NORTHWEST BIOTHERAPEUTICS INC - Quarter Report: 2002 September (Form 10-Q)

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For The Quarterly Period Ended September 30, 2002

OR

Commission File Number 0-26825

NORTHWEST BIOTHERAPEUTICS, INC.

21720 — 23rd DRIVE SE, SUITE 100, 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 [ ]

         As of November 11, 2002, the registrant had outstanding 17,003,776 shares of common stock, $0.001 par value.

Table of Contents

NORTHWEST BIOTHERAPEUTICS, INC.

TABLE OF CONTENTS

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company)
AND SUBSIDIARY

Condensed Consolidated Balance Sheets
(unaudited)

(in thousands, except share data)

See accompanying notes to condensed consolidated financial statements.

3

Table of Contents

NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company)
AND SUBSIDIARY

Condensed Consolidated Statements Of Operations

(unaudited)

(in thousands, except per share data)

See accompanying notes to condensed consolidated financial statements.

4

Table of Contents

NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company)
AND SUBSIDIARY

Condensed Consolidated Statements Of Cash Flows

(unaudited)

(in thousands)

See accompanying notes to condensed consolidated financial statements.

5

Table of Contents

Northwest Biotherapeutics, Inc.
(A Development Stage Company)
And Subsidiary

Notes To Condensed Consolidated Financial Statements

(unaudited)

1. Basis of Presentation

         The accompanying unaudited condensed consolidated financial statements of Northwest Biotherapeutics, Inc. and subsidiary (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X and reflect all adjustments consisting of normal recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the results for the periods shown. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or any future period. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s 2001 Annual Report on Form 10-K as filed with the Securities and Exchange Commission on April 1, 2002.

         The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

2. 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 and nine months ended September 30, 2002, 93,000 issued and outstanding restricted shares of common stock that are subject to repurchase. Options to purchase 1,533,910 shares of common stock and warrants to purchase 568,525 shares of common and preferred stock were excluded from the calculation of diluted net loss per share for the three and nine months ended September 30, 2002 as such securities were antidilutive. Options to purchase 1,168,016 shares of common stock and warrants to purchase 2,808,742 shares of common and preferred stock were excluded from the calculation of diluted net loss per share for the three and nine months ended September 30, 2001 as such securities were antidilutive.

3. Stockholder Rights Agreement

         On March 6, 2002, the Company adopted a Stockholder Rights Agreement, under which each common stockholder of record at the close of business on March 4, 2002 will receive a dividend of one right per share of common stock held. Each right entitles the holder to purchase one share of common stock from the Company at a price equal to $19.25 per share, subject to certain antidilution provisions. The rights become exercisable only in the event that a third party acquires beneficial ownership of, or announces a tender or exchange offer for, at least 15% of the then outstanding shares of the Company’s common stock and such acquisition or offer is determined by the

6

Table of Contents

Board of Directors to not be in the best interests of the stockholders. If the acquisition or offer were determined by the Board of Directors to be in the best interests of the stockholders, the rights may be redeemed by the Company for $0.0001 per right. The rights will expire on February 25, 2012, unless earlier redeemed, exchanged or terminated in accordance with the rights agreement.

4. Operations and Financing

         The Company’s financial statements have been prepared on a going concern basis. The consolidated financial statements do not include any adjustments that might be necessary if the Company were unable to continue as a going concern.

         On October 9, 2002, the Company announced that its Board of Directors authorized management to immediately initiate actions to conserve cash. This consisted of reducing and eliminating future commitments, such as suspending recruitment in its Phase III DCVax-Prostate clinical trial, selling fixed assets, if necessary, and continuing to assess its alternatives.

         The Company is implementing changes to restructure as a pre-clinical antibody and dendritic cell development company, comprised of approximately 13 employees, to lower cash expenditures, and, if successful in restructuring, to shift its focus to further develop diagnostic and therapeutic antibodies against its proprietary cancer targets for potential use in new cancer products.

         In this regard, the Company has withdrawn its Investigative New Drug Application (IND) for its DCVax-Prostate, a prostate cancer treatment, and for its DCVax-Lung, a potential treatment for non-small cell lung cancer. Although it is maintaining its FDA clearance to initiate a multi-site Phase II clinical trial to evaluate DCVax-Brain as a possible treatment for Glioblastoma Multiforme, without additional funding the Company will not have sufficient resources to initiate this trial.

