AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 14, 2001
REGISTRATION NO. 333-67350
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 7
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
NORTHWEST BIOTHERAPEUTICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<Table>
DELAWARE 2834 94-3306718
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</Table>
21720 - 23RD DRIVE S.E., SUITE 100
BOTHELL, WASHINGTON 98021
(425) 608-3000
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
DANIEL O. WILDS
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
21720 - 23RD DRIVE S.E., SUITE 100
BOTHELL, WASHINGTON 98021
(425) 608-3000
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
COPIES TO:
<Table>
MICHAEL E. MORGAN ROBERT M. SMITH
JIM D. JOHNSTON DEWEY BALLANTINE LLP
BRIAN B. DEFOE 525 MIDDLEFIELD ROAD, SUITE 250
LANE POWELL SPEARS LUBERSKY LLP MENLO PARK, CALIFORNIA 94025-3460
1420 FIFTH AVENUE, SUITE 4100 TELEPHONE: (650) 462-7400
SEATTLE, WASHINGTON 98101-2338
TELEPHONE: (206) 223-7000
</Table>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement of the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<Table>
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE(2)
- -----------------------------------------------------------------------------------------------------------
Common Stock, $0.001 par value............................. $27,600,000 $6,900
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</Table>
(1) Estimated for purposes of calculating the registration fee in accordance
with Rule 457(o) under the Securities Act.
(2) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING OFFERS
TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED DECEMBER 14, 2001
PROSPECTUS
4,000,000 SHARES
[NORTHWEST BIOTHERAPEUTICS LOGO]
COMMON STOCK
------------------------------
This is the initial public offering of 4,000,000 shares of the common stock
of Northwest Biotherapeutics, Inc. We are selling all of the shares of our
common stock offered under this prospectus. We anticipate that the initial
public offering price will be between $5.00 and $6.00 per share.
The Nasdaq National Market has approved our common stock for quotation
under the symbol "NWBT."
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7 TO READ ABOUT RISKS YOU SHOULD CONSIDER CAREFULLY
BEFORE BUYING SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------------
<Table>
<Caption>
PER SHARE TOTAL
--------- -------
Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds, before expenses, to Northwest Biotherapeutics..... $ $
</Table>
------------------------------
We have granted the underwriters a 30-day option to purchase up to an
additional 600,000 shares of common stock from us at the initial public offering
price less the underwriting discounts. The underwriters expect to deliver the
shares on or about , 2001.
C.E. UNTERBERG, TOWBIN
FAHNESTOCK & CO. INC.
ROTH CAPITAL PARTNERS, LLC
The date of this prospectus is , 2001.
PROSPECTUS SUMMARY
The following summary highlights the more detailed information and the
consolidated financial statements and the notes to those statements appearing
elsewhere in this prospectus. In addition to this summary, we urge you to read
this entire prospectus carefully, especially the discussion of risks of
investing in our common stock set forth under the caption "Risk Factors" and the
consolidated financial statements and accompanying notes, before you decide to
buy our common stock.
OVERVIEW
We are a biotechnology company focused on discovering, developing, and
commercializing immunotherapy products that safely generate and enhance immune
system responses to effectively treat cancer. The American Cancer Society
estimates that in the United States, cancer will strike approximately 50% of men
and 33% of women. It is the second largest cause of death in the United States
after heart disease and is expected to result in approximately 553,000 deaths
during 2001. The direct medical costs related to treating cancer in the United
States were estimated to be $60 billion in 2000.
Currently approved cancer treatments are frequently ineffective and can
cause undesirable side effects. Our approach in developing cancer therapies
combines our expertise in the biology of dendritic cells, which are a type of
white blood cells that activate the immune system, monoclonal antibodies, which
are antibodies that are identical to each other and that target only one
specific disease target, or antigen and immunology and antigen discovery. We use
our proprietary technologies to develop cancer therapies. These therapies are
derived from our two versatile product development programs, DCVax and HuRx.
DCVax. DCVax is our product candidate platform designed to create cancer
immunotherapies, which are treatments that stimulate a patient's immune system.
DCVax utilizes dendritic cells, which ingest and break up antigens and then
train the immune system to target specific types of cancers. Our DCVax therapies
are designed to safely elicit potent immune responses that eliminate cancer
cells. We are currently developing four DCVax product candidates. Our lead DCVax
product candidate, DCVax-Prostate, is a prostate cancer treatment for which we
are commencing a Phase III clinical trial. DCVax-Prostate uses prostate-specific
membrane antigen, or PSMA, an antigen highly specific to prostate cells, to
stimulate patients' immune systems to target prostate cancer cells. We observed
stabilization of disease in 52% (14 of 27) of the patients in our Phase I/II
clinical trial for DCVax-Prostate. Nine of these stable patients did not have
measurable metastatic disease at the time of treatment and all nine were stable,
as measured by radiographic criteria, at weeks 23 to 28. These results can be
compared to results for another experimental therapy given to similar patients
without metastatic disease that had a median time to progression of 29 weeks.
Patients with measurable metastatic disease in our Phase I/II clinical trial had
a median time to progression of 20 weeks. These results can be compared to
results for another experimental therapy given to patients with metastatic
disease that had a median time to progression of 12 weeks. Eighty-three percent
(83%) of patients had an immune response following treatment with
DCVax-Prostate, as measured by the amount of immune-reactive substances found in
the blood of patients, which formed specifically in response to PSMA. To date,
we have observed no significant adverse side effects from DCVax-Prostate. Our
second DCVax product candidate, DCVax-Brain, is moving towards a Phase II
clinical trial for glioblastoma, a lethal form of brain cancer. Our third DCVax
product candidate is DCVax-Lung, for which an application has been submitted to
the FDA in support of a Phase I clinical trial for non-small cell lung
cancinoma, the most prevalent form of lung cancer. Our fourth DCVax product
candidate is designed to treat renal cancer and is in pre-clinical development.
HuRx. Our HuRx product candidates are based on antibodies that are known as
fully human monoclonal antibodies. Unlike monoclonal antibodies, fully human
monoclonal antibodies do not contain mouse proteins. In partnership with
Medarex, Inc., we have assembled an initial portfolio of four HuRx product
candidates targeted to treat several types of cancers. Our lead HuRx product
candidate, HuRx-Prostate, is a fully human antibody-based therapy for the
treatment of prostate cancer. HuRx-Prostate is currently being manufactured for
our anticipated Phase I clinical trial. We have observed significant anti-cancer
activity in tests of human prostate cancer cell cultures treated with
HuRx-Prostate. Our other HuRx product candidates are in pre-clinical
development.
1
DCVAX/HURX: THERAPEUTIC ADVANTAGES
DCVax and HuRx are designed to stimulate and enhance a patient's immune
response to cancer. We believe that DCVax and HuRx products can overcome the
limitations of current cancer therapies and offer cancer patients safe and
effective treatment alternatives, alone or in combination with other therapies.
DCVAX
Our DCVax platform combines our expertise in dendritic cell biology,
immunology, and antigen discovery with our proprietary process of producing and
cultivating dendritic cells outside a patient's body to develop therapeutic
products that stimulate beneficial immune responses to treat cancer. We believe
that DCVax has the following characteristics, the total of which, we believe,
makes it a potentially attractive therapeutic alternative to current therapies:
- Activates The Natural Immune System. Our DCVax products are designed to
elicit a natural immune response. We believe that our pre-clinical and
clinical trials have demonstrated that our DCVax product candidates can
train a portion of a patient's own white blood cells, known as Killer T
cells, to seek and destroy targeted cancer cells. Our clinical trials
have shown that DCVax-Prostate stimulates the body to produce antibodies
that bind to cancer-associated antigens and potentially destroy cancer
cells marked by these antigens.
- Multiple Cancer Targets. We intend to apply our DCVax platform to treat a
wide variety of cancers. The DCVax platform affords the flexibility to
target many different forms of cancer through the pairing of dendritic
cells with cancer-associated antigens, fragments of cancer-associated
antigens or deactivated whole cancer cells.
- No Significant Adverse Side Effects Or Toxicity. Our lead DCVax product
candidate, DCVax-Prostate, has shown mild injection site reactions, which
were typical and fully anticipated, but no significant adverse side
effects in over 110 clinically administered injections. We believe that
our use of the patient's own dendritic cells to create our DCVax products
minimizes the potential for toxicity. Additionally, because our DCVax
products are designed to target the cancer-associated antigens in the
patient, we believe they minimize collateral damage to healthy cells.
- Rapid Pre-Clinical Development. We believe that our DCVax technology,
which has been safely administered in a Phase I/II clinical trial for
prostate cancer, will enable us to rapidly move new potential products
into clinical trials within six to nine months of concept, subject to FDA
approval. Identifying promising new DCVax product candidates simply
requires identification of cancer-associated antigens, fragments of
cancer-associated antigens or whole cancer cells. To date, we have
identified six cancer-associated antigens over a period of two years.
- Ease Of Administration. We initially collect a patient's white blood
cells in a single standard outpatient procedure called leukapheresis.
After patient-specific manufacturing and quality control testing, each
small dose of a DCVax product is administered by a simple injection into
the skin layer, known as intradermal injection, in an outpatient setting.
- Complementary With Other Treatments. Our DCVax products are designed to
stimulate the patient's own immune system to safely target cancer cells.
Consequently, we believe these products may be complementary to
traditional therapies such as chemotherapy, radiation therapy, hormone
therapy and surgery.
HURX
Our HuRx platform combines our expertise in monoclonal antibodies,
immunology and antigen discovery with strategic partners who have expertise in
fully human monoclonal antibody development and production. We are co-developing
our initial HuRx products with Medarex, Inc. We believe this strategic
partnership will enable us to create proprietary fully human monoclonal
antibody-based cancer therapies. Products derived from our HuRx platform will
have the following characteristics, the total of which, we believe, will make
them potentially attractive therapeutic alternatives to current therapies:
- Fully Human Antibodies. Currently approved monoclonal antibody-based
therapies contain mouse proteins or fragments of such proteins.
Consequently, these therapies have the potential to elicit unwanted
immune responses against the mouse proteins or protein fragments. Our
HuRx products are
2
based on monoclonal antibodies that are fully human, and thus do not
contain any mouse proteins. As a result, we expect these products to
exhibit a favorable safety profile and no unwanted immune response
against the HuRx antibody-based therapy itself.
- Rapid Pre-Clinical Development. Our strategic partnership with Medarex is
designed to enable us to rapidly develop product candidates from our
antigen discovery program. Consequently, we believe that, subject to FDA
review, we can progress from antigen discovery to the commencement of
clinical trials for each new HuRx product candidate in twelve months or
less.
- Cancer Specificity. The antigens used in HuRx product candidates are
significantly over-expressed in cancer cells. Our HuRx antibodies bind to
these targeted cancer-associated antigens and potentially destroy cancer
cells marked by these antigens. To date, we have successfully identified
four clinically validated antigens associated with six different cancers.
- Multiple Therapeutic Applications. We believe that HuRx antibodies may be
used as stand-alone products that bind to cancer-associated antigens and
potentially destroy cancer cells marked by these antigens. HuRx
antibodies may also be capable of enabling the targeted delivery of
existing therapies such as radiation and chemicals that destroy cells,
known as cytotoxic agents. The inherent toxic effects of cytotoxic agents
and radioactive materials on normal tissue are minimized by coupling
these agents to antibodies that have a high degree of specificity to
cancer cells.
- Commercialization. Based on our experience with the manufacturing of HuRx
antibodies for our clinical trials, we believe the manufacturing of these
antibodies can be scaled to meet market demand upon FDA approval.
Antibody-based products are typically characterized by an inherent
stability, resulting in a commercially acceptable shelf-life.
- Complementary With Other Treatments. We believe that our HuRx products
will be suitable for use alone or in combination with currently approved
therapies due to their complementary cell-killing properties.
DCVAX/HURX: CLINICAL AND PRECLINICAL DEVELOPMENT PROGRAMS
We are developing DCVax and HuRx-based therapeutic products for the
treatment of cancer. We have completed or largely completed our research and
pre-clinical testing phases of four product candidates, two of which,
DCVax-Prostate and DCVax-Brain, are in clinical trials. We have submitted an
application to the FDA to support a Phase I clinical trial for DCVax-Lung, and
we intend to submit an application to the FDA to enable us to begin clinical
testing for HuRx-Prostate. Additionally, we have numerous projects in
pre-clinical research and development. We are also actively engaged in the
research and discovery of cancer-associated antigens and fragments of
cancer-associated antigens that can be used with our DCVax and HuRx platforms.
The following table summarizes the targeted indications and status of our DCVax
and HuRx product candidates:
<Table>
<Caption>
- -------------------------------------------------------------------------------------------------------
PRODUCT CANDIDATE TARGET INDICATION STATUS
- -------------------------------------------------------------------------------------------------------
DCVAX PLATFORM
- -------------------------------------------------------------------------------------------------------
DCVax-Prostate Prostate cancer Phase III -- protocol submitted to the FDA
DCVax-Brain Glioblastoma Phase II -- trial planned to begin Q2 2002
DCVax-Lung Non-small cell lung cancer Phase I -- application submitted to the FDA
DCVax-Renal Renal cancer Pre-clinical
- -------------------------------------------------------------------------------------------------------
HURX PLATFORM
- -------------------------------------------------------------------------------------------------------
HuRx-Prostate Prostate cancer Phase I -- trial planned to begin Q3 2002
HuRx-Lung Small cell lung cancer Pre-clinical
HuRx-Breast Breast cancer Pre-clinical
HuRx-Brain Glioblastoma Pre-clinical
HuRx-Colon Colon cancer Pre-clinical
HuRx-Melanoma Melanoma Pre-clinical
Flt4 Prostate cancer Pre-clinical
- -------------------------------------------------------------------------------------------------------
</Table>
3
OUR STRATEGY
Our objective is to become the leading biotechnology company focused on
immunotherapy products designed to effectively treat cancer. To achieve this
objective, we are pursuing the following strategic initiatives:
- Maximize Speed To Market Of DCVax-Prostate. We are commencing a Phase III
clinical trial for DCVax-Prostate, which if successful, will allow us to
bring DCVax-Prostate to market. Because DCVax-Prostate addresses
late-stage prostate cancer, we intend to apply to the FDA for fast-track
designation.
- Expand DCVax To Multiple Cancers. We are also applying our DCVax platform
to brain, lung and renal cancers. We have conducted extensive
pre-clinical studies on the applicability of our DCVax platform to each
of these cancers. Subject to FDA approval, we expect to begin a Phase II
clinical trial for DCVax-Brain and a Phase I clinical trial for
DCVax-Lung within 12 months.
- Establish A Competitive Position In Antibody-Based Cancer Therapies. We
are expanding the development of our HuRx products through our strategic
partnership with Medarex. We have completed extensive pre-clinical
studies on HuRx-Prostate, our lead HuRx product candidate. Subject to FDA
approval, we expect to begin a Phase I clinical trial within twelve
months.
- Diversify Our Product Portfolio. We will continue to utilize our antigen
discovery expertise to identify and validate new cancer-associated
antigens that can be paired with our DCVax and HuRx technologies. In
addition, we intend to accelerate the development of a broader product
portfolio by licensing or acquiring complementary technologies, patents
and product candidates.
- Establish Strategic Partnerships. We intend to enter into additional
strategic partnerships with various corporate collaborators and academic
research institutions to augment our development and commercialization
efforts. Although we intend to retain rights to products that we can
commercialize ourselves, we intend to collaborate with strategic partners
to support the development and commercialization of some of our products.
We may also enter into strategic partnerships to obtain value for our
proprietary DCVax and HuRx technologies outside our areas of interest.
------------------------------------
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. We are a development stage company and, as of September 30, 2001,
had an accumulated deficit of approximately $40.5 million since our inception in
March 1996 and outstanding debt of approximately $3.0 million.
Our principal executive offices are located at 21720-23rd Drive S.E., Suite
100, Bothell, Washington 98021, and our telephone number is (425) 608-3000. Our
corporate website is www.nwbio.com. We do not intend the information contained
on our website to be part of this prospectus. We were incorporated in Delaware
in July, 1998 as the successor to Northwest Biotherapeutics, LLC, a limited
liability company formed in Washington in March 1996.
DCVax(TM) and HuRx(TM) are our trademarks. This prospectus also refers to
trademarks and trade names of other organizations.
4
THE OFFERING
The following information assumes that the underwriters do not exercise
their over-allotment option to purchase additional shares in the offering.
