Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission File Number 0-26825

NORTHWEST BIOTHERAPEUTICS, INC.

(Exact Name Of Registrant As Specified In Its Charter)

Canyon Park Building 8, 22322 20th Avenue S.E., Suite 150, Bothell, Wa. 98021
(Address of Principal Executive Offices, Including Zip Code)

(425) 608-3000
(Registrant’s Telephone Number, Including Area Code)

21720 23^rd Dr. S.E., Suite 100, Bothell, Wa. 98021
(Registrant’s Former Address)

     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 August 8, 2003, the registrant had outstanding 19,030,776 shares of common stock, $0.001 par value.

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)

See accompanying notes to condensed financial statements.

3

Table of Contents

NORTHWEST BIOTHERAPEUTICS, INC.

(A Development Stage Company)

Condensed Statements of Operations
(unaudited)

(in thousands, except per share data)

See accompanying notes to condensed financial statements.

4

Table of Contents

Northwest Biotherapeutics, Inc.
(A Development Stage Company)
Condensed Statement of Cash Flows
(unaudited)

(in thousands)

5

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 six-month period ended June 30, 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 six months ended June 30, 2003 and 2002 was $1.74 and $1.32, respectively, on the date of grant with the following assumptions:

The per share weighted average fair value of stock options granted during the three months ended June 30, 2003 and 2002 was $0.02 and $3.88, respectively and for the six months ended June 30, 2003 and 2002 was $0.09 and $4.44, respectively.

6

Table of Contents

2. Liquidity

     We currently expect that our cash and other assets will be sufficient to satisfy our liabilities as they come due through September 30, 2003. Unless we receive significant additional funding in the future, operations after September 30, 2003 will require us to use assets that otherwise would be required to successfully liquidate the business and pay our liabilities. For this reason, we may be required to shut down our operations on or before September 30, 2003. From September 30, 2003 through December 31, 2003, we expect to receive an additional $135,384 in research grant revenues and $17,500 in expense reimbursements.

     Expected grant revenue of $135,384 includes $115,464, which may be used to fund our facilities and administrative overhead costs if our June 23, 2003 Facilities and Administrative Rate Proposal is approved by the National Institutes of Health (NIH) before December 31, 2003. If not approved, the expected facilities and administrative grant revenue will be $13,986 in 2003. Revenue from research grants includes only that amount that is receivable to the Company based on the rate proposal not being approved.

     We believe that these nominal revenues will be insufficient to fund our continued operations, and we do not have any additional commitments for funding at this time.

3. 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.

     On June 30, 2003, we entered into a Settlement Agreement with Nexus Canyon Park, our prior landlord. Under this Settlement Agreement, Nexus Canyon Park agreed to permit premature termination of our prior lease and excuse future performance by the Company of lease obligations in exchange for 90,000 shares of our unregistered common stock with a fair value of $35,000 and its retention of $1.0 million of restricted cash related to the lease. The Settlement Agreement resulted in an additional loss on facility sublease and lease termination of $174,000, net of deferred rent of $203,000. In June 2003, we moved from our previous facilities and signed a new lease commencing July 1, 2003 for a term of 39 months with a future lease obligation of approximately $788,000.

4. 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 June 30, 2003, 8,004 issued and outstanding restricted shares of common stock that are subject to repurchase. Options to purchase 1,681,817 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 and six months ended June 30, 2003 as such securities were antidilutive. Options to purchase 1,490,297 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.

5. Sale of Future Royalty Rights

     On June 20, 2003, we entered into the First Amendment to Assignment and License Agreement with Medarex wherein the purchase price of $816,000 was negotiated based on the expected discounted net present value (NPV) of the future 2% royalty obligation under that certain Assignment and License Agreement dated December 9, 2002. The $816,000 was received on July 1, 2003 and is included as a receivable from Medarex at June 30, 2003.

6. Asset Impairment Loss

     In December 31, 2002, when vacating approximately 22,000 square feet of laboratory and administrative space at our prior offices, we made certain estimates in allocating the cost of tenant improvements to the remaining square feet of impaired space and made certain cost estimates related to the impairment of certain equipment. As a result of that analysis, we recognized an asset impairment loss of approximately $1.0 million in December 2002. With the lease cancellation with respect to the entire leased space on June 30, 2003, we recorded an additional loss on disposal of assets of approximately $904,000 primarily related to leasehold improvements and equipment that will not be utilized in our new location.

