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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

For The Quarterly Period Ended June 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 July 31, 2002, the registrant had outstanding 16,991,321 shares of common stock, $0.001 par value.

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NORTHWEST BIOTHERAPEUTICS, INC.

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

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

Condensed Consolidated Balance Sheets
(unaudited)

See accompanying notes to condensed consolidated financial statements.

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

Condensed Consolidated Statements Of Operations
(unaudited)

See accompanying notes to condensed consolidated financial statements.

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

Condensed Consolidated Statements Of Cash Flows
(unaudited)

See accompanying notes to condensed consolidated financial statements.

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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 six months ended June 30, 2002, 99,000 issued and outstanding restricted shares of common stock that are subject to repurchase. Options to purchase 1,503,698 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 six months ended June 30, 2002 as such securities were antidilutive. Options to purchase 1,120,148 shares of common stock and warrants to purchase 2,658,449 shares of common and preferred stock were excluded from the calculation of diluted net loss per share for the three and six months ended June 30, 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 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. If the Company were required to liquidate certain assets, the carrying value of such assets may not be recoverable. The Company intends to manage its current cash balances so that they will be sufficient to meet its operating cash requirements and to fund budgeted capital expenditures through at least December 31, 2002. The Company’s actual cash needs will depend on many unpredictable factors, including the timeframe for the successful development of an effective product, if ever, and the commercialization of such product, both of which include the regulatory approval process. The regulatory approval process is uncertain, includes extensive preclinical

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testing and clinical trials of each product candidate in order to establish its safety and effectiveness, can take many years and requires the expenditure of substantial resources. As a result of these factors, the Company cannot accurately predict the amount or timing of future cash needs.

     The Company will need to raise substantial funds to conduct the research and development activities, preclinical studies and clinical trials necessary to bring its product candidates to market. The Company intends to seek additional funding through public or private equity financings, strategic alliances with corporate collaborators or other sources. However, there is no assurance that such efforts will be successful and that adequate funds will be available to the Company.

     In order to raise additional funds, in July 2002 the Company retained C.E. Unterberg, Towbin, an investment bank, to assist it in searching out strategic alternatives, including the sale or merger of the Company or any of its development programs. Additionally, in an effort to reduce cash expenditures, on August 8, 2002, the Company terminated the employment of 18 members of its research and administration staff. Severance and other related costs of that downsizing are estimated to be approximately $100,000.

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. For the three months ended June 30, 2002, the Company accrued approximately $400,000 representing its share of the costs incurred under the cost sharing portion of the agreement.

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.

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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

     We are a biotechnology company focused on discovering, developing and commercializing innovative immunotherapy products that safely generate and enhance effective immune responses to treat cancer. Since formation in 1996, our activities have primarily been devoted to 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 June 30, 2002, had a deficit accumulated during the development stage of approximately $53.3 million. We anticipate incurring additional losses, which will increase in the foreseeable future, as we progress through current and anticipated clinical trials and expand research and development activities.

     None of our primary product candidates have received regulatory approval for commercial sale and no such approval may be received unless we successfully complete clinical trials that demonstrate to the satisfaction of the U.S. Food and Drug Administration that our candidates are safe and effective for the uses we propose. 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. Ultimately, we believe our revenue will consist mainly of pharmaceutical product sales, and licensing and royalties from marketing and distribution partnerships and technology transfers.

Critical Accounting Policies and Estimates

     We currently believe that none of our 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 June 30, 2002 and 2001

     Total Revenues. Revenues decreased 62% from $16,345 for the three months ended June 30, 2001 to $6,177 for the three months ended June 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 64% from $13,312 for the three months ended June 30, 2001 to $4,800 for the three months ended June 30, 2002. This decrease was due to the reduced sales activity.

     Research and Development Expense. Research and development expense increased 67% from $1,341,622 for the three months ended June 30, 2001 to $2,243,181 for the three months ended June 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.

