##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (Mark One) [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For The Quarterly Period Ended March 31, 2004 OR  [   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Commission File Number 0-26825 NORTHWEST BIOTHERAPEUTICS, INC.  DELAWARE
(State or Other Jurisdiction of
Incorporation or Organization)
    
    94-3306718
(I.R.S. Employer Identification
No.)
 Canyon Park Building 8, 22322 20th Avenue S.E., Suite 150, Bothell, Wa. 98021
(Address of Principal Executive Offices, Including Zip Code) (425) 608-3000
(Registrants Telephone Number, Including Area Code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes   [X]   No   [   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes   [   ]   No   [X] As of May 11, 2004, the registrant had outstanding 19,028,779 shares of
common stock, $0.001 par value.




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TABLE OF CONTENTS NORTHWEST BIOTHERAPEUTICS, INC. TABLE OF CONTENTS PagePART I  FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited)
    
    
    3Condensed Balance Sheets
    
    
    3Condensed Statements of Operations
    
    
    4Condensed Statement of Cash Flows
    
    
    5Notes to Condensed Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    9Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4. Controls and Procedures
    
    
    24PART II  OTHER INFORMATION
    
    
    24Item 1. Legal Proceedings
    
    
    24Item 2. Changes in Securities and Use of Proceeds
    
    
    24Item 3. Defaults Upon Senior Securities
    
    
    24Item 4. Submission of Matters to a Vote of Security Holders
    
    
    24Item 5. Other Information
    
    
    24Item 6. Exhibits and Reports on Form 8-K
    
    
    24SIGNATURES
    
    
    25INDEX TO EXHIBITS
    
    
    26EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### Table of Contents



Part I  Financial Information 
 Item 1. Financial Statements NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company) 
 BALANCE SHEETS December 31,
    
    March 31,2003
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    255
    
    
    $
    160Accounts receivable
    
    
    8
    
    
    
    46Prepaid expenses and other current assets
    
    
    85
    
    
    
    92Total current assets
    
    
    348
    
    
    
    298Property and equipment:Leasehold improvements
    
    
    69
    
    
    
    69Laboratory equipment
    
    
    551
    
    
    
    551Office furniture and other equipment
    
    
    128
    
    
    
    128748
    
    
    
    748Less accumulated depreciation and amortization
    
    
    (375
    )
    
    
    (412
    )Property and equipment, net
    
    
    373
    
    
    
    336Restricted cash
    
    
    105
    
    
    
    30Deposit and other non-current assets
    
    
    45
    
    
    
    45$
    871
    
    
    $
    709LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Notes payable to related parties, net of discount
    
    $
    44
    
    
    $
    147Current portion of capital lease obligations
    
    
    42
    
    
    
    42Accounts payable
    
    
    128
    
    
    
    268Accrued expenses
    
    
    34
    
    
    
    146Accrued expenses, tax liability
    
    
    492
    
    
    
    492Deferred
grant revenue
    
    
    
    
    
    
    207Total current liabilities
    
    
    740
    
    
    
    1,302Long-term liabilities:Capital lease obligations, less current portion
    
    
    49
    
    
    
    38Deferred rent
    
    
    66
    
    
    
    61Total liabilities
    
    $
    855
    
    
    $
    1,401Stockholders equity:Preferred stock, $0.001 par value, 15,000,000 shares
authorized, no shares issued or outstanding at March
31, 2004 and December 31, 2003, respectively
    
    
    
    
    
    
    Common stock, $0.001 par value, 125,000,000 shares
authorized, 19,028,799 and 19,027,799 shares issued and
outstanding at March 31, 2004 and December 31, 2003,
respectively
    
    
    19
    
    
    
    19Additional paid-in capital
    
    
    64,294
    
    
    
    64,394Deferred compensation
    
    
    (53
    )
    
    
    (33
    )Deficit accumulated during the development stage
    
    
    (64,244
    )
    
    
    (65,072
    )Total stockholders equity
    
    
    16
    
    
    
    (692
    )Commitments, contingencies and subsequent eventsTotal liabilities and shareholders equity
    
    $
    871
    
    
    $
    709
 See accompanying notes to financial statements. 3




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##### Table of Contents



NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company) 
 STATEMENTS OF OPERATIONS Period fromMarch 18, 1996Three Months Ended
    
    (Inception) toMarch 31
    
    March 31,2003
    
    2004
    
    2004Revenues:Research materials sales
    
    $
    
    
    
    $
    24
    
    
    
    384Contract research and development from related
parties
    
    
    
    
    
    
    
    
    
    
    1,128Research grants and other
    
    
    69
    
    
    
    103
    
    
    
    740Total revenues
    
    $
    69
    
    
    $
    127
    
    
    
    2,252Operating costs and expenses:Cost of research material sales
    
    
    
    
    
    
    25
    
    
    
    355Research and development
    
    
    508
    
    
    
    229
    
    
    
    24,203General and administrative
    
    
    1,066
    
    
    
    557
    
    
    
    26,401Depreciation and amortization
    
    
    87
    
    
    
    37
    
    
    
    2,108Loss on facility sublease
    
    
    
    
    
    
    
    
    
    
    895Asset impairment loss
    
    
    
    
    
    
    
    
    
    
    1,936Total operating costs and expenses
    
    
    1,661
    
    
    
    848
    
    
    
    55,898Loss from operations
    
    $
    (1,592
    )
    
    $
    (721
    )
    
    $
    (53,646
    )Other income (expense):Gain on sale of intellectual property to
Medarex
    
    
    
    
    
    
    
    
    
    
    3,656Interest expense
    
    
    (11
    )
    
    
    (107
    )
    
    
    (7,962
    )Interest income
    
    
    12
    
    
    
    
    
    
    
    728Net loss
    
    $
    (1,591
    )
    
    $
    (828
    )
    
    $
    (57,224
    )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
    
    $
    (1,591
    )
    
    $
    (828
    )
    
    $
    (65,070
    )Net loss per share applicable to common
stockholders  basic and diluted
    
    $
    (0.09
    )
    
    $
    (0.04
    )Weighted average shares used in computing basic
and diluted loss per share
    
    
    18,657
    
    
    
    19,025
 See accompanying notes to financial statements. 4




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NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company) 
 STATEMENTS OF CASH FLOWS Period fromMarch 18, 1996March 31,
    
    (Inception) to March 31,2003
    
    2004
    
    2004Cash Flows from Operating Activities:Net Loss
    
    $
    (1,591
    )
    
    $
    (828
    )
    
    $
    (57,224
    )Reconciliation of net loss to net cash used in operating
activities:Depreciation and amortization
    
    
    87
    
    
    
    37
    
    
    
    2,107Amortization of deferred financing costs
    
    
    
    
    
    
    
    
    
    
    320Amortization of debt discount
    
    
    
    
    
    
    96
    
    
    
    5887Accrued interest converted to preferred stock
    
    
    
    
    
    
    
    
    
    
    260Accreted interest on convertible promissory note
    
    
    
    
    
    
    7
    
    
    
    9Stock-based compensation costs
    
    
    85
    
    
    
    20
    
    
    
    1,062Loss on sale and disposal of equipment
    
    
    
    

    
    
    
    
    
    
    482Gain on sale of intellectual property and royalty
rights
    
    
    (40
    )
    
    
    
    
    
    
    (3,656
    )Gain on sale of property and equipment
    
    
    
    
    
    
    (1
    )
    
    
    (96
    )Asset impairment loss
    
    
    
    
    
    
    
    
    
    
    1,936Loss on facility sublease
    
    
    
    
    
    
    
    
    
    
    895Increase (decrease) in cash resulting from changes in
assets and liabilities:Accounts receivable
    
    
    (58
    )
    
    
    (38
    )
    
    
    (46
    )Prepaid expenses and other current assets
    
    
    281
    
    
    
    (7
    )
    
    
    374Accounts payable and accrued expenses
    
    
    (295
    )
    
    
    252
    
    
    
    1,305Accrued loss on sublease
    
    
    (161
    )
    
    

    
    
    
    (266
    )Deferred grant revenue
    
    
    
    
    
    
    207
    
    
    
    207Deferred rent
    
    
    30
    
    
    
    (5
    )
    
    
    471Net Cash used in Operating Activities
    
    
    (1,662
    )
    
    
    (260
    )
    
    
    (45,973
    )Cash Flows from Investing Activities:Purchase of property and equipment, net
    
    
    (29
    )
    
    
    
    
    
    
    (4,537
    )Proceeds from sale of property and equipment
    
    
    44
    
    
    
    1
    
    
    
    96Proceeds from sale of intellectual property
    
    
    
    
    
    
    
    
    
    
    1,816Proceeds from sale of marketable securities
    
    
    1,828
    
    
    
    
    
    
    
    2,000Payment of security deposit
    
    
    
    
    
    
    
    
    
    
    (45
    )Restricted cash
    
    
    
    
    
    
    75
    
    
    
    1,034Net Cash provided by Investing
Activities
    
    
    1,843
    
    
    
    76
    
    
    
    1,704Cash Flows from Financing Activities:Proceeds from issuance of note payable to stockholder
    
    
    
    
    
    
    
    
    
    
    1,650Repayment of note payable to stockholder
    
    
    
    
    
    
    
    
    
    
    (1,650
    )Proceeds from issuance of convertible promissory note and
warrants, net of issuance costs

    
    
    
    
    
    
    100
    
    
    
    5,499Borrowing under line of credit, Northwest Hospital
    
    
    
    
    
    
    
    
    
    
    2,834Repayment of line of credit to Northwest Hospital
    
    
    
    
    
    
    
    
    
    
    (2,834
    )Payment on capital lease obligations
    
    
    (20
    )
    
    
    (11
    )
    
    
    (243
    )Payment on note payable
    
    
    (157
    )
    
    
    
    
    
    
    (420
    )Proceeds from issuance of preferred stock, net
    
    
    
    
    
    
    
    
    
    
    27,432
 5




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##### Table of Contents



Period fromMarch 18, 1996March 31,
    
    (Inception) toMarch 31,2003
    
    2004
    
    2004Proceeds from exercise of stock options and warrants
    
    
    
    
    
    
    
    
    
    
    220Proceeds from issuance of common stock, net
    
    
    
    
    
    
    
    
    
    
    17,369Series A preferred stock redemption fee
    
    
    
    
    
    
    
    
    
    
    (1,700
    )Deferred financing costs
    
    
    
    
    
    
    
    
    
    
    320Net Cash (used in) provided by Financing Activities
    
    
    (177
    )
    
