0.8 million of the Goldman Notes bear interest at the rate of 10% per annum.

During the year ended December 31, 2017, the Company made an aggregate principal payment of $1.2 million to settle some of Mr. Goldman’s outstanding demand notes, and an aggregate of $47,000 interest payment associated with these demand notes. Such payment included repayment of $0.3 million outstanding debt incurred during the year ended December 31, 2016. 

During the nine months ended September 30, 2018, the Company made an aggregate principal payment of $0.4 million to the Goldman Notes.

The outstanding principal amount for the Goldman Notes was approximately $69,000 and $0.4 million as of September 30, 2018 and December 31, 2017, respectively.

There was approximately $71,000 accrued interest associated with the Goldman Notes which remained due as of September 30, 2018.

NORTHWEST BIOTHERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED STATEMENTS

Toucan Notes

In 2017, Toucan Capital Fund III loaned the Company an aggregate amount of $1.2 million pursuant to multiple Demand Promissory Notes (the “Toucan Notes”). The Toucan Notes bear interest at 10% per annum, and are payable upon demand, with 7 days’ prior written notice to the Company.

During the year ended December 31, 2017, the Company made an aggregate principal payment of approximately $0.8 million on the Toucan Notes.

During the nine months ended September 30, 2018, the Company made an aggregate principal payment of approximately $0.4 million to the Toucan Notes. In addition, the Company also made a partial interest payment of $18,000.

All principal was repaid as of September 30, 2018. There was approximately $50,000 remaining of unpaid interest as of September 30, 2018.

Board of Directors Notes

In 2017, Jerry Jasinowski, Robert Farmer and Cofer Black, members of the Company’s Board of Directors, loaned the Company an aggregate amount of $300,000 pursuant to multiple Demand Promissory Notes (the “Notes”). The Notes bear interest at 10% per annum, and are payable upon demand, with 7 days’ prior written notice to the Company.

No repayments have been made on any of these notes. The full principal and interest amounts remained outstanding as of September 30, 2018.

Advent BioServices Note

On September 26, 2018, Advent BioServices, a related party which was formerly part of Cognate BioServices and was spun off separately as part of an institutional financing of Cognate, provided a short-term loan to the Company in the amount of $65,000 (50,000 GBP). The loan bears interest at 10% per annum, and is payable upon demand, with 7 days’ prior written notice to the Company.

The Notes contained an embedded conversion feature which had been revalued as of September 30, 2018 to approximately $1.4 million (see note 4).

No repayments have been made on the Note. The remaining debt discount and accrued interest associated with the Note as of September 30, 2018 was $455,000 and $82,000, respectively.

NORTHWEST BIOTHERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED STATEMENTS

The following table summarizes total interest expenses related to senior convertible notes, other notes and mortgage loan for the three and nine months ended September 30, 2018 and 2017, respectively (in thousands):

8. Net Loss per Share Applicable to Common Stockholders

Basic loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the reporting period. Diluted loss per common share is computed similar to basic loss per common share except that it reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock. Diluted weighted average common shares include common stock potentially issuable under the Company’s convertible notes, vested and unvested stock options.

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

NORTHWEST BIOTHERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED STATEMENTS

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

9. Related Party Transactions

Cognate & Advent Expenses and Accounts Payable

The following table summarizes expenses incurred to related parties during the three and nine months ended September 30, 2018 and 2017 (amount in thousands) (some of which remain unpaid as noted below):

The following table summarizes outstanding accounts payable held by related parties as of September 30, 2018 and December 31, 2017 (amount in thousands). These unpaid amounts include part of the expenses reported in the table above and also certain expenses incurred in prior periods. The unpaid amounts to Cognate BioServices, Inc. also include certain amounts that the Company disputes and that are under discussion with Cognate.

* Including certain disputed amounts that the Company is in the process of discussing with Cognate.

