UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q







þ
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT
      OF 1934





For
the quarterly period ended September 30, 2010




OR





 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT
      OF 1934





For
the transition period from ____ to ____





Commission
file number 000-33393





Northwest
Biotherapeutics, Inc.


(Exact
Name of Registrant as Specified in its Charter)





Delaware
              
              94-3306718(State
      or other Jurisdiction of Incorporation or Organization)
              
              (I.R.S.
      Employer Identification No.)




4800
      Montgomery Lane, Suite 800
              
              20814Bethesda,
      Maryland 20814
              
              (Zip
      Code)(Address
      of Principal Executive Offices)




(240)
497-9024


(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 þ No  ̈





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




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





Large accelerated filer ̈
                        Accelerated filer ̈
                        Non-accelerated filer ̈
                        Smaller reporting company 
      þ(do not check if a smaller reporting company)





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





As of
November 5, 2010, the total number of shares of common stock, par value $0.001
per share, outstanding was 71,927,341.












NORTHWEST
BIOTHERAPEUTICS, INC.





TABLE
OF CONTENTS





PagePART
      I — FINANCIAL INFORMATIONItem
      1. Financial StatementsCondensed
      Consolidated Balance Sheets as of December 31, 2009 and September 30, 2010
      (unaudited)
                            
                            3Condensed
      Consolidated Statements of Operations (unaudited) for the three and nine
      months ended September 30, 2009 and 2010 and the period from March 18,
      1996 (inception) to September 30, 2010
                            
                            4Condensed
      Consolidated Statements of Cash Flows (unaudited) for the nine months
      ended September 30, 2009 and 2010 and the period from March 18, 1996
      (inception) to September 30, 2010
                            
                            5Notes
      to Condensed Consolidated Financial Statements
                            
                            6Item 2. Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                            
                            16Item 3. Quantitative and Qualitative Disclosures
      About Market Risk
                            
                            20Item 4. Controls and
      Procedures
                            
                            21PART II — OTHER INFORMATIONItem 1. Legal Proceedings
                            
                            23Item 1A. Risk Factors
                            
                            23Item 2. Unregistered Sales of Equity
      Securities and Use of Proceeds
                            
                            23Item 3. Defaults Upon Senior
      Securities
                            
                            24Item 4. (Removed and
      Reserved)
                            
                            24Item 5. Other Information
                            
                            24Item 6. Exhibits
                            
                            25SIGNATURES
                            
                            26INDEX TO EXHIBITS
                            
                            27




2





Part
I — Financial Information





NORTHWEST
BIOTHERAPEUTICS, INC.


(A
Development Stage Company)





Condensed
Consolidated Balance Sheets


(in
thousands)





December
      31,
                                            2009
                                          
                                          
                                          September
      30,
                                            2010(Unaudited)AssetsCurrent
      assets:Cash
                                          
                                          $
                                          65
                                          
                                          
                                          $
                                          80Prepaid
      expenses and other current assets
                                          
                                          
                                          36
                                          
                                          
                                          
                                          151Total
      current assets
                                          
                                          
                                          101
                                          
                                          
                                          
                                          231Property
      and equipment:Laboratory
      equipment
                                          
                                          
                                          29
                                          
                                          
                                          
                                          29Office
      furniture and other equipment
                                          
                                          
                                          82
                                          
                                          
                                          
                                          123111
                                          
                                          
                                          
                                          152Less
      accumulated depreciation and amortization
                                          
                                          
                                          (111
                                          )
                                          
                                          
                                          (113
                                          )Property
      and equipment, net
                                          
                                          
                                          -
                                          
                                          
                                          
                                          39Deposit
      and other non-current assets
                                          
                                          
                                          2
                                          
                                          
                                          
                                          16Total
      assets
                                          
                                          $
                                          103
                                          
                                          
                                          $
                                          286Liabilities
      And Stockholders’ Equity (Deficit)Current
      liabilities:Accounts
      payable
                                          
                                          $
                                          3,249
                                          
                                          
                                          $
                                          3,083Accounts
      payable, related party
                                          
                                          
                                          6,328
                                          
                                          
                                          
                                          6,575Accrued
      expenses
                                          
                                          
                                          1,874
                                          
                                          
                                          
                                          2,416Accrued
      expenses, related party
                                          
                                          
                                          1,329
                                          
                                          
                                          
                                          1,023Notes
      payable
                                          
                                          
                                          2,650
                                          
                                          
                                          
                                          1,650Note
      payable to related parties
                                          
                                          
                                          4,000
                                          
                                          
                                          
                                          4,000Convertible
      notes payable, net
                                          
                                          
                                          -
                                          
                                          
                                          
                                          1,054Total
      current liabilities
                                          
                                          
                                          19,430
                                          
                                          
                                          
                                          19,801Long
      term liabilities:Notes
      payable, net
                                          
                                          
                                          -
                                          
                                          
                                          
                                          1,676Convertible
      notes payable, net
                                          
                                          
                                          1,061
                                          
                                          
                                          
                                          961Convertible
      notes payable to related party, net
                                          
                                          
                                          298
                                          
                                          
                                          
                                          785Total
      long term liabilities
                                          
                                          
                                          1,359
                                          
                                          
                                          
                                          3,422Total
      liabilities
                                          
                                          
                                          20,789
                                          
                                          
                                          
                                          23,223Stockholders’
      equity (deficit):Preferred
      stock, $0.001 par value; 20,000,000 shares authorized and none issued and
      outstandingCommon stock, $0.001 par value; 150,000,000 shares
      authorized at December 31,2009
      and September 30, 2010 58,877,087 and 71,476,700 shares issued andoutstanding
      at December 31, 2009 and September 30, 2010,
      respectively
                                          
                                          
                                          58
                                          
                                          
                                          
                                          72Additional
      paid-in capital
                                          
                                          
                                          169,202
                                          
                                          
                                          
                                          185,220Deficit
      accumulated during the development stage
                                          
                                          
                                          (189,897
                                          )
                                          
                                          
                                          (208,111
                                          )Cumulative
      translation adjustment
                                          
                                          
                                          (49
                                          )
                                          
                                          
                                          (118
                                          )Total
      stockholders’ equity (deficit)
                                          
                                          
                                          (20,686
                                          )
                                          
                                          
                                          (22,937
                                          )Total
      liabilities and stockholders’
      equity (deficit)
                                          
                                          $
                                          103
                                          
                                          
                                          $
                                          286





See
accompanying notes to condensed consolidated financial
statements


3


NORTHWEST BIOTHERAPEUTICS, INC.


(A
Development Stage Company)





Condensed
Consolidated Statements of Operations


(in
thousands, except per share data)


(Unaudited)





Three months ended
                                                
                                                
                                                Nine months ended
                                                
                                                
                                                Period from
                                                  March 18,
                                                  1996
                                                  (Inception)
                                                  toSeptember30,
                                                
                                                
                                                September30,
                                                
                                                
                                                September2009
                                                
                                                
                                                2010
                                                
                                                
                                                2009
                                                
                                                
                                                2010
                                                
                                                
                                                30,
      2010Revenues:Research
      material sales
                                                
                                                $
                                                10
                                                
                                                
                                                $
                                                10
                                                
                                                
                                                $
                                                10
                                                
                                                
                                                $
                                                10
                                                
                                                
                                                $
                                                570Contract
      research and development from related parties
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                1,128Research
      grants and other
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                1,061Total
      revenues
                                                
                                                
                                                10
                                                
                                                
                                                
                                                10
                                                
                                                
                                                
                                                10
                                                
                                                
                                                
                                                10
                                                
                                                
                                                
                                                2,759Operating
      cost and expenses:Cost
      of research material sales
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                382Research
      and development
                                                
                                                
                                                2,465
                                                
                                                
                                                
                                                1,606
                                                
                                                
                                                
                                                7,437
                                                
                                                
                                                
                                                4,791
                                                
                                                
                                                
                                                71,704General
      and administration
                                                
                                                
                                                2,356
                                                
                                                
                                                
                                                1,412
                                                
                                                
                                                
                                                4,475
                                                
                                                
                                                
                                                4,680
                                                
                                                
                                                
                                                59,523Depreciation
      and amortization
                                                
                                                
                                                -
                                                
                                                
                                                
                                                2
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                2
                                                
                                                
                                                
                                                2,353Loss
      on facility sublease
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                895Asset
      impairment loss and other (gain) loss
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                389
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                2,445Total
      operating costs and expenses
                                                
                                                
                                                4,821
                                                
                                                
                                                
                                                3,020
                                                
                                                
                                                
                                                12,301
                                                
                                                
                                                
                                                9,473
                                                
                                                
                                                
                                                137,302Loss
      from operations
                                                
                                                
                                                (4,811
                                                )
                                                
                                                
                                                (3,010
                                                )
                                                
                                                
                                                (12,291
                                                )
                                                
                                                
                                                (9,463
                                                )
                                                
                                                
                                                (134,543
                                                )Other
      income (expense):Warrant
      valuation
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                6,759Loan
      conversion inducement
                                                
                                                
                                                (5,617
                                                )
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (5,617
                                                )
                                                
                                                
                                                (4,522
                                                )
                                                
                                                
                                                (10,139
                                                )Gain
      on sale of intellectual property and property and
equipment
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                3,664Interest
      expense
                                                
                                                
                                                (1,813
                                                )
                                                
                                                
                                                (632
                                                )
                                                
                                                
                                                (3,004
                                                )
                                                
                                                
                                                (4,229
                                                )
                                                
                                                
                                                (30,261
                                                )Interest
      income and other
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                1,218Net
      loss
                                                
                                                
                                                (12,241
                                                )
                                                
                                                
                                                (3,642
                                                )
                                                
                                                
                                                (20,912
                                                )
                                                
                                                
                                                (18,214
                                                )
                                                
                                                
                                                (163,302
                                                )Issuance
      of common stock in connection with elimination of Series A and Series A-1
      preferred stock preferences
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (12,349
                                                )Modification
      of Series A preferred stock warrants
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (2,306
                                                )Modification
      of Series A-1 preferred stock warrants
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (16,393
                                                )Series
      A preferred stock dividends
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (334
                                                )Series
      A-1 preferred stock dividends
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (917
                                                )Warrants
      issued on Series A and Series A-1 preferred stock
dividends
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (4,664
                                                )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
                                                
                                                $
                                                (12,241
                                                )
                                                
                                                $
                                                (3,642
                                                )
                                                
                                                $
                                                (20,912
                                                )
                                                
                                                $
                                                (18,214
                                                )
                                                
                                                $
                                                (208,111
                                                )Net
      loss per share applicable to common stockholders — basic and
      diluted
                                                
                                                $
                                                (0.27
                                                )
                                                
                                                $
                                                (0.05
                                                )
                                                
                                                $
                                                (0.47
                                                )
                                                
                                                $
                                                (0.28
                                                )Weighted
      average shares used in computing basic and diluted net loss per
      share
                                                
                                                
                                                45,276
                                                
                                                
                                                
                                                70,413
                                                
                                                
                                                
                                                44,583
                                                
                                                
                                                
                                                65,361





See
accompanying notes to condensed consolidated financial
statements.