    
    89
    
    
    
    47,837Net increase (decrease) in cash and cash equivalents
    
    
    4
    
    
    
    (95
    )
    
    
    160Cash and cash equivalents at beginning of period
    
    
    2,539
    
    
    
    255
    
    
    
    Cash and cash equivalents at end of period
    
    
    2,543
    
    
    
    160
    
    
    
    160Supplemental disclosure of cash flow information  cash
paid during the period for interest
    
    
    11
    
    
    
    3
    
    
    
    1,351Supplemental schedule of non-cash financing activities
Equipment acquired through capital leases
    
    
    
    
    
    
    
    
    
    
    285Accretion of Series A preferred stock mandatory redemption
obligation
    
    
    
    
    
    
    
    
    
    
    1,872Beneficial conversion feature of convertible promissory
notes
    
    
    
    
    
    
    
    
    
    
    1,026Conversion of convertible promissory notes and accrued
interest to Series D preferred stock
    
    
    
    
    
    
    
    
    
    
    5,324Issuance of Series C preferred stock warrants in connection
with lease agreement
    
    
    
    
    
    
    
    
    
    
    43Issuance of common stock for license rights
    
    
    
    
    
    
    
    
    
    
    4Liability for and issuance of common stock and warrants to
Medarex
    
    
    
    
    
    
    
    
    
    
    560Deferred compensation on issuance of stock options and
restricted stock grants
    
    
    
    
    
    
    
    
    
    
    471Cancellation of options and restricted stock
    
    
    
    
    
    
    
    
    
    
    844Financing of prepaid insurance through note payable
    
    
    
    
    
    
    
    
    
    
    420Stock subscription receivable
    
    $
    
    
    
    $
    
    
    
    $
    480
 See accompanying notes to financial statements. 6




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##### Table of Contents



Northwest Biotherapeutics, Inc. (A Development Stage Company) 
 Notes to Condensed Financial Statements (unaudited) 1. Basis of Presentation The accompanying unaudited financial statements for Northwest
Biotherapeutics, Inc. (the Company) have been prepared in accordance
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the
United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the three-month period ended March 31, 2004 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2004. For further information, refer to the financial statements and
footnotes thereto included in the Companys Annual Report on Form 10-K
for the year ended December 31, 2003, as filed with the Securities and
Exchange Commission. The auditors report on the foregoing financial statements of the
Company for the fiscal year ended December 31, 2003 states that because
of recurring operating losses, a working capital deficit, and a
deficit accumulated during the development stage, there is substantial doubt about our ability to continue as a
going concern. A going concern opinion indicates that the financial
statements have been prepared assuming we will continue as a going
concern and do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of
this uncertainty. Stock-Based Compensation The Company accounts for its stock option plans for employees in
accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense related to employee stock
options is recorded if, on the date of grant, the fair value of the
underlying stock exceeds the exercise price. The Company applies the
disclosure-only requirements of SFAS No. 123, Accounting for Stock-Based
Compensation, which allows entities to continue to apply the provisions
of APB Opinion No. 25 for transactions with employees, and to provide
pro-forma results of operations disclosures for employee stock option
grants as if the fair-value-based method of accounting in SFAS No. 123
had been applied to those transactions. Stock compensation costs related to fixed employee awards with pro
rata vesting are recognized on a straight-line basis over the period of
benefit, generally the vesting period of the options. For options and
warrants issued to non-employees, the Company recognizes stock
compensation costs utilizing the fair value methodology prescribed in
SFAS No. 123 over the related period of benefit. Had the Company recognized the compensation cost of employee stock
options based on the fair value of the options on the date of grant as
prescribed by SFAS No. 123, the pro-forma net loss applicable to common
stockholders and related loss per share would have been adjusted to the
pro-forma amounts indicated below: Three months endedMarch 31,2003
    
    2004Net loss applicable to common stockholders as reported
    
    $
    (1,591
    )
    
    $
    (828
    )Add: Stock-based employee compensation expense included in
reported net loss, net
    
    
    85
    
    
    
    20Deduct: Stock-based employee compensation determined under
fair value based method for all awards
    
    
    (580
    )
    
    
    (84
    )Pro forma
    
    $
    (2,086
    )
    
    $
    (892
    )
 7




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##### Table of Contents



Three months endedMarch 31,2003
    
    2004Net loss per share-basic and
diluted:As reported
    
    $
    (0.09
    )
    
    $
    (0.04
    )Pro forma
    
    $
    (0.11
    )
    
    $
    (0.05
    )
 There were no stock options granted during the three months ended
March 31, 2004. The per share weighted average fair value of stock options
granted during the three months ended March 31, 2003 was $0.09. These
weighted average fair values were determined on the dates of grants using
the following weighted average assumptions: Three months endedMarch 31,2003Risk-free interest rate
    
    
    3.43
    %Expected life
    
    5 yearsExpected volatility
    
    
    187
    %Dividend yield
    
    
    0
 2. Liquidity On April 26, 2004 we entered into a Recapitalization Agreement with
Toucan Capital Fund II, L.P. (Toucan). The Recapitalization Agreement
calls for the possible recapitalization of the Company. At Toucans
option, and if successfully implemented, the recapitalization could
potentially provide the company with up to $40 million through the issuance of new
securities to Toucan and a syndicate of investors selected by Toucan.
Following the recapitalization, Toucan and the investor syndicate would
potentially own, on a combined basis, over 90% of the outstanding capital
stock of the Company. The proposed recapitalization would occur in two
stages, a bridge period which expires July 23, 2004, unless earlier
terminated or extended by Toucan, followed by a potential equity
financing. On April 26, 2004 Toucan loaned the Company $500,000. Since February
1, 2004 Toucan has loaned the Company a total of $600,000, including the
$500,000 loan on April 26, 2004. The recent borrowing from Toucan should
allow the Company to fund its operations for approximately 30 days, or
until approximately May 26, 2004. Toucan has the option to loan
additional amounts to the Company during this bridge period, but is not
obligated to do so. These loans accrue interest at 10% per year and are
also convertible into capital stock of the Company. Generally, Toucan may, in its sole discretion, elect to convert the
principal and interest due under the notes into any equity security and/or
debt security of the Company at any time prior to full repayment. The
conversion price for any conversion of a note at the election of Toucan
will be the lowest of (i) with certain exceptions, the lowest nominal or
effective price per share paid by any investor of the Company at any time
on or after one year prior to April 26, 2004, (ii) with certain
exceptions, the lowest nominal or effective price at which any investor of
the Company has a right to acquire shares of the Company pursuant to
any security, instrument, or promise, undertaking, commitment,
agreement or letter of intent outstanding on or after April 26, 2004
or granted, issued, extended or otherwise made available by the
Company at any time on or after
one year prior to April 26, 2004 and (iii) the lesser of $0.10 per share or 35% discount to the
average closing price per share of the Companys common stock during any
20 consecutive trading days (beginning with the 20 consecutive trading
days prior to the effective date of the Recapitalization Agreement), but
not less than $0.04 per share under this clause (iii). In addition to these conversion rights,
the notes will automatically be converted into convertible preferred stock
of the Company in the event the Company raises $15 million through the
issuance of convertible preferred stock. In this event the conversion
price would be the lowest nominal or effective price per share paid by
investors other than Toucan who purchase shares of convertible preferred
stock (excluding shares issuable upon exercise of the bridge
warrants). If
the outstanding loans, including principal and interest were
converted into common stock on May 12, 2004 the
conversion price would be $0.04 per share and Toucan would own
15,113,000
million shares (or
44.3%) of the Companys outstanding capital stock. In connection with the loans, Toucan has received warrants to
purchase up to 36.0 million shares of the Companys capital stock at an
exercise price of $0.01 per share. Any future bridge loans by Toucan up
to an additional $500,000, or $1.1 million in the aggregate, would include similar
conversion features and warrant coverage. Therefore, if Toucan were to loan the Company an additional $500,000,
it would receive warrants to purchase an additional 30 million share of
the Companys capital stock. The warrants are exercisable for up to seven
years from the date of issuance and have an exercise price of one cent
($0.01) per share. The warrants are exercisable upon the earliest of (i)
the time at which the Company has raised at least $2 million through the
issuance of any class or series of equity securities, debt securities or
any combination thereof, (ii) at such time as the Company breaches any
provision of the Recapitalization Agreement or any documents executed in
connection with the Recapitalization Agreement, (iii) the time at which
the Company elects to exercise its fiduciary out under the
Recapitalization Agreement 8