Common stock we are offering........ 4,000,000 shares
Common stock to be outstanding after
the offering........................ 16,848,305 shares
Nasdaq National Market symbol....... NWBT
Use of proceeds..................... To fund clinical trial activities,
pre-clinical research and development
activities and contract manufacturing
activities and to pay a fee to
Northwest Hospital, with any remainder
to fund general corporate purposes,
including capital expenditures, and
working capital to fund anticipated
operating losses. See "Use Of
Proceeds."
Unless otherwise indicated, all information in this prospectus has been
adjusted to reflect:
- the exercise of warrants to acquire 1,101,402 shares of our common stock
at the closing of this offering pursuant to an agreement with the holder;
- the exercise of warrants to acquire 33,000 shares of series D convertible
preferred stock at the closing of this offering pursuant to an agreement
with the holder, and the subsequent automatic conversion of such series D
convertible preferred stock into 33,000 shares of our common stock upon
the closing of this offering; and
- the conversion of series A convertible preferred stock in connection with
an agreement with the holder and the automatic conversion of all other
outstanding shares of our convertible preferred stock into 9,776,321
shares of our common stock upon the closing of the offering.
The number of shares of common stock to be outstanding after the offering
is based on the number of shares outstanding as of September 30, 2001, adjusted
as noted above, and excludes as of September 30, 2001:
- 1,647,340 shares of convertible preferred stock issuable upon the
exercise of outstanding warrants at a weighted-average exercise price of
$4.61 per share, of which warrants to acquire 1,088,815 shares at a
weighted-average exercise price of $4.95 per share will expire upon
completion of this offering if not previously exercised;
- 10,000 shares of common stock issuable upon the exercise of outstanding
warrants at an exercise price of $5.50 per share;
- 158,600 shares of common stock issuable upon the exercise of outstanding
options issued to certain officers at a weighted-average exercise price
of $1.25 per share;
- 431,851 shares of common stock issuable upon the exercise of outstanding
options under our 1998 and 2001 Stock Option Plans at a weighted-average
exercise price of $0.95 per share;
- 586,166 shares of common stock issuable upon the exercise of outstanding
options under our 1999 Executive Stock Option Plan at a weighted-average
exercise price of $0.85 per share; and
- 1,776,042 shares available for future grant under our 2001 Stock Option
Plan, 200,000 shares available for future grant under our 2001
Nonemployee Director Stock Incentive Plan and 500,000 shares available
for future purchase under our Employee Stock Purchase Plan.
In addition, we have agreed to issue an additional 600,000 shares if the
underwriters exercise their over-allotment option in full, which we describe in
"Plan Of Distribution." If the underwriters exercise this option in full,
17,448,305 shares of our common stock will be outstanding after this offering.
5
SUMMARY FINANCIAL DATA
Our summary financial data are presented in the following table to aid you
in your analysis of a potential investment in our common stock. You should read
these data in conjunction with "Management's Discussion And Analysis Of
Financial Condition And Results Of Operations," our consolidated financial
statements and the notes to those consolidated financial statements appearing
elsewhere in this prospectus. The pro forma net loss per share data give effect
to the automatic conversion, upon completion of this offering, of all
outstanding shares of our series B, C and D convertible preferred stock into
shares of common stock as if it occurred on January 1 of the respective period
or the dates of original issuance, if later.
<Table>
<Caption>
PERIOD FROM
MARCH 18, 1996 NINE MONTHS
(INCEPTION) ENDED
THROUGH YEARS ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ----------------------------------------- -------------------
1996 1997 1998 1999 2000 2000 2001
-------------- ------- ------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
TOTAL REVENUES...................... $ 227 $ 479 $ 385 $ 211 $ 156 $ 142 $ 74
OPERATING COSTS AND EXPENSES
Cost of research material sales... -- -- 81 46 51 53 49
Research and development.......... 660 1,966 2,860 2,885 3,114 2,211 3,470
General and administrative........ 697 884 1,765 2,535 3,682 2,313 3,396
Depreciation and amortization..... 104 142 164 196 199 146 337
------- ------- ------- ------- -------- ------- --------
Total operating costs and
expenses...................... 1,461 2,992 4,870 5,662 7,046 4,723 7,252
------- ------- ------- ------- -------- ------- --------
Loss from operations............ (1,234) (2,513) (4,485) (5,451) (6,890) (4,581) (7,178)
OTHER INCOME (EXPENSE), NET
Interest expense.................. -- (47) (262) (319) (6,056) (3,848) (464)
Other............................. 1 -- 28 161 166 145 149
------- ------- ------- ------- -------- ------- --------
Net loss.......................... (1,233) (2,560) (4,719) (5,609) (12,780) (8,284) (7,493)
Accretion of redemption value of
mandatorily redeemable
membership units and preferred
stock......................... (106) (275) (329) (354) (430) (314) (312)
Beneficial conversion feature of
series D convertible preferred
stock......................... -- -- -- -- -- -- (4,274)
------- ------- ------- ------- -------- ------- --------
Net loss applicable to common
stockholders.................. $(1,339) $(2,835) $(5,048) $(5,963) $(13,210) $(8,598) $(12,079)
======= ======= ======= ======= ======== ======= ========
Net loss per share -- basic and
diluted(a)........................ $ (0.61) $ (1.29) $ (2.29) $ (2.71) $ (6.35) $ (4.04) $ (6.24)
======= ======= ======= ======= ======== ======= ========
Weighted average shares used in
computing basic and diluted net
loss per share(a)................. 2,203 2,203 2,203 2,203 2,080 2,131 1,935
======= ======= ======= ======= ======== ======= ========
Pro forma net loss per share - basic
and diluted(b).................... (1.82) (1.19)
======== ========
Weighted average shares used in
computing basic and diluted pro
forma net loss per share.......... 7,244 10,109
======== ========
</Table>
<Table>
<Caption>
DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- -------------
1996 1997 1998 1999 2000 2001
------- ------- ------- -------- -------- -------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 121 $ 264 $ 638 $ 649 $ 411 $ 4,974
Working capital................................ 28 108 (1,176) (209) (4,488) 718
Total assets................................... 730 828 1,400 2,519 4,629 9,321
Long-term obligations, net of current portion
and discounts................................ -- 1,463 2,834 2,881 801 275
Mandatorily redeemable convertible preferred
stock........................................ 1,975 3,380 3,709 4,063 4,493 4,805
Convertible preferred stock.................... -- -- 2,088 9,341 16,444 26,707
Total stockholders' deficit.................... (1,338) (4,172) (9,220) (14,790) (22,515) (27,083)
</Table>
- ------------------------------
(a) Net loss per share and weighted average shares outstanding for periods prior
to our incorporation in July 1998 are calculated based on the conversion of
LLC units to common shares at the time of incorporation. In 1998, we
effected a stock split of approximately 1:5.507, for which all prior periods
have been adjusted.
(b) Pro forma net loss per share is calculated as if shares of series B, C and D
convertible preferred stock were converted to common shares at the beginning
of the periods presented or upon issuance, if later.
6
RISK FACTORS
You should carefully consider the following risks and all of the other
information contained in this prospectus before you decide whether to buy our
common stock. We have included a discussion of each material risk that we have
identified as of the date of this prospectus. However, additional risks and
uncertainties not presently known to us or that we currently deem immaterial may
also impair our business operations. If any of the following risks actually
occurs, our business, financial condition or results of operations could suffer.
In such an event, the trading price of our common stock could decline, and you
could lose all or part of the money you paid to buy our common stock.
RISKS RELATED TO OUR BUSINESS
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 September 30, 2001, we had a deficit accumulated during the
development stage of $40.5 million. We had net losses applicable to common
stockholders as follows:
- $5.0 million in 1998;
- $6.0 million in 1999;
- $13.2 million in 2000; and
- $12.1 million in the nine months ended September 30, 2001.
We expect that these losses will continue and anticipate negative cash flow
for the foreseeable future. We expect that our operating expenses will continue
to increase, due in part to investments we intend to make in research and
development and clinical trials. For example, we expect to expend at least $8
million on our proposed clinical trials and at least $5 million in research and
development. Consequently, we will need to generate revenue sufficient to cover
operating expenses and increased research and development costs to achieve
profitability. We may never achieve profitability. Even if we do achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis.
For example, during October 2001, we experienced a decrease in net current
assets of approximately $1.1 million and an increase in stockholders' deficit of
approximately $800,000 from September 30, 2001. Since November 1, 2001, we have
continued to experience a decrease in net current assets and an increase in
stockholders' deficit. Additionally, during October 2001, we experienced an
increase in total net loss of approximately $178,000 and per-share net loss of
approximately $0.09 as compared to October 2000. During the period from October
1, 2001 to date, we also experienced an increase in the total and per-share
amounts of net loss as compared to the corresponding period of 2000.
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; and
- $74,000 in the nine months ended September 30, 2001.
7
We have derived most of these limited revenues from:
- the sale of research products to BioWhittaker, Inc., our sole customer,
pursuant to a sales contract which terminated on May 31, 2001 and may not
be renewed;
- contract research and development from related parties; and
- research grants.
In the future, we anticipate that our revenues will be derived primarily
through the commercialization of our product candidates, none of which are
currently approved for commercial sale. 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.
WE WILL NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT BE AVAILABLE, WHICH COULD
ADVERSELY AFFECT OUR OPERATIONS.
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. Additional
capital may not be available on terms acceptable to us, or at all. Any
additional equity financing may be dilutive to stockholders, and debt financing,
if available, may include restrictive covenants. If we cannot raise more money
when needed, we may have to reduce our capital expenditures, scale back our
development of new product candidates, reduce our workforce or license to others
product candidates that we otherwise would seek to commercialize ourselves.
Moreover, our cash used in operations has exceeded cash generated from
operations in each period since our inception. For example, we used
approximately $6.4 million of net cash in operating activities in 2000 and
approximately $6.7 million for the nine months ended September 30, 2001. We
expect net cash used in operations to increase in the near future as we make
significant investments in research and development and clinical trials. We
expect that our current resources, together with the proceeds from this
offering, will be sufficient to fund operations through 2002.
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.
Significant further research and development, financial resources and personnel
will be required to develop commercially viable products and obtain regulatory
approvals. Much of our efforts and expenditures over the next few years will be
devoted to our lead product candidates, DCVax-Prostate, DCVax-Brain, DCVax-Lung
and HuRx-Prostate. 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
Food and Drug Administration, or FDA, approval for one or more of our product
candidates could significantly harm our business.
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 reduce our anticipated revenues
and delay or terminate the potential commercialization of our product
candidates.
We have limited experience in conducting and managing clinical trials. We
rely on third parties, including our strategic partners, to assist us in
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. We will rely on Quintiles Laboratories
8
Limited to provide us with analytical and data management services in connection
with our Phase III clinical trial for DCVax-Prostate. We will rely solely on
Quintiles for these services. 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.
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:
- 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;
- there may be insufficient patient enrollment in the clinical trials; or
- we may be unable to produce sufficient quantities of the product
candidate to complete the trials.
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. Our lead
product candidate, DCVax-Prostate, is moving towards Phase III clinical trials.
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;
9
- 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 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 any of our 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 pharmaceutical
products. 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,
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.
10
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 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.
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. Our primary current strategic partner is Medarex, Inc.
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, 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.
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
11
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.
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.
OUR PRODUCT DEVELOPMENT EFFORTS ARE BASED ON TECHNOLOGIES THAT MAY NOT PROVE TO
BE VIABLE.
We intend to devote significant resources to the research and development
of new products based upon our DCVax and HuRx technologies. We may not be
successful in developing products, and we may never realize any benefits from
such research and development activities. Our ability to achieve and sustain
12
profitability depends upon our ability to successfully develop new and
commercially viable products, which is particularly difficult for us as our
technologies and their commercial viability are unproven.
COMPETITION IN OUR INDUSTRY IS INTENSE AND 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. Of these companies, we believe that only Dendreon is carrying-out
Phase III clinical trials with a cell-based therapy. No cell-based therapeutic
product is currently approved for commercial sale. Additionally, several
companies, such as Abgenix, Inc., Agensys, Inc., IDEC Pharmaceuticals
Corporation and Genentech, Inc., are actively involved in the research and
development of monoclonal antibody-based cancer therapies. Currently, at least
three antibody-based products are approved for commercial sale for cancer
therapy. Genentech is also engaged in several Phase III clinical trials for
additional antibody-based therapeutics for a variety of cancers, and several
other companies are in early stage clinical trials for such products. Many other
third parties compete with us in developing alternative therapies to treat
cancer, including:
- 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.
Our competitors may develop more effective or affordable products, or
achieve earlier patent protection or product marketing and sales than we may. As
a result, any products we develop may be rendered obsolete and noncompetitive.
OUR INTELLECTUAL PROPERTY RIGHTS MAY NOT PROVIDE MEANINGFUL COMMERCIAL
PROTECTION FOR OUR PRODUCTS, WHICH COULD ENABLE THIRD PARTIES TO USE OUR
TECHNOLOGY, OR VERY SIMILAR TECHNOLOGY, AND COULD REDUCE OUR ABILITY TO
COMPETE IN THE MARKET.
We rely on patent, copyright, trade secret and trademark laws to limit the
ability of others to compete with us using the same or similar technology in the
United States and other countries. However, as described below, these laws
afford only limited protection and may not adequately protect our rights to the
extent necessary to sustain any competitive advantage we may have. The laws of
some foreign countries do not
13
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 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
14
from our core business. We may be exposed to future litigation by third parties
based on claims that our products infringe their intellectual property rights.
This risk is exacerbated by the fact that there are numerous issued and pending
patents in the biotechnology industry and the fact that the validity and breadth
of biotechnology patents involve complex legal and factual questions for which
important legal principles remain unresolved. Our competitors may assert that
our products and the methods we employ are covered by U.S. or foreign patents
held by them. In addition, because patent applications can take many years to
issue, there may be currently pending applications, unknown to us, which may
later result in issued patents that our products may infringe. There could also
be existing patents of which we are not aware that one or more of our products
may inadvertently infringe.
If we lose a patent infringement lawsuit, we could be prevented from
selling our 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 FAIL TO PROPERLY MANAGE OUR GROWTH, OUR BUSINESS COULD BE ADVERSELY
AFFECTED.
We have experienced significant growth in the number of our employees and
the scope of our operations. As of December 31, 2000, we had 41 employees, and
as of September 30, 2001, we had 51 employees. We expect our number of employees
to continue to increase for the foreseeable future. In addition, we have
substantially increased the scale of our operations in the last year and expect
to continue doing so for the foreseeable future. Our overall growth and need to
develop many different areas of our business have placed, and may continue to
place, a strain on our management and operations. If we obtain regulatory
approval to market DCVax-Prostate, we may be required to establish processing
facilities in diverse geographic regions to keep pace with the introduction of
the product. This growth would place additional stress on our resources. If we
are unable to manage our growth effectively, our business will be harmed. The
management of our growth will depend, among other things, upon our ability to
improve our operational, financial and management controls, reporting systems
and procedures. In addition, upon the approval of any of our other DCVax product
candidates for commercial sale, we will need to invest significant resources in
additional processing facilities to produce sufficient quantities of these
products. This will result in additional burdens on our existing systems and
resources.
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
15
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 a wealth of
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 and time-consuming to replace him.
With the exception of Mr. Wilds and Dr. Boynton, none of the principal
members of our management team or scientific staff have entered into employment
agreements with us, nor, with the exception of Mr. Wilds and Dr. Boynton, do we
have any key person life insurance on such individuals. Additionally, as a
practical matter, any employment agreement we enter into will not ensure the
retention of the employee who is a party to the agreement.
Our future success will also depend in part on the continued service of our
key scientific and management personnel and our ability to identify, hire and
retain additional personnel. We experience intense competition for qualified
personnel. We may be unable to attract and retain the personnel necessary for
the development of our 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.
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.
16
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.
RISKS RELATED TO THIS OFFERING
YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION.
We expect the initial public offering price of our shares to be
substantially higher than the book value per share of the outstanding common
stock. Accordingly, investors purchasing shares of common stock in this offering
will:
- pay a price per share that substantially exceeds the value of our assets
after subtracting liabilities; and
- contribute 38.9% of the total amount invested to date to fund us, but
will own only 23.7% of the shares of common stock outstanding. To the
extent outstanding stock options or warrants are exercised, there will be
further dilution to new investors.
THE FUTURE SALE OF COMMON STOCK COULD NEGATIVELY AFFECT OUR STOCK PRICE.