4




NORTHWEST BIOTHERAPEUTICS, INC.


(A
Development Stage Company)





Condensed
Consolidated Statements of Cash Flows


(in
thousands)


(Unaudited)




Nine
      Months Ended
                September
      30,
              
              
              Period from March
      18, 1996 (Inception) to September 30,2009
              
              
              2010
              
              
              2010Cash
      Flows from Operating Activities:Net
      Loss
              
              $
              (20,912
              )
              
              $
              (18,214
              )
              
              $
              (163,302
              )Reconciliation
      of net loss to net cash used in operating activities:Depreciation
      and amortization
              
              
              -
              
              
              
              2
              
              
              
              2,353Amortization
      of deferred financing costs
              
              
              -
              
              
              
              -
              
              
              
              320Amortization
      debt discount
              
              
              819
              
              
              
              1,114
              
              
              
              20,815Accrued
      interest converted to stock
              
              
              -
              
              
              
              1,047
              
              
              
              1,307Accreted
      interest on convertible promissory note
              
              
              -
              
              
              
              -
              
              
              
              1,484Stock-based
      compensation costs
              
              
              1,909
              
              
              
              1,512
              
              
              
              11,016Stock
      and warrants issued for services and other expenses
              
              
              2,576
              
              
              
              3,593
              
              
              
              6,592Loan
      conversion inducement
              
              
              5,617
              
              
              
              4,522
              
              
              
              10,139Warrant
      valuation
              
              
              -
              
              
              
              -
              
              
              
              (6,759
              )Asset
      impairment loss and loss (gain) on sale of properties
              
              
              389
              
              
              
              -
              
              
              
              (936
              )Loss
      on facility sublease
              
              
              -
              
              
              
              -
              
              
              
              895Increase
      (decrease) in cash resulting from changes in assets and
      liabilities:Prepaid
      expenses and other current assets
              
              
              956
              
              
              
              (129
              )
              
              
              559Accounts
      payable and accrued expenses
              
              
              444
              
              
              
              380
              
              
              
              5,425Related
      party accounts payable and accrued expenses
              
              
              4,222
              
              
              
              (59
              )
              
              
              7,598Accrued
      loss on sublease
              
              
              -
              
              
              
              -
              
              
              
              (265
              )Deferred
      rent
              
              
              -
              
              
              
              -
              
              
              
              410Net
      Cash used in Operating Activities
              
              
              (3,980
              )
              
              
              (6,232
              )
              
              
              (102,349
              )Cash
      Flows from Investing Activities:Purchase
      of property and equipment, net
              
              
              (2
              )
              
              
              (41
              )
              
              
              (5,044
              )Proceeds
      from sale of property and equipment
              
              
              -
              
              
              
              -
              
              
              
              258Proceeds
      from sale of intellectual property
              
              
              -
              
              
              
              -
              
              
              
              1,816Proceeds
      from sale of marketable securities
              
              
              -
              
              
              
              -
              
              
              
              2,000Refund
      of security deposit
              
              
              -
              
              
              
              -
              
              
              
              (3
              )Transfer
      of restricted cash
              
              
              -
              
              
              
              -
              
              
              
              (1,035
              )Net
      Cash used in Investing Activities
              
              
              (2
              )
              
              
              (41
              )
              
              
              (2,008
              )Cash
      Flows from Financing Activities:Proceeds
      from issuance of note payable
              
              
              -
              
              
              
              -
              
              
              
              4,710Proceeds
      from issuance of convertible notes payable to related
    parties
              
              
              1,340
              
              
              
              2,667
              
              
              
              3,967Proceeds
      from issuance of note payable to related parties
              
              
              1,375
              
              
              
              -
              
              
              
              11,250Repayment
      of note payable to related party
              
              
              -
              
              
              
              -
              
              
              
              (6,700
              )Proceeds
      from issuance of convertible promissory note and warrants, net of issuance
      costs
              
              
              -
              
              
              
              -
              
              
              
              13,099Repayment
      of convertible promissory note
              
              
              -
              
              
              
              -
              
              
              
              (119
              )Borrowing
      under line of credit, Northwest Hospital
              
              
              -
              
              
              
              -
              
              
              
              2,834Repayment
      of line of credit, Northwest Hospital
              
              
              -
              
              
              
              -
              
              
              
              (2,834
              )Payment
      on capital lease obligations
              
              
              -
              
              
              
              -
              
              
              
              (323
              )Payments
      on note payable
              
              
              -
              
              
              
              -
              
              
              
              (420
              )Proceeds
      from issuance preferred stock, net
              
              
              -
              
              
              
              -
              
              
              
              28,708Proceeds
      from exercise of stock options and warrants
              
              
              -
              
              
              
              -
              
              
              
              228Proceeds
      from issuance common stock, net
              
              
              1,394
              
              
              
              3,690
              
              
              
              53,426Payment
      of preferred stock dividends
              
              
              -
              
              
              
              -
              
              
              
              (1,251
              )Series
      A preferred stock redemption fee
              
              
              -
              
              
              
              -
              
              
              
              (1,700
              )Deferred
      financing costs
              
              
              -
              
              
              
              -
              
              
              
              (320
              )Net
      Cash provided by Financing Activities
              
              
              4,109
              
              
              
              6,357
              
              
              
              104,555Effect
      of exchange rates on cash
              
              
              (28
              )
              
              
              (69
              )
              
              
              (118
              )Net
      increase in cash
              
              
              99
              
              
              
              15
              
              
              
              80Cash
      at beginning of period
              
              
              16
              
              
              
              65
              
              
              
              -Cash
      at end of period
              
              $
              115
              
              
              $
              80
              
              
              $
              80Supplemental
      disclosure of cash flow information — Cash paid during the period for
      interest
              
              $
              -
              
              
              $
              -
              
              
              $
              1,879Supplemental
      schedule of non-cash financing activities:Equipment
      acquired through capital leases
              
              $
              -
              
              
              $
              -
              
              
              $
              285Issuance
      of common stock in connection with elimination of Series A and Series A-1
      preferred stock preferences
              
              
              -
              
              
              
              -
              
              
              
              12,349Issuance
      of common stock in connection conversion of notes payable and accrued
      interest notes
              
              
              1,500
              
              
              
              1,004
              
              
              
              2,504Modification
      of Series A preferred stock warrants
              
              
              -
              
              
              
              -
              
              
              
              2,306Modification
      of Series A-1 preferred stock warrants
              
              
              -
              
              
              
              -
              
              
              
              16,393Warrants
      issued on Series A and Series A-1 preferred stock
dividends
              
              
              -
              
              
              
              -
              
              
              
              4,664Common
      stock warrant liability
              
              
              -
              
              
              
              -
              
              
              
              11,841Accretion
      of mandatorily redeemable Series A preferred stock redemption
      obligation
              
              
              -
              
              
              
              -
              
              
              
              1,872Debt
      discount on promissory notes
              
              
              2,028
              
              
              
              664
              
              
              
              11,501Conversion
      of convertible promissory notes and accrued interest to Series D preferred
      stock
              
              
              -
              
              
              
              -
              
              
              
              5,324Conversion
      of convertible promissory notes and accrued interest to Series A-1
      preferred stock
              
              
              -
              
              
              
              -
              
              
              
              7,707Conversion
      of convertible promissory notes and accrued interest to common
      stock
              
              
              -
              
              
              
              -
              
              
              
              269Issuance
      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
              
              
              -
              
              
              
              -
              
              
              
              840Issuance
      of common stock to landlord
              
              
              -
              
              
              
              -
              
              
              
              35Deferred
      compensation on issuance of stock options and restricted stock
      grants
              
              
              -
              
              
              
              -
              
              
              
              759Cancellation
      of options and restricted stock
              
              
              -
              
              
              
              -
              
              
              
              849Financing
      of prepaid insurance through note payable
              
              
              -
              
              
              
              -
              
              
              
              491Stock
      subscription receivable
              
              
              -
              
              
              
              -
              
              
              
              480


See
accompanying notes to condensed consolidated financial
statements.


5





Northwest
Biotherapeutics, Inc.


(A
Development Stage Company)





Notes
to Condensed Consolidated Financial Statements


(unaudited)





1.
Basis of Presentation





The
accompanying unaudited condensed consolidated financial statements include the
accounts of Northwest Biotherapeutics, Inc. and its subsidiary, NW Bio Europe
Sarl (collectively, the “Company”, “we”, “us”, and “our”). All material
intercompany balances and transactions have been eliminated. The accompanying
unaudited condensed consolidated financial statements should be read in
conjunction with the financial statements included in our Annual Report on Form
10-K for the year ended December 31, 2009. The year-end condensed balance sheet
data was derived from audited financial statements, but does not include all
disclosures required by accounting principles generally accepted in the United
States of America (“GAAP”). All normal recurring adjustments which are necessary
for the fair presentation of the results for the interim periods are reflected
herein. Operating results for the three and nine month periods ended September
30, 2009 and 2010 are not necessarily indicative of results to be expected for a
full year.