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     General and Administrative Expense. General and administrative expense increased 72% from $1,211,538 for the three months ended June 30, 2001 to $2,078,749 for the three months ended June 30, 2002. The increase in costs was primarily due to an increase in the number of employees, increased costs associated with our directors and officers liability insurance and costs attributable to our becoming a public company, which occurred in December 2001.

     Depreciation and Amortization. Depreciation and amortization increased 39% from $117,107 for the three months ended June 30, 2001 to $162,455 for the three months ended June 30, 2002. This increase was primarily due to the purchase of laboratory equipment during 2001 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 94% from $164,637 for the three months ended June 30, 2001 to $10,170 for the three months ended June 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 27% from $63,045 for the three months ended June 30, 2001 compared to $46,309 for the three months ended June 30, 2002. This decrease was due to the decline in market interest rates.

Six Months Ended June 30, 2002 and 2001

     Total Revenues. Revenues decreased 85% from $60,406 for the six months ended June 30, 2001 to $9,266 for the six months ended June 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 81% from $40,187 for the six months ended June 30, 2001 to $7,500 for the six months ended June 30, 2002. This decrease was due to the reduced sales activity.

     Research and Development Expense. Research and development expense increased 55% from $2,326,609 for the six months ended June 30, 2001 to $3,595,662 for the six months ended June 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 73% from $2,173,326 for the six months ended June 30, 2001 to $3,764,587 for the six months ended June 30, 2002. The increase in costs was primarily due to an increase in the number of employees, increased costs associated with our directors and officers liability insurance and costs attributable to our becoming a public company, which occurred in December 2001.

     Depreciation and Amortization. Depreciation and amortization increased 33% from $229,886 for the six months ended June 30, 2001 to $305,041 for the six months ended June 30, 2002. This increase was primarily due to the purchase of laboratory equipment during 2001 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 $300,905 for the six months ended June 30, 2001 to $22,075 for the six months ended June 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 increased 39% from $79,815 for the six months ended June 30, 2001 compared to $110,886 for the six months ended June 30, 2002. This increase was due to the investment of the net proceeds from our initial public offering which occurred in December 2001.

Liquidity and Capital Resources

     From inception through June 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 June 30, 2002, we had cash and cash equivalents of $7.4 million compared to $15.0 million at December 31, 2001.

     We used $7.1 million in cash for operating activities during the six months ended June 30, 2002, compared to $4.3 million during the six months ended June 30, 2001. The change in cash used in operating activities from 2001 to 2002 was primarily due to an increased net loss resulting from expanded operations including expenditures related to three clinical trials in 2002 compared to a single trial in 2001. We used $619,117 in cash for investing activities during the six months ended June 30, 2002 compared to

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$107,536 during the six months ended June 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 six months ended June 30, 2002, we obtained $182,655 in cash from financing activities compared to $11.8 million for the six months ended June 30, 2001. The primary reason for this difference was the $12.6 million of proceeds from the issuance of preferred stock during the second quarter of 2001.

     We would expect to incur substantial costs if we were to continue to expand our clinical trials, research and pre-clinical development initiatives. We expect that our existing cash and cash equivalents will be sufficient to fund operations through at least December 31, 2002. We need to raise additional capital by issuing additional equity or debt securities, obtaining credit arrangements or through strategic partnerships and licenses. Additional financing may not be available on terms acceptable to us or at all. The issuance of additional equity or convertible debt securities could result in additional dilution to our stockholders. Our future capital needs will depend on many unpredictable factors including the size, duration and number of clinical trials, the progress associated with pre-clinical trials, the time frame for successful development of an effective product, if ever, and the commercialization of such product all of which includes the regulatory approval process. The regulatory process is uncertain, includes extensive pre-clinical testing and clinical trials of each product candidate in order to establish its safety and effectiveness, can take many years and requires the expenditure of substantial resources. 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. As a result of these factors, we cannot predict accurately the amount or timing of future cash needs.