Advent BioServices Agreement

On May 14, 2018, the Company entered into a DCVax®-L Manufacturing and Services Agreement with Advent BioServices, a related party which was formerly part of Cognate BioServices and was spun off separately as part of an institutional financing of Cognate. The Advent Agreement provides for manufacturing of DCVax-L products for the European region. The Agreement is structured in the same manner as the Company’s existing Agreements with Cognate BioServices. The Advent Agreement provides for a program initiation payment of approximately $1.0 million (£0.7 million), in connection with technology transfer to the UK, development of new Standard Operating Procedures (SOPs), training of personnel, selection of new suppliers and auditing for GMP compliance, and other preparatory activities. Such initiation payment was fully paid by the Company as of September 30, 2018. The Advent Agreement provides for certain payments for achievement of milestones and, as is the case under the existing agreement with Cognate BioServices, the Company is required to pay certain fees for dedicated production capacity reserved exclusively for DCVax production, and pay for a certain minimum number of patients, whether or not the Company fully utilizes the dedicated capacity and number of patients.

NORTHWEST BIOTHERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED STATEMENTS

Other Related Parties Loans

Linda F. Powers - Demand Loans

Between February 2018 and April 2018, the Company’s Chief Executive Officer, Linda Powers, loaned the Company aggregate principal amounts of $5.4 million, and the Company entered into convertible note agreements for these amounts (the “Convertible Notes”). The Convertible Notes bear interest at a rate of 10% per annum, and are repayable upon 15 days' notice from the holder (and no later than five years from the date of the Convertible Notes).

The Convertible Notes are convertible into Series B Preferred Stock at a conversion price of $2.30 per share, and each share of Series B Preferred Stock is convertible into 10 shares of common stock. Additionally, the Convertible Notes carry Class D-2 Warrants, with half of the Class D-2 Warrants due and issuable when the loan was provided, and half of the Class D-2 Warrants due on a proportional basis in the event of conversion of some or all of the Note. The Class D-2 Warrants have five-year term.

The Company issued 23.5 million Class D-2 Warrants with an exercise price of $0.30, including 11.7 million contingently issuable warrants. The fair value of the warrants was approximately $4.2 million, which were recorded as debt discount at the issuance date. 

The Company recorded $4.2 million of interest expenses as amortization on the debt discount immediately due to the term of the Convertible Notes, which are on demand.

The accrued interest associated with the Convertible Notes was approximately $314,000 as of September 30, 2018.

Leslie J. Goldman - Demand Loans

In 2017, Leslie J. Goldman, an officer of the Company, loaned the Company an aggregate amount of $1.3 million pursuant to multiple Demand Promissory Note Agreements. On January 3, 2018, Mr. Goldman loaned the Company an additional $30,000 (collectively the “Goldman Notes”). Approximately $0.5 million of the Goldman Notes bear interest at the rate of 12% per annum, and $0.8 million of the Goldman Notes bear interest at the rate of 10% per annum.

During the year ended December 31, 2017, the Company made an aggregate principal payment of $1.2 million to settle some of Mr. Goldman’s outstanding demand notes, and an aggregate of $47,000 interest payment associated with these demand notes. Such payment included repayment of $0.3 million outstanding debt incurred during the year ended December 31, 2016. 

During the nine months ended September 30, 2018, the Company made an aggregate principal payment of $0.4 million to the Goldman Notes.

The outstanding principal amount for the Goldman Notes was approximately $69,000 and $0.4 million as of September 30, 2018 and December 31, 2017, respectively.

There was approximately $71,000 accrued interest associated with the Goldman Notes as of September 30, 2018.

Toucan Capital III Fund - Demand Loans

In April, 2017, Toucan Capital Fund III loaned the Company an aggregate amount of $1.2 million pursuant to multiple Demand Promissory Notes (the “Toucan Notes”). The Toucan Notes bear interest at 10% per annum, and are payable upon demand, with 7 days’ prior written notice to the Company.

