##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (Mark One) [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For The Quarterly Period Ended June 30, 2004 OR [  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 Commission File Number 0-26825 NORTHWEST BIOTHERAPEUTICS, INC.  DELAWARE
    
    94-3306718(State or Other Jurisdiction of
    
    (I.R.S. Employer IdentificationIncorporation or Organization)
    
    No.)
 Canyon Park Building 8, 22322 20th Avenue S.E., Suite 150, Bothell, Wa. 98021
(Address of Principal Executive Offices, Including Zip Code) (425) 608-3000
(Registrants Telephone Number, Including Area Code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
[  ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes
[  ] No
[X] As of August 13, 2004, the registrant had outstanding 19,028,779 shares of
common stock, $0.001 par value.




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TABLE OF CONTENTS NORTHWEST BIOTHERAPEUTICS, INC. TABLE OF CONTENTS PagePART I  FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited)
    
    3Condensed Balance Sheets
    
    3Condensed Statements of Operations
    
    4Condensed Statements of Cash Flows
    
    5Notes to Condensed Financial Statements
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    11Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    29Item 4. Controls and Procedures
    
    29PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    30Item 2. Changes in Securities and Use of Proceeds
    
    30Item 3. Defaults Upon Senior Securities
    
    30Item 4. Submission of Matters to a Vote of Security Holders
    
    30Item 5. Other Information
    
    30Item 6. Exhibits and Reports on Form 8-K
    
    30SIGNATURES
    
    31INDEX TO EXHIBITS
    
    32EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### Table of Contents



Part I  Financial Information 
 Item 1. Financial Statements NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company) 
 BALANCE SHEETS
(in thousands)
(Unaudited) December 31,
    
    June 30,2003
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    255
    
    
    $
    329Accounts receivable
    
    
    8
    
    
    
    7Prepaid expenses and other current assets
    
    
    85
    
    
    
    47Total current assets
    
    
    348
    
    
    
    383Property and equipment:Leasehold improvements
    
    
    69
    
    
    
    69Laboratory equipment
    
    
    551
    
    
    
    551Office furniture and other equipment
    
    
    128
    
    
    
    128748
    
    
    
    748Less accumulated depreciation and amortization
    
    
    (375
    )
    
    
    (449
    )Property and equipment, net
    
    
    373
    
    
    
    299Restricted cash
    
    
    105
    
    
    
    30Deposit and other non-current assets
    
    
    45
    
    
    
    45$
    871
    
    
    $
    757LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Notes payable to related parties, net of discount
    
    $
    44
    
    
    $
    337Current portion of capital lease obligations
    
    
    42
    
    
    
    42Accounts payable
    
    
    128
    
    
    
    334Accrued expenses
    
    
    34
    
    
    
    65Accrued expenses, tax liability
    
    
    492
    
    
    
    492Deferred grant revenue
    
    
    
    
    
    
    105Total current liabilities
    
    
    740
    
    
    
    1,375Long-term liabilities:Capital lease obligations, less current portion
    
    
    49
    
    
    
    28Deferred rent
    
    
    66
    
    
    
    59Total liabilities
    
    $
    855
    
    
    $
    1,462Stockholders equity (deficit):Preferred stock, $0.001 par value, 15,000,000
shares authorized, no shares issued or outstanding
at December 31, 2003 and June 30, 2004,
respectively
    
    
    
    
    
    
    Common stock, $0.001 par value, 125,000,000 shares
authorized, 19,027,779 and 19,028,779 shares issued
and outstanding at December 31, 2003 and June 30,
2004, respectively
    
    
    19
    
    
    
    19Additional paid-in capital
    
    
    64,294
    
    
    
    65,394Deferred compensation
    
    
    (53
    )
    
    
    (27
    )Deficit accumulated during the development stage
    
    
    (64,244
    )
    
    
    (66,091
    )Total stockholders equity (deficit)
    
    
    16
    
    
    
    (705
    )Commitments, contingencies and subsequent eventsTotal
liabilities and stockholders equity (deficit)
    
    $
    871
    
    
    $
    757
 See accompanying notes to financial statements. 3




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##### Table of Contents



NORTHWEST
BIOTHERAPEUTICS, INC.
(A Development Stage Company) 
 STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited) Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,
    
    Period fromMarch 18, 1996(inception) to2003
    
    2004
    
    2003
    
    2004
    
    June 30, 2004Revenues:Research material sales
    
    $
    7
    
    
    $
    10
    
    
    $
    7
    
    
    $
    34
    
    
    $
    394Contract research and development
from related parties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,128Research grants
    
    
    180
    
    
    
    106
    
    
    
    249
    
    
    
    209
    
    
    
    846Total revenues
    
    
    187
    
    
    
    116
    
    
    
    256
    
    
    
    243
    
    
    
    2,368Operating expenses:Cost of research material sales
    
    
    40
    
    
    
    6
    
    
    
    40
    
    
    
    31
    
    
    
    361Research and development
    
    
    500
    
    
    
    142
    
    
    
    1,008
    
    
    
    371
    
    
    
    24,345General and administrative
    
    
    1,437
    
    
    
    706
    
    
    
    2,503
    
    
    
    1,263
    
    
    
    27,107Depreciation and amortization
    
    
    50
    
    
    
    37
    
    
    
    137
    
    
    
    74
    
    
    
    2,145Accrued loss on facility sublease
    
    
    174
    
    
    
    
    
    
    
    174
    
    
    
    
    
    
    
    895Asset impairment loss
    
    
    904
    
    
    
    
    
    
    
    904
    
    
    
    
    
    
    
    1,936Total operating expenses
    
    
    3,105
    
    
    
    891
    
    
    
    4,766
    
    
    
    1,739
    
    
    
    56,789Loss from operations
    
    
    (2,918
    )
    
    
    (775
    )
    
    
    (4,510
    )
    
    
    (1,496
    )
    
    
    (54,421
    )Other income (expense):Gain on sale of intellectual rights
    
    
    816
    
    
    
    
    
    
    
    816
    
    
    
    
    
    
    
    3,656Interest expense
    
    
    (8
    )
    
    
    (245
    )
    
    
    (19
    )
    
    
    (352
    )
    
    
    (8,207
    )Interest income
    
    
    8
    
    
    
    1
    
    
    
    20
    
    
    
    1
    
    
    
    729Net loss
    
    
    (2,102
    )
    
    
    (1,019
    )
    
    
    (3,693
    )
    
    
    (1,847
    )
    
    
    (58,243
    )Accretion of Series A preferred stock mandatory
redemption obligation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,872
    )Series A preferred stock redemption fee
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,700
    )Beneficial conversion feature of Series D
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,274
    )Net loss applicable to common stockholders
    
    $
    (2,102
    )
    
    $
    (1,019
    )
    
    $
    (3,693
    )
    
    $
    (1,847
    )
    
    $
    (66,089
    )Net loss per share applicable to common
stockholders  basic and diluted
    
    $
    (0.11
    )
    
    $
    (0.05
    )
    
    $
    (0.20
    )
    
    $
    (0.10
    )Weighted average shares used in computing basic
and diluted loss per share
    
    
    18,933
    
    
    
    19,027
    
    
    
    18,296
    
    
    
    19,026
 See accompanying notes to condensed financial statements. 4




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NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company) 
 STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited) Period fromMarch 18, 1996June 30,
    
    (Inception) to
June 30,2003
    
    2004
    
    2004Cash Flows from Operating Activities:Net Loss
    
    $
    (3,693
    )
    
    $
    (1,847
    )
    
    $
    (58,243
    )Reconciliation of net loss to net cash used in operating activities:Depreciation and amortization
    
    
    137
    
    
    
    74
    
    
    
    2,144Amortization of deferred financing costs
    
    
    
    
    
    
    
    
    
    
    320Amortization of debt discount
    
    
    
    
    
    
    319
    
    
    
    6,110Accrued interest converted to preferred stock
    
    
    
    
    
    
    
    
    
    
    260Accreted interest on convertible promissory note
    
    
    
    
    
    
    26
    
    
    
    28Stock-based compensation costs
    
    
    169
    
    
    
    26
    
    
    
    1,068Loss on sale and disposal of property and equipment
    
    
    904
    
    
    
    
    
    
    
    482Gain on sale of intellectual property and royalty rights
    
    
    (816
    )
    
    
    
    
    
    
    (3,656
    )Gain on sale of property and equipment
    
    
    
    
    
    
    (36
    )
    
    
    (131
    )Asset impairment loss
    
    
    
    
    
    
    
    
    
    
    1,936Loss on facility sublease
    
    
    174
    
    
    
    
    
    
    
    895Increase (decrease) in cash resulting from changes in assets and liabilities:Accounts receivable
    
    
    (85
    )
    
    
    1
    
    
    
    (7
    )Prepaid expenses and other current assets
    
    
    426
    
    
    
    38
    
    
    
    419Accounts payable and accrued expenses
    
    
    (197
    )
    
    
    237
    
    
    
    1,290Accrued loss on sublease
    
    
    (266
    )
    
    
    
    
    
    
    (266
    )Deferred grant revenue
    
    
    
    
    
    
    105
    
    
    
    105Deferred rent
    
    
    44
    
    
    
    (7
    )
    
    
    469Net Cash
used in Operating Activities
    
    
    (3,203
    )
    
    
    (1,064
    )
    
    
    (46,777
    )Cash Flows from Investing Activities:Purchase of property and equipment, net
    
    
    (134
    )
    
    
    
    
    
    
    (4,537
    )Proceeds from sale of property and equipment
    
    
    44
    
    
    
    36
    
    
    
    131Proceeds from sale of intellectual property
    
    
    
    
    
    
    
    
    
    
    1,816Proceeds from sale of marketable securities
    
    
    1,828
    
    
    
    
    
    
    
    2,000Payment of security deposit
    
    
    
    
    
    
    
    
    
    
    (45
    )Transfer of restricted cash
    
    
    
    
    
    
    75
    
    
    
    (1,034
    )Net Cash
provided by (used in) Investing Activities
    
    
    1,738
    
    
    
    111
    
    
    
    (1,669
    )Cash Flows from Financing Activities:Proceeds from issuance of note payable to stockholder
    
    
    
    
    
    
    
    
    
    
    1,650Repayment of note payable to stockholder
    
    
    
    
    
    
    
    
    
    
    (1,650
    )Proceeds from issuance of convertible promissory note and warrants, net of
issuance costs
    
    
    
    
    
    
    1,100
    
    
    
    6,499Repayment of convertible promissory note
    
    
    
    
    
    
    (52
    )
    
    
    (52
    )Borrowing under line of credit, Northwest Hospital
    
    
    
    
    
    
    
    
    
    
    2,834Repayment of line of credit to Northwest Hospital
    
    
    
    
    
    
    
    
    
    
    (2,834
    )Payment on capital lease obligations
    
    
    (50
    )
    
    
    (21
    )
    
    
    (253
    )Payment on note payable
    
    
    (315
    )
    
    
    
    
    
    
    (420
    )Proceeds from issuance of preferred stock, net
    
    
    
    
    
    
    
    
    
    
    27,432
 5




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Period fromMarch 18, 1996June 30,
    
    (Inception) to
June 30,2003
    
    2004
    
    2004Proceeds from exercise of stock options and warrants
    
    
    
    
    
    
    
    
    
    
    220Proceeds from issuance of common stock, net
    
    
    
    
    
    
    
    
    
    
    17,369Series A preferred stock redemption fee
    
    
    
    
    
    
    
    
    
    
    (1,700
    )Deferred financing costs
    
    
    
    
    
    
    
    
    
    
    (320
    )Net Cash (used in) provided by Financing Activities
    
    
    (365
    )
    
    
    1,027
    
    
    
    48,775Net increase (decrease) in cash and cash equivalents
    
    
    (1,830
    )
    
    
    74
    
    
    
    329Cash and cash equivalents at beginning of period
    
    
    2,539
    
    
    
    255
    
    
    
    Cash and cash equivalents at end of period
    
    
    709
    
    
    
    329
    
    
    
    329Supplemental disclosure of cash flow information  cash paid during the period
for interest
    
    
    18
    
    
    
    7
    
    
    
    1,384Supplemental schedule of non-cash financing activitiesEquipment acquired
through capital leases
    
    
    
    
    
    
    
    
    
    
    285Accretion of Series A preferred stock mandatory redemption obligation
    
    
    
    
    
    
    
    
    
    
    1,872Beneficial conversion feature of convertible promissory notes
    
    
    
    
    
    
    
    
    
    
    1,026Conversion of convertible promissory notes and accrued interest to Series D
preferred stock
    
    
    
    
    
    
    
    
    
    
    5,324Issuance of Series C preferred stock warrants in connection with lease agreement
    
    
    
    
    
    
    
    
    
