ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read this discussion together with the Financial Statements, related Notes and other financial information included elsewhere in this Form 10-K. The following discussion contains assumptions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under “Risk Factors,” and elsewhere in this Form 10-K. These risks could cause our actual results to differ materially from those anticipated in these forward-looking statements.
Overview
We are a biotechnology company 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.
Our lead product, DCVax®-L, is designed to treat solid tumor cancers in which the tumor can be surgically removed. We have completed a 331-patient international Phase III trial of DCVax-L for Glioblastoma multiforme brain cancer (GBM). As previously reported, the data collection and confirmation process was conducted by the independent contract research organization (CRO) who managed the trial and by other independent service firms. On October 5, 2020, the Company announced that Data Lock for the Phase III trial had been reached, and that a series of steps and processes would follow. These processes included data validation, analyses of the data by independent statisticians, preparations by the statisticians of summaries of the Trial results for review by the Company, the Principal Investigator, the Steering Committee of the Trial, the Scientific Advisory Board, and a panel of independent brain cancer experts, in preparation for publication in a scientific journal and public announcement. This series of processes is under way. It is anticipated that public announcement will follow these processes.
As also previously reported, coronavirus-related difficulties have impacted most aspects of the process, especially with the waves of COVID cases in many areas. The independent service firms have had limited capacity, and restrictions on operations. Key experts at certain specialized service providers have been unavailable for periods of time due to illness in their family. Other experts have gone on extended leave due to restrictions on operations. Clinical trial site personnel have been unavailable due to being reassigned for COVID, and the limited site personnel have had to work under restrictions. Committee processes and regulatory processes have been similarly focused on COVID matters and delayed on other matters. Firms such as the ones storing the Phase III trial tissue samples that are needed for certain analyses, and the firms conducting the analyses, continue to have only limited operations. Even logistical matters such as the shipping of materials have been, and continue to be, subjected to substantial restrictions and delays.
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On August 28, 2020, the Company acquired Flaskworks, LLC (“Flaskworks”), a company that has developed a system to close and automate the manufacturing of cell therapy products such as DCVax®. The Company acquired 100% of the ownership, and Flaskworks became a wholly-owned subsidiary of the Company. Flaskworks was previously owned by its technical founders and Corning Inc. The technical team from Flaskworks joined the Company as part of the Acquisition. It is anticipated that the Flaskworks system will enable substantial scale-up of production volumes of DCVax products and substantial reduction of production costs. The Company’s buildout of the Sawston, UK facility has been designed to proceed in phases, as modules, both for efficiency in the timing of capital costs and to allow flexibility in operations and usage. The Company anticipates that implementation of the Flaskworks system will enable certain phases of the buildout to be simplified and streamlined. For further details on the financial aspects of the acquisition, please see Item 8 Note 5 below.
Our 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 more than a dozen types of cancers. The Company is working on preparations for Phase II trials of DCVax-Direct, as resources permit.
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 derivative liabilities, 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 could differ from those estimates, particularly given the significant social and economic disruptions and uncertainties associated with the ongoing coronavirus pandemic (“COVID-19”) and the COVID-19 control responses.
Fair Value Measurements
Fair value is defined as the price that would be received for sale of an asset or paid for transfer of a liability, in an orderly transaction between market participants at the measurement date. U.S. GAAP establishes a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:
We account for the issuance of common stock purchase warrants issued in connection with the equity offerings in accordance with the provisions of ASC 815, Derivatives and Hedging (“ASC 815”). We classify as equity any contracts that (i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). We account for certain common stock warrants outstanding as a liability at fair value and adjust the instruments to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in our consolidated statements of operations. The fair value of the warrants issued by us has been estimated using Monte Carlo simulation and or a Black Scholes model. The warrant liabilities are valued using Level 3 valuation inputs.
Derivative Financial Instruments
The Company has derivative financial instruments that are not hedges and do not qualify for hedge accounting. Changes in the fair value of these instruments are recorded in other income (expense), net in the Consolidated Statements of Operations and Comprehensive Loss.
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Impairment of Long-Lived Assets
The Company assesses its long-lived assets for impairment whenever facts and circumstances indicate that the carrying amounts may not be fully recoverable. To analyze recoverability, the Company projects undiscounted net future cash flows over the remaining lives of such assets. If these projected cash flows are less than the carrying amounts, an impairment loss would be recognized, resulting in a write-down of the assets with a corresponding charge to earnings. The impairment loss is measured based upon the difference between the carrying amounts and the fair values of the assets. Assets to be disposed of are reported at the lower of the carrying amounts or fair value less cost to sell. Management determines fair value using the discounted cash flow method or other accepted valuation techniques.
As of December 31, 2020 and 2019, the undiscounted net future cash flows of the U.K. property were greater than the carrying value. Therefore, no impairment loss was considered necessary.
Leases
We adopted ASC 842 on January 1, 2019, using the optional transition method to apply the new guidance as of January 1, 2019, rather than as of the earliest period presented, and elected the package of practical expedients. Leases with an initial term of 12 months or less are not recorded on the Consolidated Balance Sheets. We recognize these lease expenses on a straight-line basis over the lease term. Based on the analysis, on January 1, 2019, we recorded right of use (“ROU”) assets and lease liabilities of approximately $4.3 million, which represented operating lease entered prior to January 1, 2019. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Additionally, we recorded an adjustment to opening accumulated deficit of $4.8 million related to the derecognition of deferred profit related to the U.K facility sales leaseback transaction.