         Eighteen members of its research and administrative staff were terminated on August 8, 2002. Severance and other related costs of that downsizing, approximately $100,000, were fully paid as of September 30, 2002.

         The Company terminated an additional 10 members of its research and administrative staff, including its Executive Vice President and Chief Financial Officer, in the month of October 2002 incurring severance and other related costs in October 2002 of approximately $208,000.

         Scheduled for the month of November 2002, is the termination of an additional 20 members of its research and administrative staff, including its Vice President and Chief Medical Officer with projected severance and other related costs in November 2002 of approximately $165,000.

         The Company accrued, as of September 30, 2002, approximately $263,000 for severance costs coming due in October and November 2002. These costs were fully paid as of November 11, 2002. The additional severance costs not accrued as of September 30, 2002, approximately $110,000, were expensed upon notification of the employees in October and November 2002.

         After the November 2002 terminations, the remaining staff of approximately 13 is expected to provide the core personnel needed to maintain the Company with a revised focus on pre-clinical antibody and dendritic cell development.

7

Table of Contents

         The Company, on October 24, 2002, signed a conditional agreement to sell certain rights, title, and interest in certain antigen targets pertaining to its fully human monoclonal antibodies to a third party. Pursuant to this October 24, 2002 agreement, the Company received a $500,000 non-refundable payment. The other party to this agreement has an absolute right to cancel this agreement under certain circumstances. The potential additional $2.5 million payment from this particular Intellectual Property Rights sale is a critical factor in determining whether the Company can, in-fact, restructure as a pre-clinical antibody and dendritic cell development company.

         In addition, the October 24, 2002 conditional agreement, if consummated, will pay the Company a royalty of 2% on net product sales.

         If successful in restructuring, the Company believes it can manage its operating cash requirements so that its current cash balance, including this potential additional $2.5 million in working capital, will be sufficient to fund restructured operations into the fourth quarter of 2003 while retaining sufficient assets to satisfy its remaining liabilities, in the event restructuring in unsuccessful.

         If this agreement’s conditions are not satisfied and the agreement is not consummated, the Company has determined that it will likely cease business operations by December 31, 2002, and sell all tangible and intangible assets. The carrying value of such assets may not be recoverable. The Company would have a trustee appointed to finalize the Company’s remaining business affairs and the Company believes that it has sufficient assets to satisfy its remaining liabilities.

         Under the terms of the October 24, 2002 agreement, if consummated, the Company will purchase rights to certain other antigen targets in exchange for 2.0 million newly issued non-registered shares of our common stock and warrants to purchase 800,000 shares of our common stock which could be dilutive to our stockholders.

5. Collaboration Agreement

         Under the terms of the Company’s Collaboration Agreement with Medarex, Inc., development of HuRx-Prostate has advanced to the stage where the costs incurred on development of this product candidate are shared equally by Medarex and the Company. As of September 30, 2002, the Company has accrued approximately $400,000 representing its share of the costs incurred under the cost sharing portion of the agreement. As of October 2002, agreements have been signed that, if finally consummated, would result in each company waiving its right to receive reimbursement of 50% of their respective development costs incurred to date under this Collaboration Agreement (see note 4).

6. New Accounting Pronouncements

         In July 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses financial accounting and reporting for costs associated with exit or disposal activities. Statement No. 146 nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The principal difference between Statement No. 146 and Issue No. 94-3 relates to the recognition of a liability for a cost associated with an exit or disposal activity. Statement No. 146 requires that a liability be recognized for those costs only when the liability is incurred, that is, when it meets the definition of a liability in the FASB’s conceptual framework. In contrast, under Issue No. 94-3, a company recognized a liability for an exit cost when it committed to an exit plan. Statement No. 146 also establishes fair value as the objective for initial measurement of liabilities related to exit or disposal activities. The Statement is effective for exit or disposal activities that are initiated after December 31, 2002 although earlier application is encouraged. The Company intends to adopt SFAS 146 on January 1, 2003.

8

Table of Contents

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

FORWARD LOOKING INFORMATION

         The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed, consolidated financial statements and the notes to those financial statements included with this report. In addition to historical information, this report contains “forward-looking statements” that are within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and 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 their absence does not mean that such statement is not forward-looking. Many factors could affect our actual results, including those factors described under “Factors That May Affect Results of Operations and Financial Condition” at the end of this Item 2. These factors, among others, could cause results to differ materially from those presently anticipated by us. Readers are cautioned not to place undue reliance on these forward-looking statements.