During the year ended December 31, 2017, the Company made an aggregate principal payment of approximately $0.8 million to the Toucan Notes.

During the nine months ended September 30, 2018, the Company made an aggregate principal payment of approximately $0.4 million to the Toucan Notes. In addition, the Company also made a partial interest payment of $18,000.

All principal was repaid as of September 30, 2018. There was approximately $50,000 of remaining unpaid interest as of September 30, 2018.

Board of Directors - Demand Loans

In April, 2017, Jerry Jasinowski, Robert Farmer and Cofer Black, members of the Company’s Board of Directors, loaned the Company an aggregate amount of $0.3 million pursuant to multiple Demand Promissory Notes (the “Notes”). The Notes bear interest at 10% per annum, and are payable upon demand, with 7 days’ prior written notice to the Company.

NORTHWEST BIOTHERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED STATEMENTS

No repayments have been made on any of these notes. The full principal amounts remained outstanding as of September 30, 2018.

There was approximately $43,000 accrued interest associated with the Notes as of September 30, 2018.

Advent BioServices Note

On September 26, 2018, Advent BioServices, a related party which was formerly part of Cognate BioServices and was spun off separately as part of an institutional financing of Cognate, provided a short-term loan to the Company in the amount of $65,000 (50,000 GBP). The loan bears interest at 10% per annum, and is payable upon demand, with 7 days’ prior written notice to the Company.

10. Temporary Equity

Series A Convertible Preferred Stock

The following table summarizes the Company’s Series A Convertible Preferred Stock activities for the nine months ended September 30, 2018 (amount in thousands):

The Company determined that the Series A Shares contain liquidation preference provisions allowing liquidation by the holder upon certain defined events (“deemed liquidation events”). As the event that may trigger the liquidation of the Series A Shares is not solely within the Company’s control, the Series A Shares are classified as mezzanine equity (temporary equity) in the Company’s consolidated balance sheets.

If a liquidation or deemed liquidation event occurs, and the Series A preferred stock has not yet been converted by election of the holder or by mandatory conversion at the election of the Company, the holder will be entitled to a liquidation preference of either (a) an amount equal to the amount the holder paid for their preferred stock, or (b) the proportionate proceeds applicable to their shares on an as converted basis.

2018 Grant

During the nine months ended September 30, 2018, the Company issued 294,118 shares of the Series A Convertible Preferred Stock, par value $0.001 per share (the “Series A Shares”), at a purchase price of $1.70 per share, and 2-year Class D-1 Common Stock Purchase Warrants (the “Class D-1 Warrants”) to purchase up to 2.9 million shares of common stock at an exercise price of $0.22 per share. The Company received $0.5 million cash.

Due to the Sequencing Policy, the Class D-1 Warrants were classified as warrant liabilities. On the issuance date, the Company estimated the fair value of the Class D-1 Warrants at approximately $500,000 under the Black-Scholes option pricing model using the following primary assumptions:

NORTHWEST BIOTHERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED STATEMENTS

The fair value of the Class D-1 Warrants was allocated to the $500,000 proceeds, creating a corresponding preferred stock discount in the same amount.

2018 Conversion

On September 7, 2018, the Company delivered notice of its exercise of the right to cause the mandatory conversion of all outstanding Series A Shares of the Company’s common stock, par value $0.001 per share, pursuant to the Amended and Restated Certificate of Designations of Series A Convertible Preferred Stock (the “Mandatory Conversion”). The issuance of shares of common stock upon consummation of the Mandatory Conversion eliminated all outstanding shares of preferred stock, replacing them with common stock.

Pursuant to this Mandatory Conversion during the nine months ended September 30, 2018, approximately 10.0 million shares of Series A Shares were converted into 100.0 million shares of common stock in accordance with their terms. The Company recognized approximately $10.9 million of deemed dividends upon such conversion.

During the nine months ended September 30, 2018, one of the Series A Shareholders converted his $500,000 note and $71,000 accrued interest with the Company to offset his current subscription due amount to the Company.