    
    43Issuance of common stock for license rights
    
    
    
    
    
    
    
    
    
    
    4Liability for and issuance of common stock and warrants to Medarex
    
    
    280
    
    
    
    
    
    
    
    840Deferred compensation on issuance of stock options and restricted stock grants
    
    
    
    
    
    
    
    
    
    
    711Cancellation of options and restricted stock
    
    
    
    
    
    
    
    
    
    
    844Financing of prepaid insurance through note payable
    
    
    
    
    
    
    
    
    
    
    420Stock subscription receivable
    
    $
    
    
    
    $
    
    
    
    $
    480
 See accompanying notes to financial statements. 6




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##### Table of Contents



Northwest Biotherapeutics, Inc. (A Development Stage Company) 
 Notes to Condensed Financial Statements (unaudited) 1. Basis of Presentation The accompanying unaudited financial statements for Northwest
Biotherapeutics, Inc. (the Company) have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six-month period ended June 30, 2004
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2004. For further information, refer to the financial statements and footnotes
thereto included in the Companys Annual Report on Form 10-K for the year ended
December 31, 2003, as filed with the Securities and Exchange Commission. The auditors report on the foregoing financial statements of the Company
for the fiscal year ended December 31, 2003 states that because of recurring
operating losses, a working capital deficit, and a deficit accumulated during
the development stage, there is substantial doubt about the
Companys ability to continue
as a going concern. A going concern opinion indicates that the financial
statements have been prepared assuming the Company will continue as a going concern and
do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification
of liabilities that may result from the outcome of this uncertainty. Stock-Based Compensation The Company accounts for its stock option plans for employees in
accordance with the provisions of Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees, and related interpretations. As
such, compensation expense related to employee stock options is recorded if, on
the date of grant, the fair value of the underlying stock exceeds the exercise
price. The Company applies the disclosure-only requirements of SFAS No. 123,
Accounting for Stock-Based Compensation, which allows entities to continue to
apply the provisions of APB Opinion No. 25 for transactions with employees, and
to provide pro-forma results of operations disclosures for employee stock
option grants as if the fair-value-based method of accounting in SFAS No. 123
had been applied to those transactions. Stock compensation costs related to fixed employee awards with pro rata
vesting are recognized on a straight-line basis over the period of benefit,
generally the vesting period of the options. For options and warrants issued to
non-employees, the Company recognizes stock compensation costs utilizing the
fair value methodology prescribed in SFAS No. 123 over the related period of
benefit. Had the Company recognized the compensation cost of employee stock options
based on the fair value of the options on the date of grant as prescribed by
SFAS No. 123, the pro-forma net loss applicable to common stockholders and
related loss per share would have been adjusted to the pro-forma amounts
indicated below: 7




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##### Table of Contents



Three months ended June 30,
    
    Six months ended June 30,2003
    
    2004
    
    2003
    
    2004Net loss applicable to common
stockholdersAs reported
    
    
    (2,102
    )
    
    
    (1,019
    )
    
    
    (3,693
    )
    
    
    (1,847
    )Add: Stock-based
employee
compensation
expense included in
reported net loss,
net
    
    
    84
    
    
    
    7
    
    
    
    169
    
    
    
    26Deduct: Stock-based
employee
compensation
determined under
fair value based
method for all
awards
    
    
    (100
    )
    
    
    (67
    )
    
    
    (226
    )
    
    
    (152
    )Pro forma
    
    
    (2118
    )
    
    
    (1,079
    )
    
    
    (3,750
    )
    
    
    (1,973
    )Net loss per share-basic and
diluted:As reported
    
    
    (0.11
    )
    
    
    (0.05
    )
    
    
    (0.20
    )
    
    
    (0.10
    )Pro forma
    
    
    (0.11
    )
    
    
    (0.06
    )
    
    
    (0.20
    )
    
    
    (0.10
    )
 There were no stock options granted during the six months ended June 30,
2004. The per share weighted average fair value of stock options granted during
the three months ended June 30, 2003 was $0.02. The per share weighted average
fair values of stock options granted during the six months ended June 30, 2003
was $0.09. These weighted average fair values were determined on the dates of
grants using the following weighted average assumptions: Three months ended June 30, 2003
    
    Six months ended June 30, 2003Risk-free interest rate
    
    
    3.11
    %
    
    
    3.11
    %Expected life
    
    5 years
    
    5 yearsExpected volatility
    
    
    207
    %
    
    
    207
    %Dividend yield
    
    
    0
    
    
    
    0
 2. Liquidity Since the beginning of 2002, the Companys management and Board of
Directors recognized that the Company did not have sufficient working capital
to fund its operations for more than 12 months and needed to raise additional
capital from third parties in order to continue its clinical and research
programs. In April 2002 the Company retained an investment bank to assist it
in raising capital. Due to the economic climate in 2002 and declining stock
prices of biotechnology companies, including the Companys stock price, the
Company was unable to raise additional capital. In July 2002 the Company
retained an additional investment banking firm to assist it in exploring
various strategic options including raising additional capital, licensing our
technology to a third party, or merger with another company. The Company
contacted over 50 biotechnology companies and over 20 large pharmaceutical
companies in an attempt to explore these options without success. With Board
approval, and in order to conserve cash, from September of 2002 through April
of 2003 we reduced our staff from 67 to 8 employees, shut down the Phase III
clinical trial for hormone refractory prostate cancer, our Phase I trial for
non-small cell lung cancer and inactivated our Phase II clinical trial for
brain cancer which currently remains open with the Food and Drug
Administration. In addition, the Company moved its corporate headquarters to a smaller
facility and reduced lease payments by $75,000 per month. The Companys
management attempted to negotiate several bridge loans with various investment
banks, but did not 8




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##### Table of Contents



consummate any of them because the Companys Board of Directors did not
consider the terms to be in the best interest of the Company or its
stockholders. In October of 2003, the Company obtained bridge funding from
management raising $335,000 which enabled the Company to continue operating
into the first quarter of 2004. The Company retained another investment bank
to help raise additional working capital, contacting several hundred
prospective investors including numerous venture capital funds. After much
discussion by our Board of Directors taking into consideration the Boards and
managements comprehensive search of a viable option for the Company, including
winding up our operations, the Board believed it in the best interest of the
Company and its stockholders to enter into a bridge loan with Toucan
Capital Fund, L.P. (Toucan). While the terms of the bridge loan imposed significant restraints on
how the Company operated its business, obtaining the funding was the Companys
only viable option for continuing its operations and attempting to create
future value for its stockholders. To date the Company has entered into
several bridge loans beginning in February 2004 through July 2004, and an
Amended and Restated Recapitalization Agreement, with the objective of
potentially raising $40 million, provided a syndicate of investors could be
identified. To date, the Company has accepted $3.1 million in loans from
Toucan, using the proceeds to fund operations and to develop jointly,
with Toucan, a new business strategy focusing on the Companys strengths. On April 26, 2004 we entered into a Recapitalization Agreement with Toucan
Capital Fund II, L.P. (Toucan). On July 30, 2004, the Company and Toucan
agreed to amend and restate the Recapitalization Agreement (the Amended and
Restated Recapitalization Agreement). In connection with entering into the
Amended and Restated Recapitalization Agreement, the Company received
a $2.0 million loan from Toucan on July 30, 2004. The Amended and Restated
Recapitalization Agreement contemplates a proposed equity financing that would
provide for the potential issuance and sale of up to $40 million of convertible
preferred stock (including any shares issuable upon conversion of bridge
funding, but not including any shares issuable upon exercise of warrants,
options, and similar instruments or obligations), in one or more closings over
a period of 12 months from the first closing of the sale of convertible
preferred stock. If issued, the convertible preferred stock will be issued at
a price per share equal to the lesser of $0.10 (as adjusted for stock splits,
stock dividends and the like) or a 35% discount to the average closing price of
the Companys common stock during the twenty trading days prior to the first
closing of the proposed equity financing, but not less than $0.04 per share.
The proposed equity financing is contingent upon the Company complying with
covenants in the Amended and Restated Recapitalization Agreement and locating
investors who are willing to invest in the Company on the terms proposed. If
fully implemented, the proposed equity financing would result in Toucan and
other investors potentially owning, on a combined basis, over 90% of the
outstanding capital stock of the Company. In connection with entering into the Amended and Restated Recapitalization
Agreement, the Company received a $2.0 million loan from Toucan
on July 30,
2004. The loan has (i) a 12 month term, (ii) accrues interest at 10% per
annum on a 365 day basis compounded annually from the issue date, is (iii)
secured by a first priority senior security interest in all of the Companys
assets, and (iv) warrant coverage equal to one hundred percent (100%) of
the $2.0 million loan. The principal and interest is
convertible into capital stock of the Company, generally at Toucans option,
prior to repayment. The conversion price for any conversion of a note at the
election of Toucan will be the lowest of (i) with certain exceptions, the
lowest nominal or effective price per share paid by any investor of the Company
at any time on or after one year prior to April 26, 2004, (ii) with certain
exceptions, the lowest nominal or effective price at which any investor of the
Company has a right to acquire shares of the Company pursuant to any security,
instrument, or promise, undertaking, commitment, agreement or letter of intent
outstanding on or after April 26, 2004 or granted, issued, extended or
otherwise made available by the Company at any time on or after one year prior
to April 26, 2004 and (iii) the lesser of $0.10 per share or 35% discount to
the average closing price per share of the Companys common stock during any 20
consecutive trading days (beginning with the 20 consecutive trading days prior
to the effective date of the Recapitalization Agreement), but not less than
$0.04 per share under this clause (iii). In addition to these conversion
rights, the notes will automatically be converted into convertible preferred
stock of the Company in the event the Company raises $15 million through the
issuance of convertible preferred stock. In this event the conversion price
would be the lowest nominal or effective price per share paid by investors
other than Toucan who purchase shares of convertible preferred stock (excluding
shares issuable upon exercise of the bridge warrants). In connection with the July 30, 2004 $2.0 million loan from Toucan, the
Company issued a warrant to Toucan which is exercisable immediately for up to
20 million shares of the Companys Capital Stock. This warrant is exercisable
for up to seven years. The exercise price of the warrant is the lesser of (i)
$0.10 per share (subject to certain adjustments); or (ii) a 35% discount to the
average closing price of the Companys common stock during the twenty trading
days prior to the first closing of the sale of convertible preferred stock of
the Company, but not less than $0.04 per share. To date the Company has issued
warrants to Toucan to purchase up to 86 million shares of the Companys capital
stock, including the July 2004 warrant and a warrant for 66 million shares
originally issued on April 26, 004 and adjusted on June 11, 2004. This warrant
was separated into two warrants (the Prior Warrants) on
July 30, 2004. The Prior Warrants are now exercisable for 36 million shares
and 30 million shares respectively. The Prior Warrants are exercisable for up to
seven years and have an exercise price of one cent ($0.01) per share. 9




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As of July 30, 2004, Toucan has the right to acquire up to 78 million
shares of the Companys outstanding capital stock upon conversion of
outstanding principal of $3.1 million and interest of $24,000 under the bridge
loans, and up to 86 million shares upon exercise of warrants. This represents a
beneficial ownership of approximately 85% of the outstanding capital stock of
the Company on a fully diluted basis. The Company does not currently have enough
authorized shares to satisfy conversion of all outstanding convertible
notes and warrants and the Company plans to request authorization of
additional shares at its annual meeting to be held before the end of 2004.

As
of August 2, 2004,
after giving effect to aggregate borrowings from Toucan of $3.1 million, the Company
had approximately $2 million in cash and cash equivalents. Of the
$2 million in cash
and cash equivalents, $1,177,801 was paid to Cognate Therapeutics, Inc.
pursuant to a service agreement between the Company and Cognate dated
July 30, 2004.
The fees the Company paid to Cognate consist of a $750,000 non-refundable
contract initiation fee and a $427,801 contract service fee for the month of August.
The payments were made on August 4 and August 5, 2004, respectively.

Cognate is a
Contract Research Organization, majority owned by Toucan and two of the
principals of Toucan are board members of Cognate. The Company is committed to
utilizing Cognates services for a two year period related primarily to manufacturing
drugs, regulatory advice, research and development (R&D) preclinical activities
and managing clinical trials. Monthly expenditures are expected to range between
approximately $427,000 and $718,000. The contract with Cognate includes a
penalty of $4.0 million if the Company cancels the contract within one year
and $2.0 million if the Company cancels the contract after one year as well
as payment for all services performed in winding down any ongoing activities.
The Company entered into this contract after consultation with an independent
expert in the field of Good Manufacturing Practices (GMP), regulatory affairs,
and clinical trial activities. The Company believes entering into this agreement
gives it an opportunity to restart its clinical and research programs much
more efficiently and rapidly as opposed to rebuilding its infrastructure,
internal cGMP facilities, regulatory, clinical and R&D expertise. In addition,
if the Company did not enter into this contract with Cognate it is likely that
Toucan would not have loaned it the additional $2.0 million on
July 30, 2004
because of the significant delay in moving forward with rebuilding these
capabilities within the Company, and the potential negative impact on formation
of a syndicate of potential investors. Given these facts the Company believes it
was in its best interest to enter into this agreement.

