NORTHWEST BIOTHERAPEUTICS INC - Quarter Report: 2003 March (Form 10-Q)

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For The Quarterly Period Ended March 31, 2003

OR

Commission File Number 0-26825

NORTHWEST BIOTHERAPEUTICS, INC.

(Exact Name Of Registrant As Specified In Its Charter)

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 [  ]

     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 5, 2003, the registrant had outstanding 18,940,776 shares of common stock, $0.001 par value.

1

Table of Contents

NORTHWEST BIOTHERAPEUTICS, INC.

TABLE OF CONTENTS

2

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

NORTHWEST BIOTHERAPEUTICS, INC.

(A Development Stage Company)

Condensed Balance Sheets
(unaudited)

(in thousands)

3

Table of Contents

     See accompanying notes to condensed financial statements.

4

Table of Contents

NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company)

Condensed Statements of Operations
(unaudited)

(in thousands, except per share data)

5

Table of Contents

     See accompanying notes to condensed financial statements.

6

Table of Contents

NORTHWEST BIOTHERAPEUTICS, INC.

(A Development Stage Company)

Condensed Statements of Cash Flows
(unaudited)

(in thousands)

7

Table of Contents

     See accompanying notes to condensed financial statements.

8

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, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

     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, 2002, 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, 2002 states that because of operating losses and an accumulated deficit, 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:

     The per share weighted average fair value of stock options granted during the three months ended March 31, 2003 and 2002 was $0.09 and $4.19, respectively, on the date of grant with the following assumptions:

2. Sale of Unregistered Securities

     On December 9, 2002, we entered into an Assignment and License Agreement wherein we sold certain intellectual property to Medarex, acquired certain intellectual property from Medarex and acquired the rights to certain additional intellectual property from Medarex. Pursuant to this agreement, we issued to Medarex 2.0 million unregistered shares of common stock and warrants to purchase 800,000 shares of our unregistered common stock, at an average price of $0.165, all of which had been issued at March 31, 2003.

     Also pursuant to this agreement, we received $3.0 million consisting of $1.0 million in cash and two payments of $1.0 million each payable in Medarex (MEDX) common stock. Medarex guaranteed the value of each payment of common stock at $1.0 million if sold within 30 days of issuance. Remaining Medarex common stock that had not been sold at December 31, 2002 was recorded as marketable securities and the $1.0 million issued in January 2003 was included as a receivable from Medarex at December 31, 2002. The Company has realized a total of $3.0 million in cash as all such securities were sold by February 10, 2003.

9

Table of Contents

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, 2003, 8,004 issued and outstanding restricted shares of common stock that are subject to repurchase. 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. Options to purchase 1,513,706 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 months ended March 31, 2002 as such securities were antidilutive.

4. 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 adopted SFAS 146 on January 1, 2003. The adoption of SFAS 146 did not have any effect on the Company’s financials.

10

Table of Contents

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

     The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the notes to those statements included with this report. In addition to historical information, this report contains forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. The words “believe,” “expect,” “intend,” “anticipate,” and similar expressions are used to identify forward-looking statements, but some forward-looking statements are expressed differently. Many factors could affect our actual results, including those factors described under “Factors That May Affect Results of Operations and Financial Condition.” These factors, among others, could cause results to differ materially from those presently anticipated by us. You should not place undue reliance on these forward-looking statements.

Overview

     Northwest Biotherapeutics, a development-stage biotechnology company, restructured its operations in the fourth quarter of the fiscal year ended December 31, 2002 to focus on discovering and developing potential cancer immunotherapy products and commercializing products for scientific research. As part of its strategy, the Company is further developing diagnostic and therapeutic antibodies against its proprietary cancer targets and it is continuing refinement of its next generation system for cost effectively producing high purity dendritic cells and dendritic cell precursors for potential cancer products.

     From our formation in 1996 to our restructuring in 2002, our activities were primarily limited to the research and development of our dendritic cell-based immunotherapy platform and our monoclonal antibody-based cancer therapies.