After this offering, we will have approximately 16,848,305 shares of common
stock outstanding, or 17,448,305 shares if the underwriters' over-allotment
option is exercised in full. The 4,000,000 shares sold in this offering, or
4,600,000 shares if the underwriters' over-allotment option is exercised in
full, will be freely tradable without restriction or further registration under
the federal securities laws unless purchased by our affiliates. The remaining
12,848,305 shares of common stock outstanding after this offering will be
available for sale in the public market 180 days after the date of the final
prospectus, relating to this offering, subject in some cases to volume and other
limitations. The previous sentence assumes the effectiveness of the lock-up
agreements with the underwriters under which holders of substantially all of our
common stock have agreed not to sell or otherwise dispose of their shares of
common stock. Most of the shares that will be available for sale after the
expiration of the lock-up period will be subject to volume restrictions because
they are held by our affiliates. We have been advised by C.E. Unterberg, Towbin
that is has no current intention of releasing any shares subject to a lock-up
agreement. Any request for the release of any lock-up would be considered on a
case-by-case basis, taking into account, among other factors, the particular
circumstances surrounding the request, including but not limited to the number
of shares to be released, the circumstances of the proposed sale and prevailing
market conditions.
If our stockholders sell substantial amounts of common stock in the public
market, or the market perceives that such sales may occur, the market price of
our common stock could fall. After this offering, the holders of common stock
and warrants convertible into common stock totaling approximately 11.5 million
shares will have rights, subject to some conditions, to include their shares in
registration statements that we may file for ourselves or other stockholders.
Furthermore, if we were to include in a company-initiated registration statement
shares held by those holders pursuant to the exercise of their registration
rights, those sales could impair our ability to raise needed capital by
depressing the price at which we could sell our common stock. See "Shares
Eligible For Future Sale."
17
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
will, in the aggregate, beneficially own approximately 19.6% of our common stock
following this offering. 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 this offering, there has been no public market for our common
stock. An active trading market for our common stock may not develop following
this offering. You may not be able to sell your shares quickly or at the market
price if trading in our stock is not active. The initial public offering price
may not be indicative of prices that will prevail in the trading market. See
"Plan Of Distribution" for more information regarding the factors considered in
determining the initial public offering price.
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, particularly following an
initial public offering, can 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.
18
OUR INCORPORATION DOCUMENTS AND BYLAWS MAY DELAY OR PREVENT A CHANGE IN OUR
MANAGEMENT.
Our amended and restated certificate of incorporation and bylaws 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; 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.
MANAGEMENT WILL HAVE BROAD DISCRETION OVER THE USE OF THE PROCEEDS FROM THIS
OFFERING.
We intend to use the net proceeds from this offering to fund clinical trial
activities, pre-clinical research and development activities and contract
manufacturing activities and to pay a fee to Northwest Hospital, with any
remainder to fund general corporate purposes, including capital expenditures and
working capital to fund anticipated operating losses. See "Use Of Proceeds."
Except for the fee to Northwest Hospital, we have not, however, reserved or
allocated the net proceeds for any specific transaction, and we cannot specify
with certainty how we will use the net proceeds. Accordingly, our management
will have considerable discretion in the application of the net proceeds, and
you will not have the opportunity, as part of your investment decision, to
assess whether the proceeds are being used appropriately. The net proceeds may
be used for corporate purposes that do not increase our operating results or
market value. Until we use the net proceeds, we intend to invest the funds in
short-term, investment grade, interest-bearing securities. This investment may
not yield a favorable return and our business could suffer as a result.
19
FORWARD-LOOKING INFORMATION
Some of the statements that we make under "Prospectus Summary," "Risk
Factors," "Management's Discussion And Analysis Of Financial Condition And
Results Of Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements relate to future events or our
future financial performance and involve known and unknown risks, uncertainties
and other factors that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from those
expressed or implied by any of our forward-looking statements. Some of these
factors are listed under "Risk Factors" and elsewhere in this prospectus. In
some cases, you can identify forward-looking statements by terminology such as
"may," "will," "should," "could," "expects," "plans," "intends," "anticipates,"
"believes," "estimates," "predicts," "potential" or "continue" or the negative
of these terms and other comparable terminology. These statements are only
predictions. Actual events or results may differ materially.
20
USE OF PROCEEDS
Our proceeds from the sale of the 4,000,000 shares of common stock we are
offering are estimated to be $19,160,000, or $22,229,000 if the underwriters'
over-allotment option is exercised in full, assuming a public offering price of
$5.50 per share and after deducting the underwriting discounts and commissions
and our estimated offering expenses. We currently intend to use the net proceeds
as follows:
- approximately $8 to $10 million for clinical trial activities;
- approximately $5 to $7 million for pre-clinical research and development
activities;
- approximately $1.5 to $2.5 million for contract manufacturing activities;
- approximately $750,000 to repay a note payable to Holmes Harbor Company,
Inc.
- approximately $1.7 million for a fee to Northwest Hospital; and
- any remainder for other general corporate purposes, including capital
expenditures and working capital to fund anticipated operating losses.
We have no current plans, agreements or commitments with respect to any
acquisition. We may, however, if the opportunity arises, use a portion of the
net proceeds to acquire or invest in products, technologies or companies. Our
management may spend the proceeds from this offering in ways that our
stockholders may not deem desirable.
The timing and amount of our actual expenditures will be based on many
factors, including cash flows from operations and the growth of our business.
Until we use the net proceeds of this offering for the above purposes, we
intend to invest the funds in short-term, investment grade, interest-bearing
securities. These investments may, however, fail to yield a favorable return.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
anticipate that we will retain any earnings to support operations and to finance
the growth and development of our business. Therefore, we do not expect to pay
cash dividends on our capital stock in the foreseeable future. Any future
determination relating to our dividend policy will be made at the discretion of
our board of directors and will depend on a number of factors, including future
earnings, capital requirements, financial conditions, contractual obligations
and future prospects and other factors our board of directors may deem relevant.
21
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 2001:
- on an actual basis;
- on a pro forma basis to give effect to:
- the repayment of the line of credit with Northwest Hospital with an
outstanding balance of $2,834,262 at September 30, 2001;
- the conversion of all outstanding shares of series A convertible
preferred stock upon completion of this offering into 550,700 shares of
our common stock pursuant to an agreement with the holder and the
accrual of a fee of $1.7 million to such holder;
- the automatic conversion of all outstanding shares of series B, C and D
convertible preferred stock upon completion of this offering into
9,225,621 shares of our common stock;
- the exercise of warrants to acquire 1,101,402 shares of common stock for
an aggregate exercise price of $198,252 in connection with an agreement
with the holder; and
- the exercise of warrants to acquire 33,000 shares of series D
convertible preferred stock for an aggregate exercise price of $165,000
in connection with an agreement with such holder and the automatic
conversion of such shares upon completion of this offering into 33,000
shares of our common stock; and
- on a pro forma as adjusted basis to give further effect to the receipt of
the estimated net proceeds of $19,160,000 from the sale of 4,000,000
shares of our common stock offered by this prospectus at an assumed
initial public offering price of $5.50 per share after deducting the
underwriting discounts and commissions and our estimated offering
expenses, payment of the $1.7 million fee described above and repayment
of a note payable to a stockholder with a remaining balance of $750,325.
<Table>
<Caption>
SEPTEMBER 30, 2001
------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------ ------------ ------------
Cash and cash equivalents................................... $ 4,974,038 $ 2,503,028 $ 19,212,703
============ ============ ============
Debt and lease obligations:
Notes and other payables to stockholders, net of discount
of $545,750............................................. $ 204,575 $ 1,904,575 $ --
Line of credit with Northwest Hospital.................... 2,834,262 -- --
Capital lease obligations................................. 242,991 242,991 242,991
------------ ------------ ------------
Total debt and lease obligations........................ 3,281,828 2,147,566 242,991
Mandatorily redeemable convertible preferred stock, $0.001
par value:
Series A, 550,700 shares authorized; 550,700 shares issued
and outstanding actual; no shares issued and outstanding
pro forma and pro forma as adjusted..................... 4,805,341 -- --
Convertible preferred stock, $0.001 par value:
Series B, 897,513 shares authorized; 897,489 shares issued
and outstanding actual; no shares issued and outstanding
pro forma and pro forma as adjusted..................... 2,088,330 -- --
Series C, 3,609,062 shares authorized; 3,350,600 shares
issued and outstanding, actual; no shares issued and
outstanding pro forma and pro forma as adjusted......... 7,253,091 -- --
Series D, 6,500,000 shares authorized; 4,135,823 shares
issued and outstanding, actual; no shares issued and
outstanding pro forma and pro forma as adjusted......... 17,365,335 -- --
Stockholders' deficit:
Common stock, $0.001 par value, 30,000,000 shares
authorized, 1,937,582 shares issued and outstanding
actual; 12,848,305 shares issued and outstanding
pro-forma; 16,848,305 shares issued and outstanding pro
forma as adjusted....................................... 1,937 12,848 16,848
Additional paid-in capital................................ 14,506,268 46,370,706 65,526,706
Deferred compensation..................................... (1,116,631) (1,116,631) (1,116,631)
Deficit accumulated during the development stage.......... (40,474,665) (42,174,665) (42,720,415)
------------ ------------ ------------
Total stockholders' equity (deficit)........................ (27,083,091) 3,092,258 21,706,508
------------ ------------ ------------
Total capitalization........................................ $ 7,710,834 $ 5,239,824 $ 21,949,499
============ ============ ============
</Table>
22
The above table does not include:
- 1,647,340 shares of convertible preferred stock issuable upon the
exercise of outstanding warrants at a weighted-average exercise price of
$4.61 per share, of which warrants to acquire 1,088,815 shares at a
weighted-average exercise price of $4.95 per share will expire upon
completion of the offering if not previously exercised;
- 10,000 shares of common stock issuable upon the exercise of outstanding
warrants at an exercise price of $5.50 per share;
- 158,600 shares of common stock issuable upon the exercise of outstanding
options granted certain officers at a weighted-average exercise price of
$1.25 per share;
- 431,851 shares of common stock issuable upon the exercise of outstanding
options granted under our 1998 and 2001 Stock Option Plans at a
weighted-average exercise price of $0.95 per share;
- 586,166 shares of common stock issuable upon the exercise of outstanding
options granted under our 1999 Executive Stock Option Plan at a
weighted-average exercise price of $0.85 per share; and
- 1,776,042 shares available for future grant under our 2001 Stock Option
Plan, 200,000 shares available for future grant under our 2001
Nonemployee Director Stock Incentive Plan and 500,000 shares available
for future purchase under our Employee Stock Purchase Plan.
23
DILUTION
If you invest in our common stock, your interest will be diluted by the
difference between the public offering price per share of our common stock and
the pro forma as adjusted net tangible book value per share of our common stock
immediately after this offering. Our pro forma net tangible book value at
September 30, 2001 was $3,092,258, or $0.24 per share of common stock. Pro forma
net tangible book value per share represents total tangible assets less total
liabilities on a pro forma basis, divided by the pro forma number of shares of
common stock outstanding at September 30, 2001. Pro forma net tangible book
value per share includes the conversion of 8,934,612 shares of our preferred
stock into 9,776,321 shares of common stock and exercise of 1,134,402 preferred
and common stock warrants into an equivalent number of common shares upon the
closing of this offering. Assuming our sale of 4,000,000 shares of common stock
at an assumed initial public offering price of $5.50 per share and after
deducting underwriting discounts and commissions and estimated offering
expenses, our pro forma as adjusted net tangible book value at September 30,
2001 would have been approximately $21,706,508, or $1.29 per share. This
represents an immediate increase in pro forma net tangible book value of $1.05
per share to existing stockholders and an immediate dilution of $4.21 per share
to new investors purchasing shares in this offering. The following table
illustrates this per share dilution:
<Table>
Assumed public offering price per share..................... $5.50
Pro forma net tangible book value per share as of
September 30, 2001..................................... $0.24
Increase per share attributable to new investors.......... 1.05
-----
Pro forma as adjusted net tangible book value per share
after the offering........................................ 1.29
-----
Dilution per share to new investors......................... $4.21
=====
</Table>
The table above assumes no exercise of the underwriters' over-allotment
option and excludes exercises of options and warrants after September 30, 2001.
The number of shares outstanding as of September 30, 2001 excludes 1,176,617
shares of common stock issuable upon exercise of options outstanding as of
September 30, 2001, having a weighted-average exercise price of $0.94 per share
and 1,657,340 shares of stock issuable upon exercise of warrants outstanding at
September 30, 2001, having a weighted-average exercise price of $4.61 per share,
of which 1,088,815 warrants at a weighted-average exercise price of $4.95 per
share must either be exercised or expire upon completion of the offering.
The following table sets forth, as of September 30, 2001, the differences
between the number of shares of common stock purchased from us, the total
consideration paid and average price per share paid by existing stockholders on
a pro forma basis and by the new investors, before deducting expenses payable by
us, using an assumed public offering price of $5.50 per share.
<Table>
<Caption>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------
Existing stockholders........................ 12,848,305 76.3 $34,510,582 61.1 $2.69
New investors................................ 4,000,000 23.7 22,000,000 38.9 5.50
---------- ------ ----------- ------ -----
Total........................................ 16,848,305 100.0% $56,510,582 100.0% $3.35
========== ====== =========== ====== =====
</Table>
If the underwriters' over-allotment option is exercised in full, the
following will occur:
- the number of shares of common stock held by existing stockholders will
decrease to approximately 73.6% of the total number of shares of common
stock outstanding; and
- the number of shares held by new public investors will be increased to
4,600,000, or approximately 26.4% of the total number of shares of our
common stock outstanding after this offering.
24
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion And Analysis Of Financial Condition And Results Of
Operations" and the consolidated financial statements and the related notes and
independent auditors' report included elsewhere in this prospectus. The
independent auditors report contains an explanatory paragraph that states that
we have incurred losses from operations, have a net capital deficiency and, at
December 31, 2000, a net working capital deficit that raise substantial doubt
about our ability to continue as a going concern. The consolidated financial
statements and the selected financial data do not include any adjustments that
might result from the outcome of that uncertainty. The balance sheet data as of
December 31, 1999 and 2000 and the statement of operations data for each of the
years in the three-year period ended December 31, 2000 are derived from our
audited consolidated financial statements included elsewhere in this prospectus.
The statement of operations data for the period from March 18, 1996 to December
31, 1996 and the year ended December 31, 1997, and the balance sheet data as of
December 31, 1996, 1997 and 1998 are derived from our audited consolidated
financial statements that are not included in this prospectus. The statement of
operations data for the nine-months ended September 30, 2000 and 2001 and the
balance sheet data as of September 30, 2001 are derived from our unaudited
consolidated financial statements included in this prospectus, and include all
adjustments, consisting of only normal, recurring adjustments, which we consider
necessary for a fair presentation of the data. The pro forma net loss per share
data give effect to the automatic conversion, upon completion of this offering,
of all outstanding shares of our series B, C and D convertible preferred stock
into shares of common stock as if it occurred on January 1 of the respective
period or the dates of original issuance, if later.
<Table>
<Caption>
PERIOD FROM
MARCH 18, 1996 NINE MONTHS
(INCEPTION) ENDED
THROUGH YEARS ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ----------------------------------------- -------------------
1996 1997 1998 1999 2000 2000 2001
-------------- ------- ------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
TOTAL REVENUES............................... $ 227 $ 479 $ 385 $ 211 $ 156 $ 142 $ 74
OPERATING COSTS AND EXPENSES
Cost of research material sales............ -- -- 81 46 51 53 49
Research and development................... 660 1,966 2,860 2,885 3,114 2,211 3,470
General and administrative................. 697 884 1,765 2,535 3,682 2,313 3,396
Depreciation and amortization.............. 104 142 164 196 199 146 337
------- ------- ------- ------- -------- ------- --------
Total operating costs and expenses....... 1,461 2,992 4,870 5,662 7,046 4,723 7,252
------- ------- ------- ------- -------- ------- --------
Loss from operations..................... (1,234) (2,513) (4,485) (5,451) (6,890) (4,581) (7,178)
OTHER INCOME (EXPENSE), NET
Interest expense........................... -- (47) (262) (319) (6,056) (3,848) (464)
Other...................................... 1 -- 28 161 166 145 149
------- ------- ------- ------- -------- ------- --------
Net loss................................... (1,233) (2,560) (4,719) (5,609) (12,780) (8,284) (7,493)
Accretion of redemption value of
mandatorily redeemable membership units
and preferred stock.................... (106) (275) (329) (354) (430) (314) (312)
Beneficial conversion feature of series D
convertible preferred stock............ -- -- -- -- -- -- (4,274)
------- ------- ------- ------- -------- ------- --------
Net loss applicable to common
stockholders........................... $(1,339) $(2,835) $(5,048) $(5,963) $(13,210) $(8,598) $(12,079)
======= ======= ======= ======= ======== ======= ========
Net loss per share -- basic and diluted(a)... $ (0.61) $ (1.29) $ (2.29) $ (2.71) $ (6.35) $ (4.04) $ (6.24)
======= ======= ======= ======= ======== ======= ========
Weighted average shares used in computing
basic and diluted net loss per share(a).... 2,203 2,203 2,203 2,203 2,080 2,131 1,935
======= ======= ======= ======= ======== ======= ========
Pro forma net loss per share - basic and
diluted(b)................................. (1.82) (1.19)
======== ========
Weighted average shares used in computing
basic and diluted pro forma net loss per
share...................................... 7,244 10,109
======== ========
</Table>
<Table>
<Caption>
DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- -------------
1996 1997 1998 1999 2000 2001
------- ------- ------- -------- -------- -------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 121 $ 264 $ 638 $ 649 $ 411 $ 4,974
Working capital.......................................... 28 108 (1,176) (209) (4,488) 718
Total assets............................................. 730 828 1,400 2,519 4,629 9,321
Long-term obligations, net of current portion and
discounts.............................................. -- 1,463 2,834 2,881 801 275
Mandatorily redeemable convertible preferred stock....... 1,975 3,380 3,709 4,063 4,493 4,805
Convertible preferred stock.............................. -- -- 2,088 9,341 16,444 26,707
Total stockholders' deficit.............................. (1,338) (4,172) (9,220) (14,790) (22,515) (27,083)
</Table>
- ------------------------------
(a) Net loss per share and weighted average shares outstanding for periods prior
to our incorporation in July 1998 are calculated based on the conversion of
LLC units to common shares at the time of incorporation. In 1998, we
effected a stock split of approximately 1:5.507 for which all prior periods
have been adjusted.