After the payments to Cognate, the Company believes that its remaining cash of approximately $822,000, based on recurring operating and associated financing costs, will be sufficient to fund its operations through approximately September 30, 2004.

After
that date we will have to seek additional funds from Toucan, which
Toucan is not obligated to provide to us. Under the terms of the
Amended and Restated Recapitalization Agreement, if Toucan elects not
to provide additional funding to us, we are prohibited from seeking
funds from any party other than Toucan for up to ten business days
after October 23, 2004.

Any additional financing with Toucan and any other third party is likely
to be dilutive to stockholders, and debt financing, if available, may include
additional restrictive covenants.

While the Company has attempted to obtain funding for working capital from
multiple parties since 2002, Toucan is the only party, to date, that has
invested a significant amount of capital in the Company. Therefore, if the
Amended and Restated Recapitalization Agreement is not fully implemented, or if
Toucan is unwilling to continue to fund the Companys operations, it is
unlikely the Company will obtain additional funding from any third parties and
the Company will be required to cease operations and liquidate its assets.

3. Net Loss Per Share Applicable to Common Stockholders

Basic and diluted net loss per share applicable to common stockholders has
been computed using the weighted-average number of shares of common stock
outstanding during the period, less, for the three months ended June 30, 2004,
2,000 issued and outstanding restricted shares of common stock that were
subject to repurchase. Options to purchase 1.7 million shares of common stock
and warrants to purchase 71.0 million shares of common and preferred stock were
excluded from the calculation of diluted net loss per share for the three and
six months ended June 30, 2004 as such securities were antidilutive. Options to
purchase 1.7 million shares of common stock and warrants to purchase 1.4
million shares of common and preferred stock were excluded from the calculation
of diluted net loss per share for the three and six months ended June 30, 2003
as such securities were antidilutive.

4. Notes Payable to Related Parties

The initial bridge funding period commenced on February 2, 2004 when we
issued Toucan an unsecured convertible promissory note, in the amount of
$50,000. On March 1, 2004, we issued Toucan a secured convertible promissory
note, in the amount of $50,000. The notes were convertible at prices below the
current price of our common stock at the date of issuance resulting in a
beneficial conversion cost of approximately $100,000 which is being amortized
over the 12-month term of the notes. Amortization of deferred debt discount of
approximately $37,000 along with interest accretion on the note of
approximately $4,000 was recorded during the six months ended June 30, 2004 for
the February 2, and March 1, 2004 note balances.

The Recapitalization Agreement stipulated that the February and March 2004
notes for $50,000 each were to be cancelled and reissued effective April 26,
2004 as two separate notes for $50,000 each and conforming to the conditions of
the note signed for the April 26, 2004 bridge loan for $500,000. As a result,
the notes issued in February and March 2004, respectively, (i) have a 12 month
term, (ii) accrue interest at 10% per annum on a 365 day basis compounded
annually from their respective original issuance dates, (iii) are secured by a
first priority senior security interest in all of the Companys assets, and
(iv) have warrants with coverage equal to three hundred percent (300%) of the
amount due under the bridge notes.

10



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On April 26, 2004 we issued Toucan a senior secured convertible promissory
note and warrants, in the amount of $500,000.
Proceeds from the April 26, 2004 loan were allocated between the notes and
warrants on a relative fair value basis. The value allocated to the warrants on
the date of the grant was approximately $375,000. The fair value of the
warrants was determined using the Black-Scholes option pricing model with the
following assumptions: expected dividend yield of 0%, risk-free interest rate
of 3.57%, volatility of 218%, and a contractual life of 7-years. The value of
the warrants was recorded as a deferred debt discount against the $500,000
proceeds of the notes. In addition, a beneficial conversion feature related to
the notes was determined to be approximately $375,000 but is capped at the
remaining value originally allocated to the notes of approximately $125,000. As
a result, the total discount on the notes equaled the face value of $500,000
which is being amortized over the twelve-month term of the notes. Amortization
of deferred debt discount of approximately $89,000 along with interest
accretion on the note of approximately $9,000 was recorded during the six
months ended June 30, 2004 for the April 26, 2004 note balance. On June 11, 2004 we issued Toucan a senior secured convertible promissory
note and warrants, in the amount of $500,000. Proceeds from the June 11, 2004
loan were allocated between the notes and warrants on a relative fair value
basis. The value allocated to the warrants on the date of the grant was
approximately $353,000. The fair value of the warrants was determined using the
Black-Scholes option pricing model with the following assumptions: expected
dividend yield of 0%, risk-free interest rate of 3.70%, volatility of 219%, and
an contractual life of 7-years. The value of the warrants was recorded as a
deferred debt discount against the $500,000 proceeds of the notes. In addition,
a beneficial conversion feature related to the notes was determined to be
approximately $353,000 but is capped at the remaining value originally
allocated to the notes of approximately $147,000. As a result, the total
discount on the notes equaled the face value of $500,000 which is being
amortized over the twelve-month term of the notes. Amortization of deferred
debt discount of approximately $26,000 along with interest accretion on the
note of approximately $3,000 was recorded during the six months ended June 30,
2004 for the June 11, 2004 note balance. On July 30, 2004 we issued Toucan a senior secured convertible promissory
note and warrants, in the amount of $2.0 million, pursuant to the Amended and
Restated Recapitalization Agreement. Toucan has the option to loan additional
amounts to the Company, on terms mutually acceptable to the Company and Toucan,
but is not obligated to do so. 5. Contingency Through abandoning the tenant improvements at our prior facility, on which
use tax payments to the State of Washington had been qualified for tax
deferral, including the disposal and impairment of previously qualified tax
deferred equipment, we received a tax assessment of $492,000 on October 21,
2003 for 87.5% of the gross tax deferred on such qualified investments. The tax
assessment payment was initially due on November 20, 2003 and
accrues interest at 7% until paid. This contingent
assessment is being carried as an estimated liability on the balance sheet as
of June 30, 2004, and for the year ended December 31, 2003, was included in
general and administrative expense. The net assessment has been reduced by $27,000 based upon the State of
Washington, Department of Revenues, reduced assessment received on August 2,
2004 which also extended the tax assessment payment date for the $465,000
balance of the assessment, excluding interest, to August 31, 2004. The length of time that has
elapsed since the completion of the leasehold improvement, the major subject of
the assessment, has made it difficult to provide the State with specific
segment specifications, and respective segment costs. We believe the blueprints
for the construction project will make it possible to provide the State with
the requested construction detail and costs. Therefore, we expect to file an
additional appeal for further reduction in this assessment, before the August
31, 2004 payment deadline, as provided under the revised code of Washington
(WAC 458-20-100). While an appeal is pending, it is our understanding of
Washington s code, payment of the assessment is suspended until the appeal
process is finally exhausted. In addition, regarding a separate tax matter, in February 2004, a refund
request of approximately $175,000 related to certain other State taxes was
submitted to the State. This review is ongoing with the State recently
requesting approximately 350 paid invoices for review. The finalization of our
appeal process for the tax assessment, and our request for a tax refund related
to other State taxes, is expected to take several more months. We cannot with
any certainty determine any amount that may be deducted from the August 2, 2004
assessed liability or that will be recovered, if any, from our tax refund
request. 
 Item. 2. Managements Discussion and Analysis of Financial Condition and
Result of Operations The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our financial
statements and the notes to those statements included with this report. In
addition to historical information, this report contains forward-looking
statements that 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 Factors That May Affect Results of Operations and
Financial Condition. 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 believe that primarily due to the difficult financial markets of 2002,
we were unable to raise the additional money needed to fund our ongoing
operations and clinical trial activities. Consequently, on October 9, 2002, our
Board of Directors authorized management to initiate immediate actions to
conserve cash. For that purpose, we reduced staff, eliminated certain future
commitments, and sold certain fixed assets. We are continuing to assess our
alternatives. In November 2002, we suspended all clinical trial activity for our DCVax
product candidates. We withdrew our Investigational New Drug Application (IND)
for DCVax-Prostate, a prostate cancer treatment, and for DCVax-Lung, a
potential treatment for non-small cell lung cancer. We maintained our FDA
clearance and our Orphan Drug designation for a multi-site Phase II clinical
trial to evaluate the DCVax-Brain product candidate as a possible treatment for
Glioblastoma Multiforme. However, this trial cannot be initiated without
additional funding. The DCVax-Brain trial was moved to an inactive status and
no patients were recruited. That trial remains open with the FDA. Operating costs and expenses consist primarily of research and development
expenses, including clinical trial expenses when the Company is actively
participating in clinical trials, and general and administrative expenses. 11




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Research and development expenses include salary and benefit expenses and
costs of laboratory supplies used in our internal research and development
projects. From our inception through June 30, 2004, we incurred costs of
approximately $24.3 million associated with our research and development
activities. Because our technologies are unproven, we are unable to estimate
with any certainty the costs we will incur in the continued development of our
product candidates for commercialization. General and administrative expenses include salary and benefit expenses
related to administrative personnel, cost of facilities, insurance, legal
support, as well as amortization costs of stock options granted to employees
and warrants issued to consultants for entering into commercial arrangements. To date, our revenues have primarily been derived from the manufacture and
sale of research materials, contract research and development services, and
research grants from the federal government. For the six months ended June 30,
2004, we earned approximately $34,000 in revenues from the manufacture and sale
of research materials. If we are to rely exclusively on revenues from the sale
of our research products to fund our operations, we will need to significantly
increase both the number of customers and the size of such sales. We lack
high-volume manufacturing, sales and marketing experience and, as a result, it
is unlikely we will be able to fund our operations through the manufacture and
sale of research products. Our financial statements for the year ended December 31, 2003 and six
months ended June 30, 2004 were prepared on a going concern basis, which
contemplates the realization of assets and the settlement of liabilities in the
normal course of business. Nevertheless, we have experienced recurring losses
from operations, have a working capital deficit, and have a deficit accumulated
during the development stage of $66.1 million, as of June 30, 2004, that raises
substantial doubt about our ability to continue as a going concern and our
auditors have issued an opinion on the December 31, 2003 financial statements
which states that there is substantial doubt about our ability to continue as a
going concern. Critical Accounting Policies and Estimates Accounting principles generally accepted in the United States of America
require our management to make estimates and assumptions that affect the
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of our financial statements, as well as the amounts of
revenues and expenses during periods covered by our financial statements. The
actual amounts of these items could differ materially from those estimates. For example, previously under EITF 94-3, Accounting for Costs Associated
with Exit or Disposal Activities, if an entity remains responsible, without
realizing ongoing economic benefit, for continued rental payments for premises
being vacated, an estimate of the loss over the remaining life of the primary
lease must be made. Sublease rental income is an allowable offset against the
total accrued cost of the rental payments that the entity continues to be
liable for related to the vacated space. Consequently, we recognized, for the year ended December 31, 2002, a
liability of approximately $929,000 and a loss on facility sublease of
$721,000, net of deferred rent write off in estimating the loss of economic
benefit from vacating approximately 22,000 square feet of laboratory and
administrative space at our prior facility. On June 30, 2003, we entered into a Settlement Agreement with Nexus Canyon
Park, our prior landlord. Under this Settlement Agreement, Nexus Canyon Park
agreed to permit premature termination of our prior lease and excuse us from
future performance of lease obligations in exchange for 90,000 shares of our
unregistered common stock with a fair value of $35,000 and Nexus retention of
our $1.0 million lease security deposit. The Settlement Agreement resulted in
an additional loss on facility sublease and lease termination of $174,000, net
of deferred rent of $202,000. FASB 146 Accounting for Costs Associated with
Exit or Disposal Activitieshas replaced EITF 94-3 but similar charges may
occur if we have to cancel our current lease or enter into other restructuring
transactions. We also determine our employee stock option compensation costs as the
difference between the estimated fair value of our common stock and the
exercise price of options on their date of grant. Prior to our initial public
offering, our common stock was not actively traded. The fair value of our
common stock for purposes of determining compensation expense for this period
was determined based on our review of the primary business factors underlying
the value of our common stock on the date such option grants were made, viewed
in light of the expected initial public offering price per share prior to the
initial public offering of our common stock. The actual initial public offering
price was significantly lower than the expected price used in determining
compensation expense. 12