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##### Table of Contents



and accepts an unsolicited proposal, or (iv) 61
days after the date Toucan provides the Company with notice that it
intends to exercise the warrant. In the event that the Company commences the proposed equity
financing and issues at least $15 million of convertible preferred stock
to investors other than Toucan, then the bridge warrants will
automatically be exercisable for such convertible preferred stock. If,
for any reason, the convertible preferred stock is not approved or
authorized, or if authorized and the Company fails to issue at least $15
million of convertible preferred stock, then the bridge warrants will be
exercisable for any equity security and/or debt security of the
Company in any
combination thereof at the election of Toucan. As part of the Recapitalization Agreement, at the election of
Toucan, the Company will be required to enter into an equity financing
with Toucan and other investors to be determined by Toucan. If Toucan
elects to pursue the equity financing, the parties have agreed that the
Company will sell to Toucan and other investors up to $40 million of
convertible preferred stock. The preferred stock would be priced at the
lower of $0.10 per share or a 35% discount to the average closing price
of the Companys common stock during the 20 trading days prior to the
first closing of the equity financing, but not less than $0.04 per share.
The equity financing is contingent upon the Company complying with
certain covenants in the Recapitalization Agreement and locating
investors who are willing to invest in the Company on the terms
proposed. The equity financing is also
subject to a number of closing conditions, including approval of the
Companys stockholders. As
of May 14, 2004, including the $600,000 borrowed from Toucan, we
had approximately $313,000 in cash and cash equivalents. We believe,
based on recurring operating and associated financing costs, our
cash will be sufficient to fund our operations through approximately May
26, 2004. After that date we will have to seek additional funds from
Toucan which Toucan is not obligated to provide to us. Under the terms of
the Recapitalization Agreement, if Toucan elects not to provide
additional funding to us, we are prohibited from seeking funds from any
party other than Toucan for up to ten business days after May 26, 2004. Any additional financing with Toucan and any other third party is
likely to be dilutive to stockholders, and debt financing, if available,
may include additional restrictive covenants. Unless we receive significant additional funding in the future,
continuing our operations would require us to use assets that otherwise
would be required to liquidate the Company and pay our obligations. For
this reason, if we are unable to obtain additional capital, we may choose
to cease operations at any time to meet our obligations and to maximize
the value, if any, to be paid to our stockholders following a potential
liquidation. 3.  Net Loss Per Share Applicable to Common Stockholders Basic and diluted net loss per share applicable to common
stockholders has been computed using the weighted-average number of shares
of common stock outstanding during the period, less, for the three months
ended March 31, 2004, 2,000 issued and outstanding restricted shares of
common stock that were subject to repurchase. Options to purchase
1,151,480 shares of common stock and warrants to purchase 5,090,748 shares
of common and preferred stock were excluded from the calculation of
diluted net loss per share for the three months ended March 31, 2004 as
such securities were antidilutive. Options to purchase 1,736,574 shares of
common stock and warrants to purchase 1,368,525 shares of common and
preferred stock were excluded from the calculation of diluted net loss per
share for the three months ended March 31, 2003 as such securities were
antidilutive. 4.  Notes
Payable to Related Parties The initial bridge funding period commenced on February 2, 2004 when
we issued Toucan an unsecured convertible promissory note, in the amount
of $50,000. On March 1, 2004, we issued Toucan a secured convertible
promissory note, in the amount of $50,000. The notes were convertible at
prices below the current price of our common stock at the date of issuance
resulting in a beneficial conversion cost of approximately $100,000 which
is being amortized over the term of the notes. On April 26, 2004, we
issued Toucan a senior secured convertible promissory note and warrants,
in the amount of $500,000. The Recapitalization Agreement stipulated that the February and March
2004 notes for $50,000 each were to be cancelled and reissued effective
April 26, 2004 as two separate notes for $50,000 each and conforming to
the conditions of the note signed for the April 26, 2004 bridge loan for
$500,000. As a result, the notes issued in February and March 2004,
respectively, have (i) a 12 month term, (ii) accrue interest at 10% per
annum on a 365 day basis compounded annually from their respective
original issuance dates, and are (iii) secured by a first priority senior
security interest in all of the Companys assets. The initial bridge
funding period expires May 26, 2004, unless extended by Toucan. 
 Item. 2.  Managements Discussion and Analysis of Financial Condition and Result of Operations The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our financial
statements and the notes to those statements included with this report. In
addition to historical information, this report contains forward-looking
statements that are subject to certain risks and uncertainties that could
cause actual results to differ materially from those projected. The words
believe, expect, intend, anticipate, and similar expressions are
used to identify forward-looking statements, but some forward-looking
statements are expressed differently. Many factors could affect our actual
results, including those factors 9




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described under Factors That May Affect
Results of Operations and Financial Condition. These factors, among
others, could cause results to differ materially from those presently anticipated by us. You
should not place undue reliance on these forward-looking statements. Overview We believe that primarily due to the difficult financial markets of
2002, we were unable to raise the additional money needed to fund our
ongoing operations and clinical trial activities. Consequently, on October
9, 2002, our Board of Directors authorized management to initiate
immediate actions to conserve cash. For that purpose, we reduced staff,
eliminated certain future commitments, and sold certain fixed assets. We
are continuing to assess our alternatives. In November 2002, we suspended all clinical trial activity for our
DCVax product candidates. We withdrew our Investigational New Drug
Application (IND) for DCVax-Prostate, a prostate cancer treatment, and for
DCVax-Lung, a potential treatment for non-small cell lung cancer. We
maintained our FDA clearance and our Orphan Drug designation for a
multi-site Phase II clinical trial to evaluate the DCVax-Brain product
candidate as a possible treatment for Glioblastoma Multiforme. However,
this trial cannot be initiated without additional funding. The DCVax-Brain
trial was moved to an inactive status and no patients were recruited. That
trial remains open with the FDA. Operating costs and expenses consist primarily of research and
development expenses, including clinical trial expenses when the Company
is actively participating in clinical trials, and general and
administrative expenses. Research and development expenses include salary and benefit expenses
and costs of laboratory supplies used in our internal research and
development projects. From our inception through March 31, 2004, we incurred costs of
approximately $24.2 million associated with our research and development
activities. Because our technologies are unproven, we are unable to
estimate with any certainty the costs we will incur in the continued
development of our product candidates for commercialization. General and administrative expenses include salary and benefit
expenses related to administrative personnel, cost of facilities,
insurance, legal support, as well as amortization costs of stock options
granted to employees and warrants issued to consultants for entering into
commercial arrangements. To date, our revenues have primarily been derived from the
manufacture and sale of research materials, contract research and
development services, and research grants from the federal government. For
the three months ended March 31, 2004, we earned approximately $24,000 in
revenues from the manufacture and sale of research materials. All research
material sales prior to 2002 were to one customer and sales to this one
customer peaked at $129,000 in 2001. If we are to rely exclusively on
revenues from the sale of our research products to fund our operations, we
will need to significantly increase both the number of customers and the
size of such sales. We lack high-volume manufacturing, sales and marketing
experience and, as a result, we will experience significant difficulties
in funding our operations through the manufacture and sale of research
products. Our
financial statements for the year ended December 31, 2003 and
three months ended March 31, 2004 were
prepared on a going concern basis, which contemplates the realization of
assets and the settlement of liabilities in the normal course of business.
Nevertheless, we have experienced recurring losses from operations,
have a working capital deficit, and
have a deficit accumulated during the development stage of $65.1 million,
as of March 31, 2004, that raises substantial doubt about our ability to
continue as a going concern and our auditors have issued an opinion on the
December 31, 2003 financial statements which states that there is
substantial doubt about our ability to continue as a going concern. Critical Accounting Policies and Estimates Accounting principles generally accepted in the United States of
America require our management to make estimates and assumptions that
affect the amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of our financial statements, as well as
the amounts of revenues and expenses during periods covered by our
financial statements. The actual amounts of these items could differ
materially from those estimates. For example, previously under EITF 94-3, Accounting for Costs
Associated with Exit or Disposal Activities, if an entity remains
responsible, without realizing ongoing economic benefit, for continued
rental payments for premises being vacated, an estimate of the loss over
the remaining life of the primary lease must be made. Sublease rental
income is an allowable offset against the total accrued cost of the rental
payments that the entity continues to be liable for related to the vacated
space. 10




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Consequently, we recognized, for the year ended December 31, 2002, a
liability of approximately $929,000 and a loss on facility
sublease of $721,000, net of deferred rent write off in estimating
the loss of economic benefit from vacating approximately 22,000 square
feet of laboratory and administrative space at our prior facility. On June 30, 2003, we entered into a Settlement Agreement with Nexus
Canyon Park, our prior landlord. Under this Settlement Agreement, Nexus
Canyon Park agreed to permit premature termination of our prior lease and
excuse us from future performance of lease obligations in exchange for
90,000 shares of our unregistered common stock with a fair value of
$35,000 and Nexus retention of our $1.0 million lease security deposit.
The Settlement Agreement resulted in an additional loss on facility
sublease and lease termination of $174,000, net of deferred rent of
$202,000. FASB 146 Accounting for Costs Associated with Exit or Disposal
Activitieshas replaced EITF 94-3 but similar charges may occur if we have
to cancel our current lease or enter into other restructuring
transactions. We also determine our employee stock option compensation costs as the
difference between the estimated fair value of our common stock and the
exercise price of options on their date of grant. Prior to our initial
public offering, our common stock was not actively traded. The fair value
of our common stock for purposes of determining compensation expense for
this period was determined based on our review of the primary business
factors underlying the value of our common stock on the date such option
grants were made, viewed in light of the expected initial public offering
price per share prior to the initial public offering of our common stock.
The actual initial public offering price was significantly lower than the
expected price used in determining compensation expense. Also, on an
ongoing basis the estimate of expense for stock options and warrants is
dependant on factors such as expected life and volatility of our stock. To
the extent actual expense is different than that estimated, the actual
expense that would have been recorded may be substantially different. Related Party Transactions On November 13, 2003, we entered into an Amended and Restated
Employment Agreement with our President, Chief Operating Officer, Chief
Science Officer and Secretary, wherein we eliminated any potential award
of severance compensation in exchange for a one-time payment of $281,571.
We also eliminated any potential award of severance compensation, totaling
$33,635, to our Vice President of 11