(b) Pro forma net loss per share is calculated as if shares of series B, C and D
convertible preferred stock were converted to common shares at the beginning
of the periods presented or upon issuance, if later.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with our financial statements and the
notes to those statements included elsewhere in this prospectus. This discussion
may contain forward-looking statements that involve risks and uncertainties. As
a result of many factors, such as those set forth under "Risk Factors" and
elsewhere in this prospectus, our actual results may differ materially from
those anticipated in 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 September 30, 2001, had a deficit accumulated
during the development stage of approximately $40.5 million. We anticipate
incurring additional losses, which will increase for the foreseeable future, as
we expand research and development activities and progress through current and
projected clinical trials.
Operating costs and expenses consist primarily of research and development
expenses, clinical trial expenses, which are included in research and
development, and general and administrative expenses.
Research and development expenses include salary expenses and costs of
supplies used in our internal research and development projects. We expect our
research and development costs to increase as we continue to develop new
applications of our technology, refine our manufacturing processes and move
research projects through pre-clinical and clinical trials. We expect to expend
at least $8 million on our proposed clinical trials and at least $5 million on
research and development.
From our inception in March 1996 through September 30, 2001, we incurred
costs of approximately $15.0 million associated with the research into and
development of our product candidates. At this time, due to the risks inherent
in the clinical trial process imposed on new drug candidates and the fact that
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 management, finance and administrative
personnel, the cost of facilities, insurance and legal support, as well as
amortization costs of stock options and warrants granted to consultants and for
entering into commercial arrangements. We expect general and administrative
expenses to increase as we strengthen our infrastructure in support of our
anticipated increased operations and expanded clinical trials.
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, licensing and royalties
from marketing and distribution partnerships and technology transfers.
We lack high volume manufacturing, sales and marketing experience and, as a
result, we may experience significant difficulties commercializing our
anticipated products.
Deferred compensation represents the difference between the fair value of
our common stock and the exercise price of options on their date of grant. The
fair value of our common stock for purposes of this calculation 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 this
offering and the expected initial public offering price per share. During the
nine months ended September 30, 2001, we recorded deferred compensation totaling
$1,329,897. We are amortizing the deferred compensation to expense using the
straight-line method over the vesting period. As of September 30, 2001, there
was approximately $1,116,631
26
of deferred compensation to be amortized in future periods as follows: $100,000
for the three months ending December 31, 2001, $401,000 for the year ending
December 31, 2002, $401,000 for the year ending December 31, 2003, $147,000 for
the year ending December 31, 2004 and $67,000 for the year ending December 31,
2005. Additionally, in June of 2000 and 2001, we granted to a consultant an
option to purchase 5,000 shares of common stock at exercise prices of $0.85 and
$1.25 per share, respectively. The fair value of options granted was determined
using the Black-Scholes model. The resulting compensation expense was
approximately $54,000 for the nine months ended September 30, 2001. The value of
the options are periodically remeasured as they vest.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2001
Total Revenues. Total revenues decreased 48% from $141,732 for the nine
months ended September 30, 2000 to $74,013 for the nine months ended September
30, 2001. Total revenues consisted primarily of research material sales and
research grants. This decrease in revenue was primarily due to lower research
material sales, which will fluctuate depending upon the timing of purchases by
BioWhittaker, Inc., our sole customer, and no grant revenue in the 2001 period.
Cost of Research Material Sales. Cost of research material sales decreased
8% from $53,362 for the nine months ended September 30, 2000 to $49,298 for the
nine months ended September 30, 2001. This decrease was primarily due to lower
research material sales.
Research And Development Expense. Research and development expense
increased 57% from $2,210,475 for the nine months ended September 30, 2000 to
$3,469,985 for the nine months ended September 30, 2001. This increase was
primarily due to increased costs associated with continued patient enrollment in
our initial clinical trial, clinical trial monitoring, manufacture of
DCVax-Prostate for clinical trial use, research and development costs associated
with improving DCVax production techniques and research and development
expenditures relating to our HuRx platform. Additionally, we expanded our
scientific and manufacturing team to 38 individuals as of September 30, 2001
from 27 as of September 30, 2000.
General And Administrative Expense. General and administrative expense
increased 47% from $2,313,427 for the nine months ended September 30, 2000 to
$3,395,561 for the nine months ended September 30, 2001. The increase in costs
was primarily due to higher monthly rental costs, and for increased legal costs
related to entering into certain contractual arrangements and increased patent
research and filings.
Depreciation And Amortization. Depreciation and amortization increased 132%
from $145,619 for the nine months ended September 30, 2000 to $337,130 for the
nine months ended September 30, 2001. This increase was primarily due to the
significant increase in capitalized leasehold improvements in December 2000, as
the result of finalization of tenant improvements at our current facility.
Total Other Income (Expense), Net. Other income (expense), net, consists
primarily of interest income and interest expense. Interest income was
substantially the same at $144,837 for the nine months ended September 30, 2000
compared to $149,239 for the nine months ended September 30, 2001.
Interest expense decreased 88% from $3,847,499 for the nine months ended
September 30, 2000 to $464,456 for the nine months ended September 30, 2001. The
decrease in interest expense was primarily due to the 2000 period including
amortization related to the discount and beneficial conversion feature of a
convertible promissory note that was converted late in 2000.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000
Total Revenues. Total revenues decreased 26% from $210,520 for the year
ended December 31, 1999 to $155,962 for the year ended December 31, 2000. Total
revenues consisted primarily of research material sales, contract research and
development fees from related parties and research grants. Sales of research
materials to our sole customer increased from $39,260 in 1999 to $110,757 in
2000. This gain in revenue was offset by a cessation of our contract research
and development agreements with Pacific Northwest Cancer
27
Foundation at the end of the first quarter of 1999, under which $84,375 was
received in 1999. Additionally, grant research revenues decreased from 1999 to
2000, due to the timing of service performed under research contracts.
Cost Of Research Material Sales. Cost of research material sales increased
12% from $45,565 for the year ended December 31, 1999 to $50,849 for the year
ended December 31, 2000. This increase was primarily due to increased variable
manufacturing costs associated with supporting increased sales of research
materials, offset by improved efficiencies in the manufacturing process.
Research And Development Expense. Research and development expense
increased 8% from $2,885,332 for the year ended December 31, 1999 to $3,114,160
for the year ended December 31, 2000. This increase was primarily due to
increased costs associated with patient enrollment in our initial clinical
trial, clinical trial monitoring and travel related expenses and manufacture of
DCVax-Prostate for clinical trial use. Our scientific and manufacturing team
remained constant at 27 individuals.
General And Administrative Expense. General and administrative expense
increased 45% from $2,535,200 for the year ended December 31, 1999 to $3,682,015
for the year ended December 31, 2000. This increase was primarily due to
increased employee costs as we expanded our administrative team to 14
individuals as of December 31, 2000, from 12 as of December 31, 1999 and higher
monthly rental costs as we moved to our current facility. Additionally, legal
costs increased, as a result of contractual agreements and patent research and
filings.
Depreciation And Amortization. Depreciation and amortization increased 1%
from $196,012 for the year ended December 31, 1999 to $198,532 for the year
ended December 31, 2000. This slight increase was primarily due to increasing
equipment needs to support our ongoing research and development programs.
Total Other Income (Expense), Net. Other income (expense), net, consists
primarily of interest income and interest expense. Interest income increased
3.5% from $160,563 for the year ended December 31, 1999 to $166,179 for the year
ended December 31, 2000. This increase was primarily due to a slightly higher
average cash balance over the respective periods.
Interest expense increased from $318,353 for the year ended December 31,
1999 to $6,055,806 for the year ended December 31, 2000. The increase in
interest expense was primarily due to recognizing as interest expense the
discount of $4,038,525 related to the value of the warrants issued with the 6%
convertible promissory notes and interest expense of $1,025,575 related to the
beneficial conversion feature on those notes.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999
Total Revenues. Total revenues decreased 45% from $385,007 for the year
ended December 31, 1998 to $210,520 for the year ended December 31, 1999. Total
revenues consisted primarily of research material sales, contract research and
development fees from related parties and research grants. Sales of research
material decreased from $47,507 in 1998 to $39,260 in 1999. Contract research
and development fees from Pacific Northwest Cancer Foundation decreased from
$337,500 in 1998 to $84,375 in 1999 as the contract terminated in the first
quarter of 1999. These decreases were offset by an increase in grant revenue, as
there were no research grants in 1998.
Cost Of Research Material Sales. Cost of research material sales decreased
44% from $81,043 for the year ended December 31, 1998 to $45,565 for the year
ended December 31, 1999. The decrease was primarily due to the drop in sales of
research materials from $47,507 at the end of 1998 to $39,260 by the end of 1999
and increased start-up costs incurred in 1998.
Research And Development Expense. Research and development expense
increased 1% from $2,860,323 for the year ended December 31, 1998 to $2,885,332
for the year ended December 31, 1999. This slight increase was primarily due to
increased costs associated with the initial development of DCVax-Prostate.
General And Administrative Expense. General and administrative expense
increased 44% from $1,765,360 for the year ended December 31, 1998 to $2,535,200
for the year ended December 31, 1999. The
28
increase was primarily due to increased employee costs as we expanded our
administrative team to 15 individuals as of December 31, 1999 from 10 as of
December 31, 1998 and increased legal support for contractual agreements and
patent research and filings.
Depreciation And Amortization. Depreciation and amortization increased 20%
from $163,529 for the year ended December 31, 1998 to $196,012 for the year
ended December 31, 1999. The increase was primarily due to the build-out of lab
facilities to support ongoing research and development and the creation of a
pilot manufacturing clean room meeting FDA guidelines.
Total Other Income (Expense), Net. Other income (expense), net, consists
primarily of interest income and interest expense. Interest income increased
482% from $27,601 for the year ended December 31, 1998 to $160,563 for the year
ended December 31, 1999. The increase in interest income was primarily due to
the receipt of net proceeds from the series C convertible preferred stock
offering of approximately $7.6 million, which increased available cash balances
for investment.
Interest expense increased 22% from $261,791 for the year ended December
31, 1998 to $318,353 for the year ended December 31, 1999. The increase in
interest expense is primarily due to increased borrowings under the $2,900,000
letter of credit from Northwest Hospital.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001, we had cash and cash equivalents of $4,974,038
compared to $410,756 at December 31, 2000.
We used $6,659,891 in cash for operating activities during the first nine
months of 2001, compared to $4,456,123 in the first nine months of 2000. The
change in cash used in operating activities from 2000 to 2001 was primarily due
to an increased net loss, exclusive of amortization of debt discount and
beneficial conversion feature, resulting from expanded operations.
For the nine months ended September 30, 2001, we used $157,085 in cash for
investing activities compared to $1,847,832 during the same period of the prior
year. Cash used in investing activities consists solely of purchases of property
and equipment for both periods.
We generated $11,380,258 in cash from financing activities during the first
nine months of 2001, compared to $6,369,641 during the first nine months of
2000. For the first nine months of 2001, cash generated from financing
activities consists primarily of proceeds from issuances of our series D
convertible preferred stock of $12,822,850, net of issuance costs, offset by
payments made on a note payable to a stockholder of $899,675. For the first nine
months of 2000, cash generated from financing activities consists primarily of
proceeds from the issuance of convertible promissory notes and warrants, net of
issuance costs.
From inception, we have financed our operations primarily through the
private sale of securities, cash generated from the sale of biomedical research
products, equipment leases and borrowings from stockholders.
We expect to incur substantial costs as we continue to expand our clinical
trials, research and pre-clinical development initiatives. Additionally, we
expect to repay the outstanding balance of our line of credit with Northwest
Hospital prior to the closing of this offering. We expect that the net proceeds
from this offering, along with our existing cash and cash equivalents will be
sufficient to fund operations for the next twelve months. However, during or
after this period, if our capital resources are insufficient to meet our capital
requirements and expenses, we would need to issue additional equity or debt
securities or obtain credit arrangements. 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
29
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.
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 that the changing value
of such assets will be realized upon liquidation.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our exposure to market risk is presently limited to interest rate
sensitivity, 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 and borrowings under debt arrangements. 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 and borrowings, 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standard, or SFAS, No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement requires
companies to record derivatives on the balance sheet as assets and liabilities,
measured at fair value. Gains and losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. SFAS No. 133 was effective for us
beginning in the first quarter of fiscal 2001 and did not have an impact on our
consolidated financial statements.
In July 2001, the FASB issued Statement No. 141, "Business Combinations,"
and Statement No. 142, "Goodwill and Other Intangible Assets." Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Statement 141 also specifies that
certain intangible assets acquired in a purchase method business combination
must be recognized and reported apart from goodwill, noting that any purchase
price allocable to an assembled workforce may not be accounted for separately.
Statement 142 will require that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of Statement 142. Statement 142 will
also require that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Statement 141 is required to be adopted immediately and Statement 142 will be
adopted January 1, 2002. As we currently have no intangible assets, adoption is
not expected to have a material impact on our financial statements.
30
BUSINESS
OVERVIEW
We are a biotechnology company focused on discovering, developing, and
commercializing immunotherapy products that safely generate and enhance immune
system responses to effectively treat cancer. Currently approved cancer
treatments are frequently ineffective and can cause undesirable side effects.
Our approach in developing cancer therapies combines our expertise in the
biology of dendritic cells, which are a type of white blood cells that activate
the immune system, monoclonal antibodies, which are antibodies that are
identical to each other and target only one specific disease target, or antigen,
and immunology and antigen discovery. We use our proprietary technologies to
develop cancer therapies. These therapies are derived from our two versatile
product development programs, DCVax and HuRx.
DCVax. DCVax is a dendritic cell-based cancer immunotherapy platform. Our
DCVax therapies are designed to safely elicit potent immune responses that
eliminate cancer cells. We are currently developing four DCVax product
candidates. Our lead DCVax product candidate, DCVax-Prostate, is a prostate
cancer treatment for which we are commencing a Phase III clinical trial. We
observed stabilization of disease in 52% (14 of 27) of the patients in our Phase
I/II clinical trial for DCVax-Prostate. All nine of these stable patients did
not have measurable metastatic disease at the time of treatment and all nine
were stable, as measured by radiographic criteria, at weeks 23 to 28. These
results can be compared to results for another experimental therapy given to
similar patients without metastatic disease that had a median time to
progression of 29 weeks. Patients with measurable metastatic disease in our
Phase I/II clinical trial had a median time to progression of 20 weeks. These
results can be compared to results for another experimental therapy given to
patients with metastatic disease that had a median time to progression of 12
weeks. Eighty-three percent (83%) of patients had an immune response following
treatment with DCVax-Prostate. This immune response was measured by the amount
of immune-reactive substances found in the blood of patients, which formed
specifically in response to a specific substance present in DCVax-Prostate that
is found on the surface of prostate cells, known as prostate-specific membrane
antigen, or PSMA. To date, we have observed no significant adverse side effects
from DCVax-Prostate. Our second DCVax product candidate, DCVax-Brain, is moving
towards a Phase II clinical trial for glioblastoma, a lethal form of brain
cancer. Our third DCVax product candidate is DCVax-Lung, for which an
application has been submitted to the FDA in support of a Phase I clinical trial
for non small-cell lung carcinoma, the most prevalent form of lung cancer. Our
fourth DCVax product candidate is designed to treat renal cancer and is in
pre-clinical development.