The
independent registered public accounting firm’s report on the financial
statements for the fiscal year ended December 31, 2009 states that because of
recurring operating losses, net operating cash flow deficits, 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.





2.
Summary of Significant Accounting Policies





The
significant accounting policies used in the preparation of the Company’s
condensed consolidated financial statements are disclosed in Note 3 to our
consolidated financial statements included in our Annual Report on Form 10-K for
the year ended December 31, 2009.





Recent
and Adopted Accounting Pronouncements





In March
2010, The Financial Accounting Standards Board ("FASB") issued new authoritative
guidance regarding revenue recognition to define a milestone and clarify that
the milestone method of revenue recognition is a valid application of the
proportional performance model when applied to research or development
arrangements.  Accordingly, a company can make an accounting policy
election to recognize a payment that is contingent upon the achievement of a
substantive milestone in its entirety in the period in which the milestone is
achieved.  This guidance began phasing in during the third quarter of
2010.  The implementation of this guidance did not have a material
impact on our consolidated financial statements.





In
January 2010, the FASB issued new authoritative guidance regarding the
disclosure of fair value measurements, which clarifies certain existing
disclosure requirements as well as requiring new disclosures related to
significant transfers between each fair value level as well as requiring
additional information about Level 3 activity. We adopted the guidance in
2010 without material impact on our consolidated financial
statements.





3.
Stock-Based Compensation





Compensation
expense for all stock-based awards is measured at the grant date based on the
fair value of the award and is recognized as an expense, on a straight-line
basis, over the employee's requisite service period (generally the vesting
period of the equity award). The fair value of each option award is estimated on
the date of grant using a Black-Scholes option valuation model. Stock-based
compensation expense is recognized only for those awards that are expected to
vest using an estimated forfeiture rate. We estimate pre-vesting option
forfeitures at the time of grant and reflect the impact of estimated pre-vesting
option forfeitures in compensation expense recognized.  For options
and warrants issued to non-employees, the Company recognizes stock compensation
costs utilizing the fair value methodology over the related period of
benefit.


6





Stock-based
compensation expense was as follows for the three and nine months ended
September 30 (in thousands):




Three months ended
                          September 30
                        
                        
                        Nine Months ended
                          September 302009
                        
                        
                        2010
                        
                        
                        2009
                        
                        
                        2010Research
      and development
                        
                        $
                        139
                        
                        
                        $
                        163
                        
                        
                        $
                        —
                        
                        
                        $
                        525General
      and administrative
                        
                        
                        329
                        
                        
                        
                        329
                        
                        
                        
                        658
                        
                        
                        
                        987Total
      stock-based compensation
                        
                        $
                        468
                        
                        
                        $
                        492
                        
                        
                        $
                        658
                        
                        
                        $
                        1,512




During the three month periods ended September 30,
2009 and 2010 options to purchase 850,000 and 50,000, respectively, shares of
common stock were issued. During the nine month periods ended September 30, 2009
and 2010 options to purchase 850,000 and 100,000, respectively, shares of common
stock were issued.





At
September 30, 2010, the unrecognized compensation expense related to stock
options was $2.6 million which is to be recognized over a weighted average
period of 1.72 years.





4.
Liquidity





The
Company has experienced recurring losses from operations, and, as of September
30, 2010, had a working capital deficit of $19.6 million and a deficit
accumulated during the development stage of $208.1 million. Of this $208.1
million deficit, $102.3 million (about half) reflects cash used in operations,
and the remaining $105.8 million reflects non-cash accounting
measures.





Between
2004 and 2010, the Company has undergone a significant recapitalization through
the transactions described below.





Toucan
Capital and Toucan Partners





Toucan
Capital Fund II, L.P. (“Toucan Capital”) loaned the Company $6.75 million during
2004 and 2005.  The Board’s Chairperson is the managing director of
Toucan Capital. In April 2006, the $6.75 million of notes payable plus all
accrued interest were converted into shares of Series A-1 cumulative convertible
Preferred Stock (the “Series A-1 Preferred Stock”). In connection with these
loans the Company issued Toucan Capital a warrant to purchase 8,166,667 shares
of Series A-1 Preferred Stock.  The warrants to purchase Series A-1
Preferred Stock were later converted into warrants to purchase 17,256,888 shares
of common stock in connection with the Conversion Agreement, described
below.





On
January 26, 2005, Toucan Capital purchased 32.5 million shares of Series A
cumulative convertible preferred stock (the “Series A Preferred Stock”) at $0.04
per share, for a total of $1.276 million. In connection with the securities
purchase agreement, the Company issued Toucan Capital a warrant to purchase
2,166,667 million shares of Series A Preferred Stock.  The warrants to
purchase Series A Preferred Stock were later converted into warrants to purchase
4,778,201 shares of common stock in connection with the Conversion Agreement,
described below.





From
November 14, 2005 through May 25, 2007, Toucan Partners, LLC (“Toucan Partners”)
loaned the Company $4.825 million under various promissory note
agreements.  The Board’s Chairperson is the managing member of Toucan
Partners.  The promissory note agreements were amended and restated
into the 2007 Convertible Notes.  The 2007 Convertible Notes also
included warrants to purchase shares of Series A-1 Preferred Stock ("2007
Warrants").  The Company repaid $5.3 million of principal and accrued
interest due to Toucan Partners during 2007.  The warrants to purchase
Series A-1 Preferred Stock were later converted into warrants to purchase
8,832,541 shares of common stock in connection with the Conversion Agreement,
described below.





Under the
June 22, 2007 Conversion Agreement, Toucan Capital and Toucan Partners agreed to
eliminate a number of rights, preferences and protections associated with the
Series A Preferred Stock and the Series A-1 Preferred Stock and Toucan Capital
received 4,287,851 shares of common stock and Toucan Partners received 2,572,710
shares of common stock.  Also, Toucan Capital converted its preferred
shares into 15,011,635 shares of common stock. Additionally under the conversion
agreement the Company exchanged the warrants to purchase Series A-1 Preferred
Stock and Series A Preferred Stock (discussed above) for warrants to purchase
common stock. As a result of the conversion Toucan Capital received warrants to
purchase 14,150,732 shares of Common Stock at an exercise price of $0.60 per
share and warrants to purchase 7,884,357 shares of Common Stock at an exercise
price of $0.15 per share and Toucan Partners received warrants to purchase
8,832,541 shares of Common Stock at an exercise price of $0.60 per
share.





Toucan
Partners loaned the Company $1.0 million on August 19, 2008 under the terms of
an unsecured promissory note (the “Toucan Partners August Loan”) with a
principal amount of $1,060,000 (reflecting an original issue discount of
$60,000).  On September 28, 2009, the note principal and accrued
interest (including a default penalty of 0.25% per month) amounting to
$1,156,718 was converted to 5,783,589 shares of common stock at a
conversion price of $0.20.  In connection with the conversion,
the Company issued Toucan Partners a warrant to purchase 690,000 shares of
common stock at an exercise price of $0.20 per share.


7





Toucan Partners loaned the Company $500,000 on December 22, 2008
under the terms of an unsecured 12% promissory note (the “Toucan Partners
December Loan”).  In connection with the promissory note, the Company
issued to Toucan Partners a warrant to purchase 132,500 shares of common stock
at an exercise price of $0.40 per share and a term of 5 years.  On
September 28, 2009, the note principal and accrued interest (including a default
penalty of 0.25% per month) amounting to $552,738 was converted to 2,763,691
shares of common stock at a conversion rate of $0.20.  To bring the
December Loan into conformity with the SDS and Private Lender notes issued in
October and November 2008, as agreed by the parties at the time of the
Toucan Partners December Loan, the Company issued Toucan Partners a warrant to
purchase 513,841 shares of common stock at an exercise price of $0.41 per
share.  In connection with the conversion, the Company issued Toucan
Partners a warrant to purchase 152,375 shares of common stock at an exercise
price of $0.20 per share.




Toucan Partners and the Board's Chairperson also
received a total of 2,504,034 shares of common stock as compensation for
services rendered during 2008 and 2009.





Toucan
Partners loaned the Company a total of $1,300,000 on June 30, 2009, July 2, 2009
and July 17, 2009 under unsecured 6% convertible promissory notes due June 29,
2011, July 1, 2011 and July 16, 2011.  The conversion feature of the
notes allows Toucan Partners to convert the principal into shares of
common stock at a conversion price of $0.20.





On July
2, 2010 the Company entered into a securities purchase agreement with Toucan
Partners, under which Toucan Partners purchased 866,667 shares of common stock
for $650,000.  In connection with this private placement the Company issued
warrants to purchase 86,667 shares of common stock at an exercise price of $0.75
per share with an exercise period of three years.





As a
result of the financings described above, as of September 30, 2010 Toucan
Capital held:





•
            an aggregate of 19,299,486 shares
      of Common Stock;





•
            warrants to purchase 14,150,732
      shares of Common Stock at an exercise price of $0.60 per share;
      and





•
            warrants to purchase 7,884,357
      shares of Common Stock at an exercise price of $0.15 per
      share.





As a
result of the financings described above, and other open market transactions, as
of September 30, 2010, Toucan Partners and its managing member Ms. Linda Powers
held:





•
            an aggregate of 13,460,691 shares
      of Common Stock;





•
            warrants to purchase 8,832,541
      shares of Common Stock at an exercise price of $0.60 per
      share;





•
            warrants to purchase
      513,841 shares of common stock at an exercise price of
      $0.41;





•
            warrants to purchase
      132,500 shares of common stock at an exercise price of
      $0.40;





•
            warrants
      to purchase 86,667 shares of common stock at an exercise price of
      $0.75; and





•
            warrants to purchase
      842,375 shares of common stock at an exercise price of
      $0.20.





As of
September 30, 2010, Toucan Capital, including the holdings of Toucan Partners,
held 32,760,177 shares of common stock, representing approximately 46.0% of the
common stock outstanding.  Further, as of September 30, 2010, Toucan
Capital, including the holdings of Toucan Partners, beneficially owned
(including unexercised warrants) 65,203,190 shares of common stock, representing
a beneficial ownership interest of approximately 57.4%.