     In order to raise additional funds, in July 2002 we retained C.E. Unterberg, Towbin, an investment bank, to assist us in searching out strategic alternatives, including the sale or merger of the company or any of our development programs. Additionally, in an effort to extend our operating horizon, we eliminated 18 research and administrative staff on August 8, 2002. Severance and other related costs of that downsizing are estimated to be approximately $100,000.

     We do not have committed external sources of funding and we may be unable to obtain additional funds on acceptable terms, if at all. If adequate funds are not available, we may be required to, among other things:

	•		delay, reduce the scope of or eliminate one or more of our programs;
	•		obtain funds through arrangements with strategic partners or others that may require us to relinquish rights to technologies or product candidates that we would otherwise seek to develop ourselves;
	•		license rights to technologies or product candidates on terms that are less favorable to us than might otherwise be available; or
	•		dispose of assets and no assurance can be given as to what value will be realized upon their liquidation.

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.

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 intend to manage our existing cash and cash equivalents so that they will be sufficient to meet operating cash requirements through at least December 31, 2002. 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 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 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.

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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 $7.6 million for the six months ended June 30, 2002. As of June 30, 2002, we had a deficit accumulated during the development stage of approximately $53.3 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, 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. For example, our primary current strategic partner, Medarex, Inc., manufactures prostate specific membrane antigen which is a critical reagent used in our Phase III trial for DCVax-Prostate. If Medarex fails to timely manufacture prostate specific membrane antigen, our Phase III trial would be delayed. 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:

	•		may not commit sufficient resources to our programs or products;
	•		may not conduct their agreed activities on time, or at all, resulting in delay or termination of the development of our products and technology;
	•		may not perform their obligations as expected;
	•		may pursue product candidates or alternative technologies in preference to ours; or
	•		may dispute the ownership of products or technology developed under our strategic partnerships.

     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.

Failure to obtain regulatory approval for one or more of our product candidates could significantly harm our business.

     All of our product candidates are in early stages of development. None of our product candidates will be commercially available prior to FDA approval which is not expected for several years. Significant further research and development, financial resources and personnel will be required to transition any of our product candidates into commercially viable products and obtain

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regulatory approvals. Success in pre-clinical and early clinical trials does not ensure that subsequent large-scale trials will be successful nor is it a basis for predicting final results. A number of companies in the biotechnology industry have suffered significant setbacks in advanced clinical trials, even after promising results have been achieved in earlier trials. Failure to obtain FDA approval for one or more of our lead product candidates would significantly harm our business.

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.

     The market price of our common stock has ranged from a high of $5.92 per share to a low of $0.82 per share between December 14, 2001, the date that our common shares commenced trading, and July 31, 2002. The price may continue to fluctuate substantially due to a variety of factors, including:

	•		the amount of funds that we have available to pursue our business strategies;
	•		announcements concerning our competitors;
	•		development and introduction of new cancer therapies;
	•		media reports and publications about cancer therapies;
	•		new regulatory pronouncements and changes in regulatory guidelines;
	•		general and industry-specific economic conditions;
	•		changes in financial estimates or recommendations by securities analysts; and
	•		changes in accounting principles.

     The market prices of the securities of biotechnology companies, particularly companies like ours without earnings and 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.

Clinical trials for our product candidates are expensive and time consuming, their outcome is uncertain and we have limited experience in managing them.

     The process of obtaining and maintaining regulatory approvals for new therapeutic products is expensive, lengthy and uncertain. It can vary substantially, based upon the type, complexity and novelty of the product involved. Accordingly, any of our current or future product candidates could take a significantly longer time to gain regulatory approval than we expect or may never gain approval, either of which could delay or terminate the potential commercialization of our product candidates.

     We have very limited experience in designing, conducting and managing clinical trials. We rely on third parties, including our strategic partners, to assist us in designing, managing and monitoring all of our clinical trials. Our reliance on these third parties may result in delays in completing, or failure to complete, these trials if the third parties fail to perform under the terms of our agreements with them. For example, we rely solely on Quintiles Laboratories Limited to provide us with analytical and data management services in connection with our Phase III clinical trial for DCVax-Prostate. We may not be able to find a sufficient alternative supplier of these services in a reasonable time period, or on commercially reasonable terms, if at all. If we were unable to obtain an alternative supplier of these services, we might be forced to curtail our Phase III clinical trial for DCVax-Prostate which would substantially harm our business.