7. 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

7

Table of Contents

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 financial statements.

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, Inc., 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 our strategy, we are further developing diagnostic and therapeutic antibodies against proprietary cancer targets and we are continuing refinement of our 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 restructuring in 2002, our activities were primarily limited to the research and development of a dendritic cell-based immunotherapy platform and monoclonal antibody-based cancer therapies.

     We have a limited history of operations. Since inception, we have incurred significant losses and, as of June 30, 2003, we had a deficit accumulated during the development stage of approximately $62.2 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 third quarter 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.

     From our inception in March 1996 through June 30, 2003, we incurred costs of approximately $23.4 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.

     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 issued to consultants and for entering into commercial arrangements.

     To date, our revenues have primarily been derived from the manufacture and sale of research materials, contract research and development services and research grants from the federal government. For the six months ended June 30, 2003, we earned approximately $7,000 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 these sales were made to one customer. If we are to rely exclusively on revenues from the sale of our research products to fund our operations, we will need to significantly increase both the number of customers and

8

Table of Contents

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 offset 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, for the year ended December 31, 2002, a liability of approximately $929,000 and a loss on facility sublease of $721,000, net of deferred rent write off in estimating the loss of economic benefit from vacating approximately 22,000 square feet of laboratory and administrative space at our prior offices. Our payments, as of December 31, 2002, over the remaining lease term of this primary lease, with Nexus Canyon Park (Landlord), totaled approximately $9.1 million.

     On June 30, 2003, we entered into a Settlement Agreement with Nexus Canyon Park, our prior landlord. Under this Settlement Agreement, Nexus Canyon Park agreed to permit premature termination of our prior lease and excuse future performance by the Company of lease obligations in exchange for 90,000 shares of our unregistered common stock with a fair value of $35,000 and its retention of $1.0 million of restricted cash related to the lease. The Settlement Agreement resulted in an additional loss on facility sublease and lease termination of $174,000, net of deferred rent of $203,000.

     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.

     Additionally, we estimate the fair value of stock options and warrants issued to non-employees 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 were to 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.

9

Table of Contents

     On June 20, 2003, we entered into the First Amendment to Assignment and License Agreement with Medarex wherein Medarex agreed to purchase the expected discounted net present value (NPV) of the future 2% royalty obligation under that certain Assignment and License Agreement dated December 9, 2002 for $816,000. The $816,000 was received on July 1, 2003 and is included as a receivable from Medarex at June 30, 2003.

Results of Operations

Three Months Ended June 30, 2003 and 2002

     Total Revenues. Revenues increased from $6,000 for the three months ended June 30, 2002 to $187,000 for the three months ended June 30, 2003. This increase in revenue is primarily related to research grant revenue attributable to the receipt of a research grant award in the first quarter of 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 increased from $5,000 for the three months ended June 30, 2002 to $40,000 for the three months ended June 30, 2003. This increase was due to increased direct labor costs attributed to our entry into the sale of research reagents.

     Research and Development Expense. Research and development expense decreased 77.2% from $2.2 million for the three months ended June 30, 2002 to $500,000 for the three months ended June 30, 2003. This decrease was primarily due to the November 2002 suspension of all clinical trial activity for our DCVax product candidates and the withdrawal of our Investigational New Drug Application (IND) for DCVax-Prostate, 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 30% from $2.0 million for the three months ended June 30, 2002 to $1.4 million for the three months ended June 30, 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 69.3% from $163,000 for the three months ended June 30, 2002 to $50,000 for the three months ended June 30, 2003. This decrease was primarily due to the disposal or impairment of $1.0 million of equipment and leasehold improvements in the fourth quarter 2002 and approximately $904,000 of equipment and leasehold improvements disposed of during the three months ending June 30, 2003.

     Loss on Facility Sublease and Lease Cancellation Loss. Lease cancellation costs of $174,000 are associated with the June 30, 2003 premature termination of the Company's primary lease and release from future lease obligations.