Other
Financings





In April
2006, the Company raised approximately $5.5 million from the issuance of
2.6 million shares of common stock.





On
June 22, 2007, the Company placed 15,789,473 shares of common stock
with foreign institutional investors at a price of £0.95 per share. The gross
proceeds from the placement were approximately £15.0 million, or
$29.9 million, while net proceeds from the offering, after deducting
commissions and expenses, were approximately £13.0 million, or
$25.9 million.


8


On
January 16, 2009 the Company entered into a securities purchase agreement
for $700,000 with Al Rajhi Holdings who purchased 1,000,000 shares of our common
stock at $0.70 per share.





On March
27, 2009, the Company completed a private placement of 1.4 million shares of our
common stock and received $700,000.





Between
February 22, 2010 and March 31, 2010, the Company sold 1,451,666 shares of
common stock at $0.75 per share for net proceeds
of $1,088,750.





During the three months ended June 30, 2010 the Company issued
2,333,333 shares of common stock at $0.75 per share plus ten percent warrant
coverage for net proceeds of $1,750,000.  As a result, the Company issued
warrants to purchase 233,333 shares of common stock at an exercise price of
$0.75 per share for a period of three years from the date of
issue.





On August
11, 2010, the Company completed a private placement of 266,667 shares of common
stock and received $200,000. In connection with the private placement, the
Company issued warrants to purchase 40,000 shares of common stock at an exercise
price of $0.75 per share for a period of three years from the date of
issuance.




Shareholder
Loan





Al Rajhi
loaned the Company $4.0 million on May 12, 2008 under the terms of an unsecured
promissory note with a principal amount of $4,240,000 (reflecting an original
issue discount of $240,000).  The note was initially due on November
12, 2008.  Al Rajhi agreed to extend the term of the note of the loan
until December 31, 2009.  On February 22, 2010, Al Rajhi agreed to
extend the term of the note to December 31, 2010. Additionally,  Al Rajhi agreed to
convert the interest accrued pursuant to the promissory note into shares of
common stock.  A total of $853,952 was converted into 1,138,603 shares
of common stock at a conversion price of $0.75.  In consideration of
the extension the Company agreed to extend the term of the warrants issued to Al
Rajhi to September 30, 2013.




Other
Loans





On
October 1, 2008, the Company entered into a $1 million unsecured 12% Loan
Agreement with SDS (the “SDS Loan”).  The SDS Loan was initially due
April 1, 2009. On May 27, 2010 SDS agreed to extend the term of the note to June
2, 2011.  In consideration of the extension the Company issued SDS a
warrant to purchase 474,000 shares of the Company’s stock with an exercise price
of $0.53 per share. The warrants have a five year term.





On dates
between October 21, 2008 and November 6, 2008, the Company entered into
unsecured 12% Loan Agreements (the “Private Investor Loans”) and Promissory
Notes (the “Private Investor Promissory Notes”) with SDS and a group of private
investors (the “Private Investors”).  Under the Private Investor
Promissory Notes, SDS loaned the Company $1 million and the Private Investors
loaned the Company $650,000 for a total of $1.65 million. The Private Investor
Promissory Notes were initially due in April 2009, and the Private Investors
(excluding SDS) agreed to extend the maturity date to June 2010.  The
Private Investors agreed to further extend the maturity of the loans, maturing
in June 2010, on terms that are currently being negotiated. Under the terms of a
conversion and extension agreement, SDS converted the November 2008 $1 million
unsecured 12% loan and accrued interest payable into 5,024,400 shares of common
stock during May 2010.  The value of the stock issued to SDS in excess of
the carrying amount of the loan principal and accrued interest payable that was
converted was $4,521,960.  This amount was charged to loan conversion
inducement expense in the accompanying consolidated statements of operations
during the quarter ended June 30, 2010.





During
March 2009, the Company received $650,000 upon issuing unsecured 6% convertible
loan agreements and promissory notes due in March 2011 to a group of private
lenders (“Private Lenders”).





During
March 2009, the Company received $110,000 upon issuing a unsecured 6%
convertible loan agreement and promissory note due in March 2011 to a private
lender (“Private Lender”).





On dates
between August 13, 2009 and September 24, 2009, the Company received $580,000
upon issuing unsecured 6% convertible loan agreements and promissory notes due
in August and September 2011 to a group of Private Lenders.





On dates
between October 6, 2009 and December 31, 2009, the Company received $720,000
upon issuing unsecured 6% convertible loan agreements and promissory notes due
in October through December 2011 to a group of Private Lenders.





On dates
between January 8, 2010 and March 29, 2010, the Company received $375,000 upon
issuing unsecured 6% convertible loan agreements and promissory notes due
between January and March 2012 to a group of Private
Lenders.





On July
14, 2010, the Company entered into unsecured 6% Loan Agreements and
Promissory Notes with private lenders (“Private Lenders”). Under the Notes,
the Private Lenders have provided bridge funding (“Bridge Funding”) to the
Company in the amount of $1,750,000.   The Bridge Funding is to be to
be repaid on the earlier of 5 business days from the date on which the Company
receives $1,600,000 in additional funding or February 14,
2012. Additionally, the Private lenders received warrants to purchase
116,667 shares of the Company’s common stock at a price of $0.75 per
share.


9


Going
Concern





As of
November 19, 2010, the Company had approximately $0.5 million of cash on
hand including the amounts granted under the Qualified Therapeutic Discovery
Project Grants Program (discussed in note 10 Subsequent Events below). The
Company will need to raise additional capital in the near future to
fund its clinical trials and other operating activities. The
Company is in late stage discussions with multiple parties regarding
potential funding transaction. However, these parties are not obligated to
provide any financing.





The
Company will require additional funding before it achieves
profitability and there can be no assurance that its efforts to seek such
funding will be successful. The Company may raise additional funds by
issuing additional common stock or securities (equity or debt) convertible into
shares of Common Stock, in which case, the ownership interest of its
stockholders will be diluted. Any debt financing, if available, is likely to
include restrictive covenants that could limit the Company’s ability
to take certain actions. Further, the Company may seek funding from Toucan
Capital or Toucan Partners or their affiliates or other third parties. Such
parties are under no obligation to provide the Company with any additional
funds, and any such funding may be dilutive to stockholders and may contain
restrictive covenants. The Company is currently exploring additional
financings with several other parties; however, there can be no assurance that
the Company will be able to complete any such financings or that the terms of
such financings will be attractive to the Company. If the Company’s capital
raising efforts are unsuccessful, its inability to obtain additional cash
as needed could have a material adverse effect on the Company’s financial
position, results of operations and the Company’s ability to continue its
existence. The Company’s independent registered public accounting firm has
indicated in its report on the Company’s consolidated financial statements
included in the Annual Report on Form 10-K for the year ended December 31, 2009,
that there is substantial doubt about the Company’s ability to continue as a
going concern.


10


5.
            Notes
      Payable





Notes
Payable Originating During 2010





On dates
between January 8, 2010 and March 29, 2010, the Company received $875,000 upon
issuing unsecured 6% convertible loan agreements and promissory notes due
between January and March 2012 to a group of Private Lenders.  The
conversion feature allows the holders to elect in their discretion to receive
shares of common stock at a conversion price of $0.50.  The intrinsic
value of the convertible notes resulted in a beneficial conversion feature
amounting to $579,000 which was recorded as a debt discount to be amortized over
the term of the notes.




On July
14, 2010, the Company received $1,750,000 upon issuing unsecured 6% loan
agreements and promissory notes due on the earliest of 5 business days from the
date on which the Company receives $1,600,000 in funding, as defined, or
February 14, 2012.  Warrants to purchase 116,667 shares of common
stock were issued with the loan agreements.  The $1,750,000 proceeds
from the issuance of the promissory notes and warrants were allocated on a
relative fair value basis.  The relative fair value of the promissory
notes was estimated to be $1,666,000.  The relative fair value of the
warrants was estimated to be $84,000, which was recorded as a debt discount to
be amortized over the term of the notes.




Notes
payable to related parties consist of the following at December 31, 2009 and
September 30, 2010 (in thousands):




December 31,
                            2009
                          
                          
                          September 30,
                            201012%
      note payable to Al Rajhi, due December 31, 2010
                          
                          $
                          4,000
                          
                          
                          $
                          4,0006%
      unsecured convertible note payable to Toucan Partners, due July, 2011 and
      November 2011, (net of discount of $1,002 and $515 in 2009 and 2010,
      respectively)
                          
                          
                          298
                          
                          
                          
                          7854,298
                          
                          
                          
                          4,785Less
      current portion
                          
                          
                          (4,000
                          )
                          
                          
                          (4,000
                          )Long-term
      notes payable to related parties (net)
                          
                          $
                          298
                          
                          
                          $
                          785




Notes
payable consist of the following at December 31, 2009 and September 30, 2010 (in
thousands):




December 31,
                            2009
                          
                          
                          September 30,
                            201012%
      unsecured note payable to SDS
                          
                          $
                          1,000
                          
                          
                          $
                          1,00012%
      unsecured notes payable to SDS and Private Investors
                          
                          
                          1,650
                          
                          
                          
                          6506%
      unsecured convertible notes payable to Private Lenders, due in August and
      September 2011, (net of discount of $485 and $268 in 2009 and 2010,
      respectively)
                          
                          
                          95
                          
                          
                          
                          3126%
      unsecured convertible notes payable to Private Lenders, due March 25,
      2011, (net of discount of $46 and $18 in 2009 and 2010,
      respectively)
                          
                          
                          604
                          
                          
                          
                          6326%
      unsecured convertible note payable to Private Lender, due March 25,
      2011
                          
                          
                          110
                          
                          
                          
                          1106%
      unsecured convertible notes payable to Private Lenders, due October, 2011,
      (net of discount of $194 and $114 in 2009 and 2010,
      respectively)
                          
                          
                          21
                          
                          
                          