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We may choose to, or may be required to, suspend, repeat or terminate our clinical trials if they are not conducted in accordance with regulatory requirements, the results are negative or inconclusive, or the trials are not well designed.

     Clinical trials must be conducted in accordance with the FDA’s regulations and guidelines and are subject to oversight by the FDA and the clinical sites where the clinical trials are conducted. In addition, clinical trials must be conducted with product candidates produced under the FDA’s manufacturing guidelines, and may require large numbers of test patients.

     Clinical trials may be suspended by the FDA or a clinical site at any time if the trials are not being conducted in accordance with FDA or clinical site requirements, or if the trials expose patients to unacceptable health risks.

     In addition, we, the clinical site, or the FDA might delay or halt our clinical trials of a product candidate for various reasons, including but not limited to the following:

	•		we may be unable to produce sufficient quantities of the product candidate to complete the trials;
	•		there may be insufficient patient enrollment in the clinical trials;
	•		the product candidate may have significant adverse side effects;
	•		the time required to determine whether the product candidate is effective may be longer than expected;
	•		fatalities or other adverse events may arise during a clinical trial due to medical problems that may or may not be related to clinical trial treatments;
	•		the product candidate may not achieve the level of efficacy required by the FDA.

     We believe we are currently in compliance with all applicable regulations relating to our product candidates, all of which are subject to governmental regulation.

Because we are not certain that we will obtain necessary regulatory approvals to market our products in the United States and foreign jurisdictions, we do not know if we will be permitted to commercialize our products.

     The biotechnology and biopharmaceutical industries are subject to stringent regulation by a wide range of authorities. We may fail to obtain regulatory approval for any product candidate we develop. We cannot market any of our products in the United States until they have completed rigorous pre-clinical testing and clinical trials and the FDA’s extensive regulatory approval process. Satisfaction of regulatory requirements typically takes many years, is dependent upon the type, complexity, and novelty of the product and requires the expenditure of substantial resources for research and development, testing, manufacturing, quality control, labeling and promotion of drugs. Neither the FDA nor international regulatory authorities have approved cancer-therapy products based on our area of scientific focus for commercialization, and we do not know whether our research and clinical approaches to developing new cancer therapies will lead to products that the FDA will consider safe and effective for indicated uses. We must receive FDA approval of preliminary investigational applications before commencing clinical trials in humans. Clinical trials are subject to oversight by clinical sites and the FDA and:

	•		must conform with the FDA’s good laboratory practice regulations;
	•		must meet requirements for informed consent;
	•		must meet requirements for good clinical practices;
	•		are subject to continuing FDA oversight; and
	•		may require large numbers of test subjects.

     Before receiving FDA approval to market a product, we must demonstrate that the product is safe and effective for the patient population that will be treated. If we fail to comply with applicable FDA or other regulatory requirements, we could be subject to criminal prosecution, civil penalties, recall or seizure of products, total or partial suspension of production or injunction, as well as

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other regulatory actions against our product candidates or us. If we are unable to obtain approval for any of our product candidates, we will not be permitted to bring these product candidates to market.

     Outside the United States, our ability to market a product will depend upon receiving marketing approvals from the appropriate regulatory authorities. This foreign regulatory approval process includes all of the risks associated with FDA approval described above.

We lack sales and marketing experience and, as a result, we may experience significant difficulties commercializing our products.

     Even if we do obtain regulatory approval to market one of our product candidates, the commercial success of such 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 product candidates. If we develop an approved product, we will need to create a substantial marketing staff and sales force with technical expertise and the ability to distribute our products. As an alternative, we could seek assistance from a pharmaceutical or biotechnology company 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 products.