Series B Convertible Preferred Stock

The following table summarizes the Company’s Series B Convertible Preferred Stock activities for the nine months ended September 30, 2018 (amount in thousands):

The Company determined that the Series B Shares contain contingent liquidation provisions allowing liquidation by the holder upon certain defined events (“deemed liquidation events”). As the event that may trigger the liquidation of the Series B Shares is not solely within the Company’s control, the Series B Shares are classified as mezzanine equity (temporary equity) in the Company’s consolidated balance sheets.

If a liquidation or deemed liquidation event occurs, and the Series B preferred stock has not yet been converted by election of the holder or by mandatory conversion at the election of the Company, the holder will be entitled to a liquidation preference of either (a) an amount equal to the amount the holder paid for their preferred stock, or (b) the proportionate proceeds applicable to their shares on an as converted basis.

2018 Grant

During the nine months ended September 30, 2018, the Company issued 2.9 million shares of the Series B Convertible Preferred Stock, par value $0.001 per share (the “Series B Shares”), at a purchase price of $2.30 per share, and 2-year Class D-2 Common Stock Purchase Warrants (the “Class D-2 Warrants”) to purchase up to 28.7 million shares of common stock at an exercise price of $0.30 per share. The Company received $6.6 million cash.

Due to the Sequencing Policy, the Class D-2 Warrants were classified as warrant liabilities. On the issuance date, the Company estimated the fair value of the Class D-2 Warrants at approximately $4.3 million under the Black-Scholes option pricing model using the following primary assumptions:

NORTHWEST BIOTHERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED STATEMENTS

The entire fair value of the Class D-2 Warrants was allocated to the $6.6 million net proceeds, creating a corresponding preferred stock discount in the same amount.

The initial fair value of the warrants of approximately $4.3 million was deducted from the gross proceeds from the Series B Investors to arrive at the initial discounted carrying value of the Series B Shares. The initial discounted carrying value resulted in recognition of a beneficial conversion feature of $2.1 million, further reducing the initial carrying value of the Series B Shares. The resulting discount to the aggregate stated value of the Series B Shares, resulting from recognition of the beneficial conversion feature, was immediately accreted as a reduction of additional paid-in capital and an increase in the carrying value of the Series B Shares. The accretion is presented in the Consolidated Statement of Operations as a deemed dividend, increasing net loss to arrive at net loss attributable to common stockholders.

2018 Conversion

On September 7, 2018, the Company delivered notice of its exercise of the right to cause the mandatory conversion of all outstanding Series A Shares of the Company’s common stock, par value $0.001 per share, pursuant to the Amended and Restated Certificate of Designations of Series B Convertible Preferred Stock (the “Mandatory Conversion”). The issuance of shares of common stock upon consummation of the Mandatory Conversion eliminated all outstanding shares of preferred stock, replacing them with common stock.

Pursuant to this Mandatory Conversion, during the nine months ended September 30, 2018, approximately 8.5 million shares of Series B Shares were converted into 85 million shares of common stock based on original term. The Company recognized approximately $4.8 million of deemed dividends upon such conversion.

11. Stockholders’ Equity (Deficit)

Increase of Authorized Shares

On April 27, 2018, the Company held a Special Meeting of Shareholders to vote on several matters, including increasing the number of authorized shares of common stock from 450,000,000 to 1,200,000,000, par value $0.001 per share, and increasing the number of authorized shares of preferred stock from 40,000,000 to 100,000,000, par value $0.001 per share. The shareholders approved both increases, with 87% of the votes cast in favor of the increase in common stock and 86% of the votes cast in favor of the increase in preferred stock. On May 2, 2018, the Company filed a Certificate of Amendment of its Seventh Amended and Restated Certificate of Incorporation with the Secretary of the State of Delaware, which effected the increase in authorized shares of common stock and the increase in authorized shares of preferred stock. 