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Vaccine Research and Development and our
Controller. Subsequently, the after-tax portion of those payments,
totaling $210,000, were invested in the November 13, 2003 completed Secured Convertible
Promissory Note and Warrant financing. It was also Managements understanding that Washington State law
considers accrued, but unpaid, wages (including possibly severance
payments) a personal liability of our Directors. Management, by electing
to take potential severance payments in cash in November 2003, eliminated
this potential personal liability on the part of our Directors. In addition to the above sums, our Vice President of Vaccine Research
and Development invested an additional $25,000 and another $100,000 was
received from non-employee investors. These additional funds, including
the after-tax severance funds, brought the total invested in the November
13, 2003 secured convertible promissory note and warrants financing to
$335,000. The November 13, 2003 notes have a 12 month term, accrue interest at
an annual rate equal to the prime rate plus 2% and initially were secured
by substantially all of our assets. One of the notes is convertible into the
number of shares of our common stock equal to the principal and accrued
interest amount divided by (i) in the event that we complete a
financing generating gross proceeds to us of at least
$1 million, then the price per share paid by investors in that offering; or
(ii) if we do not complete such an offering, then $0.18, which was the
closing price of our common stock on the date of the financing. The
principal amount of this note is $50,000. In connection with the Recapitalization Agreement with Toucan, note
holders of 70% of the principal amount of the notes agreed to an amendment to
their notes. The purpose of the amendment was to set the conversion price of
the amended notes at $0.10 per share and change the maturity date to
November 12, 2004 in the event the Company raises at least $15 million in a financing
prior to that time or May 12, 2005 if the Company has not
completed a $15 million financing by May 12, 2005. As part of the November 13, 2003 investment, the investors received
warrants initially exercisable to acquire an aggregate of
3.7 million shares of our common stock, expiring November 2008 subject to certain
antidilution adjustments, at an exercise price to be determined as
follows: (i) in the event that we complete an offering of our common stock
generating gross proceeds to us of at least $1 million, then the price per
share paid by investors in that offering; or (ii) if we do not complete
such an offering, then $0.18, which was the closing price of our common
stock on the date of the financing. In connection with the Recapitalization Agreement discussed below,
certain members of management who hold warrants agreed to an amendment to their warrants. The amendment applies to all
warrants issued in the November 13, 2003 financing. The
purpose of the amendment was to remove the economic anti-dilution
provisions and set the warrant exercise price at the lesser of (i) $0.10
per share or (ii) a 35% discount to the average closing price during the
twenty trading days prior to the first closing of the sale by the Company
of convertible preferred stock as contemplated by the Recapitalization
Agreement but not less than $0.04 per share. Proceeds
from the November 13, 2004 offering were allocated between the notes and
warrants on a relative fair value basis. The value allocated to the
warrants on the date of the grant was approximately $221,000. The fair
value of the warrants was determined using the Black-Scholes option
pricing model with the following assumptions: expected dividend yield of
0%, risk-free interest rate of 3.36%, volatility of 194%, and an
contractual life of 5-years. The value of the warrants was recorded as a
deferred debt discount against the $335,000 proceeds of the notes. In
addition, a beneficial conversion feature related to the notes was
determined to be approximately $221,000 but is capped at the remaining
value originally allocated to the notes of approximately $114,000. As a
result, the total discount on the notes equaled the face value of $335,000
which is being amortized over the twelve-month term of the notes. Amortization of deferred debt discount of approximately
$83,750, along with interest accretion on the note of approximately
$5,134, was recorded during the three months ended March 31, 2004 resulting in notes payable to
related parties, net of discount, at March 31, 2004 of approximately
$133,000. Toucan
Financing In an effort to continue to fund our operations, on April 26, 2004
we entered into a Recapitalization Agreement with Toucan. In
connection with the Recapitalization Agreement we issued Toucan three
10% convertible promissory notes in the aggregate principal amount of
$600,000. We also issued Toucan a warrant to purchase
36.0 million shares of our capital stock. Pursuant
to the Recapitalization Agreement, on April 26, 2004 Toucan loaned the Company $500,000. Since February
1, 2004 Toucan has loaned the Company a total of $600,000, including the
$500,000 loan on April 26, 2004. The recent borrowing from Toucan should
allow the Company to fund its operations for approximately 30 days, or
until approximately May 26, 2004. Toucan has the option to loan additional
amounts to the Company during this bridge period, but is not obligated to
do so. These loans accrue interest at 10% per year and are also
convertible into capital stock of the Company. Initial Bridge Funding The initial bridge funding period commenced on February 2, 2004 when
we issued Toucan an unsecured convertible promissory note, in the amount
of $50,000. On March 1, 2004, we issued Toucan a secured convertible
promissory note, in the amount of $50,000. The notes were convertible at
prices below the current price of our common stock at the date of issuance
resulting in a beneficial conversion cost of approximately $100,000 which
is being amortized over the term of the notes. Amortization of
beneficial conversion feature of $14,000 was recorded for the three months ended March 31,
2004. On April 26, 2004, we
issued Toucan a 12




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senior secured convertible promissory note and warrants,
in the amount of $500,000. The Recapitalization Agreement stipulated that the February and March
2004 notes for $50,000 each were to be cancelled and reissued effective
April 26, 2004 as two separate notes for $50,000 each and conforming to
the conditions of the note signed for the April 26, 2004 bridge loan for
$500,000. As a result, the notes issued in February and March 2004,
respectively, have (i) a 12 month term, (ii) accrue interest at 10% per
annum on a 365 day basis compounded annually from their respective
original issuance dates, and are (iii) secured by a first priority senior
security interest in all of the Companys assets. The initial bridge
funding period expires May 26, 2004, unless earlier terminated
or extended by Toucan. During the bridge period, Toucan and the Company have agreed to
cooperate and use their best efforts to restart the Companys development
programs and to take the necessary actions to enable the Company to
ultimately complete an equity financing. At its election, Toucan will lead
all bridge period activities after consultation with the Company. The
bridge period activities will include without limitation: (i) negotiation
and execution of contract manufacturing arrangements for good
manufacturing practice sourcing and handling of dendritic cells, (ii)
analysis of the intellectual property of the Company, (iii) identification
and pursuit of additional antigens to establish a product pipeline for the
Company, through negotiation and execution of binding letters of intent or
agreements for one or more licensing and/or merger and acquistion
transactions, (iv) clarification and analysis of licensing terms and costs
for license of IL-4, (v) preparation of an updated business plan, budgets,
regulatory plan, manufacturing plans, and intellectual property analyses,
(vi) preparation of an investor package and due diligence binders to
facilitate review and due diligence by prospective equity investors, (vii)
evaluation of potential structures for the anticipated equity financing,
(viii) analysis and determination, satisfactory to Toucan, of what reverse
stock splits should be taken by the Company (including terms, conditions
and timing), and preparations for implementation of the transactions
decided upon, including, without limitation, Toucans consent and
regulatory filings, and (ix) assembly of a financing syndicate for the
anticipated equity financing, and determination of the amounts and timing
of such financing. Additional Bridge Funding Toucan, in its sole discretion, may provide up to an additional
$500,000 of bridge funding, in one or more tranches, during the 60 day
period following May 26, 2004. Any additional bridge funding during this
60 day period would be provided on the same terms and conditions as the
initial bridge funding. Following the expiration of the 60 day period, or
90 days from April 26, 2004, Toucan in its sole discretion, may loan
additional funds to the Company on terms mutually acceptable to the
Company and Toucan. During the bridge period and so long as any bridge funding remains
outstanding, the Company is required to comply with certain covenants
relating to financial matters, handling of intellectual property, issuance
of any equity or debt securities, handling of Tangential Flow Filtration
devices, confidentiality and exclusivity and other material matters.
Specifically, during the bridge period and the equity financing period the
Company is required to: (i) coordinate with Toucan on the preparation and
filing of its reports and, (ii) refrain from hiring any new people in any
capacity except in accordance with the Companys budget that has been
approved by the Companys board of directors and Toucan, (iii) refrain
from entering into or revising any severance or similar agreements without
the prior written approval of Toucan, (iv) refrain from acquiring or
leasing any asset or facility outside the ordinary course of business in
an amount in excess of $10,000, in the aggregate, except in accordance
with the Companys budget that has been approved by the Companys board of
directors and Toucan. The bridge period is scheduled to last 90 days but can be terminated
sooner by Toucan upon the occurrence of one of the following events: (i)
in the event that Toucan makes a written election to cease providing
bridge funding, the bridge period will end upon the later of expiration of
the portion of the bridge period covered by the funding already provided
by Toucan, as specified in the note evidencing such funding or ten
business days after Toucans written election, (ii) in the event Toucan
does not make a written election to cease providing bridge funding, but
Toucan fails to offer or provide additional bridge funding, on terms and
conditions set forth in the Recapitalization Agreement, during the ten
business days after the completion of the funded bridge period and the
Company needs additional funding at the time to avoid termination of its
operations, the Company has used and spent the bridge funding provided by
Toucan in accordance with the provisions of the Recapitalization Agreement
and the applicable note, and on or after completion of the bridge funding
period the Company has made a written request to Toucan for additional
bridge funding. In the event that this does occur, the bridge period will
end on the later of twenty business days after completion of the funded
bridge period, or ten business days after the Companys written request
for additional bridge funding. The bridge period may be extended beyond the 90 day period referenced
above by mutual agreement of the parties, or by Toucan if Toucan
determines in its sole discretion that further time is needed to complete
the bridge period activities. Conversion Of Bridge Notes Automatic Conversion The principal amount of the bridge notes as well as any accrued and
unpaid interest will automatically convert into convertible preferred
stock in the event investors, other than Toucan, have purchased a minimum
of $15.0 million of convertible preferred stock. The 13




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conversion price for
any automatic conversion will be the lowest nominal or effective price per
share paid by the other investors who
purchase such convertible preferred stock (excluding shares issuable
upon exercise of the bridge warrants). Discretionary Conversion Until, and/or in the absence of a purchases for cash of a minimum of
$15 million of convertible preferred stock, by investors other than
Toucan, Toucan may, in its sole discretion, elect to convert any or all of
the principal and/or interest due under the notes into any equity security
and/or debt security and/or any combination thereof of the Company. Toucan
may make such determinations from time to time and at any time before the
notes have been discharged in full, and, as applicable, at any time on or
before the expiration of the thirty (30) day notice period required under
the notes in the event the Company wishes to prepay the notes. The conversion price for any discretionary conversion will be the
lowest of, (i) with certain exceptions, the lowest nominal or effective
price per share paid by any investor at any time on or after the date one
year prior to April 26, 2004, (ii) with certain exceptions, the lowest
nominal or effective price at which any investor is entitled to
acquire shares (including, without limitation, through purchase, exchange,
conversion or exercise) pursuant to any other security, instrument, or
promise, undertaking, commitment, agreement or letter of intent of the
Company outstanding on or after April 26, 2004 or granted, issued,
extended or otherwise made available by the Company at any time on or
after the date one year prior to April 26, 2004 (regardless of whether
currently exercisable or convertible), and (iii) the lesser of $0.10 per
share or a 35% discount to the average closing price per share of the
common stock during any twenty consecutive trading days (beginning with
the twenty consecutive trading days prior to April 26, 2004) but
not less
than $0.04 per share under this clause (iii). As
of May 12, 2004, the bridge notes, including principal and
accrued interest, are convertible at
$0.04 per share
for a total of 15,113,000 shares (or 44.3%) of common stock. Bridge Warrants As part of the bridge funding Toucan received warrants with coverage
equal to three hundred percent (300%) of the principal amount due under
the bridge notes. As a result, the Company has issued $1.8 million
dollars in coverage on $600,000 of the initial bridge funding and, if
Toucan elects, to provide $500,000 of additional bridge funding, the
Company will issue $1.5 million in warrant coverage on that $500,000 in
additional bridge funding. The number of shares subject to bridge
warrants to be issued, but not the exercise price, will be determined on
the same basis for all bridge funding and shall be on the basis of $0.05
per share (subject to adjustment for stock splits, stock dividends and
the like). The number of shares for which Toucan will be able to exercise
the bridge warrants from the initial bridge funding is 36 million shares.
If Toucan provides additional bridge funding it will receive the same
warrant coverage on any loans up to $1.1 million in the aggregate. As a
result Toucan could potentially receive warrants for up to an additional
30 million shares. The bridge warrants are exercisable upon the earliest of (i) the time
at which the Company has raised at least $2 million for the issuance of
any class or series of equity security, debt security and/or combinations
thereof (including without limitation, any conversion of any notes and/or
other convertible or exercisable securities and/or instruments other than
the bridge warrants), (ii) the time at which the Company breaches any
provision of the Recapitalization Agreement or any related
recapitalization document, (iii) the time at which the Company decides to
accept an unsolicited proposal, or (iv) sixty-one (61) days after notice
from Toucan that it intends to exercise. The warrants are exercisable for
up to seven (7) years after their respective issuance dates. The exercise
price of the bridge warrants is $0.01 per share (subject to adjustment for
stock dividends, stock splits, certain dilutive issuances and similar
transactions, as more fully provided in the bridge warrants). In the event
the issuance of the Companys convertible preferred stock is approved and
authorized, and investors other than Toucan have closed on the purchase in
cash of a minimum of $15 million of such convertible preferred stock, then
the bridge warrant will be exercisable for such convertible preferred
stock. In the event that the convertible preferred stock is not approved
or authorized, or if investors other than Toucan have not closed on the
purchase of at least $15 million of the Companys convertible preferred
stock, then the bridge warrants will be exercisable for any equity
security and/or debt security and/or any combination thereof in each case
that Toucan shall designate in its sole discretion. Anticipated Equity Financing The
proposed equity financing provides for the potential issuance and sale
of up to $40 million of convertible preferred stock (including any shares
issuable upon conversion of bridge funding, but not including any shares
issuable upon exercise of warrants, options, and similar instruments or
obligations), in one or more closings over a period of 12 months from the
first closing of the sale of convertible preferred stock. If issued, the convertible
preferred stock will be issued at a price per share equal to the lesser of
$0.10 (as adjusted for stock splits, stock dividends and the like) or a
35% discount to the average closing price of the Companys common stock
during the twenty trading days prior to the first closing of the proposed
equity financing, but not less than $0.04 per share. The proposed equity
financing is contingent upon the Company complying with covenants in the
Recapitalization Agreement and locating investors who are willing to
invest in the Company on the terms proposed. As part of the Recapitalization Agreement, we have already agreed to
the principal terms of the equity financing with Toucan. If and when the
Company has raised at least $2 million through the issuance of any class
or series of equity security, debt security and/or 14