HuRx. HuRx is our monoclonal antibody-based cancer therapy platform. HuRx
product candidates are based on monoclonal antibodies that do not contain mouse
proteins, like traditional monoclonal antibodies, and are known as fully human
monoclonal antibodies. In partnership with Medarex, Inc., we have assembled an
initial portfolio of four HuRx product candidates targeted to treat several
types of cancers. Our lead HuRx product candidate, HuRx-Prostate, is a fully
human monoclonal antibody-based therapy for the treatment of prostate cancer.
HuRx-Prostate is currently being manufactured under FDA guidelines for our
anticipated Phase I clinical trials. We have observed significant anti-cancer
activity in tests of human prostate cancer cell cultures treated with
HuRx-Prostate. Our other HuRx product candidates are in pre-clinical
development.
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.
INDUSTRY BACKGROUND
INCIDENCE OF CANCER IN THE UNITED STATES
The American Cancer Society estimates that in the United States, men have a
1 in 2 lifetime risk of developing cancer, while women have a risk of 1 in 3.
Doctors are expected to diagnose approximately 1.3 million new cases of cancer
in the United States during 2001. Cancer is the second leading cause of death in
the United States after heart disease and is estimated to result in
approximately 553,000 deaths, or 1,500 per day, in 2001. The direct medical
costs related to treating cancer in the United States were estimated to be $60
billion in 2000. Our initial therapeutic targets, prostate, brain and lung
cancers, cause
31
approximately 37% of the cancer deaths in the United States each year. The
American Cancer Society estimates that the incidence of new diagnosis and deaths
resulting from several common cancers during 2001 will be as follows:
<Table>
<Caption>
- ----------------------------------------------------
TYPE OF CANCER NEW CASES DEATHS
- ----------------------------------------------------
Breast 193,700 40,600
Prostate 198,100 31,500
Colorectal 135,400 56,700
Lung 169,500 157,400
Kidney 30,800 12,100
Melanoma 51,400 7,800
Brain 17,200 13,100
- ----------------------------------------------------
</Table>
Our most advanced product candidate, DCVax-Prostate, addresses the
treatment of prostate cancer. Prostate cancer is now the most prevalent form of
cancer among men in the United States, representing 31% of all new cases in men,
resulting in the second highest number of deaths of men from cancer.
CANCER
Cancer is characterized by aberrant cells that multiply uncontrollably. As
cancer progresses, the cancer cells may invade other tissues throughout the body
producing additional cancers, called metastases. Cancer growth can cause tissue
damage, organ failure and, ultimately, death.
Many immunologists believe that cancer cells occur frequently in the human
body, yet are effectively controlled by the immune system because these cells
are recognized as aberrant. Cancer growth occurs if this natural process fails.
Cancer cells produce abnormal kinds and amounts of substances called
antigens, which may be distinguishable from those produced by healthy cells. The
use of these cancer-associated antigens is essential to the successful
development of products capable of stimulating the immune system to seek and
destroy cancer cells marked by these antigens.
THE HUMAN IMMUNE SYSTEM
The immune system is the body's defense mechanism responsible for
recognizing and eliminating cancer cells, viruses, bacteria and other
disease-causing organisms. This system consists of populations of white blood
cells whose components are responsible for initiating the cellular immune
response, and the humoral, or antibody-based, immune response.
Dendritic cells, a component of white blood cells, initiate the cellular
immune response by processing and displaying disease-associated antigen
fragments on their outer cell surface, where they are recognized by white blood
cells, known as naive T cells, that have not yet been exposed to antigens. Upon
exposure to these antigen fragments, naive T cells become disease-specific
Helper T cells or Killer T cells. Helper T cells then induce Killer T cells to
seek and destroy the cells marked by the disease-associated antigen.
B cells direct the humoral immune response by binding to disease-associated
antigens on the surface of various cell types, producing disease-specific
antibodies. Helper T cells also enhance B cell production of disease-specific
antibodies. These antibodies bind to and initiate the destruction of cells
marked by the associated disease-specific antigens.
A small population of activated Helper T cells, Killer T cells, and
antibody-producing B cells survive for long periods of time, retaining the
memory of what the disease fragment looks like. These cells can respond very
rapidly to subsequent exposure to disease-specific antigens and fragments. The
most effective natural immune response is one in which both Killer T cells and
antibody-producing B cells are activated.
32
The immune system response to cancer is generally characterized by the
following sequence:
- Step 1. Dendritic cells ingest cancer antigens, break them into small
fragments and display them on their outer cell surfaces.
- Step 2. Dendritic cells bearing these cancer antigen fragments bind to
and activate naive T cells, which become disease-specific Helper T and
Killer T cells.
- Step 3. The activated Helper T cells produce factors that greatly enhance
the cell division of Killer T cells and mature their cancer-killing
properties.
- Step 4. Cancer cells and their cancer-associated antigens are also
recognized by antibody producing B cells.
- Step 5. The activated Helper T cells produce factors that greatly enhance
antibody production by B cells that in turn are specific for the
cancer-associated antigens.
- Step 6. The Killer T cells and antibodies, acting alone or in
combination, destroy cancer cells.
LIMITATIONS OF CURRENT CANCER THERAPIES
TRADITIONAL CANCER THERAPY APPROACHES
Cancer is characterized by aberrant cells that multiply uncontrollably. As
cancer progresses, the cancer cells may invade other tissues throughout the body
producing additional cancers, called metastases. Effective therapies must attack
the cancer both at its site of origin and at sites of metastases. Traditional
treatments for cancer include:
- Surgery. Surgery may be used to remove cancer cells, but not all cancer
cells can be removed surgically. Surgery may also result in significant
adverse side effects such as collateral damage to healthy tissue,
bleeding and infection.
- Radiation Therapy. Radiation therapy may be used to treat cancers but it
can cause significant damage to healthy tissue surrounding the targeted
cancer cells. Recurrent cancers may not be treatable with further
radiation therapy. Radiation therapy may also cause additional
significant adverse side effects such as burns to treated skin, organ
damage and hair loss.
- Chemotherapy. Chemotherapy may be used to treat cancer, but involves the
use of toxic chemical agents. These toxic chemical agents affect both
healthy and diseased cells and may cause additional significant adverse
side effects such as hair loss, immune suppression, nausea and diarrhea.
- Hormone Therapy. Hormone therapy may be used to treat cancer, but
involves the use of substances that chemically inhibit the production of
growth and reproductive hormones. Hormone therapy is limited in
effectiveness. Hormone therapy may also cause significant adverse side
effects such as bone loss, hot flashes, impotence and blood clots.
CURRENT CANCER IMMUNOTHERAPY APPROACHES
Immunotherapy can stimulate and enhance the body's natural mechanism for
destroying pathogens, such as cancer cells, and may overcome many of the
limitations of traditional cancer therapies. Immunotherapy may be particularly
useful to augment traditional cancer therapies. In recent years, two cancer
immunotherapy approaches have emerged, with FDA approved products to address the
limitations of traditional therapies:
- Antibody-Based Therapies. Currently approved antibody-based cancer
therapies have improved survival rates with reduced side effects when
compared with traditional therapies. However, these antibody-based
therapies can elicit an immune response against themselves because they
contain mouse proteins or fragments of such proteins. This can limit
their effectiveness and potentially endanger a patient's health.
- Immune-Modulating Agents. Currently approved immune-modulating agents,
such as IL-2, GM-CSF and alpha-interferon, have been found to have some
ability to enhance the immune system and control
33
cancer growth. However, these therapies involve delivery of the immune
modulating agent through the blood system. This lack of selectivity may
result in significant toxicity to healthy tissue.
We believe that the most effective way to address cancer is to stimulate
and enhance the patient's natural immune system to seek and destroy cancer
cells.
OUR SOLUTIONS
We have developed two proprietary approaches, DCVax and HuRx, for
stimulating and enhancing a patient's cellular and humoral immune response to
cancer. We believe that DCVax and HuRx products can overcome the limitations of
current cancer therapies and offer cancer patients safe and effective treatment
alternatives, alone or in combination with other therapies.
DCVAX
Our DCVax platform combines our expertise in dendritic cell biology,
immunology and antigen discovery with our proprietary process of producing and
activating dendritic cells outside a patient's body to develop therapeutic
products that stimulate beneficial immune responses to treat cancer. We believe
that DCVax has the following significant characteristics, the total of which, we
believe makes it a potentially attractive therapeutic alternative to current
therapies:
- Activates The Natural Immune System. Our DCVax products are designed to
elicit a natural immune response. We believe that our pre-clinical and
clinical trials have demonstrated that our DCVax product candidates can
train a patient's own Killer T cells to seek and destroy specifically
targeted cancer cells. Our clinical trials have also shown that
DCVax-Prostate stimulates the body to produce antibodies that bind to
cancer-associated antigens and potentially destroy cancer cells marked by
these antigens.
- Multiple Cancer Targets. We intend to apply our DCVax platform to treat a
wide variety of cancers. The DCVax platform affords the flexibility to
target many different forms of cancer through the pairing of dendritic
cells with cancer-associated antigens, fragments of cancer-associated
antigens or deactivated whole cancer cells.
- No Significant Adverse Side Effects Or Toxicity. Our lead DCVax product
candidate, DCVax-Prostate, has shown mild injection site reactions, which
were typical and fully anticipated, but no significant adverse side
effects in over 110 clinically administered injections. We believe that
we minimize the potential for toxicity by using the patient's own cells
to create our DCVax products. Additionally, because our DCVax products
are designed to target the cancer-associated antigens in the patient, we
believe they minimize collateral damage to healthy cells.
- Rapid Pre-Clinical Development. We believe that our DCVax technology,
which has been safely administered in a Phase I/II clinical trial for
prostate cancer, will enable us to rapidly move new potential products
into clinical trials within six to nine months of concept, subject to FDA
approval. Identifying promising new DCVax product candidates simply
requires identification of cancer-associated antigens, fragments of
cancer-associated antigens or whole cancer cells. To date, we have
identified six cancer-associated antigens over a period of two years.
- Ease Of Administration. We initially collect a patient's white blood
cells in a single standard outpatient procedure called leukapheresis.
After patient-specific manufacturing and quality control testing, each
small dose of a DCVax product is administered by a simple intradermal
injection in an outpatient setting.
- Complementary With Other Treatments. Our DCVax products are designed to
stimulate the patient's own immune system to safely target cancer cells.
Consequently, we believe these products may be complementary to
traditional therapies such as chemotherapy, radiation therapy, hormone
therapy and surgery.
34
HURX
Our HuRx platform is designed to combine our expertise in monoclonal
antibodies, immunology and antigen discovery with strategic partners who have
expertise in fully human monoclonal antibody development and production. We are
currently co-developing our initial HuRx products with Medarex, Inc., our
existing HuRx strategic partner. This strategic partnership enables us to create
proprietary fully human monoclonal antibody-based cancer therapies. Products
derived from our HuRx platform will have the following characteristics the total
of which, we believe, will make them potentially attractive alternatives to
current therapies:
- Fully Human Antibodies. Current monoclonal antibody-based therapies
contain mouse proteins or fragments of such proteins. Consequently, these
therapies have the potential to elicit unwanted immune responses against
the mouse proteins or protein fragments. Our HuRx products are based on
monoclonal antibodies that are fully human, and thus do not contain any
mouse proteins. As a result, we expect these products to exhibit a
favorable safety profile and no unwanted immune response against the HuRx
antibody-based therapy itself.
- Rapid Pre-Clinical Development. We are developing our initial HuRx
products in collaboration with Medarex. This strategic partnership
combines expertise in fully human monoclonal antibody technology,
in-house development and clinical supply manufacturing. Our strategic
partnership with Medarex is designed to enable us to rapidly develop
product candidates from our antigen discovery program. Consequently, we
believe that, subject to FDA approval, we can progress from antigen
discovery to clinical trials for each new HuRx product candidate in
twelve months or less.
- Cancer Specificity. Our proprietary antigens are significantly
over-expressed in cancer cells. Our HuRx antibodies bind to these
targeted cancer-associated antigens and potentially destroy cancer cells
marked by these antigens. To date, we have successfully identified four
clinically validated antigens associated with six different cancers.
- Multiple Therapeutic Applications. We believe that HuRx antibodies may be
used as stand-alone products that bind to cancer-associated antigens, and
potentially destroy cancer cells marked by these antigens. HuRx
antibodies may also enable the targeted delivery of existing therapies
such as radiation and cytotoxic agents. The inherent toxic effects of
cytotoxic agents and radioactive materials on normal tissue are minimized
by coupling these agents to antibodies that have a high degree of
specificity to cancer cells.
- Commercialization. Based on our experience with the manufacturing of HuRx
antibodies for our clinical trials we believe the manufacturing of these
antibodies can be scaled to meet market demand. Antibody-based products
are typically characterized by an inherent stability, resulting in a
commercially acceptable shelf-life.
- Complementary With Other Treatments. We believe that our HuRx products
may be suitable for use alone or in combination with currently approved
therapies due to their complementary cell-killing properties.
In addition, we believe that HuRx antibodies may be useful for the
development of cancer diagnostic imaging products.
OUR STRATEGY
Our objective is to become the leading biotechnology company focused on
discovering, developing and commercializing immunotherapy products that safely
generate and enhance natural immune system responses to effectively treat
cancer. To achieve this objective, we are pursuing the following strategic
initiatives:
- Maximize Speed To Market Of DCVax-Prostate. We are commencing a Phase III
clinical trial for DCVax-Prostate, which if successful, will allow us to
bring DCVax-Prostate to market. Because DCVax-Prostate addresses
late-stage prostate cancer, we intend to apply to the FDA for fast-track
designation.
35
- Expand DCVax To Multiple Cancers. We are applying our DCVax platform to
brain, lung and renal cancers. We have conducted extensive pre-clinical
studies on the applicability of our DCVax platform to each of these
cancers. Subject to FDA approval, we expect to begin a Phase II clinical
trial for DCVax-Brain, and a Phase I clinical trial for DCVax-Lung within
12 months.
- Establish A Competitive Position In Antibody-Based Cancer Therapies. We
are expanding the development of our HuRx products through our strategic
partnership with Medarex. We have completed extensive pre-clinical
studies on HuRx-Prostate, our lead HuRx product candidate. Subject to FDA
approval, we expect to begin Phase I clinical trials within 12 months.
- Diversify Our Product Portfolio. We will continue to utilize our antigen
discovery expertise to identify and validate new cancer-associated
antigens that can be paired with our DCVax and HuRx technologies. In
addition, we intend to accelerate the development of a broader product
portfolio by licensing or acquiring complementary technologies, patents
and product candidates.
- Establish Strategic Partnerships. We intend to enter into additional
strategic partnerships with various corporate collaborators and academic
research institutions to augment our development and commercialization
efforts. Although we intend to retain rights to products that we can
commercialize ourselves, we intend to collaborate with strategic partners
to support the development and commercialization of some of our products.
We may also enter into strategic partnerships to obtain value for our
proprietary DCVax and HuRx technologies outside our areas of interest.
OUR CLINICAL AND PRECLINICAL DEVELOPMENT PROGRAMS
We are developing DCVax- and HuRx-based therapeutic products for the
treatment of cancer. We have completed or largely completed our research and
pre-clinical testing phases of four product candidates, two of which,
DCVax-Prostate and DCVax-Brain, are in clinical trials. We have submitted an
application to the FDA to support a Phase I clinical trial for DCVax-Lung and we
intend to submit an application to the FDA to enable us to begin clinical
testing for HuRx-Prostate. Additionally, we have numerous projects in
pre-clinical research and development. We are also actively engaged in the
research and discovery of cancer-associated antigens and fragments of
cancer-associated antigens that can be used with our DCVax and HuRx platforms.