Equity Financing

On June 22, 2018, the Company entered into agreements with institutional investors for a registered direct offering with proceeds of $1.0 million. The Company issued 4,000,000 shares of common stock at a purchase price of $0.25 per share. Additionally, the investors received 2-year Class D-3 warrants to purchase up to 2,000,000 million shares of common stock with an exercise price of $0.30 per share.

Debt Conversion

During the nine months ended September 30, 2018, the Company converted approximately $4.4 million principal and $0.3 million accrued interest into approximately 22.3 million shares of common stock at fair value of $5.5 million. The Company recorded an approximate $0.8 million debt extinguishment loss from the conversion.

Warrants Exercised for Cash

During the nine months ended September 30, 2018, the Company issued approximately 9.0 million shares of common stock from the exercise of warrants with an exercise price from $0.22 to $0.26 for aggregate proceeds of $2.1 million.

NORTHWEST BIOTHERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED STATEMENTS

Share-settled Debt

During the nine months ended September 30, 2018, the Company issued 13.3 million shares of common stock to the holder of the Company’s share-settled debt as advance payment for future debt conversion. The fair value of the remaining share-settled debt will be reduced when the Company is notified by the Holder of the value at which the shares have been sold.

As of September 30, 2018, and December 31, 2017, the outstanding share-settled debt was approximately $0.9 million and $3.3 million, respectively. 

Common Stock Purchase Warrants

During the nine months ended September 30, 2018, the Company modified approximately 124 million warrants, with new expiration dates ranging between 2018 and 2023, and new exercise prices ranging between $0.24 and $2.50. These warrants, pursuant to the sequencing policy, were reclassified as liabilities.

The following is a summary of warrant activity for the nine months ended September 30, 2018 (in thousands, except per share data):

12. Variable Interest Entities

Variable Interest Entities (“VIEs”) are entities in which equity investors lack the characteristics of a controlling financial interest.  VIEs are consolidated by the primary beneficiary.  The primary beneficiary is the party who has both the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the entity.  

Advent

On May 14, 2018, the Company entered into a DCVax-L Manufacturing and Services Agreement with Advent BioServices, a related party which was formerly part of Cognate and was spun off separately as part of an institutional financing of Cognate. The Advent Agreement provides for manufacturing of DCVax-L products for the European region. See Note 9 for more detail. Similar to Cognate, the Company has an implicit variable interest in Advent to potentially fund Advent’s losses (if Advent incurs losses).  As of September 30, 2018, the Company did not have the power over the most significant activities (control of operating decisions) and therefore did not meet the "power" criteria of the primary beneficiary. 

The maximum exposure to loss is limited to the notional amounts of the implicit variable interest in Advent.  Under the Advent Agreement, either party may terminate at any time upon twelve months’ notice, providing a transition period for technology transfer.  Accordingly, the maximum exposure to loss from the Company’s implicit variable interest in Advent is $5 million as of September 30, 2018, which is the minimum twelve-monthly payments the Company must pay to terminate their relationship with Advent.

13. Commitments and Contingencies

U.S. Securities and Exchange Commission

As previously reported, the Company has received a number of formal information requests (subpoenas) from the SEC regarding several broad topics that have been previously disclosed, including the Company’s membership on Nasdaq and delisting, related party matters, the Company’s programs, internal controls, the Company’s Special Litigation Committee, disclosures and the publication of interim clinical trial data. Testimony of certain officers and third parties has been taken as well. The Company has been cooperating with the SEC investigation.  As hoped, the investigation is winding to a conclusion.  After investigation of a broad array of issues over the past two-plus years, the SEC Staff has informed us preliminarily that they have concerns in regard to two issues, relating to the Company’s internal controls over financial reporting and the adequacy of certain disclosures made in the past.  We have previously disclosed material weaknesses in our internal controls.  As for disclosures, we believe our disclosures complied with applicable law.  Despite our belief that the Staff should close the investigation, there can be no assurance that the Staff will not recommend some action involving the Company and/or individuals. Given the stage of the process, the Company is unable to provide a current assessment of the potential outcome or potential liability, if any.