Overview

         Northwest Biotherapeutics is a biotechnology company focused on discovering, developing and commercializing immunotherapy products that safely generate and enhance immune system responses to effectively treat cancer. The Company has combined its expertise in dendritic cell biology, immunology and antigen discovery with its proprietary technologies to develop cancer therapies.

         On October 8, 2002, the Company received notification from NASDAQ that its common stock failed to maintain a minimum $1.00 per share bid price for 30 consecutive trading days as required by NASDAQ rules. The Company has 90 calendar days, or to January 6, 2003, to meet the minimum $1.00 per share bid price for 10 consecutive trading days to regain compliance. If not, it may apply for SmallCap status or become delisted. If the Company’s securities are delisted, stockholders’ ability to obtain price quotations and buy and sell shares may be materially impacted. It is possible that the common stock may be eligible for trading on the OTC bulletin board.

         On October 9, 2002, the Company announced that its Board of Directors authorized management to immediately initiate actions to conserve cash. This consisted of reducing and eliminating future commitments, such as suspending recruitment in its Phase III DCVax-Prostate clinical trial, selling fixed assets, if necessary, and continuing to assess its alternatives.

         The Company is implementing changes to restructure as a pre-clinical antibody and dendritic cell development company, comprised of approximately 13 employees, to lower cash expenditures, and, if successful in restructuring, to shift focus to further develop diagnostic and therapeutic antibodies against its proprietary cancer targets for potential use in new cancer products.

         In this regard, in November 2002, the Company suspended all clinical trial activity for its DCVax product candidates. It has withdrawn its Investigative New Drug Application (IND) for its DCVax-Prostate, a prostate cancer treatment, and for its DCVax-Lung, a potential treatment for non-small cell lung cancer. Although it is maintaining its FDA clearance to initiate a multi-site Phase II clinical trial to evaluate DCVax-Brain as a possible treatment for Glioblastoma Multiforme, without additional funding the Company will not have sufficient resources to initiate this trial.

         Eighteen members of its research and administrative staff were terminated on August 8, 2002. Severance and other related costs of that downsizing, approximately $100,000, were fully paid as of September 30, 2002.

         The Company terminated an additional 10 members of its research and administrative staff, including its Executive Vice President and Chief Financial Officer, in the month of October 2002 incurring severance and other related costs in October 2002 of approximately $208,000.

         We have scheduled for the month of November 2002, the termination of an additional 20 members of our research and administrative staff, including our Vice President and Chief Medical Officer with projected severance and other related costs in November 2002 of approximately $165,000.

9

Table of Contents

         The Company accrued, as of September 30, 2002, approximately $263,000 for severance costs coming due in October and November 2002. These costs were fully paid as of November 11, 2002. The additional severance costs not accrued as of September 30, 2002, approximately $110,000, were expensed upon notification of the employees in October and November 2002.

         After the November 2002 terminations, we expect the remaining staff of approximately 13 to provide the core personnel needed to maintain the Company in the near term with a revised focus on pre-clinical antibody and dendritic cell development.

         The Company, on October 24, 2002, signed a conditional agreement to sell certain rights, title, and interest in certain antigen targets pertaining to its fully human monoclonal antibodies to a third party. Pursuant to this October 24, 2002 agreement, the Company received a $500,000 non-refundable payment. The other party to this agreement has an absolute right to cancel this agreement under certain circumstances. The potential additional $2.5 million working capital from this particular Intellectual Property Rights sale is a critical factor in determining whether the Company can, in-fact, restructure as a pre-clinical antibody and dendritic cell development company.

         In addition, the October 24, 2002 conditional agreement, if consummated, will pay the Company a royalty of 2% on net product sales.

         If successful in restructuring, the Company believes it can manage its operating cash requirements so that its current cash balance, including this potential additional $2.5 million in working capital, will be sufficient to fund restructured operations into the fourth quarter of 2003 while retaining sufficient assets to satisfy its remaining liabilities, in the event restructuring is unsuccessful.

         If this agreement's conditions are not satisfied and the agreement is not consummated, the Company has determined that it will most likely cease business operations by December 31, 2002, and sell all tangible and intangible assets. The carrying value of such assets may not be recoverable. The Company would have a trustee appointed to finalize the Company’s remaining business affairs and the Company believes that it has sufficient assets to satisfy its remaining liabilities.