                          1016%
      unsecured convertible notes payable to Private Lenders, due October and
      December 2011, (net of discount of $274 and $168 in 2009 and 2010,
      respectively)
                          
                          
                          231
                          
                          
                          
                          3376%
      unsecured convertible notes payable to Private Lenders, due between
      January and March 2012, (net of discount of $394 in 2010)
                          
                          
                          -
                          
                          
                          
                          4816%
      unsecured notes payable to Private Lenders, due February 14, 2012, (net of
      discount of $74 in 2010)
                          
                          
                          -
                          
                          
                          
                          1,6766%
      unsecured convertible note payable, due March 18, 2012
                          
                          
                          -
                          
                          
                          
                          423,711
                          
                          
                          
                          5,341Less
      current portion
                          
                          
                          (2,650
                          )
                          
                          
                          (2,704
                          )Long-term
      notes payable (net)
                          
                          $
                          1,061
                          
                          
                          $
                          2,637




The
current portion of notes payable at September 30, 2010, is reported in the
accompanying consolidated balance sheet as follows (in thousands):




Notes
      payable
                    
                    $
                    1,650Convertible
      notes payable, net
                    
                    
                    1,054$
                    2,704




The long-term
portion of notes payable at September 30, 2010, is reported in the accompanying
consolidated balance sheet as follows (in thousands):
  Notes
      payable, net
                      
                      $
                      1,676Convertible
      notes payable, net
                      
                      
                      961$
                      2,637


11


6.
Net Income (Loss) Per Share Applicable to Common Stockholders





Basic net
loss per share is calculated based on the weighted average number of common
shares outstanding during the reporting period. Diluted loss per share is
computed on the basis of the weighted average number of common shares plus
dilutive potential common shares outstanding using the treasury stock method.
The potentially dilutive securities are antidilutive due to the Company's net
losses and are as follows for all periods presented (in
thousands):




Three Months Ended
                          September 30
                        
                        
                        Nine Months Ended
                          September 302009
                        
                        
                        2010
                        
                        
                        2009
                        
                        
                        2010Common
      stock options
                        
                        
                        4,100
                        
                        
                        
                        4,110
                        
                        
                        
                        4,100
                        
                        
                        
                        4,110Common
      stock warrants
                        
                        
                        36,600
                        
                        
                        
                        38,200
                        
                        
                        
                        36,600
                        
                        
                        
                        38,200Convertible
      notes
                        
                        
                        4,600
                        
                        
                        
                        20,000
                        
                        
                        
                        4,600
                        
                        
                        
                        20,000Excluded
      potentially dilutive securities
                        
                        
                        45,300
                        
                        
                        
                        62,310
                        
                        
                        
                        45,300
                        
                        
                        
                        62,310




7.
Related Party Transactions





Cognate
Agreement





On
July 30, 2004, the Company entered into a service agreement with Cognate
Therapeutics, Inc. (now known as Cognate BioServices, Inc., or Cognate), a
contract manufacturing and services organization in which Toucan Capital has a
majority interest. In addition, two of the principals of Toucan Capital are
members of Cognate’s board of directors and, on May 17, 2007, the managing
director of Toucan Capital was appointed to serve as a director of the Company
and to serve as the non-executive Chairperson of the Company’s Board of
Directors. Under the service agreement, the Company agreed to utilize Cognate’s
services for an initial two-year period, related primarily to manufacturing
DCVax ® product
candidates, regulatory advice, research and development preclinical activities
and managing clinical trials. The agreement expired on July 30, 2006;
however, the Company continued to utilize Cognate’s services under the same
terms as set forth in the expired agreement. On May 17, 2007, the Company
entered into a new service agreement with Cognate pursuant to which Cognate will
provide certain consulting and, when needed, manufacturing services to the
Company for its DCVax ® -Brain
Phase II clinical trial. Under the terms of the new contract, the Company
paid a non-refundable contract initiation fee of $250,000 and committed to pay
budgeted monthly service fees of $400,000, subject to quarterly true-ups, and
monthly facility fees of $150,000. Under the terms of the contract unless the
contract is terminated earlier the contract will expire at the earlier of (i)
the submission of an FDA biological license application/new drug application on
the Company’s brain cancer clinical trial or (ii) July 1,
2010.  Although the Company failed to complete enrollment for the
brain cancer clinical trial by July 1, 2009 and as of July 1, 2010, has not
submitted an FDA biological license application/new drug application on the
Company’s brain cancer clinical trial, Cognate has elected not to terminate the
agreement and as such the $2 million termination penalty has not been triggered.
   Since July 1, 2009, with the mutual agreement of Cognate and the
Company, the agreement has continued on the same terms as included in the
original agreement.




Cognate has moved its operations from Sunnyvale,
California to its newer facility in Memphis, Tennessee. The current
capacity in Memphis (using only part of the facility) is approximately 600
patients per year, which we believe will be sufficient for our Phase II
clinical trial for DCVax ® -Brain.
We have made arrangements with Cognate to accommodate an increase in production
capacity in the current facility on a stepwise or modular basis based on demand
from approximately 600 patients to over 5,000 patients per
year.




During
the three months ending September 30, 2009 and 2010, respectively, the Company
recognized approximately $2.5 million and $1.1 million of research and
development costs related to three service agreements. During the nine months
ending September 30, 2009 and 2010, respectively, the Company recognized
approximately $6.5 million and $3.0 million of research and development costs
related to these service agreements. As of December 31, 2009, and September 30,
2010, accounts payable to Cognate amounted to approximately $5.9 and $6.5
million, respectively. The parties have agreed to review charges and adjust
as needed.





During
2009, the Company and Cognate agreed that most of the accounts payable owed by
the Company to Cognate, will be converted into shares of common stock instead of
paid in cash.  The conversion price will be no less favorable than the
conversion price applied to any other creditor of the Company. The lowest
conversion price applied to any other creditor of the Company to date following
the agreement is $0.20 per share. Accordingly, if no lower conversion
price is applied to any other creditor prior to completion of the Cognate
conversion, the Cognate conversion will take place at $0.20 per share. The
impact of the conversion will result in a reduction of liabilities for the
amount converted.  In addition, the Company will recognize the value of
common stock issued in excess of the amount of accounts payable converted, if
any, as a charge to operations when the conversion takes place.  Initial
review of the payables by both parties indicated a difference in the parties’
respective understanding of the amounts due. The parties are in the process of
reviewing the accounts payable in order to reach agreement about such amounts
and conversion arrangements.


12




Toucan Capital and ToucanPartners





In
accordance with a recapitalization agreement dated April 26, 2004 between
the Company and Toucan Capital, as amended and restated on July 30, 2004
and further amended ten times between October 22, 2004 and
November 14, 2005, pursuant to which Toucan Capital agreed to recapitalize
the Company by making loans to the Company, the Company accrued and paid certain
legal and other administrative costs on Toucan Capital’s behalf. Pursuant to the
terms of the Conversion Agreement discussed above, the recapitalization
agreement was terminated on June 22, 2007. Subsequent to the termination of
the recapitalization agreement, Toucan Capital and Toucan Partners continue to
incur costs on behalf of the Company. These costs primarily relate to consulting
costs and travel expenses incurred in support of the Company’s expansion efforts
as well as certain operating expenses. In addition, during 2007, 2008 and 2009
the Company accrued and recorded rent expense due to Toucan Capital Corp. an
affiliate of Toucan Capital for its office space in Bethesda,
Maryland.





During
the three months ending September 30, 2009 and 2010, respectively, the Company
recognized approximately $102,000 and $15,000 of general and administrative
costs for rent expense, as well as legal, travel and other costs incurred by
Toucan Capital and Toucan Partners on the Company’s behalf. At December 31, 2009
and September 30, 2010 accrued expenses payable to Toucan Capital amounted to
$0.5 million and $0.3 million.  Other expenses remain to be received and
reviewed.




Also
during 2009, the Company agreed with Toucan Capital, Toucan Partners and Linda
Powers (the Board’s Chairperson) that accrued expenses owed by the Company to
these parties for certain expense reimbursements will be converted into shares
of common stock instead of paid in cash.  The parties agreed that these
accrued expenses will be converted into common stock (at a conversion rate of
$0.20 per share).  The impact of the conversion will result in a reduction
of liabilities for the amount converted.  In addition, the Company will
recognize the value of common stock issued in excess of the amount of the
accrued expenses converted, if any, as a charge to operations when the
conversion takes place.  Finalization of these arrangements is in
process.





8.
Contingencies and Commitments





The Company terminated its lease with Toucan Capital Corporation on December 31,
2009.  The Company is obligated to make monthly payments of approximately
$5,000 during 2010 and 2011 and other amounts thereafter under the terminated
lease.  Management is not able to estimate the amount of obligations
subsequent to 2011.




On March
17, 2010, the Company entered into a non-cancelable operating lease for 7,097
square feet of office space in Bethesda, Maryland, which expires in September
2012. Future minimum lease payments under the lease are $39,921, $163,475 and
$126,027, in 2010, 2011 and 2012, respectively. Rent expense for the three and
nine months ended September 30, 2009 and 2010 amounted to nil and $35,674
and nil and $41,649 respectively. The Company expects to lease part of this
space to Toucan and proceeds of this sublease, if any, will be offset against
the minimum lease payments specified above.





During
the three months ended September 30, 2010, the Company entered into three
consulting agreements for business development and investment banking
services.  The agreements have terms of approximately eighteen months
and provide for the issuance of common stock and reimbursement of the
consultant's expenses.  The first agreement provides for the issuance
of 134,167 shares of the Company's stock on a monthly basis during the eighteen
month period ended December 2011.  The second agreement provides for
the issuance of 57,500 shares of the Company's stock on a monthly basis during
the eighteen month period ended January 2012.  The third agreement
provides for the issuance of 100,000 shares of common stock at the inception of
the agreement and issuance of additional shares of common stock contingent upon
the successful efforts of the consultant, as defined.  The Company may
terminate the three consulting agreements at any time, after providing 90 days
notice.  The value of common stock issued to the three consultants
amounted to $482,000 during the three months ended September 30, 2010, and was
recorded as a charge to general and administrative expenses in the accompanying
consolidated statements of operations.