Stock Based Compensation
Share-based compensation cost is recorded for all option grants and awards of non-vested stock based on the grant date fair value of the award using the Black-Scholes option-pricing model, and is recognized over the service period required for the award.
We estimate the fair value of stock option grants using the Black-Scholes option pricing model and the assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment.
Expected Term - The expected term of options represents the period that the Company’s stock-based awards are expected to be outstanding based on the simplified method, which is the half-life from vesting to the end of its contractual term.
Expected Volatility - The Company computes stock price volatility over expected terms based on its historical common stock trading prices.
Risk-Free Interest Rate - The Company bases the risk-free interest rate on the implied yield available on U. S. Treasury zero-coupon issues with an equivalent remaining term.
Expected Dividend - The Company has never declared or paid any cash dividends on its common shares and does not plan to pay cash dividends in the foreseeable future, and, therefore, uses an expected dividend yield of zero in its valuation models.
We recognize forfeitures when they occur.
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Recent Accounting Standards
Income Taxes
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.
Debt
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas. This ASU is effective for annual reporting periods beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. This update permits the use of either the modified retrospective or fully retrospective method of transition. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements and related disclosures.
Revision of Previously Issued Financial Statements
We have revised certain previously reported non-material financial information for the year ended December 31, 2019 in this Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, including but not limited to information within the Results of Operations section.
See Note 14, Revision to Prior Period Financial Statements, for additional information related to the revision, including descriptions of the misstatements and the non-material impact on our consolidated financial statements.
Results of Operations
Operating costs:
Operating costs and expenses consist primarily of research and development expenses, including clinical trial expenses, which increase when we are actively participating in clinical trials and especially when we are in a large ongoing international phase III trial or we are completing such a large international trial, and undertaking substantial one-time expenses such as for final site visits, query resolutions, statistical work for the Statistical Analysis Plan, preparations for data analyses and other activities related to completion and assessment of the trial and its results. The operating costs also include administrative expenses associated with trials, and 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 are also incurring large amounts of costs to carry out and complete statistical analyses, process validation work, final data collection and validation, and other work associated with moving towards preparing for locking, unblinding and analyzing the trial results.
Following our acquisition of Flaskworks, our operating costs now include the costs for its ongoing operations and its intellectual property filings.
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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 and substantial expansion 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 personnel related salary and benefit expenses, cost of facilities, insurance, travel, legal services, property and equipment and amortization of stock options and warrants.
For the Years Ended December 31, 2020 and 2019
We recognized a net loss of $529.8 million and $20.8 million for the years ended December 31, 2020 and 2019, respectively. The net loss of $529.8 million for the year ended December 31, 2020 included a cash loss of $32 million and a non-cash loss of $497.8 million. The increase in net loss for the year ended December 31, 2020 was primarily due to the increased stock price, which resulted in significant non-cash loss from the change on the derivative liability.
Net cash used in operations was $32.1 million and $31.9 million for the years ended December 31, 2020 and 2019, respectively.
Research and development expense
For the years ended December 31, 2020 and 2019, research and development expense was $33.6 million and $14.1 million, respectively. Research and development expenses included activities and involvement of external consultants as the Phase 3 trial moved through final data collection and query resolution, independent data validation, and other preparations for Data Lock and analyses. The increase of $19.5 million was mainly due to the recognition of approximately $19.8 million stock-based compensation under research and development during the year ended December 31, 2020.
The following table summarizes expenses incurred (i.e., amounts invoiced, including those which have only been partly paid) to entities as related parties during the years ended December 31, 2020 and 2019 (amount in thousands):
For the year ended
(As Revised)
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General and Administrative Expense
General and administrative expenses were $51.0 million and $12.5 million for the years ended December 31, 2020 and 2019, respectively. The increase was mainly related to a one-time cost of $30.8 million stock-based compensation that covered several years of such compensation and that was recognized in general and administrative.
Legal Expenses
Legal costs were $3.3 million and $3.7 million for the years ended December 31, 2020 and 2019, respectively. The decrease in legal costs reflects a reduction in the need for legal services.
Change in fair value of derivatives
We recognized a non-cash loss of $435.4 million and a non-cash gain of $11.8 million for the years ended December 31, 2020 and 2019, respectively. The non-cash loss was primarily due to the increase of our stock price as of December 31, 2020 ($1.53 per share) compared to December 31, 2019 ($0.21 per share). In the year ended December 31, 2019, the non-cash gain was primarily due to the decrease in stock price as of December 31, 2019 compared with December 31, 2018.
Loss from Extinguishment of Debt
During the year ended December 31, 2020, we converted debt of approximately $12.7 million principal and $1.2 million accrued interest into approximately 58.4 million shares of common stock and 6.2 million warrants. We also extinguished $6.6 million embedded derivative liabilities, wrote off $0.9 million unamortized debt discount and made some debt amendment upon the conversion. We recorded an approximate $1.6 million debt extinguishment loss from the conversion.
Our PPP Loan forgiveness application was approved on December 7, 2020. We recorded approximate $0.4 million debt extinguishment gain from the forgiveness of PPP Loan.