         Under the terms of the October 24, 2002 agreement, if consummated, the Company will purchase rights to certain other antigen targets in exchange for 2.0 million newly issued non-registered shares of our common stock and warrants to purchase 800,000 shares of our common stock which could be dilutive to our stockholders.

Critical Accounting Policies and Estimates

         These financial statements have been prepared on a going concern basis. If we are unable to close our October 24, 2002 conditional agreement or to obtain additional funding, we will likely cease business operations by December 31, 2002. As of September 30, 2002, we consider our business to be a going concern and no adjustments have been made for the potential of ceasing business operations.

         We currently believe that none of our other accounting policies or estimates are critical. However, as the nature and scope of our business operations mature, certain of our accounting policies and estimates may become critical. You should understand that generally accepted accounting principles 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 the periods covered by our financial statements. The actual amounts of these items could differ materially from those estimates. For example, we estimate the fair value of stock options and warrants issued to nonemployees using an option valuation method that considers market indicators.

Results of Operations

Three Months Ended September 30, 2002 and 2001

         Total Revenues. Revenues decreased 100% from $13,000 for the three months ended September 30, 2001 to $0 for the three months ended September 30, 2002. Our revenues from research material sales will fluctuate depending upon the timing of purchases by BioWhittaker, Inc., our sole customer.

         Cost of Research Material Sales. Cost of research material sales decreased 100% from $9,000 for the three months ended September 30, 2001 to $0 for the three months ended September 30, 2002. This decrease was due to the reduced sales activity.

         Research and Development Expense. Research and development expense increased 39% from $1,190,000 for the three months ended September 30, 2001 to $1,657,000 for the three months ended September 30, 2002. This increase was primarily due to increased costs associated with site initiation expenditures related to our Phase III

10

Table of Contents

clinical trials, research and development expenditures relating to HuRx-Prostate, and our 50% share of certain research and development costs initially incurred by Medarex under our collaboration agreement with Medarex.

         General and Administrative Expense. General and administrative expense increased 47% from $1,168,000 for the three months ended September 30, 2001 to $1,721,000 for the three months ended September 30, 2002. The increase in costs was primarily due to increased costs associated with our directors and officers liability insurance and costs attributable to our being a public company, which occurred in December 2001, and recognized severance and outplacement service costs.

         Depreciation and Amortization. Depreciation and amortization increased 26% from $114,000 for the three months ended September 30, 2001 to $144,000 for the three months ended September 30, 2002. This increase was primarily due to the purchase of laboratory equipment during 2002 to support expanding clinical activities.

         Total Other Income (Expense), Net. Other income (expense), net, consists primarily of interest expense and interest income. Interest expense decreased 95% from $163,000 for the three months ended September 30, 2001 to $8,000 for the three months ended September 30, 2002. This decrease was primarily due to the repayment and termination of our line of credit from Northwest Hospital which occurred in December 2001. Interest income decreased 58% from $69,000 for the three months ended September 30, 2001 compared to $29,000 for the three months ended September 30, 2002. This decrease was primarily due to the decline in market interest rates.

Nine Months Ended September 30, 2002 and 2001

         Total Revenues. Revenues decreased 88% from $74,000 for the nine months ended September 30, 2001 to $9,000 for the nine months ended September 30, 2002. Our revenues from research material sales will fluctuate depending upon the timing of purchases by BioWhittaker, Inc., our sole customer.

         Cost of Research Material Sales. Cost of research material sales decreased 86% from $49,000 for the nine months ended September 30, 2001 to $7,000 for the nine months ended September 30, 2002. This decrease was due to the reduced sales activity.

         Research and Development Expense. Research and development expense increased 51% from $3,470,000 for the nine months ended September 30, 2001 to $5,253,000 for the nine months ended September 30, 2002. This increase was primarily due to increased costs associated with site initiation expenditures related to our Phase III clinical trials, research and development expenditures relating to HuRx-Prostate, and our 50% share of certain research and development costs initially incurred by Medarex under our collaboration agreement with Medarex.

         General and Administrative Expense. General and administrative expense increased 62% from $3,395,000 for the nine months ended September 30, 2001 to $5,486,000 for the nine months ended September 30, 2002. The increase in costs was primarily due to increased costs associated with our directors and officers liability insurance, costs attributable to our being a public company, which occurred in December 2001, and recognized severance and outplacement service costs.