9.  Stockholders’
Equity (Deficit)





Common
Stock Issuances





Between
February 22, 2010 and March 31, 2010, the Company sold 1,451,666 shares of
common stock at $0.75 per share for net proceeds of $1,088,750.





During
the three months ended March 31, 2010, accrued interest payable to Al Rajhi
under the promissory note dated May 12, 2008 amounting to $853,952 was converted
into 1,138,603 shares of common stock at a conversion rate of $0.75 per
share.  The fair value of the common stock issued in excess of the
accrued interest payable converted into common stock amounted to $194,761 and is
recorded to interest expense in the accompanying consolidated financial
statements.





During
the three and nine months ended September 30, 2010, the Company issued nil and
358,850 shares of common stock valued at nil and $278,390 based on the closing
market price on the date of issuance of the shares to employees in lieu of cash
payment of salaries earned in 2009.





During
three and nine months ended September 30, 2010, the Company issued 593,921 and
959,288 shares of common stock for services valued at $536,360 and $746,360,
respectively based on the closing market price on the date of issuance of the
shares.


13


During
the three months ended June 30, 2010, the Company sold to private investors
2,333,333 shares of common stock at $0.75 per share for net proceeds of
$1,750,000. In connection with this private placement, the Company issued
warrants to purchase 233,333 shares of common stock, as described
below.





On May
27, 2010 the Company issued 5,024,400 shares of common stock upon the conversion
of a note payable and accrued interest payable due to SDS. The note payable and
accrued interest payable converted amounted to $1,004,880. T he value of the
stock issued to SDS in excess of the carrying amount of the loan principal and
accrued interest payable that was converted was $4,521,960. This amount was
charged to loan conversion inducement expense in the accompanying consolidated
statements of operations during the quarter ended June 30, 2010.





During
the three months ended September, 2010, the Company sold to a private investor
266,667 shares of common stock at $0.75 per share for net proceeds of $200,000.
In connection with this private placement, the Company issued warrants to
purchase 40,000 shares of common stock, as described below.





During
the three months ended September, 2010, the Company sold to Toucan Partners
866,667 shares of common stock at $0.75 per share for net proceeds of $650,000.
In connection with this private placement, the Company issued warrants to
purchase 86,667 shares of common stock, as described below.





Stock
Purchase Warrants





During
2009, Al Rajhi agreed to extend the due date of the May 12, 2008 promissory
note in the amount of $4 million, to December 31, 2009.  As
consideration for the extension of the due date to December 31, 2009, the
Company issued Al Rajhi warrants to purchase 1,743,111 shares of common stock at
an exercise price of $0.63 with an exercise period of three
years.  During February 2010, Al Rajhi agreed to extend the due date
of the promissory note to December 31, 2010.  As consideration for the
extension of the due date of the promissory note to December 31, 2010, the
Company extended the term of the warrants by one year.  The warrants
now expire in September 2013.  Upon extending the term of the
warrants, the Company recognized the increase in the fair value of the warrants
amounting to $53,018 as a charge to interest expense in the accompanying
consolidated financial statements.  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 1.98%
volatility of 201%, and a contractual life of 4 years.





During
the three months ended March 31, 2010, the Company, Toucan Partners, and Toucan
Capital agreed to extend the term of certain warrants held by Toucan
parties an additional three years.  The extension of the term applies
to 7,884,357 warrants with an exercise price of $0.15 held by Toucan Capital,
132,500 warrants with an exercise price of $0.40 held by Toucan Partners,
14,150,732 warrants with an exercise price of $0.60 held by Toucan Capital, and
8,832,541 warrants with an exercise price of $0.60 held by Toucan
Partners.  Upon extending the term of the warrants, the Company
recognized the increase in the fair value of the warrants amounting to
$1,500,722 as a charge to interest expense in the accompanying consolidated
financial statements.  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 2.46% volatility of
217%, and a contractual life of 5 years.





During
the three months ended March 31, 2010, the Company issued warrants to purchase
100,000 shares of common stock at an exercise price of $0.75 with a three year
exercise period to a consultant.  The fair value of the warrants
amounting to $72,494 was charged to general and administrative expense in the
accompanying consolidated financial statements and was determined using the
Black-Scholes option pricing model with the following assumptions: expected
dividend yield of 0%, risk-free interest rate of 1.7%, volatility of 198%, and a
contractual life of 3 years.





During
the three months ended June 30, 2010, the Company issued warrants to purchase
250,000 shares of common stock at an exercise price of $1.00 per share with a
three year exercise period to a consultant.  The fair value of the
warrants amounting to $169,448 was charged to general and administrative expense
in the accompanying consolidated financial statements and was determined using
the Black-Scholes option pricing model with the following assumptions: expected
dividend yield of 0%, risk-free interest rate of 1.41%, volatility of 199%, and
a contractual life of 3 years.





During
the three months ended June 30, 2010, the Company issued warrants to purchase
300,000 shares of common stock at an exercise price of $0.75 per share with a
three year exercise period to a consultant.  The fair value of the
warrants amounting to $203,054 was charged to general and administrative expense
in the accompanying consolidated financial statements and was determined using
the Black-Scholes option pricing model with the following assumptions: expected
dividend yield of 0%, risk-free interest rate of 1.0%, volatility of 198%, and a
contractual life of 3 years.





In
connection with the extension of the SDS October 2008 $1 million unsecured 12%
loan, the Company issued warrants to purchase 474,000 shares of common stock at
an exercise price of $0.53 per share with a three year exercise period. 
The fair value of the warrants amounting to $472,931 was charged to interest
expense in the accompanying consolidated financial statements and was determined
using the Black-Scholes option pricing model with the following assumptions:
expected dividend yield of 0%, risk-free interest rate of 1.28%, volatility of
198%, and a contractual life of 5 years.


14


In
connection with the issuance of 2,333,333 shares of common stock for proceeds of
$1,750,000 during the three months ended June 30, 2010, the Company issued
warrants to purchase 233,333 shares of common stock at an exercise price of
$0.75 per share with a three year exercise period from the date of issue. 
The fair value of the warrants amounting to $240,288 was determined using the
Black-Scholes option pricing model with the following assumptions: expected
dividend yield of 0%, risk-free interest rate of 1.51%, volatility of 198%, and
a contractual life of 3 years.  The $1,750,000 proceeds from the issuance
of the common stock and warrants were allocated on a relative fair value
basis.  The relative fair value of the stock was estimated to be $1,540,000
and the relative fair value of the warrants was estimated to be
$210,000.





In
connection with the issuance of 866,667 shares of common stock to Toucan
Partners for proceeds of $650,000 in July 2010, the Company issued warrants to
purchase 86,667 shares of common stock at an exercise price of $0.75 per share
with a three year exercise period from the date of issue.  The fair value
of the warrants amounting to $53,050 was determined using the Black-Scholes
option pricing model with the following assumptions: expected dividend yield of
0%, risk-free interest rate of 1.04%, volatility of 192%, and a contractual life
of 3 years.  The $650,000 proceeds from the issuance of the common stock
and warrants were allocated on a relative fair value basis.  The relative
fair value of the stock was estimated to be $601,000 and the relative fair value
of the warrants was estimated to be $49,000.





In
connection with the July 2010 Bridge Funding of $1.75 million, the Company
issued warrants to purchase 116,667 shares of common stock at an exercise price
of $0.75 per share with a three year exercise period.  The fair value of
the warrants amounted to $88,641 was determined using the Black-Scholes option
pricing model with the following assumptions: expected dividend yield of 0%,
risk-free interest rate of 1.02%, volatility of 192%, and a contractual life of
3 years. The $1.75 million proceeds from the issuance of the promissory notes
and warrants were allocated on a relative fair value basis.  The
relative fair value of the promissory notes was estimated to be
$1,666,000.  The relative fair value of the warrants was estimated to
be $84,000 which was recorded as a debt discount to be amortized over the term
of the notes.





In
connection with the issuance of 266,667 shares of common stock for proceeds of
$200,000 in July 2010, the Company issued warrants to purchase 40,000 shares of
common stock at an exercise price of $0.75 per share with a three year exercise
period from the date of issue.  The fair value of the warrants amounting to
$30,232 was determined using the Black-Scholes option pricing model with the
following assumptions: expected dividend yield of 0%, risk-free interest rate of
1.04%, volatility of 192%, and a contractual life of 3 years.  The $200,000
proceeds from the issuance of the common stock and warrants were allocated on a
relative fair value basis.  The relative fair value of the stock was
estimated to be $174,000 and the relative fair value of the warrants was
estimated to be $26,000.





10.
Subsequent Events





On
October 18, 2010, the Company accepted subscriptions in the amount of $150,000
for the purchase of 200,000 shares of common stock and warrants to purchase an
additional 20,000 shares of common stock.  The warrants are
exercisable at the price of  $0.75 per share of common stock and
expire in three years.




On
November 5, 2010, the Company received approximately $490,000 in two grants
under the Qualified Therapeutic Discovery Project Grants Program.  The
Qualified Therapeutic Discovery Project Grants Program was included in the
healthcare reform legislation, and established a one-time pool of $1 billion for
grants to small biotech companies developing novel therapeutics which show
potential to (a) result in new therapies that either treat areas of unmet
medical need, or prevent, detect, or treat chronic or acute diseases and
conditions, (b) reduce long-term health care costs in the United States, or (c)
significantly advance the goal of curing cancer within the 30-year period
beginning on May 21, 2010.There are no matching funding requirements or other
requirements necessary to receive the funding.




15




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





The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our unaudited condensed
consolidated financial statements and the notes to those statements included
with this report. In addition to historical information, this report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the “Securities Act”), and Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected. The words
“believe,” “expect,” “intend,” “anticipate,” and similar expressions are used to
identify forward-looking statements, but some forward-looking statements are
expressed differently. Many factors could affect our actual results, including
those factors described under “Risk Factors” elsewhere in this report. These
factors, among others, could cause results to differ materially from those
presently anticipated by us. You should not place undue reliance on these
forward-looking statements.