The following table summarizes the targeted indications and status of our
product candidates:
<Table>
<Caption>
- --------------------------------------------------------------------------------------------------------------
PRODUCT CANDIDATE TARGET INDICATIONS STATUS
- --------------------------------------------------------------------------------------------------------------
DCVAX PLATFORM
- --------------------------------------------------------------------------------------------------------------
DCVax-Prostate Prostate cancer Phase III -- protocol submitted to the FDA
DCVax-Brain Glioblastoma Phase II -- trial planned to begin Q2 2002
DCVax-Lung Non small-cell lung cancer Phase I -- application submitted to the FDA
DCVax-Renal Renal cancer Pre-clinical
- --------------------------------------------------------------------------------------------------------------
HURX PLATFORM
- --------------------------------------------------------------------------------------------------------------
HuRx-Prostate Prostate cancer Phase I -- trial planned to begin Q3 2002
HuRx-Lung Small cell lung cancer Pre-clinical
HuRx-Breast Breast cancer Pre-clinical
HuRx-Brain Glioblastoma Pre-clinical
HuRx-Colon Colon cancer Pre-clinical
HuRx-Melanoma Melanoma Pre-clinical
Flt4 Prostate cancer Pre-clinical
- --------------------------------------------------------------------------------------------------------------
GENE THERAPY
- --------------------------------------------------------------------------------------------------------------
CXCR4 Breast cancer, Glioblastoma, Colon Pre-clinical
cancer and Melanoma
CX43 Breast cancer, Glioblastoma and Pre-clinical
Prostate cancer
- --------------------------------------------------------------------------------------------------------------
</Table>
36
OUR DCVAX PLATFORM
The DCVax platform uses our proprietary process to efficiently produce and
activate dendritic cells outside of a patient's body. Our Phase I/II clinical
trial has shown that these cells can generate an effective immune system
response when administered therapeutically. Manufacture of a DCVax product takes
approximately 30 days to complete, and is characterized by the following
sequence:
- Collection. A patient's white blood cells are collected in a single and
simple outpatient procedure called leukapheresis.
- Isolation of Precursors. These cells are sent to our manufacturing
facility, where dendritic cell precursors are isolated from the patient's
white blood cells.
- Transformation by Growth Factors. Dendritic cell precursors are
transformed, through the application of specific growth factors, into
highly pure populations of immature dendritic cells during a six-day
culture period.
- Maturation. Immature dendritic cells are exposed to a proprietary
maturation factor in order to maximize Helper T cell, Killer T cell and B
cell activation.
- Antigen Display. Cancer-associated antigens, fragments of
cancer-associated antigens or deactivated whole cancer cells are added
to, ingested and processed by the maturing dendritic cells, causing the
dendritic cells to display fragments of cancer-associated antigens on
their outer cell surfaces.
- Harvest. These dendritic cells are harvested and separated into
single-use DCVax administration vials, frozen and stored.
- Quality Control. Each DCVax product lot undergoes rigorous quality
control testing, including 14-day sterility testing for bacterial and
mycoplasma contamination, and potency testing prior to shipment to the
administration site for intradermal injection.
Illustration of the DCVax Platform
37
We believe that, by virtue of the process described above as antigen
display, our DCVax platform affords the flexibility to target many different
forms of cancer through the pairing of dendritic cells with cancer-associated
antigens, pieces of cancer-associated antigens or deactivated whole cancer
cells. We have either patented or licensed critical intellectual property
encompassing this technology.
DCVAX PRODUCT CANDIDATES
DCVAX-PROSTATE
DCVax-Prostate results from combining the DCVax platform with the
cancer-associated antigen PSMA. PSMA is located on the surface of prostate
cells. It is expressed at very low levels on benign or healthy prostate cells,
and at much higher levels on prostate cancer cells. Because PSMA is
over-expressed in all prostate cancers, it represents an effective target for
prostate cancer therapeutics. We have an exclusive worldwide license for the use
of PSMA as a target for dendritic cell-based prostate cancer immunotherapy.
DCVax-Prostate Clinical Trials. We are commencing a pivotal double-blind,
placebo-controlled Phase III clinical trial for DCVax-Prostate involving
late-stage prostate cancer patients for whom hormone therapy is no longer
effective. This trial will include 495 patients enrolled at multiple sites in
the United States. Patients will be evaluated throughout the course of the
trial, and interim data will be analyzed after 250 patients have completed their
first year of the trial. In November 2001, we entered into a laboratory services
agreement with Quintiles Laboratories Limited. Under this agreement, Quintiles
will provide us with analytical and data management services in connection with
our Phase III clinical trial for DCVax-Prostate. We expect to pay Quintiles
approximately $1.6 million for these services. The agreement is intended to
continue for the duration of our Phase III clinical trial for DCVax-Prostate,
however, it can be terminated upon 90 day prior written notice by either party.
The agreement is also subject to termination if either party breaches its
material obligations under the agreement.
In September 1999, we filed an application to conduct a Phase I/II clinical
trial for DCVax-Prostate to treat late-stage prostate cancer patients for whom
hormone therapy was no longer effective. This trial, carried out at M.D.
Anderson Cancer Center and at UCLA, administered DCVax-Prostate to 32 patients
in order to establish the safety and efficacy of three different dosage levels
of DCVax-Prostate.
We observed stabilization of disease in 52% (14 of 27) of the patients in
our Phase I/II clinical trial for DCVax-Prostate. Nine of these stable patients
did not have measurable metastatic disease at the time of treatment and all nine
were stable, as measured by radiographic criteria, at weeks 23 to 28. These
results can be compared to results for another experimental therapy given to
similar patients without metastatic disease that had a median time to
progression of 29 weeks. Patients with measurable metastatic disease in our
Phase I/II clinical trial had a median time to progression of 20 weeks. These
results can be compared to results for another experimental therapy given to
patients with metastatic disease that had a median time to progression of 12
weeks. Eight-three percent (83%) of patients had an immune response following
treatment with DCVax-Prostate, as measured by the amount of immune-reactive
substances found in the blood of patients, which formed specifically in response
to PSMA.
Target Market. The American Cancer Society estimates that 198,100 new cases
of prostate cancer will be diagnosed in the United States during 2001. Deaths
from prostate cancer are estimated at 31,500 per year. We estimate that there is
an initial DCVax-Prostate target population consisting of approximately 73,000
patients with late stage, or hormone refractory, prostate cancer.
Current Treatments. Existing treatments for localized prostate cancer
include surgery and various forms of radiation therapy. The current
standard-of-care for treating metastatic prostate cancer is hormone therapy.
Although this therapy achieves temporary tumor control, the National Cancer
Institute's 1989 - 1996 five-year survival rate for metastatic prostate cancer
is only 33%. Moreover, hormone therapy may cause significant adverse side
effects, including bone loss, hot flashes, impotence and blood clots. Disease
progression in the presence of hormone therapy occurs on average in two years,
and is then classified as hormone refractory prostate cancer. Approximately 50%
of patients with hormone refractory prostate cancer will die within one year of
its onset. Currently, the only FDA approved treatments for hormone refractory
prostate cancer are
38
chemotherapy and radioactive pharmaceuticals, which can alleviate cancer-related
symptoms but may cause significant adverse side effects and do not prolong
survival. We believe that DCVax-Prostate addresses this critical unmet medical
need.
DCVAX-BRAIN
DCVax-Brain uses our DCVax platform in combination with
glioblastoma-associated antigen fragments. Our clinical collaborators at UCLA
are conducting a Phase I clinical trial to assess the safety and efficacy of
dendritic cell-based immunotherapy for glioblastoma. They have informed us that
it has been safely administered to nine patients and provided us with
preliminary data on seven patients. Three patients that were newly diagnosed
with glioblastoma and treated with dendritic cells similar to those used in our
DCVax(TM)-Brain have all survived and showed no recurrence of disease with a
mean of 16.5 months to date compared to 7 months for historical controls at
UCLA. Four patients that had recurrent glioblastoma and received the dendritic
cells had a mean time to progression of 13 months compared to 5 months for
historical controls and a mean survival of 18 months to date compared to 10
months for historical controls. One of the patients died within approximately 11
months of treatment. Based on these results, we intend to discuss with the FDA
the transfer to us of the application on which the UCLA study was based, for the
purpose of initiating a Phase II clinical trial with DCVax-Brain at several
clinical sites. Because DCVax-Brain is not identical to the product used in the
UCLA trial, the FDA may require us to perform Phase I clinical trials using
DCVax-Brain prior to proceeding to Phase II.
Target Market. The American Cancer Society estimates that 17,200 new cases
of brain cancer will be diagnosed in the United States during 2001. Deaths from
brain cancer are estimated at 13,100 per year. The most common and lethal form
of brain cancer is glioblastoma, the indication we are targeting with DCVax-
Brain. We estimate that DCVax-Brain addresses a population consisting of
approximately 10,000 new patients per year.
Current Treatments. Existing treatments for glioblastoma include surgery,
radiation and chemotherapy that are used in various combinations and/or
sequences. These treatments have significant adverse side effects. In its most
recent study, The National Institute of Health reported that the 1989 - 1996
five-year survival rate for all brain cancer patients was only 31%. Following
initial treatment, virtually all cases of this cancer recur, with a life
expectancy of approximately one year following recurrence. No effective therapy
exists for these patients. We believe that DCVax-Brain addresses this critical
unmet medical need.
DCVAX-LUNG
DCVax-Lung uses our DCVax platform in combination with isolated and
deactivated lung cancer cells as antigens. We are moving towards a Phase I
clinical trial to assess the safety and efficacy of DCVax-Lung. We have
completed all pre-clinical work for this trial and have submitted an application
to commence a Phase I clinical trial to the FDA.
Target Market. The American Cancer Society estimates that 169,500 new cases
of lung cancer will be diagnosed in the United States during 2001. Approximately
80% of these cases will be attributable to non small-cell lung cancer, the
indication we are targeting with DCVax-Lung. Deaths from all forms of lung
cancer are estimated at 157,400 per year.
Current Treatments. Existing treatments for non small-cell lung cancer
include surgery and radiation therapy, which are used in various combinations.
These treatments have significant adverse side effects. In its most recent
study, the National Institute of Health reported that the 1989 - 1996 five-year
survival rate for non small-cell lung cancer patients was only 6.2%. Following
initial treatment, virtually all cases of this cancer recur, with a life
expectancy of approximately one year following recurrence. No effective therapy
exists for these patients. We believe that DCVax-Lung addresses this critical
unmet medical need.
39
DCVAX-RENAL
The American Cancer Society estimates that 30,800 new cases of renal cancer
will be diagnosed in the United States during 2001. Deaths from renal cancer are
estimated at 12,100 per year. DCVax-Renal is in preclinical development.
OUR HURX PLATFORM
Our HuRx platform combines our expertise in monoclonal antibodies,
immunology and antigen discovery with strategic partners who have expertise in
fully human monoclonal antibody development. We are co-developing our initial
HuRx products with Medarex. We believe this strategic partnership will enable us
to create proprietary fully human monoclonal antibody-based cancer therapies. We
manufacture our HuRx products in the following sequence:
- Identification. We identify, validate and select a potentially useful
cancer-associated antigen for our HuRx platform.
- Immunization. This cancer-associated antigen is used to immunize
transgenic mice. These mice create B cells, which produce fully human
cancer-associated antigen-specific antibodies.
- Selection And Culturing. From the B cells created during immunization, we
select single antibody-producing cells, which we then culture to large
quantities. These cells produce identical antibodies with high
specificity to the targeted cancer-associated antigen.
- Analysis And Evaluation. These fully human monoclonal antibodies are
analyzed for specificity to the cancer-associated antigen, ability to
bind to live cancer cells with high affinity and ability to kill those
cells. In addition, the antibody-producing cells are evaluated for their
ability to generate high quantities of the selected antibodies.
- Manufacturing. Our HuRx fully human monoclonal antibodies are
manufactured for clinical trials under FDA guidelines.
We believe that our antigen discovery program will enable us to identify
and develop cancer-associated antigens in the HuRx platform, potentially
expanding our portfolio of therapeutic products. We expect that the antibodies
generated by the HuRx platform will be useful as stand-alone products or as
products coupled with cytotoxins or radioactive agents.
HURX PRODUCT CANDIDATES
HURX-PROSTATE
HuRx-Prostate results from combining the HuRx platform with the
cancer-associated antigen PSMA to create therapeutically useful antibodies.
These antibodies bind to and initiate the destruction of cancer cells marked by
PSMA. We are moving towards a Phase I clinical trial in hormone refractory
prostate cancer patients. We are manufacturing HuRx-Prostate under FDA
guidelines for this clinical trial. Pre-clinical work is largely completed.
Target Market. The American Cancer Society estimates that 198,100 new cases
of prostate cancer will be diagnosed in the United States during 2001. Deaths
from prostate cancer are estimated at 31,500 per year. We estimate that there is
an initial HuRx-Prostate target population consisting of approximately 73,000
patients with late stage or hormone refractory prostate cancer.
Current Treatments. Existing treatments for localized prostate cancer
include surgery and various forms of radiation therapy. The current
standard-of-care for treating metastatic prostate cancer is hormone therapy.
Although this therapy achieves temporary tumor control, the National Cancer
Institute's 1989 - 1996 five-year survival rate for metastatic prostate cancer
is only 33%. Moreover, hormone therapy may cause significant adverse side
effects such as bone loss, hot flashes, impotence and blood clots. Disease
progression in the presence of hormone therapy occurs on average in two years,
and is then classified as hormone refractory prostate cancer. Approximately 50%
of patients with hormone refractory prostate cancer will die within one
40
year of its onset. Currently, the only FDA approved treatments for hormone
refractory prostate cancer are chemotherapy and radioactive pharmaceuticals,
which can alleviate cancer-related symptoms but may cause significant adverse
side effects and do not prolong survival. We believe that HuRx-Prostate
addresses this critical unmet medical need.
HURX-LUNG, HURX-BREAST, HURX-BRAIN, HURX-COLON AND HURX-MELANOMA
We have selected cancer-associated antigens for non small-cell lung cancer,
breast cancer, glioblastoma, colon cancer and melanoma. According to the
American Cancer Society, these conditions represent approximately 32% of all
cancers expected to be diagnosed in the United States in the year 2001. Through
our strategic partnership with Medarex, we are currently developing fully human
monoclonal antibodies targeted to antigens associated with these cancers.
GENE THERAPY PROGRAM
Cancer is characterized by normal cellular activity becoming aberrant as a
result of altered gene function or expression. The result of this alteration is
uncontrolled cell division. Gene therapy involves the use of genes for purposes
of expressing specific proteins in cancer cells that alter the aberrant behavior
of those cancer cells in order to:
- normalize uncontrolled cell division;
- increase sensitivity to treatments capable of inducing cell death; or
- induce cell death.
We have identified two genes, which we are evaluating as potential targets
for developing therapies for breast cancer, glioblastama, colon cancer, melanoma
and prostate cancer. We intend to use the preclinical data developed to explore
opportunities to license this technology to others.
STRATEGIC PARTNERSHIPS
We have entered into the following strategic partnerships:
Medarex, Inc. In April 2001, we entered into a collaboration agreement with
Medarex to produce fully human monoclonal antibodies to certain antigen targets
identified by us. The agreement calls for joint development of antibodies to at
least eight cancer-associated antigen targets. Under our agreement, certain
profits, losses and costs associated with the development of our HuRx products
will be shared equally by both of us, and certain other costs will be borne
entirely by each party. From our inception through September 30, 2001, we have
incurred approximately $91,000 in expenses relating to this agreement. This
relationship is governed by a joint steering committee composed of
representatives of both companies to make development and commercialization
decisions concerning jointly developed fully human monoclonal antibody product
candidates. Each of us has the right to elect not to participate in the joint
development of antibodies to a given antigen target and receive instead certain
milestone and royalty payments on net sales. The agreement terminates upon the
later of one year after completion of the research activities thereunder, or the
date on which neither party is exploiting any products developed thereunder. The
agreement is also subject to termination if either party breaches its material
obligations under the agreement.
UCLA Sponsored Research Agreements. In April 2001, we entered into an
agreement with the Regents of the University of California, Los Angeles,
pursuant to which scientists at that institution will assist us in our Phase I
clinical trials for DCVax-Lung in exchange for $84,150 payable in installments
over the term of the agreement. In August 2001, we entered into another
agreement with the Regents of the University of California, Los Angeles,
pursuant to which scientists at that institution will assist us in our Phase II
clinical trials for DCVax-Brain in exchange for $76,500 payable in installments
over the term of the agreement.
Department of Molecular Medicine, Northwest Hospital. In August 2001, we
entered into an agreement with the Department of Molecular Medicine, Northwest
Hospital, which provides us the right of first refusal to use and exploit any of
their cancer-related intellectual property in exchange for our payment of the
costs
41
associated with pursuing patent protection and our payment of a royalty based on
the industry standard rates at such time.
MANUFACTURING
We have only limited manufacturing facilities for the production of our
product candidates currently under development. We expect to rely upon
third-party manufacturers to produce some of our product candidates for
pre-clinical, clinical and commercial purposes. Furthermore, the product
candidates under development by us have never been manufactured on a commercial
scale and may not be able to be manufactured at a cost or in sufficient
quantities to make commercially viable products.