     We have limited manufacturing facilities and expertise to produce our product candidates. For the duration of our currently anticipated clinical trials and pre-development efforts, third-party manufacturers, such as Medarex, Inc., will produce some or all of the components of our product candidates. They will also package, label and distribute some or all of those products. Although we believe that such third parties have adequate resources to meet our needs, we cannot directly control the amount or timing of resources they will devote to our product candidates.

     We have never manufactured, on a commercial scale, any of our product candidates. We may be unable to manufacture these product candidates or any other products that we or our strategic partners develop at a reasonable cost or in sufficient quantities to be profitable. If we cannot manufacture or contract with manufacturers to provide a sufficient supply of our product candidates on acceptable terms, it will delay:

	•		our pre-clinical and clinical testing schedule;
	•		our submission of products for regulatory approval; and
	•		our new development programs.

     These delays would seriously harm our business. Any other delays or difficulties that we may have in manufacturing or contracting with manufacturers to produce, package and distribute our products will also harm our ability to market or sell our products.

Our product candidates may not gain market acceptance among physicians, patients, health care payors and the medical community.

     The degree of market acceptance of any approved product will depend on a number of factors, including:

	•		cost-effectiveness;
	•		potential advantage over alternative treatments; and
	•		marketing and distribution support.

     In addition, government health administrative authorities, private health insurers and other organizations are increasingly challenging both the need for and the price of new medical products and services. Consequently, uncertainty exists as to the reimbursement status of newly approved therapeutics. For these and other reasons, physicians, patients, third-party payors and the

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medical community may not accept and utilize any product candidates that we develop and, even if they do, adequate levels of reimbursement may not be available to enable us to realize an appropriate return on our investment in research and product development.

Even if we obtain regulatory approval of a product candidate, we will be subject to extensive regulation, which can be costly and time consuming and may subject us to unanticipated delays.

     Even if we obtain regulatory approval of a product candidate, we will continue to be subject to extensive governmental regulation which may be costly and time consuming, and which may adversely impact our ability to commercialize our product candidates. Currently, we are required to comply with FDA manufacturing guidelines for compounds used in our product candidates in clinical trials, and we believe that we and our third-party suppliers of our compounds are in compliance with these guidelines. The principal regulating authority in the United States is the FDA. Similar agencies in other countries will regulate our products. These regulations affect product:

	•		manufacturing;
	•		labeling;
	•		marketing;
	•		sales;
	•		distribution; and
	•		export or import.

     Any approved product candidate will be subject to extensive governmental regulation. For example, regulatory agencies could:

	•		withdraw product approvals;
	•		limit the uses for which our product may be labeled, which would limit the uses for which our new products may be marketed;
	•		impose burdensome labeling requirements;
	•		require us to conduct additional clinical trials, thereby suspending our ability to sell any approved products; or
	•		require us to prepare and submit additional marketing applications.

     We may be subject to any of the following penalties or compliance actions for violating government regulations:

	•		warning letters;
	•		fines;
	•		injunctions;
	•		recall or seizure of our products;
	•		total or partial suspension of production;
	•		government refusal to approve our marketing applications; and
	•		criminal prosecution.

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     We must also comply with numerous laws, regulations and recommendations relating to:

	•		safe working conditions;
	•		laboratory and manufacturing practices;
	•		experimental use of animals;
	•		protection of the environment; and
	•		safe use and disposal of hazardous substances used in product discovery, research, and development, including radioactive compounds and infectious disease agents.

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 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. 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:

	•		biopharmaceutical companies;
	•		biotechnology companies;
	•		pharmaceutical companies;
	•		academic institutions; and
	•		other research organizations.

     Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, pre-clinical testing, conducting clinical trials, obtaining regulatory approvals and 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:

	•		successfully complete clinical trials and obtain all requisite regulatory approvals;
	•		maintain a proprietary position in our technologies and products;
	•		attract and retain key personnel; and
	•		maintain existing or enter into new strategic partnerships.

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

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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 have 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.

     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.

     Our future success will depend to a substantial degree upon our ability to develop, manufacture, market and sell our product candidates 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.