         Depreciation and Amortization. Depreciation and amortization increased 33% from $337,000 for the nine months ended September 30, 2001 to $449,000 for the nine months ended September 30, 2002. This increase was primarily due to the purchase of laboratory equipment during 2002 to support expanding clinical activities.

         Total Other Income (Expense), Net. Other income (expense), net, consists primarily of interest expense and interest income. Interest expense decreased 93% from $465,000 for the nine months ended September 30, 2001 to $31,000 for the nine months ended September 30, 2002. This decrease was primarily due to the repayment and termination of our line of credit from Northwest Hospital which occurred in December 2001. Interest income decreased 5% from $149,000 for the nine months ended September 30, 2001 compared to $141,000 for the nine months ended September 30, 2002. This decrease was due to the decline in market interest rates.

11

Table of Contents

Liquidity and Capital Resources

         From inception through September 30, 2002, we have financed our operations primarily through the public and private sale of securities, cash generated from the sale of biomedical research products, equipment leases and borrowings from stockholders. At September 30, 2002, we had cash and cash equivalents of $4.0 million compared to $15.0 million at December 31, 2001.

         Pursuant to the October 24, 2002 agreement, the Company received a $500,000 non-refundable payment.

         We used $10.4 million in cash for operating activities during the nine months ended September 30, 2002, compared to $6.7 million during the nine months ended September 30, 2001. The change in cash used in operating activities from 2001 to 2002 was primarily due to expanded operations including expenditures related to three clinical trials in 2002 compared to a single trial in 2001. We used $712,000 in cash for investing activities during the nine months ended September 30, 2002 compared to $157,000 during the nine months ended September 30, 2001. The change in cash used in investing activities from 2001 to 2002 was primarily due to the purchase of property and equipment necessary for the expansion of Company operations. For the nine months ended September 30, 2002, we obtained $205,000 in cash from financing activities compared to obtaining $11.4 million for the nine months ended September 30, 2001. The primary reason for this difference was the $12.8 million of proceeds from the issuance of preferred stock during the second quarter of 2001.

         Refer to the “Overview” section of “Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations” regarding our discussion of a possible restructuring as a pre-clinical antibody and dendritic cell development company which would shift our research focus to further develop diagnostic and therapeutic antibodies against our proprietary cancer targets for potential use in new cancer products. If successful in our restructuring, we expect to continue refinement of our next generation system for cost effectively producing high purity dendritic cells and dendritic cell precursors as a platform for a new generation of cancer and infectious disease products.

         The uncertainty surrounding our capitalization negatively affects our business. We do not have committed external sources of funding and we may be unable to obtain additional funds on acceptable terms, if at all. Even if the October 24, 2002 agreement is consummated, we may not be able to exist as a scaled-down company. If adequate funds are not available, we may be required to, among other things:

FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION

         This section briefly discusses certain risks that should be considered by stockholders and prospective investors in Northwest Biotherapeutics, Inc. You should carefully consider the risks described below, together with all other information included in this quarterly report on Form 10-Q and the information incorporated into this report by reference. If any of the following risks actually occur, our business, financial condition or operating results could be materially harmed. In such case, the trading price of our common stock could decline.

Our intellectual property rights may not be marketable.

12

Table of Contents

         We may experience difficulty in finding buyers for any of our intellectual property and have no commitments for the purchase of any of our intellectual property rights, other than that certain conditional agreement, dated October 24, 2002, to sell the rights to certain of our antigen targets to a third party. The other party to this agreement has an absolute right to cancel this agreement under certain circumstances.

         If the October 24, 2002 agreement is not consummated we have determined that we will most likely cease business operations by December 31, 2002.

We need to raise additional capital that may not be available, which would adversely affect our operations.

         None of our products are available for commercial sale and we are not generating sufficient cash to fund our operations. We may seek additional funds from public and private stock offerings, strategic partnerships and licenses, borrowing under lease lines of credit or other sources. We have no commitments for additional financing, other than that certain conditional agreement, dated October 24, 2002, to purchase the rights to certain antigen targets by a third party, and we may experience difficulty in raising additional capital on terms acceptable to us, or at all. Any additional equity financing would likely be dilutive to stockholders, and debt financing, if available, may include restrictive covenants. If we cannot raise more money, we will have to further reduce our capital expenditures, scale back our development of product candidates, further reduce our workforce or license our product candidates to third parties for commercialization that we would otherwise seek to commercialize ourselves.