     We have a limited history of operations. Since inception, we have incurred significant losses and, as of March 31, 2003, we had a deficit accumulated during the development stage of approximately $60.1 million. In late 2002, we initiated actions to conserve cash including reducing and eliminating certain future commitments, the sale of certain fixed assets, and restructuring as a pre-clinical antibody and dendritic cell development company. Without additional funding, we believe we will only have sufficient funds to operate through the quarter ending September 30, 2003, which raises substantial doubt about our ability to continue as a going concern. In addition, if we are unable to obtain additional capital, we may choose to cease operations prior to that date in an effort to maximize the value, if any, to be paid to our stockholders following a potential liquidation.

     Operating costs and expenses consist primarily of research and development expenses, including clinical trial expenses, and general and administrative expenses.

     Research and development expenses include salary expenses and costs of supplies used in our internal research and development projects. As a result of our recent restructuring, we expect to expend approximately $1.0 million on research and development during 2003.

     From our inception in March 1996 through March 31, 2003, we incurred costs of approximately $22.8 million associated with the research into and development of our product candidates. At this time, 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.

11

Table of Contents

     General and administrative expenses include compensation expenses related to executive, information technology, finance and administrative personnel, the cost of facilities, insurance and legal support, as well as amortization costs of stock options and warrants granted to consultants and for entering into commercial arrangements. As a result of our restructuring, we expect general and administrative expenses to be approximately $3.5 million in 2003.

     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 fiscal year ended December 31, 2002, we earned approximately $9,000 in revenues from the manufacture and sale of research materials. To date, we have never generated annual revenues in excess of $129,000 from such sales and have never sold our research products to more than one customer in any given year. 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 and the size of such sales. We lack high volume manufacturing, sales and marketing experience and, as a result, we may experience significant difficulties in funding our operations through the manufactured sale of research products.

Critical Accounting Policies and Estimates

     Accounting principles generally accepted in the United States 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, 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 off set against the total accrued cost of the rental payments that the entity continues to be liable for related to the vacated space.

     Consequently, we recognized a liability of approximately $929,000 and a loss on facility sublease of $721,000, net of deferred rent write off, for the year ended December 31, 2002 in estimating the loss of economic benefit from vacating approximately 22,000 square feet of laboratory and administrative space at our Bothell, Washington, facility. Our payments over the remaining lease term total $9.1 million.

     As of April 15, 2003, consistent with our original expectations, the First Amendment to the Lease for the Bothell, Washington facility was finalized, reducing the Basic Annual Rent from $1,137,720 to $1,081,656 for the balance of the 2003 lease contractual year. This reduction in contractual rent will, however, continue to increase at 3.5% on each succeeding September anniversary of the lease agreement as stipulated in the original lease agreement. As of May 12, 2003, we had not subleased any of the remaining vacated first floor space. We have made our estimate of expected receipts under sublease payments based on expected fair market value rents. To the extent that the parameters on which the estimate of sublease payments to be received change in the future, the liability recognized will be adjusted.

     Also, we made certain estimates in allocating the cost of tenant improvements to the remaining square feet of impaired space, at our Bothell Washington facility, and made certain cost estimates related to the impairment of certain equipment. As a result of this analysis, we recognized an asset impairment loss of approximately $1.0 million in December 2002.

     We also determine our employee stock option compensation costs as the difference between the estimated fair value of our common stock and the exercise price of options on their date of grant. Prior to our initial public offering, our common stock was not actively traded. The fair value of our common stock for purposes of determining compensation expense for this period was determined based on our review of the primary business factors underlying the value of our common stock on the date such option grants were made, viewed in light of the expected initial public offering price per share prior to the initial public offering of our common stock. The actual initial public offering price was significantly lower than the expected price used in determining compensation expense.

12

Table of Contents

     Additionally, we estimate the fair value of stock options and warrants issued to nonemployees using an option valuation method that considers market indicators.

Related Party Transactions

     On December 9, 2002, we entered into an agreement to sell certain rights, title, and interest in certain antigen targets pertaining to our fully human monoclonal antibodies to Medarex. Pursuant to this agreement, we received $3.0 million in working capital, forgiveness of $400,000 payable to Medarex, and we will receive a royalty of 2% of net sales with respect to products deriving from certain intellectual property. Under the terms of our agreement with Medarex, we also acquired the rights to certain other cancer targets in exchange for 2.0 million newly issued unregistered shares of our common stock and warrants to purchase 800,000 shares of our common stock that are dilutive to our stockholders.