     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

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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 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 provides 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. Cytogen may terminate our license to use PSMA if we fail to use reasonable efforts to achieve certain milestones in the development of commercial products or otherwise breach the agreement. We believe we are currently in compliance with the terms of this agreement. Nevertheless, the scope of our rights under this or other licenses may be subject to dispute of our licensors or third parties.

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 CEO candidates are few in number, and we believe it would be very difficult and time-consuming to replace Mr. Wilds. 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. Because of Dr. Boynton’s history with us, we believe that it would be very difficult, expensive and time-consuming to replace him.

     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.

Health care reform and other changes in the health care industry, including changes in reimbursement policies, could adversely affect our potential profitability.

     Recent proposals to change the health care system in the United States have included measures that would limit or eliminate payments for medical procedures and treatments or subject the pricing of medical treatment products to government control. In addition, as a result of the trend towards managed health care in the United States, as well as legislative proposals to reduce government insurance programs, third-party payors are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement for new medical treatment products. Even if we are successful in obtaining regulatory approval for any of our product candidates, our commercialization efforts and any potential profits may be adversely affected by these developments in the U.S. health care system.

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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 involves unavoidable risks. The use of our product candidates in clinical trials, and the sale of products we may develop, could result in injury to patients receiving our product candidates or products, and may lead to claims or lawsuits against us by:

	•		consumers;
	•		regulatory agencies;
	•		biotechnology and biopharmaceutical companies; or
	•		others using or selling our product candidates or products.

     We have purchased liability insurance coverage in the amount of $15 million for our current clinical trials and for the research products we may sell. We intend to seek additional liability insurance coverage if and when we 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 plans for growth, however, may result in our becoming subject to additional requirements, and if we fail to comply with applicable requirements we could be subject to substantial fines and other sanctions, delays in research and production, and increased operating costs. In addition, if regulated materials were improperly released at our current or former facilities or at locations to which we send materials for disposal, we could be strictly liable for substantial damages and costs, including cleanup costs and personal injury or property damages, and incur delays in research and production and increased operating costs. Insurance covering certain types of claims of environmental damage or injury resulting from the use of these materials is available but can be expensive and is limited in its coverage. We have no insurance specifically covering environmental risks or personal injury from the use of these materials and if such use results in liability, our business may be seriously harmed.

Our principal stockholders, executive officers and directors own a significant percentage of our stock and, as a result, the trading price for our shares may be depressed and these stockholders can take actions that may be adverse to your interests.

     Our executive officers and directors and entities affiliated with them, in the aggregate, beneficially own approximately 21% of our common stock as of June 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:

	•		authorize the issuance of preferred stock that can be created and issued by the board of directors without prior stockholder approval, commonly referred to as “blank check” preferred stock, with rights senior to those of common stock;
	•		authorize our board of directors to issue dilutive shares of common stock upon certain events; and

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•

provide for a classified board of directors.

     These provisions could allow our board of directors to affect your rights as a stockholder since our board of directors can make it more difficult for common stockholders to replace members of the board. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt to replace our current management team.

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Item 3. Quantitative And Qualitative Disclosures About Market Risk

     Our exposure to market risk is presently limited to the interest rate sensitivity of our cash and cash equivalents which is affected by changes in the general level of U.S. interest rates. We are exposed to interest rate changes primarily as a result of our investment activities. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive without significantly increasing risk. To minimize risk, we maintain our cash and cash equivalents in interest-bearing instruments, primarily money market funds. Our interest rate risk management objective with respect to our borrowings is to limit the impact of interest rate changes on earnings and cash flows. Due to the nature of our cash and cash equivalents, we believe that we are not subject to any material market risk exposure. We do not have any foreign currency or other derivative financial instruments.

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 June 30, 2002, we had approximately $7.4 million of these proceeds remaining which are invested in money market accounts.

Item 6. Exhibits And Reports On Form 8-K

     a) Exhibits:

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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INDEX TO EXHIBITS

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