     Asset Impairment loss. Asset disposal costs of $904,000 are primarily related to the write-off of leasehold improvements and equipment associated with the June 30, 2003 premature termination of the Company's primary lease and the resulting move from a 38,000 square foot facility to a facility of approximately 14, 000 whereby such assets will not be utilized.

     Total Other Income (Expense), Net. Other income (expense), net, consists primarily of interest expense and interest income. Interest expense decreased 20% from $10,000 for the three months ended June 30, 2002 to $8,000 for the three months ended June 30, 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 82.6% from $46,000 for the three months ended June 30, 2002 compared to $8,000 for the three months ended June 30, 2003. This decrease was primarily due to the decline in market interest rates and having lower average cash balances during the three months ended June 30, 2003.

     Gain on Sale of Royalty Rights. The $816,000 gain realized on the sale of royalty rights was negotiated based on the expected discounted net present value (NPV) of the future 2% royalty obligation under that certain Assignment and License Agreement dated December 9, 2002 with Medarex and was received in cash on July 1, 2003.

Six Months Ended June 30, 2003 and 2002

     Total Revenues. Revenues increased from $9,000 for the six months ended June 30, 2002 to $256,000 for the six months ended June 30, 2003. One component of revenue consisted of research material sales which decreased from $9,000 for the six months ended June 30, 2002 to $7,000 for the six months ended June 30, 2003. The rest of our revenues for the period consisted of research grant revenue, which increased from $0 for the six months ended June 30, 2002 to $249,000 for the six months ended June 30, 2003. This increase in grant revenue was attributable to the receipt of a research grant award in the first quarter of 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 increased from $8,000 for the six months ended June 30, 2002 to $40,000 for the six months ended June 30, 2003. This increase was due to increased direct labor costs attributed to our entry into the sale of research reagents.

     Research and Development Expense. Research and development expense decreased 72% from $3.6 million for the six months ended June 30, 2002 to $1.0 million for the six months ended June 30, 2003. This decrease was primarily due to the November 2002 suspension of all clinical trial activity for our DCVax product candidates and the withdrawal of our Investigational New Drug Application (IND) for DCVax-Prostate, 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 34% from $3.8 million for the six months ended June 30, 2002 to $2.5 million for the six months ended June 30, 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 55% from $305,000 for the six months ended June 30, 2002 to $137,000 for the six months ended June 30, 2003. This decrease was primarily due to the disposal or impairment of $1.0 million of equipment and leasehold improvements in the fourth quarter 2002 and approximately $904,000, net of equipment and leasehold improvements write-offs during the six months ending June 30, 2003.

     Loss on Facility Sublease and Lease Cancellation. Lease cancellation costs of $174,000 are associated with the June 30, 2003 termination of the Company’s primary lease of its prior offices and release from future lease obligations.

     Asset Impairment Loss. Asset disposal costs of $904,000 are primarily related to the write-off of leasehold improvements and equipment associated with the June 30, 2003 termination of the Company’s primary lease and the resulting move from a 38,000 square foot facility to a facility of approximately 14,000 square feet whereby such assets will not be utilized.

     Total Other Income (Expense), Net. Other income (expense), net, consists primarily of interest expense and interest income. Interest expense decreased 14% from $22,000 for the six months ended June 30, 2002 to $19,000 for the six months ended June 30, 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 $111,000 for the six months ended June 30, 2002 compared to $20,000 for the six months ended June 30, 2003. This decrease was primarily due to the decline in market interest rates and having lower average cash balances during the six months ended June 30, 2003.

     Gain on Sale of Royalty Rights. The $816,000 gain realized on the sale of royalty rights was negotiated based on the expected discounted net present value (NPV) of the future 2% royalty obligation under that certain Assignment and License Agreement dated December 9, 2002 with Medarex and was received in cash on July 1, 2003.

10

Table of Contents

Liquidity and Capital Resources

General Discussion

     We currently expect that our cash and other assets will be sufficient to satisfy our liabilities as they come due through September 30, 2003. Unless we receive significant additional funding in the future, operations after September 30, 2003 will require us to use assets that otherwise would be required to successfully liquidate the business and pay our liabilities. For this reason, we may be required to shut down our operations on or before September 30, 2003. From September 30, 2003 through December 31, 2003, we expect to receive an additional $135,384 in research grant revenues and $17,500 in expense reimbursements.