During the year ended December 31, 2019, we recorded loss from extinguishment of debt of $1.9 million. The debt extinguishment loss resulted from debt conversion, when the fair value of common stock exceeded the book value of the debt as of the conversion date. We also amended certain notes in 2019, which was treated as an extinguishment for accounting purposes.
Interest expense
During the years ended December 31, 2020 and 2019, we recorded interest expense of $8.5 million and $3.0 million, respectively.
Foreign currency transaction gain
During the years ended December 31, 2020 and 2019, we recognized foreign currency transaction gain of $2.3 million and $0.3 million, respectively. The gain was due to the weakening of the U.S. dollar relative to the British pound sterling.
Liquidity and Capital Resources
We have experienced recurring losses from operations since inception. We have not yet established an ongoing source of revenues and must cover our operating expenses through debt and equity financings to allow us to continue as a going concern. Our ability to continue as a going concern depends on the ability to obtain adequate capital to fund operating losses until we generate adequate cash flows from operations to fund our operating costs and obligations. If we are unable to obtain adequate capital, we could be forced to cease operations.
We depend upon our ability, and will continue to attempt, to secure equity and/or debt financing. We cannot be certain that additional funding will be available on acceptable terms, or at all. Our management determined that there was substantial doubt about our ability to continue as a going concern within one year after the consolidated financial statements were issued, and management’s concerns about our ability to continue as a going concern within the year following this report persist.
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Contingent Contractual Payment
The following table summarizes our contractual obligations as of December 31, 2020 (amount in thousands):
Payment Due by Period
Less than 1 to 2 3 to 5
Total 1 Year Years Years
Short term convertible notes payable (1)
6% unsecured $ 226 $ 226 $ — $ —
Short term notes payable (2)
Long term notes payable (3)
Purchase obligation (5)
For a shut down or suspension of the DCVax-L program at Advent, the Company must give 12 months’ advance notice. During the notice period services would still be provided. Minimum required payments for this notice period total approximately £3.8 million ($5 million).
As of December 31, 2020, no shut-down or suspension fees were triggered.
Operating Activities
We used $32.1 million and $31.9 million in cash for operating activities during the years ended December 31, 2020 and 2019, respectively. The increase in cash used in operating activities was primarily attributable to an increase in clinical trial related expenditures.
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Investing Activities
During the year ended December 31, 2020, we spent approximately $6.6 million to purchase additional equipment in the UK and construction in progress.
During the year ended December 31, 2020, we spent approximately $1.5 million related to the Flaskworks acquisition.
During the year ended December 31, 2019, we spent approximately $360,000 to purchase additional equipment in the UK.
Financing Activities
We received approximately $26.8 million and $6.9 million in cash proceeds from issuance of convertible preferred stock, common stock and warrants, in both public and private offerings during the years ended December 31, 2020 and 2019, respectively.
We received approximately $13.9 million and $2.2 million cash proceeds from the exercise of warrants during the years ended December 31, 2020 and 2019, respectively.
We received approximately $13.7 million and $7.0 million in cash proceeds from the issuance of multiple notes payable during the years ended December 31, 2020 and 2019, respectively.
We received approximately $0.3 million in cash proceeds from issuances of debt with a related party during the year ended December 31, 2020.
We made aggregate debt payments of $2.0 million and $6.1 million during the years ended December 31, 2020 and 2019, respectively.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The full text of our audited consolidated financial statements as of December 31, 2020 and 2019 and for the fiscal years ended December 31, 2020 and 2019, begins on page F-1 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We, the management of Northwest Biotherapeutics, Inc. (the “Company”), are responsible for establishing and maintaining adequate internal control over financial reporting of the Company.
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our Chief Executive Officer and Principal Financial and Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure.
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As required by Rule 13a-15 under the Exchange Act, our management, including our Chief Executive Officer and Principal Financial and Accounting Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2020. In making this assessment, the Company’s management used the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Our management concluded that as of December 31, 2020, our disclosure controls and procedures were effective, and previous noted deficiencies have been remediated, as described below.
Management’s Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Management of the Company, including our CEO and Principal Financial and Accounting Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. Based on this assessment, we determined that we have effectively designed and implemented, consistently performed, and tested the functioning of these controls.
Based on the efforts identified above, we have concluded that the previously identified material weaknesses in the Company’s internal control over financial reporting have been remediated through the following efforts:
The Company has added and implemented financial operational policies and related procedures which govern our system of internal controls over evaluating disclosures under ASC740. These policies were reviewed and tested to be effective as of December 31, 2020.
Because the material weakness was successfully remediated and additional material weaknesses were not identified, management, including our principal executive officer and principal financial officer, has concluded that our internal control over financial reporting was effective as of December 31, 2020.
Changes in Internal Control Over Financial Reporting
There were no changes, other than those described above, in our internal control over financial reporting during the fiscal quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 is hereby incorporated by reference from our 2021 Proxy Statement under the captions “Election of Directors” and “Code of Ethics.” To the extent that we do not file the 2021 Proxy Statement prior to the end of the 120-day period following December 31, 2020, we will amend this Annual Report on Form 10-K to provide the required information.
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ITEM 11. EXECUTIVE COMPENSATION
Information required by this item will be contained in the Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS-EQUITY COMPENSATION PLAN INFORMATION
Information required by this item will be contained in the Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Information required by this item will be contained in the Proxy Statement and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this item will be contained in the Proxy Statement and is incorporated herein by reference.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The Exhibits listed below are identified by numbers corresponding to the Exhibit Table of Item 601 of Regulation S-K. The Exhibits designated by an asterisk (*) are management contracts or compensatory plans or arrangements required to be filed pursuant to Item 15.