NORTHWEST BIOTHERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED STATEMENTS

Chardan Capital Markets v. Northwest Biotherapeutics, Inc.

On June 22, 2017, Chardan Capital Markets, LLC filed a lawsuit against the Company in the United District Court for the Southern District of New York, captioned Chardan Capital Markets v. Northwest Biotherapeutics, Inc., 1:17-cv-04727-PKC. Chardan alleges that it provided capital placement agent services to the Company in December 2016 under a contract and that it has not been fully compensated for those services. Chardan further alleges that it provided additional services to the Company in March 2017 in anticipation of entering into a contract and that it received no compensation. The operative complaint asserted claims sounding in unjust enrichment, quantum meruit, and breach of contract, and sought recovery in the amount of $496,000, plus interest and attorneys’ fees and costs. The Company filed a motion to dismiss the complaint on December 1, 2017. On August 6, 2018, the District Court granted the Company’s motion to dismiss in its entirety and entered a Judgment dismissing Chardan’s Amended Complaint.  On September 5, 2018, Chardan filed a notice of appeal seeking review of the District Court’s ruling.  Chardan’s brief on appeal was originally due to be filed on or before October 30, 2018, but Chardan did not file its brief on that day.  On October 31, 2018, the Clerk of Court of the United States Court of Appeals for the Second Circuit entered an order stating that the “case is deemed in default” and ordering “that the appeal is dismissed effective November 14, 2018 if the brief and any required appendix are not filed by that date.”  Chardan did not file its brief and appendix on or before November 14, 2018.  Accordingly, Chardan’s appeal has been dismissed by force of the October 31, 2018 order of the Court of Appeals. 

14. Subsequent Events

On November 7, 2018, the Company completed an aggregate of $5 million of debt financing pursuant to Notes with a number of individual investors. The Company already received $1.0 million in August 2018. The Notes bear an interest rate of 10% per annum, and Original Issue Discount of 5%. The Notes also carry 50% warrant coverage. The warrants are exercisable at $0.35 per share, and have an exercise period of 2 years. The Notes have a maturity of one year, although the holder may require pre-payment after four months.

As previously disclosed, in February, March and April of 2018, the Company and its Chief Executive Officer, Linda F. Powers, entered into demand notes for short-term bridge loans of $5.4 million from Ms. Powers to the Company. The notes have remained outstanding to date. On November 11, 2018, the Company and Ms. Powers agreed to extend the notes to a maturity of one year following the respective funding dates. In consideration of the continuing forbearance, the Company will issue warrants representing 50% of the amounts due under the loans from Ms. Powers. The warrants will have the same exercise price and exercise period as the warrants issued to the investors who loaned the Company $5 million.

Between October 2, 2018 and November 1, 2018, approximately $439,000 principal and $17,000 of accrued interest on certain notes were converted into approximately 3.1 million shares of common stock.

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, 2017 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

The Company is focused on developing personalized immune therapies for cancer. We have developed a platform technology, DCVax®, which uses activated dendritic cells to mobilize a patient's own immune system to attack their cancer.

The Company’s lead product, DCVax®-L, is designed to treat solid tumor cancers in which the tumor can be surgically removed. This product is in an ongoing Phase III trial for newly diagnosed Glioblastome multiforme (GBM). 331 patients have been enrolled in the trial, and enrollment is closed. The trial is ongoing as the data continue to mature. The Company, the physicians and the patients remain blinded. On May 29, 2018, interim blinded data from the Phase III trial collected in 2017 were published in a peer reviewed scientific journal. As the Company noted in its announcement of the publication and in subsequent reports, the data could get either better or worse as it continues to mature. The Company is consulting with its Scientific Advisory Board, the Steering Committee of the trial and other independent experts about the ongoing handling of the trial.