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Also, on an ongoing basis the estimate of expense for stock options and
warrants is dependent on factors such as expected life and volatility of our
stock. To the extent actual expense is different than that estimated, the
actual expense that would have been recorded may be substantially different. Related Party Transactions On November 13, 2003, we entered into an Amended and Restated Employment
Agreement with our President, Chief Operating Officer, Chief Science Officer
and Secretary, wherein we eliminated any potential award of severance
compensation in exchange for a one-time payment of $281,571. We also eliminated
any potential award of severance compensation, totaling $33,635, to our Vice
President of Vaccine Research and Development and our Controller. Subsequently,
the after-tax portion of those payments, totaling $210,000, were invested in
the November 13, 2003 completed Secured Convertible Promissory Note and Warrant
financing. It was also Managements understanding that Washington State law considers
accrued, but unpaid, wages (including possibly severance payments) a personal
liability of our Directors. Management, by electing to take potential severance
payments in cash in November 2003, eliminated this potential personal liability
on the part of our Directors. In addition to the above sums, our Vice President of Vaccine Research and
Development invested an additional $25,000 and another $100,000 was received
from non-employee investors. These additional funds, including the after-tax
severance funds, brought the total invested in the November 13, 2003 secured
convertible promissory note and warrants financing to $335,000. The November 13, 2003 notes have a 12 month term, accrue interest at an
annual rate equal to the prime rate plus 2% and initially were secured by
substantially all of our assets. The aggregate principal amount of the five notes was
$335,000 of which $50,000, including interest of $1,674, was repaid on June 1,
2004. In connection with the April 26, 2004 Recapitalization Agreement with
Toucan, note holders of 70% of the principal amount of the notes agreed to an
amendment to their notes. The purpose of the amendment was to set the
conversion price of the amended notes at $0.10 per share and change the
maturity date to November 12, 2004 in the event the Company raises at least $15
million in a financing prior to that time or May 12, 2005 if the Company has
not completed a $15 million financing by May 12, 2005. As part of the November 13, 2003 investment, the investors received
warrants initially exercisable to acquire an aggregate of 3.7 million shares of
our common stock, expiring November 2008 subject to certain antidilution
adjustments, at an exercise price to be determined as follows: (i) in the event
that we complete an offering of our common stock generating gross proceeds to
us of at least $1 million, then the price per share paid by investors in that
offering; or (ii) if we do not complete such an offering, then $0.18, which was
the closing price of our common stock on the date of the financing. In
connection with the April 26, 2004 Recapitalization Agreement, certain members
of management who hold warrants agreed to an amendment to their warrants. The
amendment applies to all warrants issued in the November 13, 2003 financing.
The purpose of the amendment was to remove the economic anti-dilution
provisions and set the warrant exercise price at the lesser of (i) $0.10 per
share or (ii) a 35% discount to the average closing price during the twenty
trading days prior to the first closing of the sale by the Company of
convertible preferred stock as contemplated by the Recapitalization Agreement
but not less than $0.04 per share. Proceeds from the November 13, 2003 offering were allocated between the
notes and warrants on a relative fair value basis. The value allocated to the
warrants on the date of the grant was approximately $221,000. The fair value of
the warrants was determined using the Black-Scholes option pricing model with
the following assumptions: expected dividend yield of 0%, risk-free interest
rate of 3.36%, volatility of 194%, and an contractual life of 5-years. The
value of the warrants was recorded as a deferred debt discount against the
$335,000 proceeds of the notes. In addition, a beneficial conversion feature
related to the notes was determined to be approximately $221,000 but is capped
at the remaining value originally allocated to the notes of approximately
$114,000. As a result, the total discount on the notes equaled the face value
of $335,000 which is being amortized over the twelve-month term of the notes.
Amortization of deferred debt discount of approximately $168,000 along with
interest accretion on the note of approximately $11,000 was recorded during the
six months ended June 30, 2004 for the November 13, 2003 note balances. 13




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Toucan Financing In an effort to continue to fund our operations, on April 26, 2004 the
Company entered into a Recapitalization Agreement with Toucan. On July 30, 2004
the Company and Toucan amended and restated the Recapitalization Agreement (the
Amended and Restated Recapitalization Agreement). To date, we have issued Toucan
five 10% convertible promissory notes in the aggregate principal amount of $3.1
million, including a $2.0 million loan extended on July 30,
2004, in connection
with the execution of the Amended and Restated Recapitalization Agreement. The
notes accrue interest at 10% per year from their respective issuance dates and
are convertible into capital stock of the Company. We have also issued Toucan
warrants to purchase up to 86 million shares of our capital stock. The recent
borrowing from Toucan should enable the Company to fund its operations to
approximately September 30, 2004. Toucan has the option to loan additional
amounts to the Company, on terms mutually acceptable to the Company and Toucan,
but is not obligated to do so. Initial Bridge Funding The initial bridge funding period commenced on February 2, 2004 when we issued
Toucan an unsecured convertible promissory note, in the amount of $50,000. On
March 1, 2004, we issued Toucan a secured convertible promissory note, in the
amount of $50,000. The notes were convertible at prices below the current price
of our common stock at the date of issuance resulting in a beneficial
conversion cost of approximately $100,000 which is being amortized over the
term of the notes. Amortization of deferred debt discount of approximately
$37,000 along with interest accretion on the note of approximately $4,000 was
recorded during the six months ended June 30, 2004 for the February 2, and
March 1, 2004 note balances. The April 26, 2004 Recapitalization Agreement stipulated that the February
and March 2004 notes for $50,000 each were to be cancelled and reissued
effective April 26, 2004 as two separate notes for $50,000 each and conforming
to the conditions of the note signed for the April 26, 2004 bridge loan for
$500,000. As a result, the notes issued in February and March 2004,
respectively, have (i) a 12 month term, (ii) accrue interest at 10% per annum
on a 365 day basis compounded annually from their respective original issuance
dates, (iii) are secured by a first priority senior security interest in all of
the Companys assets, and (iv) warrants with coverage equal to three hundred
percent (300%) of the amount due under the bridge notes. The initial bridge
funding period expired May 26, 2004. On April 26, 2004 we issued Toucan a senior secured convertible promissory
note and warrants, in the amount of $500,000. Proceeds from the April 26, 2004
loan were allocated between the notes and warrants on a relative fair value
basis. The value allocated to the warrants on the date of the grant was
approximately $375,000. The fair value of the warrants was determined using the
Black-Scholes option pricing model with the following assumptions: expected
dividend yield of 0%, risk-free interest rate of 3.57%, volatility of 218%, and
an contractual life of 7-years. The value of the warrants was recorded as a
deferred debt discount against the $500,000 proceeds of the notes. In addition,
a beneficial conversion feature related to the notes was determined to be
approximately $375,000 but is capped at the remaining value originally
allocated to the notes of approximately $125,000. As a result, the total
discount on the notes equaled the face value of $500,000 which is being
amortized over the twelve-month term of the notes. Amortization of deferred
debt discount of approximately $89,000 along with interest accretion on the
note of approximately $9,000 was recorded during the six months ended June 30,
2004 for the April 26, 2004 note balance. Additional Bridge Funding Toucan, during the 60 day period following May 26, 2004, or to July 25,
2004, in its sole discretion, could provide up to an additional $500,000 of
bridge funding, in one or more tranches, on the same terms and conditions as
the initial bridge funding On June 11, 2004 we issued Toucan a senior secured convertible promissory note
and warrants, in the amount of $500,000. Proceeds from the June 11, 2004 loan
were allocated between the notes and warrants on a relative fair value basis.
The value allocated to the warrants on the date of the grant was approximately
$353,000. The fair value of the warrants was determined using the Black-Scholes
option pricing model with the following assumptions: expected dividend yield of
0%, risk-free interest rate of 3.70%, volatility of 219%, and an contractual
life of 7-years. The value of the warrants was recorded as a deferred debt
discount against the $500,000 proceeds of the notes. In addition, a beneficial
conversion feature related to the notes was determined to be approximately
$353,000 but is capped at the remaining value originally allocated to the notes
of approximately $147,000. As a result, the total discount on the notes equaled
the face value of $500,000 which is being amortized over the twelve-month term
of the notes. Amortization of deferred debt discount of approximately $26,000
along with interest accretion on the note of approximately $3,000 was recorded
during the six months ended June 30, 2004 for the June 11, 2004 note balance. 14




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Subsequent Bridge Funding On July 30, 2004, the Company and Toucan entered into the Amended and
Restated Recapitalization Agreement wherein Toucan agreed to make, and the
Company agreed to receive, an additional $2.0 million. The
amounts and timing of any further bridge funding will be determined
by mutual agreement between the Company and Toucan. Toucan is not
obligated to provide the Company with any additional bridge funding. During the bridge period, Toucan and the Company have agreed to cooperate
and use their best efforts to restart the Companys development programs and to
take the necessary actions to enable the Company to ultimately complete an
equity financing. At its election, Toucan will lead all bridge period
activities after consultation with the Company. The bridge period activities
will include without limitation: (i) negotiation and execution of contract
manufacturing arrangements for good manufacturing practice sourcing and
handling of dendritic cells, (ii) analysis of the intellectual property of the
Company, (iii) identification and pursuit of additional antigens to establish a
product pipeline for the Company, through negotiation and execution of binding
letters of intent or agreements for one or more licensing and/or merger and
acquisition transactions, (iv) evaluation of the antigen for the Companys
prostate cancer clinical trial and related production and regulatory issues,
(v) clarification and analysis of licensing terms and costs for license of IL-4
in case it is not feasible or not desirable to change the dendritic cell
production method to use Tangential Flow Filtration devices in the prostate
cancer clinical trial re-start, (vi) preparation of an updated business plan,
budgets, regulatory plan, manufacturing plans, and intellectual property
analyses, (vii) preparation of an investor package and due diligence binders to
facilitate review and due diligence by prospective equity investors, (viii)
evaluation of potential structures for the anticipated equity financing and
preparations for implementation of the transaction selected, including, without
limitation, Toucans consent and regulatory filings, (ix) analysis and
determination, satisfactory to Toucan, of what reverse stock splits should be
taken by the Company (including terms, conditions and timing), and preparations
for implementation of the transactions decided upon, including, without
limitation, Toucans consent and regulatory filings, and (x) planning for
syndication of the anticipated equity financing, and determination of the
amounts and timing of such financing. During the bridge period and so long as any bridge funding remains
outstanding, the Company is required to comply with certain covenants relating
to financial matters, handling of intellectual property, issuance of any equity
or debt securities, handling of Tangential Flow Filtration devices,
confidentiality and exclusivity and other material matters. Specifically,
during the bridge period and the equity financing period the Company is
required to: (i) coordinate with Toucan on the preparation and filing with the
Securities Exchange Commission of any filings and confidential treatment
requests covering any commercially sensitive terms (as determined jointly by
the Company and Toucan) of the Amended and Restated Recapitalization Agreement
and certain agreements entered into in connection with such agreement required
to be filed with the SEC under applicable SEC regulations, and use best efforts
to obtain confidential treatment of such information from the SEC, (ii) take
all steps reasonably necessary to implement the financing structure
contemplated by the Amended and Restated Recapitalization Agreement, (iii) not
hire, engage, retain or agree to hire, engage or retain, any full or part-time,
permanent or temporary employee, consultant, adviser, independent contractor,
collaborator, intern or other personnel of any kind, except with Toucans
express prior written approval, on a case by case basis, (iv) not enter into,
increase, expand, extend, renew or reinstate any severance, separation,
retention, change of control or similar agreement with any personnel (or agree,
promise, commit or undertake to do so), except with Toucans prior written
approval, on a case by case basis, (v) not purchase, lease, hire, rent or
otherwise acquire directly or indirectly any rights in or to any asset or
facility outside of the ordinary course of business in an amount in excess of
$10,000, in aggregate, or agree, promise or commit to do so, except in
accordance with the Companys budget that has been approved by the Companys
board of directors and Toucan, (vi) make no expenditures in excess of $10,000
in aggregate other than in accordance with a budget pre-approved by Toucan,
(vii) report the Companys cash position and all expenditures and agreements,
commitments or undertakings to Toucan on a bi-weekly basis, and (viii) not
deviate, during the period covered by a budget pre-approved by Toucan, more
than $10,000 in aggregate from such budget, 15