EXHIBIT INDEX
ExhibitNumber Description
4.1 Description of Securities
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10.81 Equity Compensation Plan, dated May 29, 2020.
10.83 Agreement to acquire Flaskworks, L.L.C, August 28, 2020.
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21.1 Subsidiaries of the Registrant.
23.1 Independent Registered Public Accounting Firm’s Consent.
101.INS XBRL Instance Document.
101.SCH XBRL Schema Document.
101.CAL XBRL Calculation Linkbase Document.
101.DEF XBRL Definition Linkbase Document.
101.LAB XBRL Label Linkbase Document.
101.PRE XBRL Presentation Linkbase Document.
*Confidential information in this exhibit has been omitted and filed separately with the SEC pursuant to a confidential treatment request.
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ITEM 16.FORM 10–K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
NORTHWEST BIOTHERAPEUTICS, INC.(Registrant)
Date: March 31, 2021 By: /s/ Linda F. Powers
Linda F. Powers,
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Linda F. Powers President and Chief Executive Officer March 31, 2021
Linda F. Powers Principal Executive Officer
Principal Financial and Accounting Officer
/s/ Alton L. Boynton Director March 31, 2021
Alton L. Boynton
/s/ Navid Malik Director March 31, 2021
Dr. Navid Malik
/s/ Jerry Jasinowski Director March 31, 2021
Jerry Jasinowski
/s/ J. Cofer Black Director March 31, 2021
J. Cofer Black
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NORTHWEST BIOTHERAPEUTICS, INC.
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of December 31, 2020 and 2019 F-6
Notes to the Consolidated Financial Statements F-11
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Northwest Biotherapeutics, Inc.
Bethesda, Maryland
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Northwest Biotherapeutics, Inc. and Subsidiaries (the “Company”) as of December 31, 2020, and the related consolidated statements of operations and comprehensive loss, stockholders’ deficit, and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
Substantial Doubt about the Company's Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has recurring losses and negative cash flows from operations that raise substantial doubt about its ability to continue as a going concern. Management’s evaluations of the events and conditions and management’s plans regarding those matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board of the United States of America (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter – Debt and Equity Accounting Considerations
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the Company’s Audit Committee and that: (i) relates to accounts or disclosures that are material to the financial statements and (ii) involved especially challenging, subjective, or complex judgements. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
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Critical Audit Matter Description
As disclosed in Notes 4, 8, and 11 to the consolidated financial statements, the Company had various debt, derivative, and equity transactions where management evaluated required accounting considerations, significant estimates, and judgements around certain features, the possibility of conversion or redemption, and the valuation of certain components of the financings, including the valuation around certain freestanding and embedded derivatives. Certain features were initially measured at fair value and subsequently have been remeasured to fair value at each reporting period.
There is no current observable market for these types of features and, as such, the Company determined the fair value of the freestanding instruments or embedded derivatives using the Black-Scholes-Merton or the Monte Carlo option pricing model to measure the fair value of the debt and/or equity instrument both with and without the derivative liability features. As a result, a high degree of auditor judgment and effort was required in performing audit procedures to evaluate the various components of these instruments.
How the Critical Audit Matter Was Addressed In the Audit
Our principal audit procedures performed to address this critical audit matter included the following:
We have served as the Company’s auditors since 2021.
/s/ Cherry Bekaert LLP
Tampa, Florida
March 31, 2021
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Northwest Biotherapeutics, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Northwest Biotherapeutics, Inc. and Subsidiaries (the “Company”) as of December 31, 2019, the related statements of operations and comprehensive loss, changes in stockholders’ deficit and cash flows for the year ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company's internal control over financial reporting as of December 31, 2019, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013 and our report dated March 16, 2020, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting, except for the restatement as to the effectiveness of internal control over financial reporting for the material weakness related to ineffective designed controls over the evaluation and conclusion of contingencies under ASC 740, as to which the date is June 23, 2020.
Explanatory Paragraph – Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has incurred recurring operating losses and net operating cash flow deficits, and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Change in Accounting Principle
As discussed in Note 3 to the consolidated financial statements, the Company has changed its method of accounting for leases in 2019 due to the adoption of the guidance in ASC Topic 842, Leases (“Topic 842”).
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Marcum LLP
Marcum LLP
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We served as the Company’s auditor from 2013 to 2021.
New York, NY
March 16, 2020, except for the restatement as to the effectiveness of internal control over financial reporting for the material weakness related to ineffective designed controls over the evaluation and conclusion of contingencies under ASC 740, as to which the date is June 23, 2020.