Results of Operations

Three Months Ended March 31, 2003 and 2002

     Total Revenues. Revenues increased from $3,000 for the three months ended March 31, 2002 to $69,000 for the three months ended March 31, 2003. One component of revenue consisted of research material sales which decreased from $3,000 for the three months ended March 31, 2002 to $0 for the three months ended March 31, 2003. The rest of our revenues for the period consisted of research grant revenue, which increased from $0 for the three months ended March 31, 2002 to $69,000 for the three months ended March 31, 2003. This increase in revenue was attributable to the receipt of a research grant award in the first quarter 2003. While we continue to seek funding through research grants, we do not anticipate receiving grant revenue sufficient to fund our operations.

     Cost of Research Material Sales. Cost of research material sales decreased from $3,000 for the three months ended March 31, 2002 to $0 for the three months ended March 31, 2003. This decrease was due to reduced sales activity.

     Research and Development Expense. Research and development expense decreased 64% from $1.4 million for the three months ended March 31, 2001 to $0.5 million for the three months ended March 31, 2003. This decrease was primarily due to the November 2002 suspension of all clinical trial activity for our DCVax product candidates and through withdrawing our Investigational New Drug Application (IND) for DCVax-Prostate, a potential treatment for prostate cancer, and for DCVax-Lung, a potential treatment for non-small cell lung cancer.

     General and Administrative Expense. General and administrative expense decreased 37% from $1.7 million for the three months ended March 31, 2002 to $1.0 million for the three months ended March 31, 2003. This decrease was primarily due to the October 9, 2002 directive from our Board of Directors to initiate immediate actions to conserve cash and resulting staff reductions.

     Depreciation and Amortization. Depreciation and amortization decreased 39% from $143,000 for the three months ended March 31, 2002 to $87,000 for the three months ended March 31, 2003. This decrease was primarily due to the disposal or impairment of $1.2 million of equipment and leasehold improvements in 2002.

13

Table of Contents

     Total Other Income (Expense), Net. Other income (expense), net, consists primarily of interest expense and interest income. Interest expense decreased 8% from $12,000 for the three months ended March 31, 2002 to $11,000 for the three months ended March 31, 2003. This decrease was primarily due to several capital leases reaching the end of their respective lease terms with the elimination of the interest component of each lease payment. Interest income decreased 82% from $66,000 for the three months ended March 31, 2002 compared to $12,000 for the three months ended March 31, 2003. This decrease was primarily due to the decline in market interest rates and having lower average cash balances during the quarter.

Liquidity and Capital Resources

     Our independent auditors have indicated in their report on our 2002 financial statements, included in our 2002 Form 10-K, that there is substantial doubt about our ability to continue as a going concern. From inception, we have financed our operations primarily through the public and private sale of securities, cash generated from the sale of scientific research products, equipment leases, sale of intellectual property rights and borrowings from stockholders. We need to raise substantial additional funding to conduct research and development activities, pre-clinical studies and clinical trials necessary to bring our product candidates to market. We intend to seek additional financing through public or private equity financings, strategic alliances with corporate collaborators, additional government grants or other sources.

     However, additional financing 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. We expect to incur substantial costs as we continue our research and pre-clinical development initiatives. Additional costs will be incurred for preparing, filing, maintaining and enforcing patent claims and other intellectual property rights, modifications in existing or the establishment of new strategic partnerships and licensing arrangements, and clinical trials manufacturing costs.

     On October 9, 2002, our Board of Directors authorized management to initiate immediate actions to conserve cash. For that purpose, we reduced and eliminated certain future commitments, sold certain fixed assets and restructured our operations to focus on discovering and developing potential cancer immunotherapy products and commercializing research products.

     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 potential treatment for prostate cancer, and for DCVax-Lung, a potential treatment for non-small cell lung cancer.