MARKETING
We plan to market our products in strategic partnership with established
pharmaceutical companies. Our collaboration with these companies may take the
form of royalty agreements, licensing agreements or other co-marketing
arrangements. The U.S. oncology market is characterized by highly concentrated
distribution channels. Consequently, we also intend to develop a direct sales
force to market our cancer-related products in the United States.
INTELLECTUAL PROPERTY
We seek to protect our commercially relevant proprietary technologies
through patents both in the United States and abroad. We have several issued
United States and foreign patents and patent applications pending in a number of
areas that we believe will be valuable to our business, including dendritic cell
isolation and manipulation and the use of dendritic cells for immunotherapy as
well as monoclonal antibodies which bind to the portion of PSMA outside of the
cell. Our issued patents expire on dates between 2015 and 2016. We intend to
continue using our scientific expertise to pursue and patent new developments
with respect to uses, methods, and compositions to enhance our position in the
field of cancer treatment.
In August 2000, we entered into an agreement with Cytogen for an exclusive
world-wide license to make, have made, use, sublicense and sell PSMA as part of
our dendritic cell-based immunotherapy for prostate cancer. The agreement terms
include milestone payments, which require us to pay Cytogen $250,000 after the
first product approval, and another $750,000 in the form of a 2% royalty on the
first two years of net product sales. In addition, we are obligated to pay a 5%
royalty to Cytogen on future net sales of products that include PSMA and we have
agreed to make minimum annual payments of $10,000 to Cytogen until our
commencement of a Phase III clinical trial involving any PSMA-based product
candidate for the immunotherapy of prostate cancer. The license expires upon the
expiration of the last to expire of the underlying patents, but not prior to
November 2012.
Any patents that we obtain may be circumvented, challenged or invalidated
by our competitors. Our patent applications may not result in the issuance of
any patents, and any patents that may issue may not offer any protection against
others who seek to practice the claimed inventions. We have obtained licenses
for certain technologies that we use, but we may be unable to maintain those
licenses and may be unable to secure additional licenses in the future. Thus, we
may be forced to abandon certain product areas or develop alternative methods
for operating in those areas.
In addition to patents, we rely on copyright protection, trade secrets,
proprietary know-how and trademarks to maintain our competitive position. Our
success will depend in part on our ability to preserve our copyrights and trade
secrets. Although our officers, employees, consultants, contractors,
manufacturers, outside scientific collaborators, sponsored researchers and other
advisors are required to sign agreements obligating them not to disclose our
confidential information, these parties may nevertheless disclose such
information and compromise our trade secrets. We may not have adequate remedies
for any such breach. It is also possible that our trade secrets or proprietary
know-how will otherwise become known or be independently replicated or otherwise
circumvented by competitors.
42
Our technologies may infringe the patents or violate other proprietary
rights of third parties. In the event of infringement or violation, we may be
prevented from pursuing further licensing, product development or
commercialization. Such a result would materially adversely affect our business,
financial condition and results of operations.
If we become involved in any litigation, interference or other
administrative proceedings, we will incur substantial expenses and the efforts
of our technical and management personnel will be significantly diverted. An
adverse determination may subject us to significant liabilities or require us to
seek licenses, which may not be available. We may also be restricted or
prevented from manufacturing and selling our products, if any, in the event of
an adverse determination in a judicial or administrative proceeding, or if we
fail to obtain necessary licenses.
COMPETITION
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 research and development of cell-based cancer
therapeutics. Of these companies, only Dendreon is carrying-out Phase III
clinical trials with a cell-based therapy. No cell-based therapeutic product is
currently available for commercial sale. Additionally, several companies, such
as Abgenix, Inc., Agensys, Inc., IDEC Pharmaceuticals Corporation and Genentech,
Inc. are actively involved in 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
therapeutic products 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 resources and expertise
in research and development, manufacturing, pre-clinical testing, conducting
clinical trials, obtaining regulatory approvals and marketing. In addition, many
of these competitors have become more 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.
GOVERNMENTAL REGULATION
Governmental authorities in the United States and other countries
extensively regulate the pre-clinical and clinical testing, manufacturing,
labeling, storage, record-keeping, advertising, promotion, export,
43
marketing and distribution, among other things, of immunotherapeutics. In the
United States, the FDA under the Federal Food, Drug, and Cosmetic Act, the
Public Health Service Act and other federal statutes and regulations subjects
pharmaceutical and biologic products to rigorous review. If we or our strategic
partners do not comply with applicable requirements, we may be fined, our
products may be recalled or seized, our production may be totally or partially
suspended, the government may refuse to approve our marketing applications or
allow us to distribute our products, and we may be criminally prosecuted. The
FDA also has the authority to revoke previously granted marketing
authorizations.
In order to obtain approval of a new product from the FDA, we must, among
other requirements, submit proof of safety and efficacy as well as detailed
information on the manufacture and composition of the product. In most cases,
this proof entails extensive laboratory tests, and pre-clinical and clinical
trials. This testing, and the preparation of necessary applications and
processing of those applications by the FDA are expensive and typically take
several years to complete. The FDA may not act quickly or favorably in reviewing
these applications, and we may encounter significant difficulties or costs in
our efforts to obtain FDA approvals that could delay or preclude us from
marketing any products we may develop. The FDA also may require post-marketing
testing and surveillance to monitor the effects of approved products or place
conditions on any approvals that could restrict the commercial applications of
these products. Regulatory authorities may withdraw product approvals if we fail
to comply with regulatory standards or if we encounter problems following
initial marketing. With respect to patented products or technologies, delays
imposed by the governmental approval process may materially reduce the period
during which we will have the exclusive right to exploit the products or
technologies.
After an investigational new drug application becomes effective, a sponsor
may commence human clinical trials. The sponsor typically conducts human
clinical trials in three sequential phases, but the phases may overlap. In Phase
I clinical trials, the product is tested in a small number of patients or
healthy volunteers, primarily for safety at one or more doses. In Phase II, in
addition to safety, the sponsor evaluates the efficacy of the product in a
patient population somewhat larger than Phase I clinical trials. Phase III
clinical trials typically involve additional testing for safety and clinical
efficacy in an expanded population at geographically dispersed test sites. The
sponsor must submit to the FDA a clinical plan, or protocol, accompanied by the
approval of a clinical site responsible for ongoing review of the investigation,
prior to commencement of each clinical trial. The FDA or a clinical site may
order the temporary or permanent discontinuation of a clinical trial at any
time, if the trial is not being conducted in accordance with FDA or clinical
site requirements or presents a danger to its subjects.
The sponsor must submit to the FDA the results of the pre-clinical and
clinical trials, together with, among other things, detailed information on the
manufacture and composition of the product, in the form of a new drug
application or, in the case of a biologic, a biologics license application. The
FDA is regulating our therapeutic vaccine products as biologics and, therefore,
we will be submitting biologics license applications to the FDA to obtain
approval of our products. In a process which generally takes several years, the
FDA reviews this application and, when and if it decides that adequate data is
available to show that the new compound is both safe and effective and that
other applicable requirements have been met, approves the drug or biologic for
marketing. The amount of time taken for this approval process is a function of a
number of variables, including the quality of the submission and studies
presented, the potential contribution that the compound will make in improving
the treatment of the disease in question, and the workload at the FDA. It is
possible that our vaccines will not successfully proceed through this approval
process or that the FDA will not approve them in any specific period of time, or
at all.
Congress enacted the Food and Drug Administration Modernization Act of
1997, in part, to ensure the availability of safe and effective drugs, biologics
and medical devices by expediting the FDA review process for new products. The
Modernization Act establishes a statutory program for the approval of fast-track
products, including biologics. A fast-track product is defined as a new drug or
biologic intended for the treatment of a serious or life-threatening condition
that demonstrates the potential to address unmet medical needs for this
condition. Under the fast-track program, the sponsor of a new drug or biologic
may request the FDA to designate the drug or biologic as a fast-track product at
any time during the clinical development of the product, prior to marketing
approval.
44
The Modernization Act specifies that the FDA must determine if the product
qualifies for fast-track designation within 60 days of receipt of the sponsor's
request. The FDA can base approval of a marketing application for a fast-track
product on an effect, on a surrogate endpoint, or on another endpoint that is
reasonably likely to predict clinical benefit. The FDA may subject approval of
an application for certain fast-track products to post-approval studies to
validate the surrogate endpoint or confirm the effect on the clinical endpoint
and prior review of all promotional materials. In addition, the FDA may withdraw
its approval of a fast-track product on a number of grounds, including the
sponsor's failure to conduct any required post-approval study with due
diligence.
If a preliminary review of clinical data suggests that a fast-track product
may be effective, the FDA may initiate review of entire sections of a marketing
application for a fast-track product before the sponsor completes the
application. This rolling review is available if the applicant provides a
schedule for submission of remaining information and pays applicable user fees.
However, the time periods specified under the Prescription Drug User Fee Act
concerning timing goals to which the FDA has committed in reviewing an
application, do not begin until the sponsor submits the entire application.
The FDA may, during its review of a new drug application or biologics
license application, ask for additional test data. If the FDA does ultimately
approve the product, it may require post-marketing testing, including
potentially expensive Phase IV studies, and surveillance to monitor the safety
and effectiveness of the drug. In addition, the FDA may in some circumstances
impose restrictions on the use of the drug, which may be difficult and expensive
to administer, and may require prior approval of promotional materials.
Before approving a new drug application or biologics license application,
the FDA also will inspect the facilities at which the product is manufactured
and will not approve the product unless the manufacturing facilities are in
compliance with guidelines for the manufacture, holding, and distribution of a
product. Following approval, the FDA periodically inspects drug and biologic
manufacturing facilities to ensure continued compliance with manufacturing
guidelines. Manufacturers must continue to expend time, money and effort in the
area of production and quality control and record keeping and reporting to
ensure full compliance with those requirements. The labeling, advertising,
promotion, marketing and distribution of a drug or biologic product must be in
compliance with FDA regulatory requirements. Failure to comply with applicable
requirements can lead to the FDA demanding that production and shipment cease,
and, in some cases, that the manufacturer recall products, or to FDA enforcement
actions that can include seizures, injunctions and criminal prosecution. These
failures can also lead to FDA withdrawal of approval to market the product.
We, and our strategic partners, are also subject to regulation by the
Occupational Safety and Health Administration, the Environmental Protection
Agency, the Nuclear Regulatory Commission and other foreign, federal, state and
local agencies under various regulatory statutes, and may in the future be
subject to other environmental, health and safety regulations that may affect
our research, development and manufacturing programs. We are unable to predict
whether any agency will adopt any regulation, which could limit or impede on our
operations.
Sales of pharmaceutical products outside the United States are subject to
foreign regulatory requirements that vary widely from country to country.
Whether or not we have obtained FDA approval, we must obtain approval of a
product by comparable regulatory authorities of foreign countries prior to the
commencement of marketing the product in those countries. The time required to
obtain this approval may be longer or shorter than that required for FDA
approval. The foreign regulatory approval process includes all the risks
associated with FDA regulation set forth above, as well as country-specific
regulations.
EMPLOYEES
As of September 30, 2001, we employed 51 personnel, including approximately
22 in research and development, 13 in support/administration, and 16 in
manufacturing, regulatory affairs, and quality assurance. Each of our employees
has signed a confidentiality agreement and none is covered by a collective
bargaining agreement. We have never experienced employment-related work
stoppages and consider our employee relations to be good.
45
FACILITIES
We maintain our headquarters in Bothell, Washington where we lease
approximately 39,000 square feet of laboratory, research and development,
expansion, and general administration space. Our monthly rental obligation for
this facility is approximately $88,500, subject to an annual increase of 3.5%.
Our lease expires September 2009. The lease may be extended at our option for
two five-year periods. We sublease approximately 10,000 square feet of this
facility to the Northwest Hospital Department of Molecular Medicine. This
sublease expires on August 31, 2003. Northwest Hospital owns in excess of 5% of
our outstanding voting stock. C. William Schneider, our Treasurer and a member
of our board of directors, is the President and Chief Executive Officer of
Northwest Hospital.
LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our operations in the normal course of business. As of the date
of this prospectus, we are not a party to any material legal proceedings.
46
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is information with respect to each of our current
directors and executive officers.
<Table>
<Caption>
NAME AGE POSITION
---- --- ---------------------------------------------------------
Daniel O. Wilds........................ 53 Chairman of the Board, President and Chief Executive
Officer
Alton L. Boynton, Ph.D. ............... 57 Executive Vice President, Chief Scientific Officer,
Chief Operating Officer, Secretary and Director
C. William Schneider................... 57 Treasurer and Director
George P. Hutchinson................... 62 Director
Randall L-W. Caudill, D. Phil. ........ 54 Director
Haakon Ragde, M.D. .................... 74 Director
</Table>
Daniel O. Wilds. Mr. Wilds was named Chairman of our board of directors in
June 2001, and has served as President, Chief Executive Officer and a director
since February 1998. Prior to joining us, Mr. Wilds was President and Chief
Executive Officer of Shiloov Biotechnologies (USA), Inc., from July 1997 to
January 1998. In early 1997, Mr. Wilds was a self-employed consultant, providing
advisory services to biotechnology companies. From 1992 through 1996, Mr. Wilds
was President and Chief Executive Officer of Adeza Biomedical Corporation, prior
to which he served in several management positions in the biomedical and
biopharmaceutical fields. Mr. Wilds holds a B.A. from California State
University, Los Angeles and an MBA from Northwestern University.
Alton L. Boynton, Ph.D. Dr. Boynton co-founded our company, has served as
Secretary since August 2001, has served as our Executive Vice President since
July 2000, has served as our Chief Scientific Officer and a director since our
inception in 1996, and was appointed our Chief Operating Officer in August 2001.
Dr. Boynton has also served as Director of the Department of Molecular Medicine
of Northwest Hospital since 1995 where he has coordinated the establishment of a
program centered on carcinogenesis. Dr. Boynton is an internationally recognized
scientist in the cellular and molecular mechanisms causing cancer. Dr. Boynton
has been funded by the National Cancer Institute for more than 20 years and has
authored more than 150 publications. Dr. Boynton received his Ph.D. in Radiation
Biology from the University of Iowa in 1972.
C. William Schneider. Mr. Schneider has served as Treasurer and a director
since inception, and was Secretary from inception until August 2001. Mr.
Schneider has served as Chief Executive Officer, President, and a director of
Health Resources Northwest, which is comprised of Northwest Hospital and other
health care-related entities, since February 1981. He is also the President/CEO
of Northwest Hospital since February 1989. He has held various positions over
the past 25 years in the health care field, and is a member of the American
College of Health Care Administrators. Mr. Schneider received his B.S. degree
from Missouri Western College in 1972.
George P. Hutchinson. Mr. Hutchinson served as Chairman of the Board from
inception until June 2001 and is currently a director. Mr. Hutchinson was
President of G.P. Hutchinson and Co. from 1990 to 1999, providing
investment-banking services to regional companies. Prior to his service on our
board of directors, Mr. Hutchinson held several senior executive positions in
the investment banking industry. He currently serves as a member of the Board
for Health Resources Northwest. Mr. Hutchinson obtained a B.A. degree from the
University of Washington in 1961 and an MBA from Columbia University in 1966.
Randall L-W. Caudill, D. Phil. Dr. Caudill has served as a director since
July 1998. Since April 1997, Dr. Caudill has been President of Dunsford Hill
Capital Partners, a financial consulting firm serving early-stage health care
and technology companies. Dr. Caudill was, from 1987 to 1997, a Senior Advisor
to Prudential Securities, a full-service investment bank, where he served in
various capacities, including Head of their Mergers and Acquisitions Department
and Co-Head of their Investment Bank. He also currently serves as a director of
SBE, Inc., Locate Networks, Inc., Ramgen Power Systems, Inc. and VaxGen, Inc.,
as well as
47
several non-profit entities. Dr. Caudill received a D. Phil. from Oxford
University, where he was a Rhodes Scholar, and an M.P.P.M. from Yale University.
Haakon Ragde, M.D. Dr. Ragde has served as a director since September 1998.
Since April 2001, Dr. Ragde has been medical director of the Grado-Ragde
Clinics. From September 1988 until April 2001, Dr. Ragde was employed at
Northwest Hospital in various capacities, most recently as the Director of
Brachytherapy in the Urological Services Department. Dr. Ragde holds a clinical
academic appointment at the University of Virginia Health Sciences Center and
conducted the first successful Brachytherapy, or radioactive seed implant,
treatment of men with prostate cancer in the United States in 1987. Dr. Ragde
also is the recipient of numerous honors including, most recently, election to
the Honor Roll of the International Union Against Cancer and receipt of
University of Virginia's Honor Award for Outstanding Accomplishments in the
field of Urology. Dr. Ragde received his M.D. from University of Virginia
Medical School in 1957 and is certified by the American Board of Urology.