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combinations thereof
(including any conversion of any notes and/or other convertible or
exercisable securities and/or instruments other than the bridge warrants), a new board of directors of the Company
will be constituted. In the event a sale can not be achieved as a
public company, we would consider deregistering the Companys common
stock under the Securities Exchange Act of 1934 and conducting the
proposed equity offering on the same terms but as a private company. The Company has also agreed to issue $8 million in warrant coverage
on the first $8 million of convertible preferred stock purchased for cash.
Preferred stock warrants will be exercisable for additional shares of
convertible preferred stock. Preferred stock warrants shall not be issued
upon conversion of notes, exercise of warrants, or other conversion or
exercise. The number of shares issuable upon exercise of warrants to be so
issued will be determined on the basis of $0.10 per share (subject to
adjustment for stock splits, stock dividends and the like), and the
aggregate number of shares for which the holders of preferred stock
warrants will be able to exercise such warrants will therefore be 80.0
million shares. The exercise price of the preferred stock warrants will be the lesser
of $0.10 per share (subject to adjustment for stock splits, stock
dividends and the like) or a 35% discount to the average closing price of
our common stock during the twenty trading days prior to the first closing
of the sale of convertible preferred stock; provided, however that in no
event will the exercise price be less than $0.04 per share (subject to
adjustment for stock splits, stock dividends and the like). The exercise
period will commence upon issuance of the preferred stock warrants, and
shall continue for a period of seven years after their respective issuance
dates. The Companys obligations to enter into the proposed equity financing
is subject to a fiduciary exception pursuant to which the Company may
respond to or accept a proposal for an equity financing or merger,
consolidation, business accommodation or sale of all or substantially all
of the Companys assets from another party or parties, but only as to the
extent required by applicable law, only in regard to an alternative
proposal that has not been directly or indirectly solicited by the Company
or any of its officers, directors or employees or SOMA Partners LLC, or
any advisors, agents or consultants and only if the board of directors of
the Company provides written certification to Toucan that the alternative
proposal was unsolicited. In the event that the Company exercises this
fiduciary exception, it is required to notify Toucan. If the Companys
board of directors determines that acceptance of any unsolicited proposal
is required in order to fulfill its fiduciary obligations, prior to
accepting such unsolicited proposal, the Company is required to notify
Toucan of its intent to accept such a proposal. Toucan will then
have twenty-one (21) days from the date it receives notice from the
Company to present a revised proposal of its own to the Company (although
Toucan is under no obligation to do so) which the Companys board of
directors is required to consider in good faith. In the event that,
following the consideration of any revised proposal from Toucan or, in the
absence of any such revised proposal, following the expiration of
twenty-one (21) days, if the Companys board of directors determines that
acceptance of the unsolicited proposal is required in order to fulfill its
fiduciary obligations, the Company will be under no obligation to proceed
with the anticipated equity financing. Standstill; Termination of Obligation to Effect Anticipated Equity Financing During the bridge period and the equity financing period (but
excluding the periods from February 18, 2004 through February 29, 2004 and
March 16, 2004 through April 26, 2004), we have agreed to
refrain from working with, or entering into discussions with any other
party, other than Toucan, for a potential equity financing, debt
financing, joint venture, license, co-development or other business
arrangement, or merger, consolidation, business combination or sale of all
or substantially all of our assets. The Companys obligation to effect the proposed equity financing will
terminate in the event that the Company has not raised at least $2 million
through the issuance of any class or series of equity security, debt
security and/or combinations thereof (including, without limitation, any
conversion of any notes and/or other convertible or exercisable securities
and/or instruments of any kind) within 180 days of April 26, 2004. In the
event that the Companys obligation to effect the proposed equity
financing is terminated, the standstill period described above will
immediately end and the Company will be free to solicit investments from
parties other than Toucan. 15




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Results of Operations Three Months Ended March 31, 2004 and 2003 Total Revenues.Revenues increased from $69,000 for the three months
ended March 31, 2003 to $127,000 for the three months ended March 31,
2004. The research material sales component of revenue increased to
$24,000 for the three months ended March 31, 2004. Research grant income
is the remaining revenue component which increased from $69,000 for the
three months ended March 31, 2003 to $103,000 for the three months ended
March 31, 2004. The increase in grant revenue represents
reimbursement of increased grant research expenditures relative to the
availability of federal funds. The availability of our federal research
grant funds was dependent upon the governments approval of our grants
second year, non-competing renewal which was approved in the first quarter
2004. Cost of Research Material Sales.Cost of research material sales
increased to $25,000 for the three months ended March 31, 2004. Our
research materials supply agreement with our sole customer expired in late
2002 resulting in no sales activity occurring during the three months
ended March 31, 2003. Our efforts to sell research reagents to a broader
base of customers commenced approximately mid-year 2003 with an expected
increase in direct material and labor costs. We are unable to project
when, if ever, our sales of research materials will attain profitability. Research and Development Expense.Research and development expense
decreased 55% from $508,000 for the three months ended March 31, 2003 to
$229,000 for the three months ended March 31, 2004. This decrease was
primarily due to the November 2002 suspension of all clinical trial
activity for our DCVax product candidates and the withdrawal of our
Investigational New Drug Application (IND) for DCVax-Prostate, and for
DCVax-Lung and the accompanying reduction in material and personnel costs
associated with these activities. General and Administrative Expense.General and administrative
expense decreased 44% from $1.0 million for the three months
ended March 31, 2003 to $557,000 for the three months ended March 31, 2004. This
decrease was primarily due to the October 9, 2002 directive from our Board
of Directors to initiate immediate actions to conserve cash and the
resulting staff reductions and other cost reduction steps implemented. Depreciation and Amortization.Depreciation and amortization
decreased 58% from $87,000 for the three months ended March 31, 2003 to
$37,000 for the three months ended March 31, 2004. This decrease was
primarily due to approximately $904,000, net, of equipment and leasehold
improvements write-offs for the year ended December 31, 2003. Total Other Income (Expense), NetInterest expense increased from
$11,000 for the three months ended March 31, 2003 to $107,000 for the
three months ended March 31, 2004. This increase was due primarily to
recognizing approximately $96,000 of interest expense relative to the debt
discount associated with the November 13, 2003 Secured Convertible
Promissory Note and Warrants debt financing and the debt discount
associated with the February 2, 2004 and March 1, 2004, $50,000 bridge
loans from Toucan. Interest income decreased from $12,000 for the three
months ended March 31, 2003 to zero for the three
months ended
March 31, 2004. This decrease was primarily due to the decline in market
interest rates and having lower average cash balances during the three
months ended March 31, 2004 Liquidity and Capital Resources General Discussion Through abandoning the tenant improvements at our prior facility, on
which use tax payments to the State of Washington had been qualified for
tax deferral, including the disposal and impairment of previously
qualified tax deferred equipment, we received a tax assessment of $492,000
on October 21, 2003 for 87.5% of the gross tax deferred on such qualified
investments. The tax assessment payment was initially due on November 20,
2003. This contingent assessment is being carried as an estimated
liability on the balance sheet as of March 31, 2004 and in the
fourth quarter 2003 was included in
general and administrative expense. We appealed this assessment and were granted an extension until
January 21, 2004 in which to file an appeal. Our February 4, 2004
documentation to the State, citing the legal authority under which our
request for a reduction was based, resulted in a meeting with the State on
February 26, 2004. In response to this February 26, 2004 meeting, we have
submitted, during the week of May 3, 2004, a proposal we feel fairly
represents the exempt amounts that should be excluded from the States
sales and/or use tax which, if accepted, 16