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NORTHWEST BIOTHERAPEUTICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31, December 31,
(As revised) (Note 14)
ASSETS
Current assets:
Cash and cash equivalents $ 9,983 $ 372
Prepaid expenses and other current assets 5,528 2,828
Non-current assets:
Property, plant and equipment, net 1,040 281
Construction in progress 9,074 1,685
Right-of-use asset, net 4,489 4,679
Indefinite-lived intangible asset 1,292 —
Goodwill 626 —
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 7,380 $ 6,348
Convertible notes, net 3,830 568
Notes payable to related party — 66
Contingent payable derivative liability 8,275 7,261
Lease liabilities 167 395
Non-current liabilities:
Note payable, net of current portion, net 8,507 6,588
Lease liabilities, net of current portion 4,916 4,914
COMMITMENTS AND CONTINGENCIES (Note 12)
Stockholders’ deficit:
Stock subscription receivable (79) (10)
Accumulated other comprehensive income (1,148) 836
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT $ 32,899 $ 10,643
See accompanying notes to the consolidated financial statements
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NORTHWEST BIOTHERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share data)
For the Years ended
December 31,
(As revised) (Note 14)
Revenues:
Operating costs and expenses:
Total operating costs and expenses 87,896 30,389
Other income (expense):
Change in fair value of derivative liabilities (435,351) 11,828
Loss from extinguishment of debt (1,582) (1,941)
Foreign currency transaction gain 2,261 255
Other comprehensive loss
Foreign currency translation adjustment (1,984) (164)
See accompanying notes to the consolidated financial statements
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NORTHWEST BIOTHERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
(in thousands)
Accumulated
Additional Other Total
Shares Par value Capital Receivable Deficit Income (Loss) Equity (Deficit)
Net loss (As revised) (Note 14) — — — — (20,812) — (20,812)
Cumulative translation adjustment — — — — — (164) (164)
Cashless warrants exercise 7,086 7 (7) — — — —
Cashless option exercise 71 — - — — — —
Stock-based compensation 3,667 4 52,205 — — — 52,209
Net loss — — - — (529,821) — (529,821)
See accompanying notes to the consolidated financial statements
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NORTHWEST BIOTHERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years ended
December 31,
(As revised) (Note 14)
Cash Flows from Operating Activities:
Reconciliation of net loss to net cash used in operating activities:
Depreciation and amortization 87 21
Amortization of debt discount 3,013 1,430
Change in fair value of derivatives 435,351 (11,828)
Change in fair value of contingent liability 913 —
Loss from extinguishment of debt 1,582 1,941
Amortization of operating lease right-of-use asset 338 (322)
Stock-based compensation related to warrants modification — 3
Stock-based compensation for services 52,209 1,819
Non-cash interest expense 4,270 —
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (2,350) (1,226)
Other non-current assets (31) (11)
Accounts payable and accrued expenses 1,702 30
Related party accounts payable and accrued expenses 431 (3,230)
Lease liabilities 213 326
Net cash used in operating activities (32,093) (31,859)
Cash Flows from Investing Activities:
Purchase of equipment and construction in progress (6,610) (360)
Acquisition of Flaskworks, net of cash (1,532) —
Net cash used in investing activities (8,142) (360)
Cash Flows from Financing Activities:
Proceeds from exercise of warrants 13,915 2,220
Proceeds from warrants modification 4 7
Proceeds from issuance of notes payable, net 8,557 7,000
Proceeds from issuance of convertible notes payable, net 5,115 —
Proceeds from issuance of convertible notes payable to related party 315 —
Repayment of notes payable (1,556) (420)
Repayment of notes payable to related parties (379) (329)
Repayment of convertible notes payable (89) —
Repayment of convertible notes payable to related parties — (5,400)
Net cash provided by financing activities 52,696 9,952
Effect of exchange rate changes on cash and cash equivalents (2,850) 415
Net increase (decrease) in cash and cash equivalents 9,611 (21,852)
Cash and cash equivalents, beginning of the year 372 22,224
Cash and cash equivalents, end of the year $ 9,983 $ 372
Supplemental disclosure of cash flow information
Interest payments on notes payable $ — $ (43)
Interest payments on notes payable to related party $ (9) $ (177)
Interest payments on convertible notes payable $ (11) $ —
See accompanying notes to the consolidated financial statement
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NORTHWEST BIOTHERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years ended
December 31,
(As revised) (Note 14)
Supplemental schedule of non-cash investing and financing activities:
Cashless warrants exercise $ 7 $ —
Offering cost related to warrant liability $ 4,876 $ 2,693
Deferred offering cost $ — $ 108
Issuance of warrants in conjunction with convertible note payable $ 153 $ —
Issuance of warrants in connection with debt modification $ 395 $ —
Warrant modification in connection with debt amendment $ 91 $ —
Beneficial conversion feature related to amended convertible note $ 44 $ 68
Reclass between shares payable and additional paid-in capital $ — $ 138
Capital expenditures included in accounts payable $ 1,088 $ 947
Issuance of common shares in connection with a settlement agreement $ — $ 12
See accompanying notes to the consolidated financial statement
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NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
1. Organization and Description of Business
Northwest Biotherapeutics, Inc. and its wholly owned subsidiaries NW Bio GmbH, Aracaris Ltd, Aracaris Capital, Ltd, and Northwest Biotherapeutics B.V. (collectively, the “Company”, “we”, “us” and “our”) were organized to discover and develop innovative immunotherapies for cancer. The Company has developed DCVax® platform technologies for both operable and inoperable solid tumor cancers. The Company has wholly owned subsidiaries in the U.K. and on April 25, 2019, the Company established a new wholly owned subsidiary Northwest Biotherapeutics B.V. in the Netherlands, where the European Medicines Agency is relocating.
The Company relies upon contract manufacturers for production of its DCVax products, research and development services, distribution and logistics, and related services, in compliance with the Company’s specifications and the applicable regulatory requirements.