     Expected grant revenue of $135,384 includes $115,464, which may be used to fund our facilities and administrative overhead costs if our June 23, 2003 Facilities and Administrative Rate Proposal is approved by the National Institutes of Health (NIH) before December 31, 2003. If not approved, the expected facilities and administrative grant revenue will be $13,986 in 2003. Revenue from research grants includes only that amount that is receivable to the Company based on the rate proposal not being approved.

     We believe that these nominal revenues will be insufficient to fund our continued operations, and we do not have any additional commitments for funding at this time.

     Our independent auditors have indicated in their report on our financial statements included in our December 31, 2002 annual report on Form 10-K, that there is substantial doubt about our ability to continue as a going concern. We need to raise significant additional funding to continue our operations, conduct research and development activities, pre-clinical studies and clinical trials necessary to bring our product candidates to market. However, additional funding may not be available on terms acceptable to us or at all. The alternative of issuing additional equity or convertible debt securities also may not be available and, in any event, would result in additional dilution to our stockholders.

     On October 9, 2002, we initiated a series of substantial steps to conserve cash, including: (i) the suspension of all clinical trial activities; (ii) the sale of certain fixed assets; (iii) the relocation and consolidation of our facilities; (iv) a significant reduction in force (including the termination of our Chief Financial Officer and Chief Medical Officer and the conversion of our Chief Executive Officer to non-employee status); and (v) the sale of significant portions of our intellectual property portfolio. On June 30, 2003, after all personnel adjustments, our remaining staff of 12 consisted of 4 employees in administration and 8 employees in research and development. We are currently considering implementing additional cost-cutting measures, which may postpone or prevent a liquidation of the Company. Any such measures, however, may be unsuccessful and may also have the undesirable consequence of further reducing our ability to generate future revenues.

Asset Sales and Sources of Cash

     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 were to 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

11

Table of Contents

unregistered shares of our common stock and warrants to purchase 800,000 unregistered shares of our common stock. On June 30, 2003, we amended this agreement and Medarex purchased the expected discounted net present value (NPV) of the future 2% royalty obligation for $816,000. The $816,000 was received on July 1, 2003 and is included as a receivable from Medarex at June 30, 2003.

     On April 8, 2003, we were awarded a National Institutes of Health (NIH) cancer research grant, 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 June 30, 2003, total revenue of $122,000 has been earned under the grant and was recognized in revenue through the six months ended June 30, 2003.

     We were also awarded, 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. As of June 30, 2003, total revenue of $112,000 has been earned under the grant and is recognized in revenue through the six months ended June 30, 2003.

     On April 21, 2003, because we had received frequent requests from researchers for access to our cancer-associated monoclonal antibodies, human dendritic cells, and dendritic cell precursors (monocytes), we announced our entry into the Research Reagents Market. We earned approximately $7,000 in revenue for the six months ended June 30, 2003 from the manufacture and sale of research materials. However, we have limited manufacturing facilities and expertise to produce our research products and the commercial success of any of our research products will depend upon the strength of our sales and marketing efforts.

Uses of Cash

     We used $7.1 million in cash for the operating activities during the six months ended June 30, 2002, compared to $3.2 million during the six months ended June 30, 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 $619,000 in cash for investing activities during the six months ended June 30, 2002 compared to $1.7 million provided by investing activities during the six months ended June 30, 2003. The cash provided during the six months ended June 30, 2003 consisted of $1.8 million received from Medarex and the sale of Medarex common stock held as marketable securities on December 31, 2002 arising from the December 9, 2002 Assignment and License Agreement.

12

Table of Contents

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.

We will need to raise additional capital which may not be available.

     Other than nominal research grant awards, we do not have committed external sources of funding as of August 8, 2003 and we may be unable to obtain additional funds on acceptable terms, if at all. Although the Company is actively pursuing financing alternatives, no definite arrangements exist at this time. The Company has limited options, beyond those already implemented, to further reduce cost expenditures.

     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.