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could result in a liability of
approximately $164,000. In addition, in February 2004, a refund request
of approximately $175,000 related to certain other State taxes was
submitted to the State. The finalization of our appeal process is expected
to take several more months. We
cannot currently determine any amount that may be deducted from the
assessed liability or that will be recovered, if any, from our refund
request. As
of May 14, 2004, including the $600,000 borrowed from Toucan, we
had approximately $313,000 in cash and cash equivalents. We believe,
based on recurring operating and associated financing costs, our
cash will be sufficient to fund our operations through approximately
May 26, 2004. After that date we will have to seek
additional funds from Toucan which Toucan is not obligated to provide to
us. Under the terms of the Recapitalization Agreement, if Toucan
elects not to provide additional funding to us, we are prohibited
from seeking funds from any party other than Toucan for up to ten business
days after May 26, 2004. Any additional financing with Toucan and any other third party is
likely to be dilutive to stockholders, and debt financing, if available,
may include additional restrictive covenants. Unless we receive significant additional funding in the future,
continuing our operations would require us to use assets that otherwise
would be required to liquidate the Company and pay our obligations. For
this reason, if we are unable to obtain additional capital, we may choose
to cease operations at anytime to meet our obligations and to maximize the
value, if any, to be paid to our stockholders following a potential
liquidation. Our independent auditors have indicated in their report on our
financial statements included in our December 31, 2003 annual report on
Form 10-K, that there is substantial doubt about our ability to continue
as a going concern. We need to raise significant additional funding to
continue our operations, conduct research and development activities,
pre-clinical studies and clinical trials necessary to bring our product
candidates to market. However, additional funding may not be available on
terms acceptable to us or at all. The alternative of issuing additional
equity or convertible debt securities also may not be available and, in
any event, would result in additional dilution to our stockholders. Asset Sales and Sources of Cash On April 8, 2003, we were awarded a National Institutes of Health
(NIH) cancer research grant. The total first year grant award was for
approximately $318,000 and has been earned under the grant and was recognized in revenue
through the year ended December 31, 2003. The total award for fiscal 2004
was approximately $328,000, comprised of approximately $198,000 authorized for direct
grant research expenditures and approximately $130,000 authorized for use
to cover our facilities and administrative overhead costs. Total grant
revenues of $421,000, from the April 2003 grants inception through March
31, 2004, have been recognized through March 31, 2004.
Approximately $225,000 of
the grants original award remains to be utilized of which
$207,000 has been received and is included in deferred grant revenue. On April 21, 2003, because we had received frequent requests from
researchers for access to our cancer-associated monoclonal antibodies,
human dendritic cells, and dendritic cell precursors (monocytes), we
announced our entry into the Research Reagents Market. We earned
approximately $24,000 in revenue for the three months ended March 31,
2004 from the manufacture and sale of research materials. However, we have
limited manufacturing facilities and expertise to produce our research
products and the commercial success of any of our research products will
depend upon the strength of our sales and marketing efforts. We are unable
to project when, if ever, its sales of research materials will attain
profitability. Our effort to license certain rights, title, and interest to
technology relating to specific cell lines resulted in the July 1, 2003
License Agreement with DakoCytomation with the payment of a one-time
$25,000 license fee and future non-refundable minimum annual royalty
payments of $10,000 credited against any royalty payments made to NWBT.
The $25,000 one-time license fee was received on August 25, 2003. Recapitalization Plan In an effort to continue to fund our operations, On April 26, 2004
we entered into a Recapitalization Agreement with Toucan. The
Recapitalization Agreement calls for the possible recapitalization of the
Company. At Toucans option, and if successfully implemented, the
recapitalization could provide the company with up to $40 million through
the issuance of new securities to Toucan and a syndicate of investors
selected by Toucan. Following the recapitalization, Toucan and the
investor syndicate would potentially own, on a combined basis, over 90%
of the outstanding capital stock of the Company. The proposed
potential recapitalization would occur in two stages, a bridge period which expires
July 23, 2004, unless earlier terminated or extended by Toucan, followed
by a potential equity financing. Initial Bridge Funding The initial bridge funding period commenced on February 2, 2004 when
we issued Toucan an unsecured convertible promissory 17




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note, in the amount
of $50,000. On March 1, 2004, we issued Toucan a secured convertible
promissory note, in the amount of $50,000. On April 26, 2004, we issued
Toucan a senior secured convertible promissory note and warrants, in the
amount of $500,000. In addition, the February and March 2004 notes, $50,000 each, were
convertible at prices below the current price of our common stock at the
date of issuance resulting in a beneficial conversion cost of
approximately $100,000. The approximate $100,000 value of the beneficial
conversion feature was recorded as a debt discount against the $100,000
proceeds of the notes. The debt discount is being amortized over the 12
month term of the notes with $12,050 of amortization recognized as
interest expense for the three months ended March 31, 2004. The Recapitalization Agreement stipulated that the February and March
2004 notes for $50,000 each were to be cancelled and reissued effective
April 26, 2004 as two separate notes for $50,000 each and conforming to
the conditions of the note signed for the April 26, 2004 bridge loan for
$500,000. As a result, the notes issued in February and March 2004,
respectively, have (i) a 12 month term, (ii) accrue interest at 10% per
annum on a 365 day basis compounded annually from their respective
original issuance dates, and are (iii) secured by a first priority senior
security interest in all of the Companys assets. The initial bridge
funding period expires May 26, 2004, unless extended by Toucan. Additional Bridge Funding Toucan, in its sole discretion, may provide up to an additional
$500,000 of bridge funding, in one or more tranches, during the 60 day
period following May 26, 2004. Any additional bridge funding during this
60 day period would be provided on the same terms and conditions as the
initial bridge funding. Following the expiration of the 60 day period, or
90 days from April 26, 2004, Toucan in its sole discretion, may loan
additional funds to the Company on terms mutually acceptable to the
Company and Toucan. Uses of Cash We
used $260,000 in cash for the operating activities during the three
months ended March 31, 2004, compared to $1.6 million for the three months
ended March 31, 2003. The decrease in cash used in operating activities
from 2003 to 2004 was primarily the result of the October 9, 2002,
initiation of substantial steps to conserve cash, including: (i) the
suspension of all clinical trial activities; (ii) the sale of certain
fixed assets; (iii) the relocation and consolidation of our facilities;
(iv) a significant reduction in force (including the termination of our
Chief Executive Officer, Chief Financial Officer, and Chief Medical
Officer; and (v) the sale of significant portions of our intellectual
property portfolio. We generated $76,000 in cash from investing activities during the
three months ended March 31, 2004 compared to $1.8 million provided by
investing activities during the three months ended March 31, 2003. The
cash provided during the three months ended March 31, 2004 consisted
primarily of restricted cash released as collateral for the Companys
credit cards. Factors That May Affect Results of Operations and Financial Condition This section briefly discusses certain risks that should be
considered by our stockholders and prospective investors. You should
carefully consider the risks described below, together with all other
information included in the December 31, 2004 annual report on Form 10-K
and the information incorporated by reference. If any of the following
risks actually occur, our business, financial condition or operating
results could be harmed. In such case, you could lose all of your
investment. Control by Toucan Capital Fund II, LP of a large percentage of our voting
stock and Toucans rights under the Recapitalization Agreement may permit
Toucan to influence the Company in a way that can adversely affect our
stock price As
of May 12, 2004 Toucan has the right to acquire up to
15,113,000 shares (or 44.3%) of our outstanding capital stock and an additional 36.0
million shares upon exercise of a warrant. In addition, under
the terms of the Recapitalization Agreement, we are required to consult
with Toucan on how we conduct many aspects of our business. As a result,
Toucan has significant authority over how we presently conduct our
business, and with its stock acquisition rights, could influence all
matters requiring stockholder approval. This control may cause us to
conduct our business differently from the way we have in the past. The
concentration of ownership may also delay, deter or prevent acts that
would result in a change in control, which, in turn, could reduce the
market price of our common stock. We will need to raise additional capital which may not be available. As
of May 14, 2004, including the $600,000 borrowed from Toucan, we
had approximately $313,000 in cash and cash equivalents. We believe,
based on recurring operating and associated financing costs, our
cash will be sufficient to fund our operations through approximately May
26, 2004. After that date we will have to seek additional funds from
Toucan which Toucan is not obligated to provide to us. Under the terms of
the Recapitalization Agreement we are 18




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prohibited from seeking funds from
any party other than Toucan for up to ten business days after May 26,
2004. Any additional financing with Toucan and any other third party is
likely to be dilutive to stockholders, and debt financing, if available,
may include additional restrictive covenants. Unless we receive significant additional funding in the future,
continuing our operations will require us to use assets that otherwise
would be required to liquidate the Company and pay our obligations. For
this reason, if we are unable to obtain additional capital, we may choose
to cease operations at anytime to meet our obligations and to maximize the
value, if any, to be paid to our stockholders following a potential
liquidation. Our auditors have issued a going concern audit opinion. Our independent auditors have indicated in their report on our
December 31, 2003 financial statements included in our Form 10-K that
there is substantial doubt about our ability to continue as a going
concern. A going concern opinion indicates that the financial statements
have been prepared assuming we will continue as a going concern and do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty. We have reduced business umbrella, auto, crime and fiduciary, and
directors and officers liability insurance coverage. With rising insurance premiums for most business insurance coverage,
with our reduced level of operating activity, and reduced liability
exposure through the stopping of all clinical trials, we lowered the
levels of all of our insurance coverage. When our finances permit and when
our level of operating activities rise, our insurance needs will be
reassessed. Making a material reduction in our insurance coverage may make
it difficult for us to retain our existing directors and officers, and
will also result in increased exposure to potential liabilities arising
from any future litigation, either of which may materially harm our
business and results of operations. As a result of questions concerning our status as a going concern,
potential customers and partners may decide not to do business with us. The success of our restructured operations will depend on our ability
to attract partners to our research initiatives and to a lesser extent our
ability to attract customers to our research products. Due to concerns
regarding our ability to continue operations, these third parties may
decide not to conduct business with us, or may conduct business with us on
terms that are less favorable than those customarily extended by them. If
either of these events occurs, our business will suffer significantly. We expect to continue to incur substantial losses, and we may never
achieve profitability. We have incurred net losses every year since our incorporation in
July 1998 and, as of March 31, 2004, we had a deficit accumulated during
the development stage of approximately $65.1 million. We have had net
losses applicable to common stockholders for the prior three years as
follows:  
    
    $17.3 million in 2001;
    
    $12.8 million in 2002; and
    
    $5.8 million in 2003. We expect that these losses will continue and anticipate negative
cash flows from operations for the foreseeable future. Because of our
current cash position, we will need to secure additional funding to
continue operations. In addition, we will need to generate revenue
sufficient to cover operating expenses and research and development costs
to achieve profitability. We may never achieve or sustain profitability. As a company in the early stage of development with an unproven business
strategy, our limited history of operations makes an evaluation of our
business and prospects difficult. We have had a limited operating history and are at an early stage of
development. We may not be able to achieve revenue growth in the future.
We have generated the following limited revenues for the prior three
years.  
    