As resources permit, the Company is also working on preparations for Phase II trials of DCVax-L for other indications.

The Company’s second product, DCVax®-Direct, is designed to treat inoperable solid tumors. A 40-patient Phase I trial has been completed, and included treatment of a diverse range of cancers. As resources permit, the Company is working on preparations for Phase II trials of DCVax-Direct.

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, 2017. 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, 2017.

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 especially when we are in a large ongoing international phase III trial. The associated administrative expenses also increase as such operating activities grow.

In addition to clinical trial related costs, our operating costs may include ongoing work relating to our DCVax products, including R&D, product characterization, and related matters. Going forward, we will also have to undertake process validation work and other work associated with moving towards data lock for the clinical trial data, and analyses of the data.

Our operating costs also include the costs of preparations for the launch of new or expanded clinical trial programs, such as our planned Phase II clinical trials. The preparation costs include payments to regulatory consultants, lawyers, statisticians, sites and others, evaluation of potential investigators, the clinical trial sites and the CROs managing the trials and other service providers, and expenses related to institutional approvals, clinical trial agreements (business contracts with sites), training of medical and other site personnel, trial supplies and other. Additional substantial costs relate to the maintenance of manufacturing capacity, in both the US and Europe.

Our operating costs also include significant legal and accounting costs in operating the Company.

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 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 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, 2018 and 2017

We recognized a net income of $12.6 million and net loss of $23.3 million for the three months ended September 30, 2018 and 2017, respectively. The increase in our net earnings was primarily due to decreased costs in research and development, and gain from change in fair value of outstanding derivative liabilities during the three months ended September 30, 2018.

Research and Development Expense

Research and development expenses were $4.3 million and $9.7 million for the three months ended September 30, 2018 and 2017, respectively. The decrease compared to last year was primarily due to decreased costs for Cognate services provided during the period. At September 30, 2018, we owed Advent BioServices and Cognate Israel an aggregate of $3.3 million.

The following table summarizes expenses incurred to related parties during the three months ended September 30, 2018 and 2017 (amount in thousands), which include amounts that remained outstanding and unpaid:

General and Administrative Expense

General and administrative expenses were $3.5 million and $3.0 million for the three months ended September 30, 2018 and 2017, respectively. We recorded approximately $1.0 million of stock-based compensation under general and administrative expenses during the three months ended September 30, 2018.

Legal Expenses

Legal costs were $1.9 million and $1.6 million for the three months ended September 30, 2018 and 2017, respectively. The increase during this quarter in 2018 was primarily due to additional work towards resolving open matters during this quarter in 2018 compared with same period in 2017. Legal costs for the nine months ended September 30, 2018 decreased compared with this nine-month period in 2017, as described below.

Change in fair value of derivatives

During the three months ended September 30, 2018, we recognized a non-cash gain of $24.4 million as compared to a non-cash loss of approximately $4.9 million for the three months ended September 30, 2017.

The non-cash gain during the quarter ended September 30, 2018 was primarily due to the decrease in stock price as of September 30, 2018 compared with June 30, 2018.

Interest Expense

During the quarter ended September 30, 2018 and 2017, we recorded interest expense of $1.6 million and $1.2 million, respectively.

Nine Months Ended September 30, 2018 and 2017

For the nine months ended September 30, 2018 and 2017, net cash used in operations was $20.4 million and $21.7 million, respectively. We recognized a net loss of $30.1 million and $46.1 million for the nine months ended September 30, 2018 and 2017, respectively.

Research and Development Expense

For the nine months ended September 30, 2018 and 2017, research and development expense was $14.3 million and $20.2 million, respectively. At September 30, 2018, we owed Advent BioServices and Cognate Israel $3.3 million for unpaid invoices.

The following table summarizes expenses incurred to related parties during the nine months ended September 30, 2018 and 2017 (amount in thousands):