     Unless we receive significant additional funding in the future, operations after September 30, 2003 will require us to use assets that otherwise would be required to successfully liquidate the business and pay our liabilities. For this reason, we may be required to shut down our operations on or before September 30, 2003.

     We are currently considering further reductions in our capital expenditures, scaling back our development of new product candidates, further reducing our workforce, and licensing to others product candidates that we otherwise would seek to commercialize ourselves. These additional cost-cutting measures, which may postpone or prevent a liquidation of the Company, may be unsuccessful and may also have the undesirable consequence of further reducing our ability to generate future revenues.

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

     Our independent auditors have indicated in their report on our December 31, 2002 financial statements included in our Form 10-K that there is substantial doubt about our ability to continue as a going concern. A “going concern” opinion indicates that the financial statements have been prepared assuming we will continue as a going concern and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

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

13

Table of Contents

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 June 30, 2003, we had a deficit accumulated during the development stage of approximately $62.2 million. We have had net losses applicable to common stockholders as follows:

•		$5.0 million in 1998;
•		$6.0 million in 1999;
•		$13.2 million in 2000;
•		$17.3 million in 2001;
•		$12.8 million in 2002; and
•		$3.7 million for the six months ended June 30, 2003

     We expect that these losses will continue and anticipate negative cash flows from operations for the foreseeable future. Because of our current cash position, we will need to secure additional funding to continue operations. In addition, we will need to generate revenue sufficient to cover operating expenses and research and development costs to achieve profitability. We may never achieve or sustain profitability.

As a company in the early stage of development with an unproven business strategy, our limited history of operations makes an evaluation of our business and prospects difficult.

     We have had a limited operating history and are at an early stage of development. We may not be able to achieve revenue growth in the future. We have generated the following limited revenues:

•		$385,000 in 1998;
•		$211,000 in 1999;
•		$156,000 in 2000;
•		$129,000 in 2001;
•		$9,000 in 2002 ; and
•		$256,000 in for the six months ended June 30, 2003

     We have derived most of these limited revenues from:

•		the sale of research products to a single customer;
•		contract research and development from related parties; and
•		research grants.

     In the future, we anticipate that our revenues will be derived primarily through the 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.

14

Table of Contents

We may not be able to retain existing personnel.

     From approximately July 2002 through June 30, 2003, we significantly reduced the number of our employees as part of an extensive cost containment initiative. Our cash position, workforce reductions, the volatility in our stock price and our recent asset sales may create anxiety and uncertainty, which may adversely affect employee morale and cause us to lose employees whom we would prefer to retain. To the extent that we are unable to retain our existing personnel, our business and financial results may suffer.

Because we lack sales and marketing experience, we may experience significant difficulties commercializing our research products.

     The commercial success of any of our research products will depend upon the strength of our sales and marketing efforts. We do not have a sales force and have no experience in the sales, marketing or distribution of our research products. To fully commercialize our research products, we will need to create a substantial marketing staff and sales force with technical expertise and the ability to distribute these products. As an alternative, we could seek assistance from a third party with a large distribution system and a large direct sales force. We may be unable to put either of these plans in place. In addition, if we arrange for others to market and sell our products, our revenues will depend upon the efforts of those parties. Such arrangements may not succeed. If we fail to establish adequate sales, marketing and distribution capabilities, independently or with others, our business will be seriously harmed.

We have limited manufacturing capabilities, which could adversely impact our ability to commercialize our research products.

     We have limited manufacturing facilities and expertise to produce our research products. We have never manufactured, on a commercial scale, any of our research products. We may be unable to manufacture these products at a reasonable cost or in sufficient quantities to be profitable.

Our success partially depends on existing and future 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 DakoCytomation. 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:

•		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, M.D. Anderson Cancer Center, and the H. Lee Moffitt Cancer Center 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.

15

Table of Contents

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, DakoCytomation, 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 dendritic 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 six antibody-based products are approved for commercial sale for cancer therapy. Genentech is also engaged in several Phase III clinical trials for additional antibody-based therapeutics for a variety of cancers, and several other companies are in early stage clinical trials for such products. Many other third parties compete with us in developing alternative therapies to treat cancer, including:

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

     Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, pre-clinical testing, conducting clinical trials, obtaining regulatory approvals and marketing than we do. In addition, many of these competitors have become active in seeking patent protection and licensing arrangements in anticipation of collecting royalties for use of technology they have developed. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These third parties compete with us in recruiting and retaining qualified scientific and management personnel, as well as in acquiring technologies complementary to our programs.

