Northwest Biotherapeutics Inc: Form 10-Q for the period ended Mar 31, 2023

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, 2022 and in Part II Item 1A of this report. These factors, among others, could cause results to differ materially from those presently anticipated by us. You should not place undue reliance on these forward-looking statements.

Overview

We are a biotechnology company focused on developing 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 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, and the data were analyzed by independent statisticians.

On May 10, 2022, top line data from the Phase III trial of DCVax-L were presented in a scientific conference at the New York Academy of Sciences by one of the investigators in the trial. The presentation was made available publicly on a third-party site. On November 17, 2022, the Phase III trial results were reported in a peer reviewed publication in JAMA Oncology, a top scientific and medical journal.

The Company is now working on preparations for an application for regulatory approval of DCVax-L. The Company is working with teams of specialized consultants on pre-requisites for the application, and on portions of the application package itself. One of the pre-requisites - obtaining regulatory approval of a Pediatric Investigation Plan (PIP) - was completed during 2022 on an accelerated basis, including regulatory approval to use the same trial design with external controls as was used in the Company’s Phase 3 trial.

Additionally, substantial progress was made with the CRO and specialized consultants on preparing the Trial Master File to be inspection-ready for regulators.

Post-COVID difficulties continue to impact the Company’s programs and operations, due to backlogs in the supply chain, at clinical trial sites, and at regulators. The supply chain backlogs include service firms and also vendors and suppliers of a wide variety of items, ranging from major equipment to particular reagents required for the manufacturing process. Shortages of certain key materials and supplies have also occurred. The clinical trial site backlogs involve delays for various clinical trial follow-up matters, such as queries and additional documentation. With regulators, committee processes and regulatory processes were focused on COVID matters during the pandemic, and a substantial backlog of non-COVID matters accumulated. The Company is hopeful that the various backlog circumstances will improve in 2023.

In the future, we plan to conduct clinical trials of DCVax-L for other types of solid tumor cancers, beyond brain cancer, when resources permit. 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. We plan to work 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.

Our critical accounting policies and significant estimates are detailed in our Annual Report on Form 10-K for the year ended December 31, 2022. 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, 2022 other than those included below.

Sequencing

The Company adopted a sequencing policy under ASC 815-40-35 to determine if reclassification of contracts from equity to liabilities is necessary pursuant to ASC 815 due to the Company’s inability to demonstrate if it has sufficient authorized shares. Certain contracts were classified as liabilities as a the result of the instruments containing a potentially indeterminable number of shares and, most recently, due to the Company entering into agreements providing for the potential issuance of more shares than authorized.. While temporary agreements 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.

On January 9, 2023, the Company filed a Certificate of Amendment of its Seventh Amended and Restated Certificate of Incorporation (the “Certificate of Amendment”) with the Secretary of the State of Delaware, which effected an increase in the Company’s authorized shares of common stock, from 1.2 billion to 1.7 billion, par value $0.001 per share. As a result of this increase in authorized shares, the liability-classified warrants were reclassified to equity. Approximate 141 million warrants to purchase shares of the Company’s common stock were classified as liabilities through January 8, 2023.

Modification of Equity Classified Warrants

A change in the terms or conditions of a warrant is accounted for as a modification. For a warrant modification accounted for under ASC 815, the effect of a modification shall be measured as the difference between the fair value of the modified warrant over and the fair value of the original warrant immediately before its terms are modified, with each measured on the modification date. The accounting for any incremental fair value of the modified warrants over the original warrants is based on the specific facts and circumstances related to the modification. When a modification is directly attributable to an equity offering, the incremental change in fair value of the warrants is accounted for as an equity issuance cost. When a modification is directly attributable to a debt financing, the incremental change in fair value of the warrants is accounted for as a debt discount or debt issuance cost. For all other modifications, the incremental change in fair value is recognized as a deemed dividend.

Results of Operations

Operating costs:

Our operating costs and expenses consist primarily of research and development (R&D) expenses. R&D expenses include clinical trial expenses, and additional costs related to completion of a trial, including substantial one-time expenses such as final site visits, query resolutions, additional data collection and documentation, and related matters. There are also increased costs after completion of a Phase III trial, such as statistical analyses, document collection and quality control checking of the documents, and preparations for an application for product approval.

In addition to clinical trial and post-trial costs, our operating costs may include ongoing work relating to our DCVax products, including R&D, product characterization, manufacturing process development, quality control process development, and related matters. Additional substantial costs relate to the development and expansion of manufacturing capacity.

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.

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

The foregoing operating costs include the costs for Flaskworks’ ongoing operations and intellectual property filings, and the operations of our subsidiaries in the U.K., the Netherlands and Germany.

Research and development:

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

Because we are a pre-revenue company, we do not allocate R&D 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.

Three Months Ended March 31, 2023 and 2022

We recognized a net loss of $10.7 million and $14.2 million for the three months ended March 31, 2023 and 2022, respectively.