     As a further result of our restructuring activities, forty-five (45) members of our research and administrative staff were terminated, including our Chief Financial Officer and our Chief Medical Officer. Severance and other related costs of this downsizing totaled $596,000. All severance costs pursuant to the 2002 downsizing have been paid. After these terminations, our remaining staff of 20 consisted of 9 employees in administration and 11 employees in research and development.

     On December 9, 2002, we entered into an agreement to sell certain rights, title, and interest in certain antigen targets pertaining to our fully human monoclonal antibodies to Medarex, Inc. Pursuant to this agreement, we received $3.0 million in working capital and we will receive a royalty of 2% of net sales with respect to any products derived from certain intellectual property. Under the terms of our agreement with Medarex, we acquired the rights to certain other cancer targets in exchange for 2.0 million newly issued unregistered shares of our common stock and warrants to purchase 800,000 unregistered shares of our common stock, all of which, are dilutive to our stockholders.

On December 23, 2002, our common stock was delisted from the NASDAQ National Market for our failure to maintain minimum stockholders’ equity of at least $10 million. In addition, our shares did not meet the minimum bid price requirement of one dollar per share and our “public float” was not in compliance with the $5 million requirement contained in the NASDAQ Marketplace Rules. Our common stock is currently trading on the Over The Counter Bulletin Board (OTCBB). We do not expect to regain compliance with the NASDAQ common stock listing requirements in the foreseeable future.

     We used $3.7 million in cash for operating activities during the three months ended March 31, 2002, compared to $1.7 million during the three months ended March 31, 2003. The change in cash used in operating activities from 2002 to 2003 was primarily a result of the November 2002 suspension of all clinical trial activity.

     We used $244,000 in cash for investing activities during the three months ended March 31, 2002 compared to $1.9 million provided by investing activities during the three months ended March 31, 2003. The cash used during the three months ended March 31, 2003 consisted of $1.1 million received from Medarex and the sale of Medarex (MEDX) common stock held as marketable securities on December 31, 2002 arising from the December 9, 2002 Assignment and License Agreement.

     We were awarded a National Institutes of Health (NIH) cancer research grant, on April 8, 2003, for research to be conducted from February 1, 2003 through January 31, 2004. The total award for fiscal 2003 is $318,137, comprised of approximately $191,649 authorized for direct grant research expenditures and approximately $126,488 authorized for use to cover our facilities and administrative overhead costs. The total award for fiscal 2004 is $327,681, comprised of approximately $197,398 authorized for direct grant research expenditures and approximately $130,283 authorized for use to cover our facilities and administrative overhead costs. Only 10% of the fiscal 2003 portion of the salary and wage cost expended on the grant’s authorized research may be released at this time. The remaining portion of the fiscal 2003 award may be released upon agreement on our facilities and administrative costs. As of March 31, 2003, $69,000 had been expended under the grant which will be recognized in revenue in the second quarter of 2003.

     We were also awarded, by the University of Washington, as a subcontractor to the University of Washington’s award from NIH, a cancer research subcontract on February 26, 2003. This subcontract is from January 1, 2003 through December 31, 2003. The total award for fiscal 2003 is $146,563 consisting of $104,688 authorized for direct grant research expenditures and with approximately $41,875 authorized for use to cover our facilities and administrative overhead costs.

     Receipt of the potential facilities and administrative dollars from these grants will provide nominal funds for the Company’s working capital needs.

     On April 21, 2003, because we have 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 sale of Research Reagents. 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.

14

Table of Contents

     Other than grants described above, we do not have committed external sources of funding as of May 12, 2003. We may be unable to obtain additional funds on acceptable terms, if at all, and may need to undertake additional restructuring in the second and third quarters of 2003. Depending upon the impact of this further restructuring, and depending upon whether adequate funds are available to us we may cease business operations. If we are unable to obtain additional capital, we may choose to cease operations at any time in an effort to maximize the value, if any, to be paid to our stockholders following a potential liquidation.

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 this Quarterly Report on Form 10-Q 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.

Our auditors have issued a “going concern” audit opinion.

     The auditor’s report on our consolidated financial statements for the fiscal year ended December 31, 2002 states that because of operating losses and an accumulated deficit, 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 will need to raise additional capital which may not be available.