Overview





We are a
development stage biotechnology company focused on discovering, developing and
commercializing immunotherapy products that generate and enhance immune system
responses to treat cancer. Data from our clinical trials suggest that our cancer
therapies significantly extend both the time to recurrence and survival, while
providing a superior quality of life with no debilitating side effects when
compared with current therapies.





Our financing activities are described below
under “— Liquidity and Capital Resources”. We will need to raise additional
capital to fund our operations, including our Phase II DCVax ® -Brain
clinical trial. Depending on the trial results, we plan to seek product approval
for DCVax ® -Brain,
our leading product candidate, in both the U.S. and E.U.





We have
experienced recurring losses from operations and have a deficit accumulated
during the development stage of $208.1 million at September 30, 2010 of
which $102.3 million reflects cash expenditures and the remainder reflects
non-cash charges. In addition, our independent registered public accounting firm
has indicated in its report on our financial statements included in our Annual
Report on Form 10-K for the year ended December 31, 2009 that there is
substantial doubt about our ability to continue as a going concern.





Critical
Accounting Policies and Estimates





Our
discussion and analysis of our financial condition and results of operations is
based upon our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosure of contingent assets and liabilities. The critical accounting
policies that involve significant judgments and estimates used in the
preparation of our financial statements are disclosed in our Annual Report on
Form 10-K for the year ended December 31, 2009.





Recent
Accounting Pronouncements





See Note
2 to Condensed Consolidated Financial Statements in this Form 10-Q





Results
of Operations





Operating
costs:





Operating
costs and expenses consist primarily of research and development expenses,
including clinical trial expenses which increase when we are actively
participating in clinical trials, and general and administrative
expenses.





Research
and development:





Discovery
and preclinical research and development expenses include scientific
personnel-related salary and benefit expenses, costs of laboratory supplies used
in our internal research and development projects, travel, regulatory
compliance, and expenditures for preclinical and clinical trial operation and
management when we are actively engaged in clinical trials.


16





Because
we are a development stage company, we do not allocate research and development
costs on a project basis. We adopted this policy, in part, due to the
unreasonable cost burden associated with accounting at such a level of detail
and our limited number of financial and personnel resources. We shifted our
focus, starting in 2002, from discovering, developing, and commercializing
immunotherapy products to conserving cash and primarily concentrating on
securing new working capital to re-activate our two DCVax® clinical trial
programs.





General
and administrative:





General
and administrative expenses include administrative personnel related salary and
benefit expenses, cost of facilities, insurance, travel, legal support, property
and equipment and amortization of stock options and warrants.





Three
Months Ended September 30, 2010 and 2009





We
recognized a net loss of $3.6 million for the three months ended September 30,
2010 compared to a net loss of $12.2 million for the three months ended
September 30, 2009. The decrease in net loss was primarily attributable to non
recurrence in 2010 of the loan conversion inducement costs related to the
conversion of the Toucan Partners and other investor loans and reduced operating
costs in the period ended September 30, 2010.




Loss from Operations. 
The loss from operations decreased from $4.8 million for the three months ended
September 30, 2009 to $3.0 million for the three months ended September 30,
2010. The decrease was due to reduced research and development staffing and
contract manufacturing costs and lower general and administrative
costs.





Research and Development
Expense. Research and development expense decreased from $2.5 million for
the three months ended September 30, 2009 to $1.6 million for the three months
ended September 30, 2010. This decrease was primarily due to reduced staffing
and lower contract manufacturing costs in 2010.




General and Administrative
Expense. General and administrative expense was $1.4 million for the
three months ended September 30, 2010 compared to $2.4 million for the three
months ended September 30, 2009.  The decrease was due to lower
staffing and consulting costs.





Interest (Expense). Interest
expense decreased from $1.8 million for the three months ended September 30,
2009 to $0.6 million for the three months ended September 30, 2010. Interest
expense includes interest payable on notes payable, debt discount
amortization and other financing costs. Interest expense for the three
month periods ended September 30, 2009 and September 30, 2010 was $0.3
million and $0.3 million, respectively, and debt discount amortization and other
costs for the three month periods ended September 30, 2009 and September
30, 2010 was $1.5 million and $0.3 million respectively.  The decrease in
debt discount amortization and other costs was primarily due to conversion
of a number of loans into equity during 2010.





Nine
Months Ended September 30, 2010 and 2009





We
recognized a net loss of $18.2 million for the nine months ended September 30,
2010 compared to a net loss of $20.9 million for the nine months ended September
30, 2009. The decrease in net loss was primarily attributable to lower operating
costs and interest costs, including debt discount amortization and other
financing costs, during the nine month period ended September 30,
2010.




Loss from Operations. The
loss from operations decreased from $12.3 million for the nine months ended
September 30, 2009 to $9.5 million for the nine months ended September 30, 2010.
The decrease was due to reduced research and development staffing and contract
manufacturing costs.




Research and Development
Expense. Research and development expense decreased from $7.4 million for
the nine months ended September 30, 2009 to $4.8 million for the nine months
ended September 30, 2010. This decrease was primarily due to reduced staffing
and lower contract manufacturing costs in 2010.





General and Administrative
Expense. General and administrative expense was $4.7 million for the nine
months ended September 30, 2010 compared to $4.5 million for the three months
ended September 30, 2009. The increase was due to higher legal costs related to
intellectual property and an increase in consulting costs.





Interest (Expense).
Interest expense increased from $3.0 million for the nine months ended September
30, 2009 to $4.2 million for the three months ended September 30, 2010. Interest
expense includes interest payable on notes payable, debt discount amortization
and other financing costs. Interest expense for the nine month period ended
September 30, 2009 and September 30, 2010 was $0.8 million and $0.8 million,
respectively, and debt discount amortization and other costs for
the nine months ended September 30, 2009 and September 30, 2010 was $2.2
million and $3.4 million, respectively. The increase in debt amortization and
other costs for the nine month period ended September 30, 2010 was
primarily due to an increase in the notes payable that were outstanding during
the nine month period ended September 30, 2010.  In addition, interest
expense includes $1.6 million of expense from the modification of warrant
agreements during the 2010 period.


17





Liquidity
and Capital Resources





At
September 30, 2010, cash totaled $80,000, compared to $65,000 at
December 31, 2009.  Working capital was a deficit of
$19.6 million at September 30, 2010, compared to a deficit of
$19.3 million at December 31, 2009.  The working capital
deficit increased as of September 30, 2010 primarily due to
an increase in current liabilities.  Cash balances increased
during the quarter ended September 30, 2010 due primarily to the financing
transactions discussed below that were executed in 2010.




18




The
change in cash for the nine month periods presented was comprised of the
following (in thousands):





Nine Months EndedSeptember
                        30,
                        2009
                      
                      
                      September
                        30,
                        2010
                      
                      
                      ChangeNet
      cash provided by (used in):Operating
      activities
                      
                      $
                      (3,980)
                      
                      
                      $
                      (6,232
                      )
                      
                      $
                      (2,252
                      )Investing
      activities
                      
                      
                      (2)
                      
                      
                      
                      (41
                      )
                      
                      
                      (39
                      )Financing
      activities
                      
                      
                      4,109
                      
                      
                      
                      6,357
                      
                      
                      
                      2,248Effect
      of exchange rates on cash
                      
                      
                      (28)
                      
                      
                      
                      (69)
                      
                      
                      
                      (41)Increase
      in cash
                      
                      $
                      99
                      
                      
                      $
                      15
                      
                      
                      $
                      (84)




Operating
Activities




We used
$6.2 million in cash for operating activities during the nine months
ended September 30, 2010.    The increase in cash used in operating
activities was a result of the increase in operating expenses.





Investing
Activities





The cash used in investing activities was related to equipment used in the new
leased headquarters building.




Financing
Activities





During
the nine months ended September 30, 2010, our financing activities consisted of
proceeds from notes payable amounting to $2.7 million and proceeds from the
issuance of common stock amounting to $3.7 million.  The 2010
financing transactions consisted of:





Between
February 22, 2010 and March 31, 2010, we sold 1,451,666 shares of common stock
at $0.75 per share for net proceeds of $1,088,750.





Between
April and June 2010 we completed a private placement of 2.3 million shares of
our common stock and received $1,750,000 and the purchase carried 10%
warrants.





On dates
between January 8, 2010 and March 29, 2010, the Company received $875,000 upon
issuing unsecured 6% convertible loan agreements and promissory notes due
between January and March 2012 to a group of Private Lenders.





In July
2010 we sold 866,667 shares of our common stock and received $650,000 and
the purchase carried 10% warrants.





In August
2010 we completed a private placement of 266,667 shares of our common stock
and received $200,000 and the purchase carried 20% warrants.





On July
14, 2010, the Company borrowed $1,750,000 under unsecured 6% convertible
Loan Agreements and Promissory Notes with three private lenders.


19





In August
and September 2009, the Company received $580,000 upon issuing unsecured 6%
convertible loan agreements and promissory notes due in August and September
2011 to a group of Private Lenders.





We estimate that our current funding is
sufficient to enable us to proceed with our current (reduced) activities under
our DCVax®-Brain program.  Our ongoing
funding requirements will depend on many factors, including the number of staff
we employ, the pace of patient enrollment in our brain cancer trial, the
cost of establishing clinical studies and compassionate use/named patient
programs in other countries, and unanticipated developments.  Without
additional capital, we will not be able to proceed with significant enrollment
in our DCVax®-Brain clinical trial or move forward
with compassionate use/named patients programs or with any of our other product
candidates for which investigational new drug applications have been cleared by
the FDA. We will also be constrained in developing our second generation
manufacturing processes, which offer the potential for significant reduction in
product costs.