     We expect that our ability to compete effectively will be dependent upon our ability to:

•		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.

16

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 six in foreign jurisdictions) and 68 patent applications pending (18 in the United States and 50 in foreign jurisdictions) which cover the use of dendritic cells in DCVax as well as targets for either our dendritic cell or fully human monoclonal antibody therapy candidates. The issued patents expire at dates from 2015 to 2017.

     We will only be able to protect our technologies from unauthorized use by third parties to the extent that they are covered by valid and enforceable patents or are effectively maintained as trade secrets. The patent positions of companies developing novel cancer treatments, including our patent position, generally are uncertain and involve complex legal and factual questions, particularly concerning the scope and enforceability of claims of such patents against alleged infringement. Recent judicial decisions are prompting a reinterpretation of the limited case law that exists in this area, and historical legal standards surrounding questions of infringement and validity may not apply in future cases. A reinterpretation of existing law in this area may limit or potentially eliminate our patent position and, therefore, our ability to prevent others from using our technologies. The biotechnology patent situation outside the United States is even more uncertain. Changes in either the patent laws or in interpretations of patent laws in the United States and other countries may therefore diminish the value of our intellectual property.

     We own, or have rights under licenses to a variety of issued patents and pending patent applications. However, the patents on which we rely may be challenged and invalidated, and our patent applications may not result in issued patents. Moreover, our patents and patent applications may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products. We also face the risk that others may independently develop similar or alternative technologies or design around our patented technologies.

     We have taken security measures to protect our proprietary information, especially proprietary information that is not covered by patents or patent applications. These measures, however, may not provide adequate protection of our trade secrets or other proprietary information. We seek to protect our proprietary information by entering into confidentiality agreements with employees, 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 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

17

Table of Contents

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.

18

Table of Contents

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.

19

Table of Contents

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 41.6% of our common stock as of August 8, 2003. 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:

•		announcements of technological innovations or new products by us or our competitors;
•		development and introduction of new cancer therapies;
•		media reports and publications about cancer therapies;
•		announcements concerning our competitors or the biotechnology industry in general;
•		new regulatory pronouncements and changes in regulatory guidelines;
•		general and industry-specific economic conditions;
•		changes in financial estimates or recommendations by securities analysts; and
•		changes in accounting principles.

     The market prices of the securities of biotechnology companies, particularly companies like ours without earnings and consistent product revenues, have been highly volatile and are likely to remain highly volatile in the future. This volatility has often been unrelated to the operating performance of particular companies. In the past, securities class action litigation has often been brought against companies that experience volatility in the market price of their securities. Moreover, market prices for stocks of biotechnology-related and technology companies 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 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:

•

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;

20

Table of Contents

•		authorize our board of directors to issue dilutive shares of common stock upon certain events; and
•		provide for a classified board of directors.

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

     (a)  Evaluation of disclosure controls, procedures, and internal controls

     Our President (Principal Executive Officer) and our Controller (Principal Financial and Accounting Officer), after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) and internal control over financial reporting, as of the date of this quarterly report, have concluded that, as of the Evaluation Date, our disclosure controls and procedures were adequate to ensure that material information relating to the registrant and its consolidated subsidiaries would be made known to them by others within those entities. In addition, our President and our Controller have determined that our internal control over financial reporting is sufficient to provide reasonable assurance that; (i) our records accurately and fairly reflect our transaction and our disposition of our assets; (ii) allow transactions to be recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of our Company are only being made in accordance with authorizations of management and Company Directors; and (iii) the Company prevents or timely detects the unauthorized acquisition, use, or disposition of assets that could have a material effect on our financial statements.

     (b)  Changes in internal controls.

     To our knowledge, there were no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls during the quarter ended June 30, 2003.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

     None.

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 June 30, 2003.

21

Table of Contents

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:

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.

22

Table of Contents

INDEX TO EXHIBITS

23