On August 28, 2020, the Company acquired Flaskworks, LLC (“Flaskworks”), a company that has developed a system to close and automate the manufacturing of cell therapy products such as DCVax®.
2. Financial Condition, Going Concern and Management Plans
The Company has incurred annual net operating losses since its inception. The Company had a net loss of $529.8 million, which included a cash loss of $32 million and a non-cash loss of $497.8 million, for the year ended December 31, 2020. The increase in net loss for the year ended December 31, 2020 was primarily due to the increased stock price, which resulted in significant non-cash loss from the change on the derivative liability. The Company used approximately $32.1 million of cash in its operating activities for the year ended December 31, 2020. Management believes that the Company has access to capital resources through the sale of equity and debt financing arrangements. However, the Company has not secured any commitments for new financing for this specific purpose at this time.
The Company does not expect to generate material revenue in the near future from the sale of 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 annual 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 and operating cash flow deficits, 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 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.
As also previously reported, coronavirus-related difficulties have impacted most aspects of the process, especially with the successive waves of COVID cases in many areas. The independent service firms have had limited capacity, and restrictions on operations. Key experts at certain specialized service providers have been unavailable for periods of time due to illness in their family. Other experts have gone on extended leave due to restrictions on operations. Clinical trial site personnel have been unavailable due to being reassigned for COVID, and the limited site personnel have had to work under restrictions. Committee processes and regulatory processes have been similarly focused on COVID matters and delayed on other matters. Firms such as the ones storing the Phase III trial tissue samples that are needed for certain analyses, and the firms conducting the analyses, continue to have only limited operations. Even logistical matters such as the shipping of materials have been, and continue to be, subjected to substantial restrictions and delays.
3. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements of the Company were prepared in accordance with generally accepted accounting principles in the U.S. (“U.S. GAAP”) and include the assets, liabilities, revenues and expenses of the wholly owned subsidiaries in Germany, United Kingdom and Netherlands. All intercompany transactions and accounts have been eliminated in consolidation.
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NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
Consolidation
The Company’s policy is to consolidate all entities in which it can vote a majority of the outstanding voting stock. In addition, the Company consolidates entities that meet the definition of a variable interest entity (VIE) for which the Company is the primary beneficiary, if any. The primary beneficiary is the party who has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and who has an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the VIE.
As of December 31, 2020, the Company did not consolidate any VIE's as the Company has concluded that it is not the primary beneficiary.
Use of Estimates
In preparing 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 judgments, including 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. The Company bases its estimates on historical experience and on various other assumptions that it believes 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 could differ from those estimates, particularly given the significant social and economic disruptions and uncertainties associated with the ongoing coronavirus pandemic ("COVID-19") and the COVID-19 control responses.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist of cash accounts in a financial institution, which at times may exceed the Federal depository insurance coverage (“FDIC”) of $250,000. As of December 31, 2020, of the total $10 million in cash and cash equivalents, $0.6 million was held by foreign subsidiaries. The Company had not experienced losses on these accounts and management believes the Company is not exposed to significant risks on such accounts.
Property, Plant and Equipment
Property and equipment are stated at cost. Depreciation and amortization are provided for using straight-line methods, in amounts sufficient to charge the cost of depreciable assets to operations over their estimated service lives. Repairs and maintenance costs are charged to operations as incurred.
Costs for capital assets not yet placed into service are capitalized as construction in progress on the consolidated balance sheets and will be depreciated once placed into service.
The Company assesses its long-lived assets for impairment whenever facts and circumstances indicate that the carrying amounts may not be fully recoverable. To analyze recoverability, the Company projects undiscounted net future cash flows over the remaining lives of such assets. If these projected undiscounted net future cash flows are less than the carrying amounts, an impairment loss would be recognized, resulting in a write-down of the assets with a corresponding charge to earnings. The impairment loss is measured based upon the difference between the carrying amounts and the fair values of the assets.
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NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
Goodwill and Intangible Assets
Goodwill is the excess of purchase price over the fair value of identified net assets of businesses acquired. The Company's intangible asset with an indefinite life is related to in-process research and development ("IPR&D") programs acquired in the Flaskworks Acquisition, as the Company expects future research and development on these programs to provide the Company with substantial benefit for a period that extends beyond the foreseeable horizon. Intangible assets with indefinite useful lives are measured at their respective fair values as of the acquisition date. The Company does not amortize goodwill and intangible assets with indefinite useful lives. Intangible assets related to IPR&D projects are considered to be indefinite lived until the completion or abandonment of the associated R&D efforts. If and when development is complete, which generally occurs if and when regulatory approval to market a product is obtained, the associated assets would be deemed finite lived and would then be amortized based on their respective estimated useful lives at that point in time.
The Company has one operating segment and one reporting unit. The Company reviews goodwill and indefinite-lived intangible assets at least annually for possible impairment. Goodwill and indefinite-lived intangible assets are reviewed for possible impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit or the indefinite-lived intangible assets below their carrying values. No impairment charge was recognized for the year ended December 31, 2020.
Fair Value of Financial Instruments
ASC 820, Fair Value Measurements, provides guidance on the development and disclosure of fair value measurements. Under this accounting guidance, fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.
The accounting guidance classifies fair value measurements in one of the following three categories for disclosure purposes:
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Inputs other than Level 1 prices for similar assets or liabilities that are directly or indirectly observable in the marketplace.
Level 3: Unobservable inputs which are supported by little or no market activity and values determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.