    $129,000 in 2001;
    
    $9,000 in 2002; and
    
    $529,000 in 2003. 19




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We have derived most of these limited revenues from:  
    
    the sale of research products to a single customer;
    
    contract research and development from related parties; and
    
    research grants. In the future, we anticipate that our revenues will be derived primarily
through the commercialization of our product candidates. We may not be able to retain existing personnel. From approximately October 2002 through March 22, 2004, we reduced
our research and administrative staff by approximately sixty-three
members. Our remaining staff, as of May 12, 2004, consisted of six
full-time employees and two part-time employees. The uncertainty of our cash position, workforce reductions, the
volatility in our stock price and our recent asset sales may create
anxiety and uncertainty, which may adversely affect employee morale and
cause us to lose employees whom we would prefer to retain. To the extent
that we are unable to retain our existing personnel, our business and
financial results may suffer. Because we lack sales and marketing experience, we may experience
significant difficulties commercializing our research products. The commercial success of any of our research products will depend
upon the strength of our sales and marketing efforts. We do not have a
sales force and have no experience in the sales, marketing or distribution
of our research products. To fully commercialize our research products, we
will need to create a substantial marketing staff and sales force with
technical expertise and the ability to distribute these products. As an
alternative, we could seek assistance from a third party with a large
distribution system and a large direct sales force. We may be unable to
put either of these plans in place. In addition, if we arrange for others
to market and sell our products, our revenues will depend upon the efforts
of those parties. Such arrangements may not succeed. If we fail to
establish adequate sales, marketing and distribution capabilities,
independently or with others, our business will be seriously harmed. We have limited manufacturing capabilities, which could adversely impact
our ability to commercialize our research products. We have limited manufacturing facilities and expertise to produce our
research products. We have never manufactured, on a commercial scale, any
of our research products. We may be unable to manufacture these products
at a reasonable cost or in sufficient quantities to be profitable. Our success partially depends on existing and future partners. The success of our business strategy may partially depend upon our
ability to develop and maintain multiple partnerships and to manage them
effectively. Therefore, our success depends partially upon the performance
of our partners. We cannot directly control the amount and timing of
resources that our existing or future partners devote to the research,
development or marketing of our products. As a result, those partners:  
    
    may not commit sufficient resources to our programs or products;
    
    may not conduct their agreed activities on time, or at all, resulting in
delay or termination of the development of our products and technology;
    
    may not perform their obligations as expected;
    
    may pursue product candidates or alternative technologies in preference
to ours; or
    
    may dispute the ownership of products or technology developed under our
partnerships. We may have disputes with our partners, which could be costly and time
consuming. Our failure to successfully defend our rights could seriously
harm our business, financial condition and operating results. We intend to continue to enter into partnerships in the future.
However, we may be unable to successfully negotiate any additional
partnerships and any of these relationships, if established, may not be
scientifically or commercially successful. We also work with scientists and medical professionals at academic and
other institutions, including the University of California, Los Angeles,
M.D. Anderson Cancer Center, and the H. Lee Moffitt Cancer Center some of
whom conduct research for us or assist us in 20




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developing our research and
development strategy. These scientists and medical professionals are not
our employees. They may have commitments to, or contracts with, other
businesses or institutions that limit the amount of time they have
available to work with us. We have little control over these individuals. We can only expect them to
devote to our projects the amount of time required by our license,
consulting and sponsored research agreements. In addition, these
individuals may have arrangements with other companies to assist in
developing technologies that may compete with ours. If these individuals do
not devote sufficient time and resources to our programs, our business
could be seriously harmed. Competition in our industry is intense and most of our competitors have
substantially greater resources than we have. The research products market recently entered by us is very
competitive with many well-established large and small distribution
companies, such as BioWhittaker, a Cambrex Company, DakoCytomation, and
Cellsignalling Technology. We have marketed our research products through direct mail, the
Internet, and select participation in trade shows frequented by researchers
who could be interested in our research products. We are also seeking
distribution relationships with established and well-positioned
distribution companies. There can be no assurances that we will be
successful in establishing a market demand for our research products nor
that we will be successful in finding a suitable distributor interested in
selling our research products. The biotechnology and biopharmaceutical industries are characterized
by rapidly advancing technologies, intense competition and a strong
emphasis on proprietary products. Several companies, such as Cell Genesys,
Inc., Dendreon Corporation and Genzyme Molecular Oncology, a division of
Genzyme Corporation, are actively involved in the research and development
of cell-based cancer therapeutics. Of these companies, we believe that only
Dendreon is carrying-out Phase III clinical trials with a cell-based
therapy. No dendritic cell-based therapeutic product is currently approved
for commercial sale. Additionally, several companies, such as Abgenix,
Inc., Agensys, Inc., and Genentech, Inc., are actively involved in the
research and development of monoclonal antibody-based cancer therapies.
Currently, at least six antibody-based products are approved for commercial
sale for cancer therapy. Genentech is also engaged in several Phase III
clinical trials for additional antibody-based therapeutics for a variety of
cancers, and several other companies are in early stage clinical trials for
such products. Many other third parties compete with us in developing
alternative therapies to treat cancer, including:  
    
    biopharmaceutical companies;
    
    biotechnology companies;
    
    pharmaceutical companies;
    
    academic institutions; and
    
    other research organizations. Many of our competitors have significantly greater financial resources
and expertise in research and development, manufacturing, pre-clinical
testing, conducting clinical trials, obtaining regulatory approvals and
marketing than we do. In addition, many of these competitors have become
active in seeking patent protection and licensing arrangements in
anticipation of collecting royalties for use of technology they have
developed. Smaller or early-stage companies may also prove to be
significant competitors, particularly through collaborative arrangements
with large and established companies. These third parties compete with us
in recruiting and retaining qualified scientific and management personnel,
as well as in acquiring technologies complementary to our programs. We expect that our ability to compete effectively will be dependent upon
our ability to:  
    
    obtain additional funding;
    
    successfully complete clinical trials and obtain all requisite regulatory
approvals;
    
    maintain a proprietary position in our technologies and products;
    
    attract and retain key personnel; and
    
    maintain existing or enter into new partnerships. Our competitors may develop more effective or affordable products, or
achieve earlier patent protection or product marketing and sales than we
may. As a result, any products we develop may be rendered obsolete and
noncompetitive. 21




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Our intellectual property rights may not provide meaningful commercial
protection for our research products or product candidates, which could
enable third parties to use our technology, or very similar technology, and
could reduce our ability to
compete in the market. We rely on patent, copyright, trade secret and trademark laws to limit
the ability of others to compete with us using the same or similar
technology in the United States and other countries. However, as described
below, these laws afford only limited protection and may not adequately
protect our rights to the extent necessary to sustain any competitive
advantage we may have. The laws of some foreign countries do not protect
proprietary rights to the same extent as the laws of the United States, and
we may encounter significant problems in protecting our proprietary rights
in these countries. We have seven issued patents (four in the United States and six in
foreign jurisdictions) and 68 patent applications pending (18 in the United
States and 50 in foreign jurisdictions) which cover the use of dendritic
cells in DCVax as well as targets for either our dendritic cell or fully
human monoclonal antibody therapy candidates. The issued patents expire at
dates from 2015 to 2017. We will only be able to protect our technologies from unauthorized use
by third parties to the extent that they are covered by valid and
enforceable patents or are effectively maintained as trade secrets. The
patent positions of companies developing novel cancer treatments, including
our patent position, generally are uncertain and involve complex legal and
factual questions, particularly concerning the scope and enforceability of
claims of such patents against alleged infringement. Recent judicial
decisions are prompting a reinterpretation of the limited case law that
exists in this area, and historical legal standards surrounding questions
of infringement and validity may not apply in future cases. A
reinterpretation of existing law in this area may limit or potentially
eliminate our patent position and, therefore, our ability to prevent others
from using our technologies. The biotechnology patent situation outside the
United States is even more uncertain. Changes in either the patent laws or
in interpretations of patent laws in the United States and other countries
may therefore diminish the value of our intellectual property. We own, or have rights under licenses to a variety of issued patents
and pending patent applications. However, the patents on which we rely may
be challenged and invalidated, and our patent applications may not result
in issued patents. Moreover, our patents and patent applications may not be
sufficiently broad to prevent others from practicing our technologies or
from developing competing products. We also face the risk that others may
independently develop similar or alternative technologies or design around
our patented technologies. We have taken security measures to protect our proprietary
information, especially proprietary information that is not covered by
patents or patent applications. These measures, however, may not provide
adequate protection of our trade secrets or other proprietary information.
We seek to protect our proprietary information by entering into
confidentiality agreements with employees, partners and consultants.
Nevertheless, employees, partners or consultants may still disclose our
proprietary information, and we may not be able to protect our trade
secrets in a meaningful way. If we lose any employees, we may not be able
to prevent the unauthorized disclosure or use of our technical knowledge or
other trade secrets by those former employees despite the existence of
nondisclosure and confidentiality agreements and other contractual
restrictions to protect our proprietary technology. In addition, others may
independently develop substantially equivalent proprietary information or
techniques or otherwise gain access to our trade secrets. Our success will depend partly on our ability to operate without infringing
or misappropriating the proprietary rights of others. Our success will depend to a substantial degree upon our ability to
develop, manufacture, market and sell our research products and product
candidates without infringing the proprietary rights of third parties and
without breaching any licenses we have entered into regarding our product
candidates. There is a substantial amount of litigation involving patent and other
intellectual property rights in the biotechnology and biopharmaceutical
industries generally. Infringement and other intellectual property claims,
with or without merit, can be expensive and time-consuming to litigate and
can divert managements attention from our core business. We may be exposed
to future litigation by third parties based on claims that our products
infringe their intellectual property rights. This risk is exacerbated by
the fact that there are numerous issued and pending patents in the
biotechnology industry and the fact that the validity and breadth of
biotechnology patents involve complex legal and factual questions for which
important legal principles remain unresolved. Our competitors may assert that our products and the methods we employ
are covered by U.S. or foreign patents held by them. In addition, because
patent applications can take many years to issue, there may be currently
pending applications, unknown to us, which may later result in issued
patents that our products may infringe. There could also be existing
patents of which we are not aware that one or more of our products may
inadvertently infringe. If we lose a patent infringement lawsuit, we could be prevented from
selling our research products or product candidates unless we can obtain a
license to use technology or ideas covered by such patent or are able to
redesign our products to avoid infringement. A license may not be available
at all or on terms acceptable to us, or we may not be able to redesign our
products to avoid any infringement. If we are not successful in obtaining a
license or redesigning our products, we may be unable to sell our products
and our business could suffer. 22