We are in the early stage of development and have a history of net losses.

         We are a development stage company and none of our primary product candidates have received regulatory approval for commercial sale. Therefore, we have a limited operating history upon which an investor may evaluate our operations and future prospects. We have incurred net losses since inception, including net losses applicable to common stockholders of approximately $17.3 million for the year ended December 31, 2001 and approximately $11.1 million for the nine months ended September 30, 2002. As of September 30, 2002, we had a deficit accumulated during the development stage of approximately $56.8 million. We would need to make substantial expenditures to further develop and commercialize our product candidates. While we have devoted and expect to continue to devote significant resources to the research and development of new products, we may not be successful in developing products for commercial sale, and we may never realize any benefits from such research and development activities. Our ability to achieve and sustain profitability depends upon our ability to successfully develop new and commercially viable products, which is particularly difficult for us as our technologies and their commercial viability are unproven. As a result of these factors, it is difficult to evaluate our prospects, and our future success is more uncertain than if we had a longer or more proven history of operations.

Our success partially depends on existing and future strategic partners.

         The success of our business strategy partially depends upon our ability to develop and maintain multiple strategic partnerships and to manage them effectively. Therefore, our success depends partially upon the performance of our strategic partners. Moreover, we cannot directly control the amount and timing of resources that any of our existing or future strategic partners devote to the research, development or marketing of our products. As a result, those strategic partners:

13

Table of Contents

         We may have disputes with our strategic 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 strategic partnerships in the future. However, we may be unable to successfully negotiate any additional strategic 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, the University of Iowa and Northwest Hospital, some of whom conduct research for us or assist us in developing our research and development strategy. These scientists and medical professionals are not our employees. They may have commitments to, or contracts with, other businesses or institutions that limit the amount of time they have available to work with us. We have little control over these individuals. We can only expect them to devote to our projects the amount of time required by our license, consulting and sponsored research agreements. In addition, these individuals may have arrangements with other companies to assist in developing technologies that may compete with ours. If these individuals do not devote sufficient time and resources to our programs, our business could be seriously harmed.

Our common stock has and may continue to experience extreme price and volume fluctuations, which could lead to costly litigation for us and make an investment in us less appealing.

         On October 8, 2002, the Company received notification from NASDAQ that its common stock failed to maintain a minimum $1.00 per share bid price for 30 consecutive trading days as required by NASDAQ rules. The Company has 90 calendar days, or to January 6, 2003, to meet the minimum $1.00 per share bid price for 10 consecutive trading days to regain compliance. If not, it may apply for SmallCap status or become delisted. If the Company’s securities are delisted, stockholders’ ability to obtain price quotations and buy and sell shares may be materially impacted. It is possible that the common stock may be eligible for trading on the OTC bulletin board.

         The market price of our common stock has ranged from a high of $5.08 per share to a low of $0.10 per share between December 14, 2001, the date that our common shares commenced trading, and October 31, 2002. The price may continue to fluctuate substantially due to a variety of factors, including:

         The market prices of the securities of biotechnology companies, particularly companies like ours without earnings and product revenues, have been highly volatile and are likely to remain highly volatile in the future. In some cases this volatility has 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. 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.

Competition in our industry is intense and many of our competitors have substantially greater resources than we have.

         The biotechnology and biopharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. Several companies, such as Abgenix, Inc., Agensys,

14

Table of Contents

Inc., IDEC Pharmaceuticals Corporation and Genentech, Inc., are actively involved in the research and development of monoclonal antibody-based cancer therapies. Currently, at least three 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:

         Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, pre-clinical testing and sales 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:

         Our competitors may develop more effective or affordable products, or achieve earlier patent protection or product marketing and sales than we may. As a result, any products we develop may be rendered obsolete and noncompetitive.

Our intellectual property rights may not provide meaningful commercial protection for our products, 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 four issued patents (one in the United States and three in foreign jurisdictions) and 33 patent applications pending (10 in the United States and 23 in foreign jurisdictions) which cover the use of dendritic cells in DCVax as well as targets for either DCVax or HuRx-based therapies. The issued patents expire at dates from 2015 to 2017. In addition, we had a world-wide exclusive license from Cytogen to use PSMA for the development, manufacture and sale of DCVax-Prostate. The license expires upon the expiration of the last to expire of the underlying patents, but not prior to November 2012.