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nor take any action or make any promise, undertaking or commitment that
would result in the Company incurring or accumulating payables and/or other
financial obligations of any kind, whether current or deferred, direct or
indirect, for purposes other than as set forth in budgets expressly agreed to
by Toucan, and/or in any amounts in excess of the amounts set forth in such
agreed budgets, which equal or exceed $10,000 in aggregate and which have not
been approved in writing in advance by Toucan. Conversion Of Bridge Notes Automatic Conversion The principal amount of the bridge notes as well as any accrued and unpaid
interest will automatically convert into convertible preferred stock in the
event investors, other than Toucan, have purchased a minimum of $15.0 million
of convertible preferred stock. The conversion price for any automatic
conversion will be the lowest nominal or effective price per share paid by the
other investors who purchase such convertible preferred stock (excluding shares
issuable upon exercise of the bridge warrants). Discretionary Conversion Until, and/or in the absence of a purchases for cash of a minimum of $15
million of convertible preferred stock, by investors other than Toucan, Toucan
may, in its sole discretion, elect to convert any or all of the principal
and/or interest due under the notes into any equity security and/or debt
security and/or any combination thereof of the Company. Toucan may make such
determinations from time to time and at any time before the notes have been
discharged in full, and, as applicable, at any time on or before the expiration
of the thirty (30) day notice period required under the notes in the event the
Company wishes to prepay the notes. The conversion price for any discretionary conversion will be the lowest
of, (i) with certain exceptions, the lowest nominal or effective price per
share paid by any investor at any time on or after the date one year prior to
April 26, 2004, (ii) with certain exceptions, the lowest nominal or effective
price at which any investor is entitled to acquire shares (including, without
limitation, through purchase, exchange, conversion or exercise) pursuant to any
other security, instrument, or promise, undertaking, commitment, agreement or
letter of intent of the Company outstanding on or after April 26, 2004 or
granted, issued, extended or otherwise made available by the Company at any
time on or after the date one year prior to April 26, 2004 (regardless of
whether currently exercisable or convertible), and (iii) the lesser of $0.10
per share or a 35% discount to the average closing price per share of the
common stock during any twenty consecutive trading days (beginning with the
twenty consecutive trading days prior to April 26, 2004) but not less than
$0.04 per share under this clause (iii). Bridge Warrants As part of the initial and additional bridge funding Toucan received
warrants with coverage equal to three hundred percent (300%) of the principal
amount due under the bridge notes. As a result, the Company has issued $1.8
million dollars in warrant coverage on $600,000 of the initial bridge funding
and $1.5 million in warrant coverage on the $500,000 in additional bridge
funding received on June 11, 2004. The number of shares subject to bridge
warrants to be issued, but not the exercise price, was determined on the basis
of $0.05 per share (subject to adjustment for stock splits, stock dividends and
the like). The number of shares for which Toucan will be able to exercise the
bridge warrants from the aggregate $1.1 million of loans is 66 million shares. The bridge
warrants are currently exercisable and can be exercised for up to seven (7)
years. The exercise price of the bridge warrants is $0.01 per share (subject
to adjustment for stock dividends, stock splits, certain dilutive issuances and
similar transactions, as more fully provided in the bridge warrants). As part of the subsequent bridge funding, Toucan received warrants with
coverage equal to one hundred percent (100%) of the $2.0 million principal
amount due under the subsequent bridge note The number of shares subject to
bridge warrants to be issued was based on $0.10 per share basis (subject to
adjustment for stock splits, stock dividends and the like). The exercise price
is the lesser of (i) $0.10 per share (subject to adjustment for stock splits,
stock dividends and the like) or (ii) a 35% discount to the average closing
price during the twenty trading days prior to the first closing of the sale by
the Company of Preferred Stock as contemplated by the Recapitalization
Agreement; provided, however, that in no event will the exercise price be less
than $0.04 per share (subject to adjustment for stock splits, stock dividends
and the like). The number of shares for which Toucan will be able to exercise
the subsequent bridge warrants from the $2.0 million in subsequent bridge
funding is 20 million shares (subject to adjustment for stock splits, stock
dividends and the like). As of July 30, 2004, Toucan has the right to acquire up to 78 million
shares of the Companys outstanding capital stock upon conversion of
outstanding principal of $3.1 million and interest of $24,000 under the bridge
loans, and up to 86 million shares upon 16




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exercise of warrants. This represents a beneficial ownership of
approximately 85% of the outstanding capital stock of the Company on a fully
diluted basis. The Company does not currently have enough authorized shares to
satisfy conversion of all outstanding convertible notes and warrants and the
Company plans to request authorization of additional shares at its annual
meeting to be held before the end of 2004. In the event the issuance of the Companys convertible preferred stock is
approved and authorized pursuant to the terms of the Amended and Restated
Recapitalization Agreement and investors other than Toucan have closed on the
purchase in cash of a minimum of $15 million of such convertible preferred
stock, then all of the warrants issued to Toucan will be exercisable for such
convertible preferred stock. In the event that the convertible preferred stock
is not approved or authorized, or if investors other than Toucan have not
closed on the purchase of at least $15 million of the Companys convertible
preferred stock, then all of the warrants issued to Toucan will be exercisable
for any equity security and/or debt security and/or any combination thereof in
each case that Toucan shall designate in its sole discretion. Anticipated Equity Financing The proposed equity financing provides for the potential issuance and sale
of up to $40 million of convertible preferred stock (including any shares
issuable upon conversion of bridge funding, but not including any shares
issuable upon exercise of warrants, options, and similar instruments or
obligations), in one or more closings over a period of 12 months from the first
closing of the sale of convertible preferred stock. If issued, the convertible
preferred stock will be issued at a price per share equal to the lesser of
$0.10 (as adjusted for stock splits, stock dividends and the like) or a 35%
discount to the average closing price of the Companys common stock during the
twenty trading days prior to the first closing of the proposed equity
financing, but not less than $0.04 per share. The proposed equity financing is
contingent upon the Company complying with covenants in the Amended and
Restated Recapitalization Agreement and locating investors who are willing to
invest in the Company on the terms proposed. As part of the Amended and Restated Recapitalization Agreement, we have
already agreed to the principal terms of the equity financing with Toucan.
Under the terms of the initial Recapitalization Agreement, the Company and
Toucan agreed that the board of directors of the Company would be reconstituted
once the Company raised at least $2 million through the issuance of its
securities. In connection with amending and restating the Amended and Restated
Recapitalization Agreement, Toucan has requested that the current members of
the companys board of directors remain in place until the earlier of (i) the
approval of the transactions contemplated by the Amended and Restated
Recapitalization Agreement by the Companys stockholders, or (ii) the
expiration of the bridge period on October 23, 2004. In the event a sale of the Companys equity securities or debt securities,
or any combination thereof cannot be achieved as a public company, we would
consider deregistering the Companys common stock under the Securities Exchange
Act of 1934 and conducting the proposed equity offering on the same terms but
as a private company. The Company has also agreed to issue $8 million in warrant coverage on the
first $8 million of convertible preferred stock purchased for cash. Preferred
stock warrants will be exercisable for additional shares of convertible
preferred stock. Preferred stock warrants shall not be issued upon conversion
of notes, exercise of warrants, or other conversion or exercise. The number of
shares issuable upon exercise of warrants to be so issued will be determined on
the basis of $0.10 per share (subject to adjustment for stock splits, stock
dividends and the like), and the aggregate number of shares for which the
holders of preferred stock warrants will be able to exercise such warrants will
therefore be 80.0 million shares. The exercise price of the preferred stock warrants will be the lesser of
$0.10 per share (subject to adjustment for stock splits, stock dividends and
the like) or a 35% discount to the average closing price of our common stock
during the twenty trading days prior to the first closing of the sale of
convertible preferred stock; provided, however that in no event will the
exercise price be less than $0.04 per share (subject to adjustment for stock
splits, stock dividends and the like). The exercise period will commence upon
issuance of the preferred stock warrants, and shall continue for a period of
seven years after their respective issuance dates. The Companys obligations to enter into the proposed equity financing is
subject to a fiduciary exception pursuant to which the Company may respond to
or accept a proposal for an equity financing or merger, consolidation, business
accommodation or sale of all or substantially all of the Companys assets from
another party or parties, but only as to the extent required by applicable law,
only in regard to an alternative proposal that has not been directly or
indirectly solicited by the Company or any of its officers, directors or
employees or SOMA Partners LLC, or any advisors, agents or consultants and only
if the board of directors of the Company provides written certification to
Toucan that the alternative proposal was unsolicited. In the event that the
Company exercises this fiduciary exception, it is required to notify Toucan. If
the Companys board of directors determines that acceptance of any unsolicited
proposal is required in order to fulfill its fiduciary obligations, prior to
accepting such unsolicited proposal, the Company is required to notify 17




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Toucan of its intent to accept such a proposal. Toucan will then have
twenty-one (21) days from the date it receives notice from the Company to
present a revised proposal of its own to the Company (although Toucan is under
no obligation to do so) which the Companys board of directors is required to
consider in good faith. In the event that, following the consideration of any
revised proposal from Toucan or, in the absence of any such revised proposal,
following the expiration of twenty-one (21) days, if the Companys board of
directors determines that acceptance of the unsolicited proposal is required in
order to fulfill its fiduciary obligations, the Company will be under no
obligation to proceed with the anticipated equity financing. Standstill; Obligation to Effect Anticipated Equity Financing During the bridge period and the equity financing period (but excluding
the periods from February 18, 2004 through February 29, 2004 and March 16, 2004
through April 26, 2004), we have agreed to refrain from working with, or
entering into discussions with any other party, other than Toucan, for a
potential equity financing, debt financing, joint venture, license,
co-development or other business arrangement, or merger, consolidation,
business combination or sale of all or substantially all of our assets. Under the initial Recapitalization Agreement, the agreement terminated
unless the Company raised at least $2 million within 180 days of April 26,
2004. With the recent loan from Toucan of $2 million, this condition has been
satisfied. Therefore, the Company is obligated to enter into a financing with
Toucan pursuant to the terms of the Amended and Restated Recapitalization
Agreement. This applies even after the expiration of the standstill agreement
and the bridge period, except where doing so would conflict with the Companys
fiduciary exception under the Amended and Restated Recapitalization Agreement. Results of Operations Three Months Ended June 30, 2004 and 2003 Total Revenues.Revenues decreased 40% from $187,000 for the three months
ended June 30, 2003 to $116,000 for the three months ended June 30, 2004. The
research material sales component of revenue increased from $7,000 for the
three months ended June 30, 2003 to $10,000 for the three months ended June 30,
2004. This slightly higher sales volume resulted from direct advertising in
select trade journals in the first quarter 2004. We are unable to project when,
if ever, our sales of research materials will attain consistent profitability.
Research grant income is the remaining revenue component which decreased from
$180,000 for the three months ended June 30, 2003 to $106,000 for the three
months ended June 30, 2004. The decrease in grant revenue reflects decreased
direct research activity, and therefore a decrease in reimbursable direct and
indirect costs associated with the remaining grant award. Cost of Research Material Sales.Cost of research material sales decreased
85% from $40,000 for the three months ended June 30, 2003 to $6,000 for the
three months ended June 30, 2004. Our efforts to sell research reagents to a
broader base of customers commenced approximately mid-year 2003 with an
expected increase in direct material and direct labor costs. During the three
months ended June 30, 2004, we contracted with a third party in lowering direct
labor costs of manufacturing our research materials. We are unable to project
when, if ever, our sales of research materials will attain consistent
profitability. Research and Development Expense.Research and development expense
decreased 72% from $500,000 for the three months ended June 30, 2003 to
$142,000 for the three months ended June 30, 2004. This decrease was primarily
due to the November 2002 suspension of all clinical trial activity for our
DCVax product candidates and the withdrawal of our Investigational New Drug
Application (IND) for DCVax-Prostate, and for DCVax-Lung and the accompanying
reduction in material and personnel costs associated with these activities. General and Administrative Expense.General and administrative expense
decreased 50% from $1.4 million for the three months ended June 30, 2003 to
$706,000 for the three months ended June 30, 2004. This decrease was primarily
due to the October 9, 2002 directive from our Board of Directors to initiate
immediate actions to conserve cash and the resulting staff reductions and other
cost reduction steps implemented. Depreciation and Amortization.Depreciation and amortization decreased 26%
from $50,000 for the three months ended June 30, 2003 to $37,000 for the three
months ended June 30, 2004. This decrease was primarily due to the
approximately $904,000, net, of equipment and leasehold improvements write-offs
for the year ended December 31, 2003 and because there have been no capital
expenditures for the three months ended June 30, 2004. 18