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We use hazardous materials and must comply with environmental, health and
safety laws and regulations, which can be expensive
and restrict how we do business. We store, handle, use and dispose of controlled hazardous, radioactive
and biological materials in our business. Our current use of these
materials generally is below thresholds giving rise to burdensome
regulatory requirements. Our development efforts, however, may result in
our becoming subject to additional requirements, and if we fail to comply
with applicable requirements we could be subject to substantial fines and
other sanctions, delays in research and production, and increased operating
costs. In addition, if regulated materials were improperly released at our
current or former facilities or at locations to which we send materials for
disposal, we could be strictly liable for substantial damages and costs,
including cleanup costs and personal injury or property damages, and incur
delays in research and production and increased operating costs. Insurance covering certain types of claims of environmental damage or
injury resulting from the use of these materials is available but can be
expensive and is limited in its coverage. We have no insurance specifically
covering environmental risks or personal injury from the use of these
materials and if such use results in liability, our business may be
seriously harmed. Our principal stockholders, executive officers and directors own a
significant percentage of our stock and, as a result, the trading price for
our shares may be depressed and these stockholders can take actions that
may be adverse to your interests. Our principal stockholders, executive officers, and directors and
entities affiliated with them, in the aggregate, beneficially owned
approximately 67.6% of our common stock and shares of common stock issuable
pursuant to options and warrants exercisable within 60 days of April 26,
2004. This significant concentration of ownership may adversely affect the
trading price for our common stock because investors often perceive
disadvantages in owning stock in companies with controlling stockholders.
Company management and Toucan, as a result of the security ownership described above,
has the ability to exert substantial influence over all matters requiring
approval by our stockholders, including the election and removal of
directors and any proposed merger, consolidation or sale of all or
substantially all of our assets. In addition, they can dictate the
management of our business and affairs. This concentration of ownership
could have the effect of delaying, deferring or preventing a change in
control, or impeding a merger or consolidation, takeover or other business
combination that could be favorable to you. There may not be an active, liquid trading market for our common stock. On December 14, 2001, our common stock was listed on the NASDAQ
National Market. Prior to that time there was no public market for our
common stock. On December 23, 2002, we were delisted from the NASDAQ
National Market and our common stock is currently listed on the Over The
Counter Bulletin Board (OTCBB), which is generally recognized as being a
less active market than the NASDAQ National Market. You may not be able to
sell your shares at the time or at the price desired. Our common stock may experience extreme price and volume fluctuations,
which could lead to costly litigation for us and make an investment in us
less appealing. The market price of our common stock may fluctuate substantially due to a
variety of factors, including:  
    
    announcements of technological innovations or new products by us or our
competitors;
    
    development and introduction of new cancer therapies;
    
    media reports and publications about cancer therapies;
    
    announcements concerning our competitors or the biotechnology industry in
general;
    
    new regulatory pronouncements and changes in regulatory guidelines;
    
    general and industry-specific economic conditions;
    
    changes in financial estimates or recommendations by securities analysts;
and
    
    changes in accounting principles. The market prices of the securities of biotechnology companies,
particularly companies like ours without earnings and consistent product
revenues, have been highly volatile and are likely to remain highly
volatile in the future. This volatility has often been unrelated to the
operating performance of particular companies. In the past, securities
class action litigation has often been brought against companies that
experience volatility in the market price of their securities. Moreover,
market prices for stocks of biotechnology-related and technology companies
occasionally trade at levels that bear no relationship to the operating
performance of such companies. These market prices 23




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generally are not
sustainable and are subject to wide variations. Whether or not meritorious,
litigation brought against us could result in substantial costs, divert
managements attention and resources and harm our financial condition and
results of operations. Our incorporation documents, bylaws and stockholder rights plan may delay
or prevent a change in our management. Our amended and restated certificate of incorporation, bylaws and
stockholder rights plan contain provision that could delay or prevent a
change in our management team. Some of these provisions:  
    
    authorize the issuance of preferred stock that can be created and issued
by the board of directors without prior stockholder approval, commonly
referred to as blank check preferred stock, with rights senior to those
of common stock;
    
    authorize our board of directors to issue dilutive shares of common stock
upon certain events; and
    
    provide for a classified board of directors. These provisions could allow our board of directors to affect your
rights as a stockholder since our board of directors can make it more
difficult for common stockholders to replace members of the board. Because
our board of directors is responsible for appointing the members of our
management team, these provisions could in turn affect any attempt to
replace our current management team. Item 3.
Quantitative and Qualitative Disclosures About Market Risk Our
exposure to market risk is presently limited to the interest rate
sensitivity of our cash and cash equivalents which is affected by
changes in the general level of U.S. interest rates. We are exposed
to interest rate changes primarily as a result of our investment
activities. The primary objective of our investment activities is to
preserve principal while at the same time maximizing the income we
receive without significantly increasing risk. To minimize risk, we
maintain our cash and cash equivalents in interest-bearing
instruments, primarily money market funds. Our interest rate risk
management objective with respect to our borrowings is to limit the
impact of interest rate changes on earnings and cash flows. Due to
the nature of our cash and cash equivalents, we believe that we are
not subject to any material market risk exposure. We do not have any
foreign currency or other derivative financial instruments. Item 4.
Controls and Procedures (a) Evaluation
of disclosure controls, procedures, and internal controls Our
President (Principal Executive Officer) and our Controller (Principal
Financial and Accounting Officer), after evaluating the effectiveness
of the Companys disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) and
internal control over financial reporting, as of the date of this
quarterly report, have concluded that, as of
March 31, 2004, our disclosure controls and procedures were
adequate to ensure that material information relating to the
registrant and its consolidated subsidiaries would be made known to
them by others within those entities. In addition, our President and
our Controller have determined that our internal control over
financial reporting is sufficient to provide reasonable assurance
that; (i) our records accurately and fairly reflect our
transaction and our disposition of our assets; (ii) allow
transactions to be recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles and that receipts and expenditures of our Company are only
being made in accordance with authorizations of management and
Company Directors; and (iii) the Company prevents or timely
detects the unauthorized acquisition, use, or disposition of assets
that could have a material effect on our financial statements. (b) Changes
in internal controls. To
our knowledge, there were no significant changes in the
Companys internal controls or in other factors that could
significantly affect internal controls during the quarter ended
March 31, 2004. 
 Part II  Other Information 
 Item 1. Legal Proceedings We are not a party to any material legal proceedings. 
 Item 2. Changes in Securities and Use of Proceeds None 
 Item 3. Defaults upon Senior Securities None 
 Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of our stockholders during the
quarter ended March 31, 2004. 
 Item 5. Other Information None 
 Item 6. Exhibits and Reports on Form 8-K a) Exhibits 31.1
    
    Certification of President (Principal Executive Officer), Pursuant to Exchange Act
Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Controller (Principal Financial and Accounting Officer), Pursuant to
Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certification of President Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Controller Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 b) Reports of Form 8-K On February 20, 2004 we filed a report on Form 8-K to report the
resignation of Daniel O. Wilds as Chairman and Chief Executive Officer and
as a member our Board of Directors. 24




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. NORTHWEST BIOTHERAPEUTICS, INCDated: May 17, 2004
    
    By:
    
    /s/ Alton L. BoyntonAlton L. BoyntonPresident (PrincipalExecutive Officer)Dated: May 17, 2004
    
    By:
    
    /s/ Larry L. RichardsLarry L. RichardsController(Principal Financial andAccounting Officer)
 25




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NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company) 
 EXHIBIT INDEX ExhibitNumber
    
    Description3.1
    
    Sixth Amended and Restated Certificate of Incorporation. (3.1) (1)3.2
    
    Bylaws of the Registrant. (3.2) (2)4.1
    
    Specimen Common Stock Certificate. (4.1) (2)4.2
    
    Amendment dated April 26, 2004 to the Northwest Biotherapeutics, Inc. Stockholders Rights Plan dated February 26,
2002 between the Company and Mellon Investors Services, LLC.10.1
    
    Industrial Lease  Multiple Tenant, The Lease Agreement between Benaroya Capital Co., LLC and the Company.
Effective June 18, 2003. (10.1) (1)10.2
    
    Amended Employment Agreement, dated November 13, 2003, between Northwest Biotherapeutics, Inc. and Dr. Alton L.
Boynton. (10.1) (3)10.3
    
    Form of First Amendment To Warrants To Purchase Common Shares. (10.3) (4)10.4
    
    Form of Consent To Loan And Amendment Of Security Agreement. (10.4) (4)10.5
    
    Recapitalization Agreement dated April 26, 2004 between the Company and Toucan Capital Fund II, L.P., (10.5) (4)+10.6
    
    Loan Agreement, Security Agreement and 10% Convertible, Secured Promissory Note in the principal amount of $50,000,
dated April 26, 2004, between the Company and Toucan Capital Fund II, L.P., (10.6) (4)10.7
    
    Loan Agreement, Security Agreement and 10% Convertible, Secured Promissory Note in the principal amount of $50,000,
dated April 26, 2004, between the Company and Toucan Capital Fund II, L.P., (10.7) (4)10.8
    
    Loan Agreement, Security Agreement and 10% Convertible, Secured Promissory Note in the principal amount of
$500,000, dated April 26, 2004, between the Company and Toucan Capital Fund II, L.P., (10.8) (4)10.9
    
    Warrant to purchase securities of the Company dated April 26, 2004 to Toucan Capital Fund II, L.P., (10.9) (4)10.10
    
    Form of Warrant to purchase securities of the Company. (10.10) (4)10.11
    
    Form of Subordination Agreement. (10.11) (4)10.12
    
    Form of First Amendment To Convertible Secured Promissory Note. (10.12) (4)31.1
    
    Certification of President (Principal Executive Officer), Pursuant
to Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Controller (Principal Financial and Accounting
Officer), Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certification of President Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Controller Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   *
    
    Filed herewith.+
    
    The Company has applied for confidential treatment for portions of this
exhibit.(1)
    
    Incorporated by reference to the exhibit shown in the preceding
parentheses filed with the Registrants Form 10-Q on August 14, 2003.(2)
    
    Incorporated by reference to the exhibit shown in the preceding
parentheses filed with the Registrants Registration Statement on Form
S-1 (File No. 333-67350).(3)
    
    Incorporated by reference to the exhibit shown in the preceding
parentheses filed with the Registrants Form 10-Q on November 11, 2003.(4)
    
    Incorporated by reference to the exhibit shown in the preceding
parentheses filed with the Registrants Form 10-K on May 14, 2004.