         The Company, due to its cash conservation efforts and decision to terminate its dendritic cell therapy program for prostate cancer, is unable to comply with the Cytogen license requirement of using reasonable efforts to achieve certain milestones in the development of commercial products. These license rights are being returned to Cytogen.

15

Table of Contents

         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, strategic partners and consultants. Nevertheless, employees, strategic 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 future success will depend to a substantial degree upon our ability to develop, manufacture, market and sell our products without infringing the proprietary rights of third parties and without breaching any licenses we have entered into regarding our product candidates. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the general field of immunotherapy. In particular, we are aware of other patents issued to third parties for monoclonal antibodies that bind to prostate-specific membrane antigen, or PSMA, and patent applications of others that may issue with similar claims. Our ability to market a product based on the binding of antibodies to PSMA may depend on the actual invention date of the subject matter of the issued patent, or the scope of claimed coverage of the pending patent applications, both of which are unknown to us.

         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 products 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.

Our rights to the use of technologies licensed to us by third parties are not within our control, and without these technologies, our products and programs may not be successful and our business could be harmed.

         We rely on our license from Cytogen to use PSMA and may rely on other licenses in the future to use various technologies that may be material to our business. We rely upon our licensors to prevent infringement of the licensed patents. Our rights to use these technologies and employ the inventions claimed in the licensed patents are or may be subject to our licensors abiding by the terms of those licenses and not terminating them.

         Our license from Cytogen provided us with worldwide exclusive rights to use PSMA for the development, manufacture and sale of DCVax-Prostate in exchange for payments upon the achievement of certain milestones. The Company, due to its cash conservation efforts and decision to terminate its dendritic cell therapy program for prostate cancer, is unable to comply with the Cytogen license requirement of using reasonable efforts to achieve certain milestones in the development of commercial products. These license rights are being returned to Cytogen.

16

Table of Contents

If we lose key management or scientific personnel or cannot recruit qualified employees, our business could suffer.

         With the exception of Mr. Wilds and Dr. Boynton we do not have any key person life insurance on individuals. Our future success will also depend in part on the continued service of our key scientific and management personnel and our ability to identify, hire and retain additional personnel. We experience intense competition for qualified personnel. We may be unable to attract and retain the personnel necessary for the development of our business. Moreover, our work force is located in the Seattle, Washington area, where demand for personnel with the scientific and technical skills we seek is extremely high and is likely to remain high. Because of this competition, our compensation costs may increase significantly.

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 executive officers and directors and entities affiliated with them, in the aggregate, beneficially own approximately 21% of our common stock as of September 30, 2002. This significant concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. These stockholders, acting together, will have 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 could 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.

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 provisions that could delay or prevent a change in our management team. Some of these provisions:

         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 and procedures.

17

Table of Contents

                Our Chief 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)) as of a date (the “Evaluation Date”) within 90 days prior to the filing date of this quarterly report, have concluded
                that, as of the Evaluation Date, 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.

         (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 subsequent to the Evaluation Date.

PART II — OTHER INFORMATION

Item 2(D). Changes in Securities and Use of Proceeds

         The Registration Statement (SEC File No. 333-67350) for our initial public offering, or IPO, was declared effective by the Securities and Exchange Commission on December 14, 2001, covering an aggregate of 4,000,000 shares of our common stock, and on December 19, 2001, we issued 4,000,000 shares of our common stock at an initial public offering price of $5.00 per share. Approximately $2.8 million of the aggregate $20,000,000 IPO proceeds was used to pay underwriting discounts and commissions and offering expenses resulting in net IPO proceeds of approximately $17.2 million. C.E. Unterberg, Towbin was the managing underwriter of our IPO, and Fahnestock & Co., Inc. and Roth Capital Partners, LLC were the co-managers. As of September 30, 2002, we had approximately $4.0 million of these proceeds remaining which are invested in money market accounts.

Item 6. Exhibits and Reports on Form 8-K

         a) Exhibits:

18

Table of Contents

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.

19

Table of Contents

CERTIFICATIONS

I, Daniel O. Wilds, Chief Executive Officer of the Company, certify that:

20

Table of Contents

CERTIFICATIONS

I, Larry L. Richards, Controller (Principal Financial and Accounting Officer) of the Company, certify that:

21

Table of Contents

INDEX TO EXHIBITS

22