Research and Development Expense

For the three months ended March 31, 2023 and 2022, research and development expense was $6.9 million and $4.8 million, respectively. The increase in R&D expense in 2023 was related in part to one-time milestone activities under the SOW 6 with Advent BioServices, and in part to increased activities by expert consultants. During the three months ended March 31, 2023, we accrued for 3.0 million shares that will become issuable for completion of a milestone (obtaining a commercial manufacturing license from the MHRA). The fair value of the 3.0 million shares was approximately $2.1 million, of which $0.5 million was recognized during the three months ended March 31, 2023 and $1.6 million had already been recognized in 2022. During the three months ended March 31, 2023, the Company also expensed (but did not pay) an aggregate of $0.5 million related to completed milestones; the Company also expensed (but did not pay) an aggregate of $0.2 million related to future milestone payments and $0.1 million related to fair value of future shares milestone payments that the Company anticipates will be achieved and earned.

General and Administrative Expense

For the three months ended March 31, 2023 and 2022, general and administrative expenses was $7.0 million and $7.9 million, respectively. The decrease in 2023 was mainly related to a decrease of $0.6 million in legal and professional expense and a decrease of $0.1 million in stock-based compensation.

Change in Fair Value of Derivatives

We recognized a non-cash gain of $3.9 million and $0.5 million for the three months ended March 31, 2023 and 2022, respectively. The non-cash gain was primarily due to the decrease of our stock price, Our closing stock prices as of March 31, 2023 and December 31, 2022 were as follows:

Debt Extinguishment

During the three months ended March 31, 2023, we issued approximately 8.3 million shares of common stock with a fair value of $5.6 million to certain lenders in lieu of cash payments of $4.1 million of debt, including $0.2 million accrued interest. In addition, pursuant to exchange agreements executed with various holders, the Company is required to potentially issue additional common stock (the “Share liability”) if the stock price is less than the price defined in the exchange agreement as of the true-up date. During the three months ended March 31, 2023, we extinguished Share liabilities of $0.7 million and recognized an additional $0.5 million of Share liabilities. We recognized an approximately $1.3 million debt extinguishment loss during the three months ended March 31, 2023 from the debt redemption.

During the three months ended March 31, 2023, we issued approximately 43,000 shares of Series C preferred stock at fair value of $0.8 million to certain lenders in lieu of cash payments of $0.7 million debt, including $0.1 million accrued interest. We recognized an approximately $0.1 million debt extinguishment loss.

Interest Expense

During the three months ended and March 31, 2023 and 2022, we recorded interest expense of $1.0 million and $1.9 million, respectively. The decrease in interest expense in 2023 was mainly related to a decrease of outstanding debt as a result of the redemption of approximate $18.1 million debt in 2022.

Foreign currency transaction gain (loss)

During the three months ended and March 31, 2023 and 2022, we recognized foreign currency transaction gain of $0.9 million and loss of $1.0 million, respectively. The gain during the three months ended March 31, 2023 was due to the weakening of the U.S. dollar relative to the British pound sterling, while the loss during the three months ended March 31, 2022 was due to the strengthening 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 for at least one year after the annual 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.

Cash Flow

Operating Activities

During the three months ended March 31, 2023 and 2022, net cash outflows from operations were approximately $11.2 million and $13.0 million, respectively. The decrease in cash used in operating activities was primarily attributable to a decrease of $0.8 million in payments to external service providers and a decrease of $0.7 million interest payments to note holders.

Investing Activities

We spent approximately $1.3 million and $58,000 in cash for the purchase of additional equipment and our build out in Sawston, UK during the three months ended March 31, 2023 and 2022, respectively.

Financing Activities

We received approximately $2.4 million of cash from issuance of 0.1 million shares of Series C convertible preferred stock during the three months ended March 31, 2023.

During the three months ended March 31, 2023, we received approximately $10.0 million in cash proceeds from the issuance of a loan to a commercial lender, and during the three months ended March 31, 2022, we received approximately $0.6 million in cash proceeds from the issuance of multiple loans to individual lenders.

We received approximately $0.2 million and $4.2 million of cash from the exercise of warrants during the three months ended March 31, 2023 and 2022, respectively.

We received approximately $3.1 million of cash from issuance of 4.5 million shares of common stock during the three months ended March 31, 2022.

We made aggregate debt payments of $0.1 million and $4.0 million during the three months ended March 31, 2023 and 2022, respectively.

Other factors affecting our ongoing funding requirements include the number of staff we employ, the number of sites, number of patients and amount of activity in our clinical trial programs, the costs of further product and process development work relating to our DCVax products, the costs of preparations for Phase II trials, the costs of expansion of manufacturing, and unanticipated developments. The extent of resources available to us will determine which programs can move forward and at what pace.

Off-Balance Sheet Arrangements

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

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

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

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

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

Based on our analysis, as of March 31, 2023, the effect of a 100+/- basis point change in interest rates on the value of our financial instruments and the resultant effect on our net loss are considered immaterial.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation as of March 31, 2023, of the design and operation of our disclosure controls and procedures, as such terms are defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation, management concluded that, as of such date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

No change in internal control over financial reporting occurred during the most recent quarter with respect to our operations, which materially affected, or is reasonable likely to materially affect, our internal controls over financial reporting.