     We will need to raise more money to continue 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. These additional forms of capital may not be available on terms acceptable to us, or at all. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may include restrictive covenants. If we cannot raise more money when needed, we may have to further reduce our capital expenditures, scale back our development of new product candidates, reduce our workforce or license to others product candidates that we otherwise would seek to commercialize ourselves or, voluntarily liquidate the assets of the company.

     Moreover, our cash used in operations has exceeded cash generated from operations in each period since our inception. For example, we used approximately $6.4 million of net cash in operating activities in 2000, approximately $8.9 million in 2001 and approximately $13.1 in 2002. Due to our late 2002 restructuring, we expect net cash used in operations to decrease in the near future, but our restructuring efforts may not result in the savings we anticipate.

     Other than nominal research grant awards, we do not have committed external sources of funding as of May 12, 2003 and we may be unable to obtain additional funds on acceptable terms, if at all. Without committed external sources of funds, we may undertake additional restructuring in the second and third quarters of 2003. Depending upon the impact of this further

15

Table of Contents

restructuring, and depending upon whether adequate funds are available to us, we may cease business operations. If we are unable to obtain additional capital, we may choose to cease operations at any time in an effort to maximize the value, if any, to be paid to our stockholders following a potential liquidation.

As a result of questions concerning our status as a going concern, potential customers and strategic partners may decide not to do business with us.

     The success of our restructured operations will depend on our ability to attract customers to our research products and our ability to attract strategic partners to our research initiatives. 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 occur, 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 inception in March 1996 and, as of March 31, 2003, we had a deficit accumulated during the development stage of approximately $60.1 million. We have had net losses applicable to common stockholders as follows:

     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:

     We have derived most of these limited revenues from:

16

Table of Contents

     In the future, we anticipate that our revenues will be derived primarily through the sale of research products. Because this represents a shift in our business focus, it is difficult to evaluate our prospects. Additionally, our future success is more uncertain than if we had a longer or more proven history of operations.

We may not be able to retain existing personnel.

     During 2002, we significantly reduced the number of our employees as part of an extensive cost containment initiative. Our 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 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. Currently, our primary strategic partner is Medarex. We cannot directly control the amount and timing of resources that our existing or future strategic partners devote to the research, development or marketing of our products. As a result, those strategic partners:

     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.

17

Table of Contents

     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 product development efforts are based on technologies that may not prove to be viable.

     We intend to devote significant resources to the research and development of new products based upon our unproven technologies. We may not be successful in developing products, 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.

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 the Company is very competitive with many well-established large and small distribution companies, such as BioWhittaker, a Cambrex Company, Dako-Cytomation, and Cellsignalling Technology.

     Currently, our Company is marketing its 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 cell-based therapeutic product is currently approved for commercial sale. Additionally, several companies, such as Abgenix, Inc., Agensys, 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, 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:

18

Table of Contents

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

Our intellectual property rights may not provide meaningful commercial protection for our research products or product candidates, which could enable third parties to use our technology, or very similar technology, and could reduce our ability to compete in the market.

     We rely on patent, copyright, trade secret and trademark laws to limit the ability of others to compete with us using the same or similar technology in the United States and other countries. However, as described below, these laws afford only limited protection and may not adequately protect our rights to the extent necessary to sustain any competitive advantage we may have. The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and we may encounter significant problems in protecting our proprietary rights in these countries.

     We have seven issued patents (four in the United States and three 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, 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.

19

Table of Contents

     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.

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 licenses from our agreement with Medarex 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.

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

     We are highly dependent on the principal members of our management and scientific staff, including Daniel O. Wilds, our Chairman, President and Chief Executive Officer, and Alton L. Boynton, our Executive Vice President, Chief Operating Officer, Chief Scientific Officer and Secretary, and other members of senior management. Experienced biotechnology executives are few in number, and we believe it would be very difficult and time-consuming to replace either Mr. Wilds or Dr. Boynton. We are dependent upon Mr. Wilds and his position in the biotechnology community to continue our efforts to pursue strategic partnerships and commercialize our product candidates. Dr. Boynton is one of our founders, has substantial experience in immunotherapy research and is a recognized leader in that field of study.