The Company accounts for the issuance of common stock purchase warrants issued in connection with the equity offerings in accordance with the provisions of ASC 815, Derivatives and Hedging ("ASC 815"). The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company accounts for certain common stock warrants outstanding as a liability at fair value and adjusts the instruments to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in its Consolidated Statements of Operations and Comprehensive Loss. The fair value of the warrants issued by the Company has been estimated using Monte Carlo simulation and or a Black Scholes model. The warrant liabilities are valued using Level 3 valuation inputs (see Note 4).
Embedded Conversion Features
The Company evaluates embedded conversion features within convertible debt instruments to determine whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in the Statement of Operations. If the conversion feature does not require recognition of a bifurcated derivative, the convertible debt instrument is evaluated for consideration of any beneficial conversion feature (“BCF”) requiring separate recognition. When the Company record a BCF, the intrinsic value of the BCF is recorded as a debt discount against the face amount of the respective debt instrument (offset to additional paid-in capital) and amortized to interest expense over the life of the debt.
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NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
Derivative Financial Instruments
The Company has derivative financial instruments that are not hedges and do not qualify for hedge accounting. Changes in the fair value of these instruments are recorded in other income (expense), on a net basis in the Consolidated Statements of Operations and Comprehensive Loss.
Contingent payable derivative liability
During the year ended December 31, 2019, the Company entered into a settlement agreement with Cognate BioServices, resolving past matters and providing for the restart of DCVax®-Direct Production.
As part of this overall settlement, the Company also provided a contingent note payable (the “Contingent Payable Derivative”) of $10 million, which is only payable upon the Company’s first financing after DCVax product approval in or outside the U.S. If such product approval has not been obtained by the seventh anniversary of the agreement, such Contingent Payable Derivative will expire without becoming payable.
On a quarterly basis, management makes estimates for key performance milestones and uses the expected dates as the inputs for valuation. The fair value of the Contingent Payable Derivative has been estimated using Monte Carlo simulation, which are valued using Level 3 valuation inputs.
Leases
Prior to January 1, 2019, the Company recognized rent expense on a straight-line basis over the lease period and accounts for the difference between straight-line rent and actual lease payments as deferred rent.
Subsequent to the adoption of the new leasing standard on January 1, 2019, the Company recognizes a lease asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation. The Company determines whether an arrangement is or contains a lease at contract inception. Operating leases with a duration greater than one year are included in right-of-use assets, lease liabilities, and lease liabilities, net of current portion in the Company’s consolidated balance sheets. Right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the net present value of lease payments, the Company uses its incremental borrowing rate based on the information available at the lease commencement date. The incremental borrowing rate represents the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. The Company considers a lease term to be the non-cancelable period that it has the right to use the underlying asset.
The operating lease right-of-use assets also include any lease payments made and exclude lease incentives. Lease expense is recognized on a straight-line basis over the expected lease term. Variable lease expenses are recorded when incurred.
Foreign Currency Translation and Transactions
The Company has operations in Germany, the United Kingdom and Netherlands in addition to the U.S. The Company translated its assets and liabilities 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.
The Company converts receivables and payables denominated in other than the Company’s functional currency at the exchange rate as of the balance sheet date. The resulting transaction exchange gains or losses related to intercompany receivable and payables, are included in other income and expense.
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NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
Comprehensive Loss
The Company reports comprehensive loss and its components in its consolidated financial statements. Comprehensive loss consists of net loss and foreign currency translation adjustments, affecting stockholders’ equity deficit that, under U.S, GAAP, is excluded from net loss.
Revenue Recognition
The Company recognizes revenue in accordance with the terms stipulated under the patient service contract. In various situations, the Company receives certain payments for DCVax®-L for patient treatment. These payments are assessed and recognized in accordance with ASC 606 in the period when the performance obligation has been met.
Accrued Outsourcing Costs
Substantial portions of our preclinical studies and clinical trials are performed by third-party laboratories, medical centers, contract research organizations and other vendors (collectively “CROs”). These CROs generally bill monthly or quarterly for services performed, or bill based upon milestones achieved. For clinical studies, expenses are accrued when services are performed. The Company monitors patient enrollment, the progress of clinical studies and related activities through internal reviews of data that is tracked by the CROs under contractual arrangements, correspondence with the CROs and visits to clinical sites.
Research and Development Costs
Research and development costs are charged to operations as incurred and consist primarily of clinical trial related costs (including costs for collection, validation and analysis of trial results), related party manufacturing costs, consulting costs, contract research and development costs, clinical site costs and compensation costs.
Income Taxes
The Company evaluates its tax positions and estimates its current tax exposure along with assessing temporary differences that result from different book to tax treatment of items not currently deductible for tax purposes. These differences result in deferred tax assets and liabilities on the Company’s Consolidated Balance Sheets, which are estimated based upon the difference between the financial statement and tax bases of assets and liabilities using the enacted tax rates that will be in effect when these differences reverse. In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in the Company’s Consolidated Statements of Comprehensive Loss become deductible expenses under applicable income tax laws or loss or credit carryforwards are utilized. Accordingly, realization of the Company’s deferred tax assets is dependent on future taxable income against which these deductions, losses and credits can be utilized.