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Total Other Income (Expense), NetInterest expense increased from $8,000
for the three months ended June 30, 2003 to $245,000 for the three months ended
June 30, 2004. This increase was due primarily to recognizing interest expense
relative to the debt discount and interest accretion associated with the
November 13, 2003 Secured Convertible Promissory Note and Warrants debt
financing and the bridge loans from Toucan. Interest income decreased 86% from
$8,000 for the three months ended June 30, 2003 to $1,000 for the three months
ended June 30, 2004. This decrease was primarily due to the decline in market
interest rates and having lower average cash balances during the three months
ended June 30, 2004. Gain on Sale of Intellectual Property. The $816,000 gain realized on the
sale of royalty rights was negotiated based on the expected discounted net
present value (NPV) of the future 2% royalty obligation under that certain
Assignment and License Agreement dated December 9, 2002 with Medarex and was
received in cash on July 1, 2003. Six Months Ended June 30, 2004 and 2003 Total Revenues.Revenues decreased 5% from $256,000 for the six months
ended June 30, 2003 to $243,000 for the six months ended June 30, 2004. The
research material sales component of revenue increased from $7,000 for the six
months ended June 30, 2003 to $34,000 for the six months ended June 30, 2004.
This slightly higher sales volume resulted from direct advertising in select
trade journals in the first quarter 2004. We are unable to project when, if
ever, our sales of research materials will attain consistent profitability.
Research grant income is the remaining revenue component which decreased 16%
from $249,000 for the six months ended June 30, 2003 to $209,000 for the six
months ended June 30, 2004. The decrease in grant revenue reflects decreased
direct research activity, and therefore a decrease in reimbursable direct and
indirect costs associated with the remaining grant award. Cost of Research Material Sales.Cost of research material sales decreased
23% from $40,000 for the six months ended June 30, 2003 to $31,000 for the six
months ended June 30, 2004. Our efforts to sell research reagents to a broader
base of customers commenced approximately mid-year 2003 with an expected
increase in direct material and direct labor costs. During the three months
ended June 30, 2004, we contracted with a third party in lowering direct labor
costs of manufacturing our research materials. We are unable to project when,
if ever, our sales of research materials will attain consistent profitability. Research and Development Expense.Research and development expense
decreased 63% from $1.0 million for the six months ended June 30, 2003 to
$371,000 for the six months ended June 30, 2004. This decrease was primarily
due to the November 2002 suspension of all clinical trial activity for our
DCVax product candidates and the withdrawal of our Investigational New Drug
Application (IND) for DCVax-Prostate, and for DCVax-Lung and the accompanying
reduction in material and personnel costs associated with these activities. General and Administrative Expense.General and administrative expense
decreased 48% from $2.5 million for the six months ended June 30, 2003 to $1.3
million for the six months ended June 30, 2004. This decrease was primarily due
to the October 9, 2002 directive from our Board of Directors to initiate
immediate actions to conserve cash and the resulting staff reductions and other
cost reduction steps implemented. Depreciation and Amortization.Depreciation and amortization decreased 46%
from $137,000 for the six months ended June 30, 2003 to $74,000 for the six
months ended June 30, 2004. This decrease was primarily due to the
approximately $904,000, net, of equipment and leasehold improvements write-offs
for the year ended December 31, 2003 and because there have been no capital
expenditures for the six months ended June 30, 2004. Total Other Income (Expense), NetInterest expense increased from $19,000
for the six months ended June 30, 2003 to $352,000 for the six months ended
June 30, 2004. This increase was due primarily to recognizing interest expense
relative to the debt discount and interest accretion associated with the
November 13, 2003 Secured Convertible Promissory Note and Warrants debt
financing and the bridge loans from Toucan. Interest income decreased 95% from
$20,000 for the six months ended June 30, 2003 to $1,000 for the six months
ended June 30, 2004. This decrease was primarily due to the decline in market
interest rates and having lower average cash balances during the three months
ended June 30, 2004. 19




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Liquidity and Capital Resources General Discussion Through abandoning the tenant improvements at our prior facility, on which
use tax payments to the State of Washington had been qualified for tax
deferral, including the disposal and impairment of previously qualified tax
deferred equipment, we received a tax assessment of $492,000 on October 21,
2003 for 87.5% of the gross tax deferred on such qualified investments. The tax
assessment payment was initially due on November 20, 2003 and
accrues interest at 7% until paid. This contingent
assessment is being carried as an estimated liability on the balance sheet as
of June 30, 2004, and for the year ended December 31, 2003, was included in
general and administrative expense. The net assessment has been reduced by $27,000 based upon the State of
Washington, Department of Revenues, reduced assessment received on August 2,
2004 which also extended the tax assessment payment date for the $465,000
balance of the assessment, excluding interest, to August 31, 2004. The length of time that has
elapsed since the completion of the leasehold improvement, the major subject of
the assessment, has made it difficult to provide the State with specific
segment specifications, and respective segment costs. We believe the blueprints
for the construction project will make it possible to provide the State with
the requested construction detail and costs. Therefore, we expect to file an
additional appeal for further reduction in this assessment, before the August
31, 2004 payment deadline, as provided under the revised code of Washington
(WAC 458-20-100). While an appeal is pending, it is our understanding of
Washington s code, payment of the assessment is suspended until the appeal
process is finally exhausted. In addition, regarding a separate tax matter, in February 2004, a refund
request of approximately $175,000 related to certain other State taxes was
submitted to the State. This review is ongoing with the State recently
requesting approximately 350 paid invoices for review. The finalization of our
appeal process for the tax assessment, and our request for a tax refund related
to other State taxes, is expected to take several more months. We cannot with
any certainty determine any amount that may be deducted from the August 2, 2004
assessed liability or that will be recovered, if any, from our tax refund
request. As
of August 2, 2004,
after giving effect to aggregate borrowings from Toucan of $3.1 million, the Company
had approximately $2 million in cash and cash equivalents. Of the
$2 million in cash
and cash equivalents, $1,177,801 was paid to Cognate Therapeutics, Inc.
pursuant to a service agreement between the Company and Cognate dated
July 30, 2004.
The fees the Company paid to Cognate consist of a $750,000 non-refundable
contract initiation fee and a $427,801 contract service fee for the month of August.
The payments were made on August 4 and August 5, 2004, respectively. Cognate is a
Contract Research Organization, majority owned by Toucan and two of the
principals of Toucan are board members of Cognate. The Company is committed to
utilizing Cognates services for a two year period related primarily to manufacturing
drugs, regulatory advice, research and development (R&D) preclinical activities
and managing clinical trials. Monthly expenditures are expected to range between
approximately $427,000 and $718,000. The contract with Cognate includes a
penalty of $4.0 million if the Company cancels the contract within one year
and $2.0 million if the Company cancels the contract after one year as well
as payment for all services performed in winding down any ongoing activities.
The Company entered into this contract after consultation with an independent
expert in the field of Good Manufacturing Practices (GMP), regulatory affairs,
and clinical trial activities. The Company believes entering into this agreement
gives it an opportunity to restart its clinical and research programs much
more efficiently and rapidly as opposed to rebuilding its infrastructure,
internal cGMP facilities, regulatory, clinical and R&D expertise. In addition,
if the Company did not enter into this contract with Cognate it is likely that
Toucan would not have loaned it the additional $2.0 million on
July 30, 2004
because of the significant delay in moving forward with rebuilding these
capabilities within the Company, and the potential negative impact on formation
of a syndicate of potential investors. Given these facts the Company believes it
was in its best interest to enter into this agreement. After the payments to Cognate, the Company believes that its remaining cash of approximately $822,000, based on recurring operating and associated financing costs, will be sufficient to fund its operations through approximately September 30, 2004. After
that date we will have to seek additional funds from Toucan, which
Toucan is not obligated to provide to us. Under the terms of the
Amended and Restated Recapitalization Agreement, if Toucan elects not
to provide additional funding to us, we are prohibited from seeking
funds from any party other than Toucan for up to ten business days
after October 23, 2004. After that date we
will have to seek additional funds from Toucan, which Toucan is not obligated
to provide to us. Under the terms of the Amended and Restated Recapitalization
Agreement, if Toucan elects not to provide additional funding to us, we are
prohibited from seeking funds from any party other than Toucan for up to ten
business days after October 23, 2004. Any additional financing with Toucan and any other third party is likely
to be dilutive to stockholders, and debt financing, if available, may include
additional restrictive covenants. While the Company has attempted to obtain funding for working capital from
multiple parties since 2002, Toucan is the only party, to date, that has
invested a significant amount of capital in the Company. Therefore, if the
Amended and Restated Recapitalization Agreement is not fully implemented, or if
Toucan is unwilling to continue to fund the Companys operations, it is
unlikely the Company will obtain additional funding from any third parties and
the Company will be required to cease operations and liquidate its assets. Our independent auditors have indicated in their report on our financial
statements included in our December 31, 2003 annual report on Form 10-K, that
there is substantial doubt about our ability to continue as a going concern. We
need to raise significant additional funding to continue our operations,
conduct research and development activities, pre-clinical studies and clinical
trials necessary to bring our product candidates to market. However, additional
funding may not be available on terms acceptable to us or at all. The
alternative of issuing additional equity or convertible debt securities also
may not be available and, in any event, would result in additional dilution to
our stockholders. Asset Sales and Sources of Cash On April 8, 2003, we were awarded a National Institutes of Health (NIH)
cancer research grant. The total first year grant award was for approximately
$318,000 and has been earned under the grant and was recognized in revenue
through the year ended December 31, 2003. The total award for fiscal 2004 was
approximately $328,000, comprised of approximately $198,000 authorized 20




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for direct grant research expenditures and approximately $130,000
authorized for use to cover our facilities and administrative overhead costs.
Approximately $118,000 of the grants aggregate award remains to be utilized of
which $105,000 has been received and is included in deferred grant revenue as
of June 30, 2004. On April 21, 2003, because we had received frequent requests from
researchers for access to our cancer-associated monoclonal antibodies, human
dendritic cells, and dendritic cell precursors (monocytes), we announced our
entry into the Research Reagents Market. We earned approximately $34,000 in
revenue for the six months ended June 30, 2004 from the manufacture and sale of
research materials. However, we have limited manufacturing facilities and
expertise to produce our research products and the commercial success of any of
our research products will depend upon the strength of our sales and marketing
efforts. We are unable to project when, if ever, its sales of research
materials will attain consistent profitability. Our effort to license certain rights, title, and interest to technology
relating to specific cell lines resulted in the July 1, 2003 License Agreement
with DakoCytomation with the payment of a one-time $25,000 license fee and
future non-refundable minimum annual royalty payments of $10,000 credited
against any royalty payments made to NWBT. The $25,000 one-time license fee was
received on August 25, 2003. Recapitalization Plan In an effort to continue to fund our operations, On April 26, 2004 we
entered into a Recapitalization Agreement with Toucan Capital Fund II, L.P.
(Toucan). The Company and Toucan amended and restated this agreement on July
30, 2004 (the Amended and Restated Recapitalization Agreement). The Amended
and Restated Recapitalization Agreement calls for the possible recapitalization
of the Company. At Toucans option, and if successfully implemented, the
recapitalization could potentially provide the company with up to $40 million
through the issuance of new securities to Toucan and a syndicate of investors
selected by Toucan. Following full implementation of the recapitalization plan,
Toucan and the investor syndicate would potentially own, on a combined basis,
over 90% of the outstanding capital stock of the Company. Initial Bridge Funding The initial bridge funding period commenced on February 2, 2004 when we
issued Toucan an unsecured convertible promissory note, in the amount of
$50,000. On March 1, 2004, we issued Toucan a secured convertible promissory
note, in the amount of $50,000. On April 26, 2004, we issued Toucan a senior
secured convertible promissory note and warrants, in the amount of $500,000. Additional Bridge Funding Toucan, during the 60 day period following May 26, 2004, or to July 25,
2004, in its sole discretion, could provide up to an additional $500,000 of
bridge funding, in one or more tranches, on the same terms and conditions as
the initial bridge funding. On June 11, 2004, we issued Toucan a senior
secured convertible promissory note and warrants, in the amount of $500,000. The April 26, 2004 Recapitalization Agreement stipulated that the February
and March 2004 notes for $50,000 each were to be cancelled and reissued
effective April 26, 2004 as two separate notes for $50,000 each and conforming
to the conditions of the note signed for the April 26, 2004 bridge loan for
$500,000. As a result, the notes issued in February and March 2004,
respectively, and the notes issued in April and June 11, 2004 have (i) a 12
month term, (ii) accrue interest at 10% per annum on a 365 day basis compounded
annually from their respective original issuance dates, (iii) are secured by a
first priority senior security interest in all of the Companys assets, and
(iv) warrants with coverage equal to three hundred percent (300%) of the amount
due under the bridge notes. The initial bridge funding period expired May 26,
2004. Subsequent Bridge Funding On July 30, 2004, the Company and Toucan entered into the Amended and
Restated Recapitalization Agreement wherein Toucan agreed to make, and the
Company agreed to receive, an additional loan from Toucan. In connection with
this loan the Company issued Toucan a senior secured convertible promissory
note in the amount of $2.0 million, and warrants. 21