     With the exception of Mr. Wilds and Dr. Boynton, none of the principal members of our management team or scientific staff have entered into employment agreements with us, nor, with the exception of Mr. Wilds and Dr. Boynton, do we have any key person life insurance on such individuals. Additionally, as a practical matter, any employment agreement we enter into will not ensure the retention of the employee who is a party to the agreement.

     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

20

Table of Contents

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.

We are exposed to potential product liability claims, and it is uncertain that insurance against these claims will be available to us at a reasonable rate in the future.

     Testing product candidates and marketing and selling commercial biotechnology and biopharmaceutical products, including our research products, involves unavoidable risks. The use of our product candidates or research products in clinical trials, could result in injury to patients, and may lead to claims or lawsuits against us by:

     We have purchased liability insurance coverage in the amount of $10.0 million for our past clinical trials and for the research products we may sell. We intend to seek additional liability insurance coverage if and when we restart our suspended clinical trials or develop products that are approved for commercialization. We may be unable to obtain or maintain product liability insurance in the future on acceptable terms. Even if we are able to purchase the insurance, the policy limits may be insufficient to cover all potential claims or liabilities. Insufficient insurance to cover any damages resulting from a claim could seriously harm our business.

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.

The future sale of common stock could negatively affect our stock price.

     As of May 5, 2003, we had 18,940,776 shares of common stock outstanding. The 4.0 million shares sold in our initial public offering are freely tradable without restriction or further registration under the federal securities laws unless purchased by our affiliates. Of our remaining outstanding shares, approximately 12,940,776 may be sold in the public market, subject in some cases to volume and other limitations.

     If our stockholders sell substantial amounts of common stock in the public market, or the market perceives that such sales may occur, the market price of our common stock could fall. The holders of a substantial majority of our outstanding shares of common stock will have rights, subject to some conditions, to include their shares in registration statements that we may file for ourselves or other stockholders. Furthermore, if we were to include in a company-initiated registration statement shares held by those holders pursuant to the exercise of their registration

21

Table of Contents

rights, those sales could impair our ability to raise needed capital by depressing the price at which we could sell our common stock.

     Pursuant to our December 2002 agreement with Medarex, we issued 2.0 million shares of our unregistered common stock and warrants to purchase 800,000 shares of our unregistered common stock at an average exercise price of $0.165 per share. Pursuant to the agreement, Medarex has certain rights to include its shares in registration statements that we may file for ourselves or other stockholders. Furthermore, if we were to include in a company-initiated registration statement shares held by Medarex pursuant to the exercise of their registration rights, those sales could impair our ability to raise needed capital by depressing the price at which we could sell our common stock.

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 own approximately 42.0% of our common stock as of December 31, 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.

There may not be an active, liquid trading market for our common stock.

     Prior to December 14, 2001, there was no public market for our common stock. On December 23, 2002, we were delisted from the NASDAQ National Market and subsequently listed on the Over The Counter Bulletin Board (OTCBB). You may not be able to sell your shares quickly or at the market price if trading in our stock is not active.

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:

     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 can occasionally reach levels that bear no relationship to the operating performance of such companies. These market prices generally are not sustainable and are subject to wide variations. Whether or not meritorious, litigation brought

22

Table of Contents

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 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.

     (b)  Changes in internal controls.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

     None.

23

Table of Contents

Item 2. 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, all such proceeds have been expended as of March 31, 2003.

Item 3. Defaults upon Senior Securities

     None.

Item 4. Submission of Matters to a Vote of Security Holders

     None.

Item 5. Other Information

     None.

Item 6. Exhibits and Reports on Form 8-K

     a) Exhibits:

     10.1 First Amendment to Lease between Canyon Nexus, Inc. and the Company, effective April 15, 2003.

     99.1 Certificate of Chief Executive Officer

     99.2 Certificate of Controller (Principal Financial and Accounting Officer)

24

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.

25

Table of Contents

CERTIFICATIONS

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

26

Table of Contents

CERTIFICATIONS

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

27

Table of Contents

INDEX TO EXHIBITS

28