Additional funding will be required in the near
future and there can be no assurance that our efforts to seek such funding will
be successful. If our capital raising efforts are unsuccessful, our inability to
obtain additional cash as needed could have a material adverse effect on our
financial position, results of operations and our ability to continue our
existence. Our independent registered public accounting firm has indicated in
its report on our financial statements included in the Annual Report on
Form 10-K for the year ended December 31, 2009 that there is
substantial doubt about our ability to continue as a going concern. We may seek
additional funds through the issuance of additional common stock or other
securities (equity or debt) convertible into shares of common stock, which could
dilute the ownership interest of our stockholders. We may seek funding from
Toucan Capital or Toucan Partners or their affiliates or other third parties.
Such parties are under no obligation to provide us any additional funds, and any
such funding may be dilutive to stockholders and may contain restrictive
covenants that could limit our ability to take certain actions.





Item
3. Quantitative and Qualitative Disclosures about Market Risk





Not
required for smaller reporting companies.





20




Item
4. Controls and Procedures





Conclusion
Regarding the Effectiveness of Disclosure Controls and Procedures




Under the
supervision and with the participation of our management, including our
principal executive, financial and accounting officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended.  Based on this evaluation, our principal executive, financial
and accounting officer concluded that, as of September 30, 2010, in light of the
material weaknesses described below, our disclosure controls and procedures were
not effective to ensure that the information required to be disclosed by us in
the reports that we file or submit under the Securities Exchange Act of 1934 is
accumulated and communicated to management, including our chief executive
officer, financial and accounting officer, to allow timely decisions regarding
required disclosure, and that such information is recorded, processed,
summarized and reported within the time periods prescribed by the
SEC.





Management's
Report on Internal Controls Over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
controls over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f).  Under the supervision and with the participation of our
management, including our principal executive, financial and accounting officer,
we conducted an evaluation of the effectiveness of our internal controls over
financial reporting as of September 30, 2010.  This evaluation was
based on the framework in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
("COSO").





A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the Company's annual or interim financial
statements will not be prevented or detected on a timely basis.





Based
on management's evaluation as of September 30, 2010, our management identified
the material weaknesses set forth below in our internal control over financial
reporting:





(i)
            The Company's process for
      internally reporting material information in a systematic manner to allow
      for timely filing of material information is ineffective, due to its
      inherent limitations from being a small company, and there exist material
      weaknesses in internal control over financial reporting that contribute to
      the weaknesses in our disclosure controls and procedures.  These
      weaknesses include the lack
of:





·
            appropriate segregation of
      duties;





·
            appropriate oversight and
      review;





·
            internal accounting technical
      expertise;





·
            preparation, review and
      verification of internally developed
  documentation;





·
            controls in place to insure that
      all material developments impacting the financial statements are
      reflected; and





·
            executed agreements for
      significant contracts.





(ii)
            Lack of a sufficient number of
      independent directors for our board and audit committee.  We
      currently only have one independent director on our board, which is
      comprised of three directors, and on our audit
      committee.  Although we are considered a controlled company,
      whereby a group holds more than 50% of the voting power, and as such are
      not required to have a majority of our board of directors be independent
      it is our intention to have a majority of independent directors in due
      course.





(iii)
            Lack of a financial expert on our
      audit committee.  We currently do not have an audit committee
      financial expert, as defined by SEC regulations on our audit committee as
      defined by the SEC.





(iv)
            Insufficient corporate governance
      policies.  Although we have a code of ethics which provides
      broad guidelines for corporate governance, our corporate governance
      activities and processes are not always formally
      documented.  Specifically, decisions made by the board to be
      carried out by management should be documented and communicated on a
      timely basis to reduce the likelihood of any misunderstandings regarding
      key decisions affecting our operations and
    management.




21


(v)
            Inadequate approval and control
      over transactions and commitments made on our behalf by related
      parties.  Specifically, during the year certain related party
      transactions were not effectively communicated to all internal personnel
      who needed to be involved to account for and report the transaction in a
      timely manner.  This resulted in material adjustments during the
      quarterly reviews and annual audit, respectively, that otherwise would
      have been avoided if effective communication and approval processes had
      been maintained.





Our
company's management concluded that in light of the material weaknesses
described above, our company did not maintain effective internal control over
financial reporting as of September 30, 2010 based on the criteria set forth in
Internal Control—Integrated Framework issued by the COSO.





22




Changes
in Internal Control over Financial Reporting




There has
been no change in our internal controls over financial reporting that occurred
during the fiscal quarter ended September 30, 2010 that has materially affected,
or is reasonably expected to materially affect, our internal controls over
financial reporting.





Inherent
Limitations




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





Part
II — Other Information





Item
1. Legal Proceedings





From time
to time, we are involved in claims and suits that arise in the ordinary course
of our business. Although management currently believes that resolving any such
claims against us will not have a material adverse impact on our business,
financial position or results of operations, these matters are subject to
inherent uncertainties and management’s view of these matters may change in the
future. In addition to any such claims and suits, we are involved in the
following legal proceedings.





There are
no legal proceedings against the Company to the best of the Company’s knowledge
as of the date hereof and to the Company’s knowledge, no action, suit or
proceeding has been threatened against the Company.





Item 1A.
 Risk Factors





Not
required for smaller reporting companies





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





Between
February 22, 2010 and March 31, 2010, we sold 1,451,666 shares of common stock
at a purchase price of $0.75 per share for net proceeds of
$1,088,750.





On
February 22, 2010, we agreed to extend the term of the note made in favor of Al
Rajhi in the principal amount of $4 million issued on May 12, 2008 from December
31, 2009 to December 31, 2010. Additionally,  Al Rajhi agreed to
convert the interest accrued pursuant to the promissory into shares of common
stock.  A total of $853,952 was converted into 1,138,603 shares of
common stock at a conversion price of $0.75.  In consideration of the
extension, the Company agreed to extend by one year the term of the warrants
issued to Al Rajhi.





During
the three months ended June 30, 2010, we sold 2,333,333 shares of common stock
at $0.75 per share for net proceeds of $1,750,000.





On May
27, 2010 we issued 5,024,400 shares of common stock in respect of the conversion
the principal and accrued interest payable of a note due to SDS.





On July
2, 2010, we sold 866,667 shares of common stock at $0.75 per share for net
proceeds of $650,000 to Toucan Partners.





On August
11, 2010, we sold 266,667 shares of common stock at $0.75 per share for net
proceeds of $200,000 to a private investor.





On
October 18, 2010, the Company accepted subscriptions in the amount of $150,000
for the purchase of 200,000 shares of common stock and warrants to purchase an
additional 20,000 shares of common stock.  The warrants are
exercisable at the price of  $0.75 per share of common stock and
expire in three years





The sales
of the securities identified above were made pursuant to privately negotiated
transactions that did not involve a public offering of securities and,
accordingly, we believe that these transactions were exempt from the
registration requirements of the Securities Act pursuant to Section 4(2) of the
Securities Act and Rule 506 of Regulation D. The agreements executed in
connection with this sale contain representations to support the Company’s
reasonable belief that the Investor had access to information concerning the
Company’s operations and financial condition, the Investor acquired the
securities for their own account and not with a view to the distribution thereof
in the absence of an effective registration statement or an applicable exemption
from registration, and that the Investor are sophisticated within the meaning of
Section 4(2) of the Securities Act and are “accredited investors” (as defined by
Rule 501 under the Securities Act). In addition, the issuances did not involve
any public offering; the Company made no solicitation in connection with the
sale other than communications with the Investor; the Company obtained
representations from the Investor regarding their investment intent, experience
and sophistication; and the Investor either received or had access to adequate
information about the Company in order to make an informed investment
decision.  All of the foregoing securities are deemed restricted
securities for purposes of the Securities Act.


23




Item
3. Defaults Upon Senior Securities


None





Item
4. (Removed and Reserved)





Item
5. Other Information


None





24




Item
6. Exhibits





3.1
              
              Seventh
      Amended and Restated Certificate of Incorporation
  (3.1)(1)3.2
              
              Third
      Amended and Restated Bylaws (3.1)(2)3.3
              
              Amendment
      to the Seventh Amended and Restated Certificate of Incorporation
      (3.2)(2)3.4
              
              Amendment
      to Seventh Amended and Restated Certificate of Incorporation
      (3.4)(3)*31.1
              
              Certification
      of President (Principal Executive Officer and 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, Chief Executive Officer and Principal Financial and
      Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002.





(1)
            Incorporated by reference to the
      exhibit shown in the preceding parentheses filed with the Registrant’s
      registration statement Form S-1 (File No. 333-67350) on July 17,
      2006.





(2)
            Incorporated by reference to the
      exhibit shown in the preceding parentheses filed with the Registrant’s
      Current Report on Form 8-K on June 22,
  2007.





(3)
            Incorporated by reference to the
      exhibit shown in the preceding parentheses filed with the Post-Effective
      Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 on
      January 28, 2008.





*
            Filed
      herewith.




25





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:
      November 22, 2010
                By:
                /s/ Alton L. BoyntonAlton
      L. BoyntonPresident
      and Chief Executive Officer(Principal
      Executive Officer)


26




NORTHWEST
BIOTHERAPEUTICS, INC.


(A
Development Stage Company)





EXHIBIT
INDEX





3.1
              
              Seventh
      Amended and Restated Certificate of Incorporation
  (3.1)(1)3.2
              
              Third
      Amended and Restated Bylaws (3.1)(2)3.3
              
              Amendment
      to the Seventh Amended and Restated Certificate of Incorporation
      (3.2)(2)3.4
              
              Amendment
      to Seventh Amended and Restated Certificate of Incorporation
      (3.4)(3)*31.1
              
              Certification
      of President (Principal Executive Officer and 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, Chief Executive Officer and Principal Financial and
      Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002.





(1)
            Incorporated by reference to the
      exhibit shown in the preceding parentheses filed with the Registrant’s
      registration statement Form S-1 (File No. 333-67350) on July 17,
      2006.





(2)
            Incorporated by reference to the
      exhibit shown in the preceding parentheses filed with the Registrant’s
      Current Report on Form 8-K on June 22,
  2007.





(3)
            Incorporated by reference to the
      exhibit shown in the preceding parentheses filed with the Post-Effective
      Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 on
      January 28, 2008.





*
            Filed
      herewith.




27