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Uses of Cash We
used $1.1 million in cash for operating activities during the six months
ended June 30, 2004, compared to $3.2 million for the six months ended June 30,
2003. The decrease in cash used in operating activities from 2003 to 2004 was
primarily the result of the October 9, 2002, initiation of substantial steps to
conserve cash, including: (i) the suspension of all clinical trial activities;
(ii) the sale of certain fixed assets; (iii) the relocation and consolidation
of our facilities; (iv) a significant reduction in force (including the
termination of our Chief Executive Officer, Chief Financial Officer, and Chief
Medical Officer; and (v) the sale of significant portions of our intellectual
property portfolio. We generated $111,000 in cash from investing activities during the six
months ended June 30, 2004 compared to $1.7 million provided by investing
activities during the six months ended June 30, 2003. The cash provided during
the six months ended June 30, 2004 consisted primarily of restricted cash
released as collateral for the Companys credit cards and the sale of
non-essential equipment. Factors That May Affect Results of Operations and Financial Condition This section briefly discusses certain risks that should be considered by
our stockholders and prospective investors. You should carefully consider the
risks described below, together with all other information included in the
December 31, 2004 annual report on Form 10-K and the information incorporated
by reference. If any of the following risks actually occur, our business,
financial condition or operating results could be harmed. In such case, you
could lose all of your investment. Control by Toucan Capital Fund II, LP of a large percentage of our voting stock
and Toucans rights under the Recapitalization Agreement may permit Toucan to
influence the Company in a way that can adversely affect our stock price As of July 30, 2004, Toucan has the right to acquire up to 78 million
shares of the Companys outstanding capital stock upon conversion of
outstanding principal of $3.1 million and interest of $24,000 under the bridge
loans, and up to 86 million shares upon exercise of warrants. This represents a
beneficial ownership of approximately 85% of the outstanding capital stock of
the Company on a fully diluted basis. In addition, under the terms of the Amended and Restated Recapitalization
Agreement, we are required to consult with Toucan on how we conduct many
aspects of our business. As a result, Toucan has significant authority over how
we presently conduct our business, and with its stock acquisition rights, could
influence all matters requiring stockholder approval. This control may cause us
to conduct our business differently from the way we have operated in the past.
The concentration of ownership may also delay, deter or prevent acts that would
result in a change in control, which, in turn, could reduce the market price of
our common stock. We will need to raise additional capital which may not be available. As
of August 2, 2004,
after giving effect to aggregate borrowings from Toucan of $3.1 million, the Company
had approximately $2 million in cash and cash equivalents. Of the
$2 million in cash
and cash equivalents, $1,177,801 was paid to Cognate Therapeutics, Inc.
pursuant to a service agreement between the Company and Cognate dated
July 30, 2004.
The fees the Company paid to Cognate consist of a $750,000 non-refundable
contract initiation fee and a $427,801 contract service fee for the month of August.
The payments were made on August 4 and August 5, 2004, respectively. Cognate is a
Contract Research Organization, majority owned by Toucan and two of the
principals of Toucan are board members of Cognate. The Company is committed to
utilizing Cognates services for a two year period related primarily to manufacturing
drugs, regulatory advice, research and development (R&D) preclinical activities
and managing clinical trials. Monthly expenditures are expected to range between
approximately $427,000 and $718,000. The contract with Cognate includes a
penalty of $4.0 million if the Company cancels the contract within one year
and $2.0 million if the Company cancels the contract after one year as well
as payment for all services performed in winding down any ongoing activities.
The Company entered into this contract after consultation with an independent
expert in the field of Good Manufacturing Practices (GMP), regulatory affairs,
and clinical trial activities. The Company believes entering into this agreement
gives it an opportunity to restart its clinical and research programs much
more efficiently and rapidly as opposed to rebuilding its infrastructure,
internal cGMP facilities, regulatory, clinical and R&D expertise. In addition,
if the Company did not enter into this contract with Cognate it is likely that
Toucan would not have loaned it the additional $2.0 million on
July 30, 2004
because of the significant delay in moving forward with rebuilding these
capabilities within the Company, and the potential negative impact on formation
of a syndicate of potential investors. Given these facts the Company believes it
was in its best interest to enter into this agreement. After the payments to Cognate, the Company believes that its remaining cash of approximately $822,000, based on recurring operating and associated financing costs, will be sufficient to fund its operations through approximately September 30, 2004. After
that date we will have to seek additional funds from Toucan, which
Toucan is not obligated to provide to us. Under the terms of the
Amended and Restated Recapitalization Agreement, if Toucan elects not
to provide additional funding to us, we are prohibited from seeking
funds from any party other than Toucan for up to ten business days
after October 23, 2004. After that date we
will have to seek additional funds from Toucan, which Toucan is not obligated
to provide to us. Under the terms of the Amended and Restated Recapitalization
Agreement, if Toucan elects not to provide additional funding to us, we are
prohibited from seeking funds from any party other than Toucan for up to ten
business days after October 26, 2004. The Company has attempted to obtain funding for working capital from third
parties since 2002. To date, Toucan is the only party that has invested a
significant amount of capital in the Company. If the Amended and Restated
Recapitalization Agreement is not 22




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fully implemented or if Toucan is unwilling to provide additional funding,
it is unlikely that the Company will be able to obtain funding from other
parties. If this does occur, the Company will have to cease operations and
begin liquidating its assets. Our auditors have issued a going concern audit opinion. Our independent auditors have indicated in their report on our December
31, 2003 financial statements included in our Form 10-K that there is
substantial doubt about our ability to continue as a going concern. A going
concern opinion indicates that the financial statements have been prepared
assuming we will continue as a going concern and do not include any adjustments
to reflect the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may result from
the outcome of this uncertainty. We have reduced business umbrella, auto, crime and fiduciary, and directors and
officers liability insurance coverage. With rising insurance premiums for most business insurance coverage, with
our reduced level of operating activity, and reduced liability exposure through
the stopping of all clinical trials, we lowered the levels of all of our
insurance coverage. When our finances permit and when our level of operating
activities rise, our insurance needs will be reassessed. Making a material
reduction in our insurance coverage may make it difficult for us to retain our
existing directors and officers, and will also result in increased exposure to
potential liabilities arising from any future litigation, either of which may
materially harm our business and results of operations. As a result of questions concerning our status as a going concern, potential
customers and partners may decide not to do business with us. The success of our restructured operations will depend on our ability to
attract partners to our research initiatives and to a lesser extent our ability
to attract customers to our research products. Due to concerns regarding our
ability to continue operations, these third parties may decide not to conduct
business with us, or may conduct business with us on terms that are less
favorable than those customarily extended by them. If either of these events
occurs, our business will suffer significantly. We expect to continue to incur substantial losses, and we may never achieve
profitability. We have incurred net losses every year since our incorporation in July
1998 and, as of June 30, 2004, we had a deficit accumulated during the
development stage of approximately $66.1 million. We have had net losses
applicable to common stockholders for the prior three years as follows:  
    
    $17.3 million in 2001;  
    
    $12.8 million in 2002; and  
    
    $5.8 million in 2003. We expect that these losses will continue and anticipate negative cash
flows from operations for the foreseeable future. Because of our current cash
position, we will need to secure additional funding to continue operations. In
addition, we will need to generate revenue sufficient to cover operating
expenses and research and development costs to achieve profitability. We may
never achieve or sustain profitability. As a company in the early stage of development with an unproven business
strategy, our limited history of operations makes an evaluation of our business
and prospects difficult. We have had a limited operating history and are at an early stage of
development. We may not be able to achieve revenue growth in the future. We
have generated the following limited revenues for the prior three years.  
    
    $129,000 in 2001;  
    
    $9,000 in 2002; and 23




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
    
    $529,000 in 2003. We have derived most of these limited revenues from:  
    
    the sale of research products to a single customer;  
    
    contract research and development from related parties; and  
    
    research grants. In the future, we anticipate that our revenues will be derived primarily
through the commercialization of our product candidates. We may not be able to retain existing personnel. From approximately October 2002 through March 22, 2004, we reduced our
research and administrative staff by approximately sixty-three members. Our
remaining staff, as of August 13, 2004 consisted of six full-time employees and
one part-time employee. The uncertainty of our cash position, workforce reductions, the volatility
in our stock price and our recent asset sales may create anxiety and
uncertainty, which may adversely affect employee morale and cause us to lose
employees whom we would prefer to retain. To the extent that we are unable to
retain our existing personnel, our business and financial results may suffer. Because we lack sales and marketing experience, we may experience significant
difficulties commercializing our research products. The commercial success of any of our research products will depend upon
the strength of our sales and marketing efforts. We do not have a sales force
and have no experience in the sales, marketing or distribution of our research
products. To fully commercialize our research products, we will need to create
a substantial marketing staff and sales force with technical expertise and the
ability to distribute these products. As an alternative, we could seek
assistance from a third party with a large distribution system and a large
direct sales force. We may be unable to put either of these plans in place. In
addition, if we arrange for others to market and sell our products, our
revenues will depend upon the efforts of those parties. Such arrangements may
not succeed. If we fail to establish adequate sales, marketing and distribution
capabilities, independently or with others, our business will be seriously
harmed. We have limited manufacturing capabilities, which could adversely impact our
ability to commercialize our research products. We have limited manufacturing facilities and expertise to produce our
research products. We have never manufactured, on a commercial scale, any of
our research products. We may be unable to manufacture these products at a
reasonable cost or in sufficient quantities to be profitable. Our success partially depends on existing and future partners. The success of our business strategy may partially depend upon our ability
to develop and maintain multiple partnerships and to manage them effectively.
Therefore, our success depends partially upon the performance of our partners.
We cannot directly control the amount and timing of resources that our existing
or future partners devote to the research, development or marketing of our
products. As a result, those partners:  
    
    may not commit sufficient resources to our programs or products;  
    
    may not conduct their agreed activities on time, or at all, resulting in delay or termination of the development of our
products and technology;  
    
    may not perform their obligations as expected;  
    
    may pursue product candidates or alternative technologies in preference to ours; or 24




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
    
    may dispute the ownership of products or technology developed under our partnerships. We may have disputes with our partners, which could be costly and time
consuming. Our failure to successfully defend our rights could seriously harm
our business, financial condition and operating results. We intend to continue to enter into partnerships in the future. However,
we may be unable to successfully negotiate any additional partnerships and any
of these relationships, if established, may not be scientifically or
commercially successful. We also work with scientists and medical professionals at academic and
other institutions, including the University of California, Los Angeles, M.D.
Anderson Cancer Center, and the H. Lee Moffitt Cancer Center some of whom
conduct research for us or assist us in developing our research and development
strategy. These scientists and medical professionals are not our employees.
They may have commitments to, or contracts with, other businesses or
institutions that limit the amount of time they have available to work with us.
We have little control over these individuals. We can only expect them to
devote to our projects the amount of time required by our license, consulting
and sponsored research agreements. In addition, these individuals may have
arrangements with other companies to assist in developing technologies that may
compete with ours. If these individuals do not devote sufficient time and
resources to our programs, our business could be seriously harmed. Competition in our industry is intense and most of our competitors have
substantially greater resources than we have. The research products market recently entered by us is very competitive
with many well-established large and small distribution companies, such as
BioWhittaker, a Cambrex Company, DakoCytomation, and Cellsignalling Technology. We have marketed our research products through direct mail, the Internet,
and select participation in trade shows frequented by researchers who could be
interested in our research products. We are also seeking distribution
relationships with established and well-positioned distribution companies.
There can be no assurances that we will be successful in establishing a market
demand for our research products nor that we will be successful in finding a
suitable distributor interested in selling our research products. The biotechnology and biopharmaceutical industries are characterized by
rapidly advancing technologies, intense competition and a strong emphasis on
proprietary products. Several companies, such as Cell Genesys, Inc., Dendreon
Corporation and Genzyme Molecular Oncology, a division of Genzyme Corporation,
are actively involved in the research and development of cell-based cancer
therapeutics. Of these companies, we believe that only Dendreon is carrying-out
Phase III clinical trials with a cell-based therapy. No dendritic cell-based
therapeutic product is currently approved for commercial sale. Additionally,
several companies, such as Abgenix, Inc., Agensys, Inc., and Genentech, Inc.,
are actively involved in the research and development of monoclonal
antibody-based cancer therapies. Currently, at least six antibody-based
products are approved for commercial sale for cancer therapy. Genentech is also
engaged in several Phase III clinical trials for additional antibody-based
therapeutics for a variety of cancers, and several other companies are in early
stage clinical trials for such products. Many other third parties compete with
us in developing alternative therapies to treat cancer, including:  
    
    biopharmaceutical companies;  
    
    biotechnology companies;  
    
    pharmaceutical companies;  
    
    academic institutions; and  
    
    other research organizations. Many of our competitors have significantly greater financial resources and
expertise in research and development, manufacturing, pre-clinical testing,
conducting clinical trials, obtaining regulatory approvals and marketing than
we do. In addition, many of these competitors have become active in seeking
patent protection and licensing arrangements in anticipation of collecting
royalties for use of technology they have developed. Smaller or early-stage
companies may also prove to be significant competitors, particularly through
collaborative arrangements with large and established companies. These third
parties compete with us in recruiting and retaining qualified scientific and
management personnel, as well as in acquiring technologies complementary to our
programs. 25