The Company must assess the likelihood that the Company’s deferred tax assets will be recovered from future taxable income, and to the extent the Company believes that recovery is not more likely than not, the Company must establish a valuation allowance. Management judgment is required in determining the Company’s provision for income taxes, the Company’s deferred tax assets and liabilities and any valuation allowance recorded against the Company’s net deferred tax assets. Excluding foreign operations, the Company recorded a full valuation allowance at each balance sheet date presented because, based on the available evidence, the Company believes it is more likely than not that it will not be able to utilize all of its deferred tax assets in the future. The Company intends to maintain the full valuation allowance until sufficient evidence exists to support the reversal of the valuation allowance.
Stock Based Compensation
The Company measures stock-based compensation to employees, consultants, and Board members at fair value on the grant date of the award. Compensation cost is recognized as expense on a straight-line basis over the requisite service period of the award. For awards that have a performance condition, compensation cost is measured based on the fair value of the award on the grant date, the date performance targets are established, and is expensed over the requisite service period for each separately vesting tranche when achievement of the performance condition becomes probable. The Company assess the probability of the performance conditions being
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NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
met on a continuous basis. Forfeitures are recognized when they occur. Prior to January 1, 2019, share-based compensation cost for non-employees was re-measured at every reporting period.
The Company estimates the fair value of stock option grants that do not contain market-based vesting conditions using the Black-Scholes option pricing model and the assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment.
Expected Term - The expected term of options represents the period that the Company’s stock-based awards are expected to be outstanding based on the simplified method, which is the half-life from vesting to the end of its contractual term.
Expected Volatility - The Company computes stock price volatility over expected terms based on its historical common stock trading prices.
Risk-Free Interest Rate - The Company bases the risk-free interest rate on the implied yield available on U. S. Treasury zero-coupon issues with an equivalent remaining term.
Expected Dividend - The Company has never declared or paid any cash dividends on its common shares and does not plan to pay cash dividends in the foreseeable future, and, therefore, uses an expected dividend yield of zero in its valuation models.
The Company is also required to make estimates as to the probability of achieving the specific performance conditions. If actual results are not consistent with the Company’s assumptions and judgments used in making these estimates, the Company may be required to increase or decrease compensation expense, which could be material to the Company’s consolidated results of operations.
Debt Extinguishment
The Company accounts for the income or loss from extinguishment of debt by comparing the difference between the reacquisition price and the net carrying amount of the debt being extinguished and recognizes this as gain or loss when the debt is extinguished. The gain or loss from debt extinguishment is recorded in the consolidated statements of operations under “other income (expense)” as loss from extinguishment of convertible debt.
Sequencing
The Company adopted a sequencing policy under ASC 815-40-35 whereby in the event that reclassification of contracts from equity to liabilities is necessary pursuant to ASC 815 due to the Company’s inability to demonstrate it has sufficient authorized shares. This was previously the result of certain financial instruments with a potentially indeterminable number of shares and most recently due to the company committing more shares than authorized. While temporary suspensions are in place to keep the potential exercises beneath the number authorized, certain instruments are classified as liabilities, after allocating available authorized shares on the basis of the earliest grant date of potentially dilutive instruments. Pursuant to ASC 815, issuance of stock based awards to the Company’s employees, nonemployees or directors are not subject to the sequencing policy.
Loss per Share
Basic loss per share is computed on the basis of the weighted average number of shares outstanding for the reporting period. Diluted loss per share is computed on the basis of the weighted average number of common shares plus dilutive potential common shares outstanding using the treasury stock method. Any potentially dilutive securities are anti-dilutive due to the Company’s net losses. For the years presented, there is no difference between the basic and diluted net loss per share.
Recent Accounting Standards
Income Taxes
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain
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NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.
Debt
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas. This ASU is effective for annual reporting periods beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. This update permits the use of either the modified retrospective or fully retrospective method of transition. The Company is currently evaluating the impact this ASU will have on the its consolidated financial statements and related disclosures.
4. Fair Value Measurements
In accordance with ASC 820 (Fair Value Measurements and Disclosures), the Company uses various inputs to measure the outstanding warrants, certain embedded conversion feature associated with convertible debt and contingent payable to Cognate BioServices on a recurring basis to determine the fair value of the liability.
Fair value measured at December 31, 2020
Quoted prices in active Significant other Significant
Fair value at markets observable inputs unobservable inputs
December 31, 2020 (Level 1) (Level 2) (Level 3)
Embedded conversion option 2,507 — — 2,507
Contingent payable derivative liability 8,275 — — 8,275
Fair value measured at December 31, 2019
Quoted prices in active Significant other Significant
Fair value at markets observable inputs unobservable inputs
December 31, 2019 (Level 1) (Level 2) (Level 3)
Warrant liability $ 20,213 $ — $ — $ 20,213
Contingent payable derivative liability 7,261 — — 7,261
There were no transfers between Level 1, 2 or 3 during the years ended December 31, 2020 and 2019.
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NORTHWEST BIOTHERAPEUTICS, INC.
Notes to the Consolidated Financial Statements
The following table presents changes in Level 3 liabilities measured at fair value for the years ended December 31, 2020 and 2019. 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).
Contingent
Embedded Payable
Warrant Conversion Derivative
Liability Option Liability Total
Additional warrant liability 4,110 — — 4,110
Extinguishment of derivative liabilities — (3) — (3)
Additional warrant liability 18,864 — — 18,864
Reclassification of warrant liabilities (110,471) — — (110,471)