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We expect that our ability to compete effectively will be dependent upon our
ability to:  
    
    obtain additional funding;  
    
    successfully complete clinical trials and obtain all requisite regulatory approvals;  
    
    maintain a proprietary position in our technologies and products;  
    
    attract and retain key personnel; and  
    
    maintain existing or enter into new partnerships. Our competitors may develop more effective or affordable products, or
achieve earlier patent protection or product marketing and sales than we may.
As a result, any products we develop may be rendered obsolete and
noncompetitive. Our intellectual property rights may not provide meaningful commercial
protection for our research products or product candidates, which could enable
third parties to use our technology, or very similar technology, and could
reduce our ability to compete in the market. We rely on patent, copyright, trade secret and trademark laws to limit the
ability of others to compete with us using the same or similar technology in
the United States and other countries. However, as described below, these laws
afford only limited protection and may not adequately protect our rights to the
extent necessary to sustain any competitive advantage we may have. The laws of
some foreign countries do not protect proprietary rights to the same extent as
the laws of the United States, and we may encounter significant problems in
protecting our proprietary rights in these countries. We have ten issued patents (four in the United States and six in foreign
jurisdictions) and 113 patent applications pending (22 in the United States and
91 in foreign jurisdictions) which cover the use of dendritic cells in DCVax as
well as targets for either our dendritic cell or fully human monoclonal
antibody therapy candidates. The issued patents expire at dates from 2015 to
2017. We will only be able to protect our technologies from unauthorized use by
third parties to the extent that they are covered by valid and enforceable
patents or are effectively maintained as trade secrets. The patent positions of
companies developing novel cancer treatments, including our patent position,
generally are uncertain and involve complex legal and factual questions,
particularly concerning the scope and enforceability of claims of such patents
against alleged infringement. Recent judicial decisions are prompting a
reinterpretation of the limited case law that exists in this area, and
historical legal standards surrounding questions of infringement and validity
may not apply in future cases. A reinterpretation of existing law in this area
may limit or potentially eliminate our patent position and, therefore, our
ability to prevent others from using our technologies. The biotechnology patent
situation outside the United States is even more uncertain. Changes in either
the patent laws or in interpretations of patent laws in the United States and
other countries may therefore diminish the value of our intellectual property. We own, or have rights under licenses to a variety of issued patents and
pending patent applications. However, the patents on which we rely may be
challenged and invalidated, and our patent applications may not result in
issued patents. Moreover, our patents and patent applications may not be
sufficiently broad to prevent others from practicing our technologies or from
developing competing products. We also face the risk that others may
independently develop similar or alternative technologies or design around our
patented technologies. We have taken security measures to protect our proprietary information,
especially proprietary information that is not covered by patents or patent
applications. These measures, however, may not provide adequate protection of
our trade secrets or other proprietary information. We seek to protect our
proprietary information by entering into confidentiality agreements with
employees, partners and consultants. Nevertheless, employees, partners or
consultants may still disclose our proprietary information, and we may not be
able to protect our trade secrets in a meaningful way. If we lose any
employees, we may not be able to prevent the unauthorized disclosure or use of
our technical knowledge or other trade secrets by those former employees
despite the existence of nondisclosure and confidentiality agreements and other
contractual restrictions to protect our proprietary technology. In addition,
others may independently develop substantially equivalent proprietary
information or techniques or otherwise gain access to our trade secrets. 26




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Our success will depend partly on our ability to operate without infringing or
misappropriating the proprietary rights of others. Our success will depend to a substantial degree upon our ability to
develop, manufacture, market and sell our research products and product
candidates without infringing the proprietary rights of third parties and
without breaching any licenses we have entered into regarding our product
candidates. There is a substantial amount of litigation involving patent and other
intellectual property rights in the biotechnology and biopharmaceutical
industries generally. Infringement and other intellectual property claims, with
or without merit, can be expensive and time-consuming to litigate and can
divert managements attention from our core business. We may be exposed to
future litigation by third parties based on claims that our products infringe
their intellectual property rights. This risk is exacerbated by the fact that
there are numerous issued and pending patents in the biotechnology industry and
the fact that the validity and breadth of biotechnology patents involve complex
legal and factual questions for which important legal principles remain
unresolved. Our competitors may assert that our products and the methods we employ are
covered by U.S. or foreign patents held by them. In addition, because patent
applications can take many years to issue, there may be currently pending
applications, unknown to us, which may later result in issued patents that our
products may infringe. There could also be existing patents of which we are not
aware that one or more of our products may inadvertently infringe. If we lose a patent infringement lawsuit, we could be prevented from
selling our research products or product candidates unless we can obtain a
license to use technology or ideas covered by such patent or are able to
redesign our products to avoid infringement. A license may not be available at
all or on terms acceptable to us, or we may not be able to redesign our
products to avoid any infringement. If we are not successful in obtaining a
license or redesigning our products, we may be unable to sell our products and
our business could suffer. We use hazardous materials and must comply with environmental, health and
safety laws and regulations, which can be expensive and restrict how we do
business. We store, handle, use and dispose of controlled hazardous, radioactive and
biological materials in our business. Our current use of these materials
generally is below thresholds giving rise to burdensome regulatory
requirements. Our development efforts, however, may result in our becoming
subject to additional requirements, and if we fail to comply with applicable
requirements we could be subject to substantial fines and other sanctions,
delays in research and production, and increased operating costs. In addition,
if regulated materials were improperly released at our current or former
facilities or at locations to which we send materials for disposal, we could be
strictly liable for substantial damages and costs, including cleanup costs and
personal injury or property damages, and incur delays in research and
production and increased operating costs. Insurance covering certain types of claims of environmental damage or
injury resulting from the use of these materials is available but can be
expensive and is limited in its coverage. We have no insurance specifically
covering environmental risks or personal injury from the use of these materials
and if such use results in liability, our business may be seriously harmed. Our principal stockholders, executive officers and directors own a significant
percentage of our stock and, as a result, the trading price for our shares may
be depressed and these stockholders can take actions that may be adverse to
your interests. Our principal stockholders, executive officers, and directors and entities
affiliated with them, in the aggregate, beneficially owned approximately 94% of
our common stock and shares of common stock issuable pursuant to options and
warrants exercisable on July 30, 2004. This significant concentration of
ownership may adversely affect the trading price for our common stock because
investors often perceive disadvantages in owning stock in companies with
controlling stockholders. Company management and Toucan, as a result of the
security ownership described above, has the ability to exert substantial
influence over all matters requiring approval by our stockholders, including
the election and removal of directors and any proposed merger, consolidation or
sale of all or substantially all of our assets. In addition, they can dictate
the management of our business and affairs. This concentration of ownership
could have the effect of delaying, deferring or preventing a change in control,
or impeding a merger or consolidation, takeover or other business combination
that could be favorable to you. 27




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There may not be an active, liquid trading market for our common stock. On December 14, 2001, our common stock was listed on the NASDAQ National
Market. Prior to that time there was no public market for our common stock. On
December 23, 2002, we were delisted from the NASDAQ National Market and our
common stock is currently listed on the Over The Counter Bulletin Board
(OTCBB), which is generally recognized as being a less active market than the
NASDAQ National Market. You may not be able to sell your shares at the time or
at the price desired. Our common stock may experience extreme price and volume fluctuations, which
could lead to costly litigation for us and make an investment in us less
appealing. The market price of our common stock may fluctuate substantially due to a
variety of factors, including:  
    
    announcements of technological innovations or new products by us or our competitors;  
    
    development and introduction of new cancer therapies;  
    
    media reports and publications about cancer therapies;  
    
    announcements concerning our competitors or the biotechnology industry in general;  
    
    new regulatory pronouncements and changes in regulatory guidelines;  
    
    general and industry-specific economic conditions;  
    
    changes in financial estimates or recommendations by securities analysts; and  
    
    changes in accounting principles. The market prices of the securities of biotechnology companies,
particularly companies like ours without earnings and consistent product
revenues, have been highly volatile and are likely to remain highly volatile in
the future. This volatility has often been unrelated to the operating
performance of particular companies. In the past, securities class action
litigation has often been brought against companies that experience volatility
in the market price of their securities. Moreover, market prices for stocks of
biotechnology-related and technology companies occasionally trade at levels
that bear no relationship to the operating performance of such companies. These
market prices generally are not sustainable and are subject to wide variations.
Whether or not meritorious, litigation brought against us could result in
substantial costs, divert managements attention and resources and harm our
financial condition and results of operations. Our incorporation documents, bylaws and stockholder rights plan may delay or
prevent a change in our management. Our amended and restated certificate of incorporation, bylaws and stockholder
rights plan contain provision that could delay or prevent a change in our
management team. Some of these provisions:  
    
    authorize the issuance of preferred stock that can be created and issued by the board of directors without prior
stockholder approval, commonly referred to as blank check preferred stock, with rights senior to those of common stock;  
    
    authorize our board of directors to issue dilutive shares of common stock upon certain events; and  
    
    provide for a classified board of directors. These provisions could allow our board of directors to affect your rights
as a stockholder since our board of directors can make it more difficult for
common stockholders to replace members of the board. Because our board of
directors is responsible for appointing the members of our management team,
these provisions could in turn affect any attempt to replace our current
management team. 28




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Item 3. Quantitative and Qualitative Disclosures About Market Risk Our exposure to market risk is presently limited to the interest rate
sensitivity of our cash and cash equivalents which is affected by changes in
the general level of U.S. interest rates. We are exposed to interest rate
changes primarily as a result of our investment activities. The primary
objective of our investment activities is to preserve principal while at the
same time maximizing the income we receive without significantly increasing
risk. To minimize risk, we maintain our cash and cash equivalents in
interest-bearing instruments, primarily money market funds. Our interest rate
risk management objective with respect to our borrowings is to limit the impact
of interest rate changes on earnings and cash flows. Due to the nature of our
cash and cash equivalents, we believe that we are not subject to any material
market risk exposure. We do not have any foreign currency or other derivative
financial instruments. 
 Item 4. Controls and Procedures (a) Evaluation of disclosure controls, procedures, and internal controls Our President (Principal Executive Officer) and our Controller (Principal
Financial and Accounting Officer), after evaluating the effectiveness of the
Companys disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14(c) and 15d-14(c)) and internal control over financial reporting,
as of the date of this quarterly report, have concluded that, as of June 30,
2004, our disclosure controls and procedures were adequate to ensure that
material information relating to the registrant would be made known to them by
others within the Company. In addition, our President and our Controller have
determined that our internal control over financial reporting is sufficient to
provide reasonable assurance that; (i) our records accurately and fairly
reflect our transaction and our disposition of our assets; (ii) allow
transactions to be recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles and that
receipts and expenditures of our Company are only being made in accordance with
authorizations of management and Company Directors; and (iii) the Company
prevents or timely detects the unauthorized acquisition, use, or disposition of
assets that could have a material effect on our financial statements. (b) Changes in internal controls. To our knowledge, there were no significant changes in the Companys
internal controls or in other factors that could significantly affect internal
controls during the quarter ended June 30, 2004. 29




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Part II  Other Information 
 Item 1. Legal Proceedings We are not a party to any material legal proceedings. 
 Item 2. Changes in Securities and Use of Proceeds None 
 Item 3. Defaults upon Senior Securities None 
 Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of our stockholders during the quarter
ended June 30, 2004. 
 Item 5. Other Information None 
 Item 6. Exhibits and Reports on Form 8-K a) Exhibits  31.1
    
    Certification of President (Principal Executive Officer), Pursuant to Exchange Act
Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Controller (Principal Financial and Accounting Officer), Pursuant to
Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certification of President Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Controller Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. b) Reports on Form 8-K On August 6, 2004 we filed a report on Form 8-K to report the terms of the
Amendment No. 1 To Recapitalization Agreement executed by the Company and
Toucan Capital Fund II, LP. 30




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. NORTHWEST BIOTHERAPEUTICS, INCDated: August 13, 2004
    
    By:
    
    /s/ Alton L. BoyntonAlton L. BoyntonPresident (PrincipalExecutive Officer)Dated: August 13, 2004
    
    By:
    
    /s/ Larry L. RichardsLarry L. RichardsController(Principal Financial andAccounting Officer)
 31




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NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company) 
 EXHIBIT INDEX ExhibitNumber
    
    Description31.1
    
    Certification of President (Principal Executive Officer), Pursuant to Exchange Act
Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Controller (Principal Financial and Accounting Officer), Pursuant to
Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certification of President Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Controller Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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