BOARD COMPOSITION
Our bylaws provide for a board of directors consisting of up to nine
members. The size of our board of directors is currently set at six members. In
accordance with the terms of our certificate of incorporation, the terms of
office of the directors are divided into three classes:
- Class I, whose term will expire at the annual meeting of stockholders to
be held in 2002;
- Class II, whose term will expire at the annual meeting of stockholders to
be held in 2003; and
- Class III, whose terms will expire at the annual meeting of stockholders
to be held in 2004.
The Class I directors are Dr. Caudill and Mr. Hutchinson, the Class II
directors are Dr. Ragde and Mr. Schneider and the Class III directors are Dr.
Boynton and Mr. Wilds. At each annual meeting of stockholders after the initial
classification or special meeting in lieu thereof, the successors to directors
whose terms will then expire will be elected to serve from the time of election
and qualification until the third annual meeting following election or special
meeting held in lieu thereof. The authorized number of directors may be changed
only by resolution of the board of directors. Any additional directorships
resulting from an increase in the number of directors will be distributed among
the three classes so that, as nearly as possible, each class will consist of
one-third of the directors. This classification of our board of directors may
have the effect of delaying or preventing changes in the control or management
of us.
BOARD COMMITTEES
The compensation committee reviews and approves the compensation and
benefits for our executive officers. In addition, the compensation committee
reviews and makes recommendations to the board about compensation matters for
all of our employees. As part of these responsibilities, the compensation
committee also administers our stock option plans. The current members of the
compensation committee are Mr. Hutchinson, Dr. Ragde and Mr. Schneider.
The audit committee of the board of directors monitors our financial
reporting and internal and external audit processes and meets with and considers
suggestions from members of management and our internal accounting personnel, as
well as our independent accountants, concerning our financial operations. The
audit committee reviews our annual financial statements and any other relevant
reports or other financial information, as well as our regular internal
financial reports prepared by management and any internal auditing department.
The audit committee also recommends to the board of directors the selection of
the independent accountants and approves the fees and other compensation to be
paid to the independent accountants. As part of this responsibility, the audit
committee reviews and discusses with the accountants all significant
relationships the accountants have with us to determine the accountants'
independence, reviews the performance of the independent accountants and
approves any proposed discharge of the independent accountants when
circumstances so warrant. The audit committee reviews with the independent
accountants, following the completion of the annual audit, the results of the
audit. The audit committee also reviews the
48
independence of each member of the committee. The current members of the audit
committee are Dr. Caudill, Mr. Hutchinson and Dr. Ragde.
The executive committee of our board of directors, formed in June 2001, is
currently charged with the task of evaluating the merits of implementing a
stockholder rights plan intended to deter coercive takeover practices. Such a
plan typically involves the award to each stockholder, as a dividend, of the
right to acquire a certain number of shares in the event of activity that may
indicate an impending takeover attempt. While such a plan is not currently in
place, there can be no guarantee that our board of directors will not adopt such
a plan in the future. The adoption of such a plan could discourage certain types
of coercive takeover practices and make it necessary for a potential acquiror to
negotiate with our board. The current members of the executive committee are Dr.
Caudill and Messrs. Hutchinson and Wilds.
DIRECTOR COMPENSATION
Nonemployee directors are reimbursed for reasonable travel and other
out-of-pocket expenses incurred in connection with each board or board committee
meeting attended. Non-employee directors will each receive, automatically on an
annual basis, equity incentives in the form of stock option grants under our
2001 Nonemployee Director Stock Incentive Plan.
On May 1, 1999, we entered into a consulting agreement with Dr. Ragde, a
member of our board of directors, to engage him to advise us regarding
development of our immunotherapy programs. This agreement provided that we would
pay Dr. Ragde up to $24,000 per year and grant him the option to purchase, at
fair market value, 1,000 shares of our common stock. This agreement expired on
April 30, 2000. We entered into similar agreements with Dr. Ragde on May 1, 2000
and May 1, 2001. These agreements each provided that we would pay Dr. Ragde up
to $48,000 per year and grant him the option to purchase, at fair market value,
5,000 shares of our common stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee of the board of directors was formed on June 21,
2001, prior to which time all decisions regarding executive officers'
compensation were made by a finance committee of our board of directors
consisting of Dr. Caudill and Messrs. Hutchinson, Schneider and Wilds. Mr.
Schneider is the President and Chief Executive Officer of Northwest Hospital and
Mr. Hutchinson serves on the board of directors of Health Resources Northwest,
which controls Northwest Hospital. Northwest Hospital has extended a $2.9
million line of credit to us. Interest accrues on amounts we borrow at a rate
equal to the sum of 1% plus the large business prime rate as reported by Bank of
America. Prior to the closing of this offering, we intend to fully repay the
$2.8 million outstanding balance of this loan as of September 30, 2001.
Simultaneously, Northwest Hospital has agreed to exercise warrants to purchase
1,101,402 shares of our common stock at a purchase price of $198,252. In August
2001, we entered into an agreement with Northwest Hospital under which the
hospital agreed to forego its option to require us to repurchase its 550,700
shares of our redeemable series A convertible preferred stock and we agreed to
pay the hospital $1.7 million within 30 days following the closing of this
offering. Additionally, Northwest Hospital agreed to extend the maturity date of
the line of credit until the earlier of the date of closing of this offering or
June 30, 2002.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our certificate of incorporation limits the liability of our directors to
the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except liability for:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
49
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws require us to indemnify our
directors and officers and permit us to indemnify our employees and other agents
to the fullest extent permitted by law. We believe that indemnification under
our bylaws covers at least negligence and gross negligence on the part of
indemnified parties. Our bylaws also permit us to secure insurance on behalf of
any officer, director, employee or other agent for any liability arising out of
his or her actions in such capacity, regardless of whether the bylaws would
permit indemnification.
SCIENTIFIC ADVISORS
We choose our scientific advisors for their expertise in fields that are
important to the research and development of our product candidates. We intend
to compensate our scientific advisors for their services with a combination of
cash payments and restricted stock.
Our scientific advisors presently include the following persons:
John T. Grayhack, M.D. Dr. Grayhack is a Professor in the Department of
Urology at Northwestern University Medical School and previously served as
chairman of the department. He is an internationally recognized urologist and
researcher specializing in prostate cancer. Dr. Grayhack serves on many national
and international cancer committees and has received numerous honors and awards.
Dr. Grayhack received his medical degree from the University of Chicago.
Brian Issell, M.D. Dr. Issell is a Researcher and Professor of Medicine at
the Cancer Research Center, University of Hawaii, where he previously served as
Director of the Cancer Center from 1988 to 1999. His current work is focused on
finding new treatments for cancer patients from studying traditional herbs,
botanicals and nutritional supplements used in the traditional practices of
Asians and Pacific Islanders. Previously, Dr. Issell has held the positions of
Vice President for Research at Cetus, Clinical Professor of Medicine at Stanford
University and Director of Clinical Cancer Research at Bristol Laboratories,
Bristol Myers Pharmaceuticals, where he was involved in the acquisition,
clinical development and FDA approval of major anti-cancer drugs such as
cisplatin, carboplatin and etoposide.
Stella C. Knight, Ph.D. Dr. Knight is the MRC Professor of Immunopathology
at St. Mary's Hospital Medical School and Imperial College of Science,
Technology and Medicine in London, England. She is an internationally recognized
immunologist and was one of the first in the world to identify and recognize
dendritic cells and their potential for immunotherapy. Dr. Knight has published
over 200 papers and is frequently featured as a lecturer at both national and
international meetings. Dr. Knight received her Ph.D. in immunology from the
University of Birmingham in England.
Cornelis Melief, M.D., Ph.D. Dr. Melief is the Head of the Department of
Immunohaematology and Blood Bank at the University of Leiden, The Netherlands.
He is a world leader in the field of tumor immunology and immunotherapy. Dr.
Melief has made significant contributions to research on mechanisms to induce T
helper and cytotoxic T cell responses to a variety of cancer targets. In
addition, Dr. Melief focuses some of his research on antigen processing and
presentation by dendritic cells. Dr. Melief serves on eight editorial boards of
respected cancer and immunology journals and is a frequent speaker at
international meetings on cancer and immunology.
50
EXECUTIVE COMPENSATION
The following table sets forth all compensation, including salary, bonuses
and stock options, earned during the year ended December 31, 2000 by our Chief
Executive Officer and our four other highest-paid executive officers,
collectively referred to in this prospectus as the named executive officers.
There was no other compensation paid to the named executive officers in 2000.
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
LONG-TERM
2000 ANNUAL COMPENSATION AWARDS
COMPENSATION ---------------------
------------------ SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS(1)
--------------------------- -------- ------- ---------------------
Daniel O. Wilds......................................... $250,016 $87,500 --
Chairman of the Board, President and Chief Executive
Officer
Alton L. Boynton(2)..................................... 229,860 61,000 --
Executive Vice President, Chief Operating Officer,
Chief Scientific Officer and Secretary
Eric Holmes(3).......................................... 170,086 18,316 10,000
Vice President of Biomedical Research and Development
Michael Salgaller....................................... 124,733 12,500 5,000
Vice President of Clinical and Research Affairs
Patricia A. Lodge....................................... 108,762 12,000 10,000
Vice President of Operations and Process Development
</Table>
- ------------------------------
(1) The options generally vest over four years.
(2) We and Northwest Hospital each pay a portion of Dr. Boynton's salary. In
2000, we paid approximately 90% of Dr. Boynton's total salary of $229,860.
(3) We and Northwest Hospital each pay a portion of Dr. Holmes' salary. In 2000,
we paid approximately 93% of Dr. Holmes' total salary of $170,086.
The following table shows information regarding options granted to the
named executive officers during the year ended December 31, 2000. We have not
granted any stock appreciation rights.
We have determined the fair market value of our common stock based on
various factors including our progress in our clinical trials, our establishment
of strategic partnerships with third parties, our prior equity financings and
the anticipated initial public offering price. We record deferred stock
compensation for certain options in an amount equal to the difference between
the exercise price and the estimated fair market value on the date of grant.
The potential realizable value at assumed annual rates of stock price
appreciation for the option term represents hypothetical gains that could be
achieved for the respective options if exercised at the end of the option term.
The 5% and 10% assumed annual rates of compounded stock price appreciation are
required by rules of the SEC and do not represent our estimate or projection of
our future common stock prices. These amounts represent assumed rates of
appreciation in the value of our common stock from the exercise price per share,
representing the fair market value on the date of grant. Actual gains, if any,
are dependent on the
51
future performance of our common stock and overall stock market conditions. The
amounts reflected in the table may not necessarily be achieved.
OPTION GRANTS IN LAST FISCAL YEAR
<Table>
<Caption>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
NUMBER OF PERCENTAGE OF PRICE APPRECIATION FOR
SECURITIES TOTAL OPTIONS OPTION TERM
UNDERLYING GRANTED TO EXERCISE EXPIRATION ----------------------
NAME OPTIONS GRANTED EMPLOYEES IN 2000 PRICE DATE 5% 10%
---- --------------- ----------------- -------- ---------- -------- --------
Daniel O. Wilds............ -- --% $ -- -- $ -- $ --
Alton L. Boynton........... -- -- -- -- -- --
Eric Holmes................ 5,000 4.4 0.85 07/18/10 2,673 6,773
5,000 4.4 1.25 11/14/10 3,931 9,961
Michael Salgaller.......... 5,000 4.4 1.25 11/14/10 3,931 9,961
Patricia A. Lodge.......... 5,000 4.4 0.85 05/16/10 2,673 6,773
5,000 4.4 1.25 11/14/10 3,931 9,961
</Table>
The following table shows information concerning each exercise of stock
options during 2000 and the number and value of unexercised options held by each
of the named executive officers as of December 31, 2000. The values of
unexercised in-the-money options as listed below have been calculated as the
difference between an assumed initial public offering price of $5.50 and the
exercise price.
AGGREGATED OPTION EXERCISES IN 2000 AND YEAR-END OPTION VALUES
<Table>
<Caption>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT DECEMBER 31, 2000 DECEMBER 31, 2000
ACQUIRED VALUE ---------------------------- ---------------------------
NAME UPON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------- -------- ----------- ------------- ----------- -------------
Daniel O. Wilds........... -- $ -- 122,537 428,164 $ 562,445 $1,990,530
Alton L. Boynton.......... -- -- -- 165,210 -- 768,227
Eric Holmes............... -- -- 5,000 15,000 25,000 67,750
Michael Salgaller......... -- -- 10,000 10,000 50,000 44,500
Patricia A. Lodge......... -- -- 3,917 16,083 19,585 72,815
</Table>
EMPLOYMENT AGREEMENTS
Effective as of February 2, 2001, we entered into an employment agreement
with Daniel O. Wilds. This agreement provides that Mr. Wilds will serve as our
President and Chief Executive Officer until January 31, 2004, with an annual
salary of $300,000, subject to annual increases at the discretion of our board
of directors. Additionally, Mr. Wilds is entitled, under the agreement, to a 25%
increase in his base salary upon the successful completion of this offering. Mr.
Wilds' employment agreement granted him a one-time non-qualified stock option
for 79,300 common shares and provides him with an annual incentive compensation
opportunity of up to 45% of his base salary, based on his ability to meet
certain agreed upon financial and other performance goals for each year. The
agreement provides that if we terminate his employment without cause or if Mr.
Wilds terminates his employment with Good Reason, as such term is defined in the
agreement, Mr. Wilds will be entitled to monthly severance payments equal to six
months base salary and six months at one-half base salary.
Effective as of February 2, 2001, we entered into an employment agreement
with Alton L. Boynton. This agreement provides that Dr. Boynton will serve as
our Executive Vice President and Chief Scientific Officer until January 31,
2004, with an annual salary of $265,000, subject to annual increases at the
discretion of our board of directors. Additionally, Dr. Boynton is entitled,
under the agreement, to a 25% increase in his base salary upon the successful
completion of this offering. Dr. Boynton's employment
52
agreement granted him a one-time non-qualified stock option for 79,300 common
shares and provides him with an annual incentive compensation opportunity of up
to 35% of his base salary, based on his ability to meet certain agreed upon
financial and other performance goals for each year. The agreement provides that
if we terminate his employment without cause or if Dr. Boynton terminates his
employment with Good Reason, as such term is defined in the agreement, Dr.
Boynton will be entitled to monthly severance payments equal to six months base
salary and six months at one-half base salary.
EMPLOYEE BENEFIT PLANS
1998 STOCK OPTION PLAN
The 1998 Stock Option Plan was adopted by our board of directors in July
1998 and approved by our stockholders in February 1999. This plan provides for
the grant to our employees, including officers and employee directors, of
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code and for the grant of non-statutory stock options to our employees,
officers, directors, including non-employee directors, and consultants. To the
extent an optionee would have the right in any calendar year to exercise for the
first time one or more incentive stock options for shares having an aggregate
fair market value, under all of our plans and determined as of the grant date,
in excess of $100,000, any such excess options will be treated as non-statutory
options. A total of 413,025 shares of our common stock have been reserved for
issuance under this plan and, as of September 30, 2001, no shares remained
available for additional option grants.
The compensation committee of our board of directors serves as the
administrator of our 1998 Stock Option Plan. Subject to the terms of this plan,
the administrator determines the terms of options granted, including the number
of shares subject to the option, exercise price, term and exercisability. The
exercise price of all incentive stock options granted under this plan must be at
least equal to the fair market value of our common stock on the date of grant.
The exercise price of any incentive stock option granted to an optionee who owns
stock representing more than 10% of the total combined voting power of our
outstanding capital stock, or a 10% stockholder, must be at least equal to 110%
of the fair market value of our common stock on the date of grant. The exercise
price of all non-statutory stock options cannot be less than 85% of the fair
market value of our common stock on the date of grant, and in the case of 10%
stockholders, the exercise price cannot be less than 110% of the fair market
value of our common stock. The term of options granted under this plan may not
exceed 10 years, and the term of an incentive stock option granted to a 10%
stockholder may not exceed five years. An option may not be transferred by the
optionee other than by will or the laws of descent or distribution. Each option
may be exercised during the lifetime of the optionee only by such optionee.
Generally, each option granted under this plan becomes exercisable as to 25% of
the total number of shares subject to the option after the first anniversary
following the date of grant, with subsequent equal monthly vesting over three
years, subject to the optionee's continued relationship with us as an employee,
director or consultant, as the case may be.
Our board of directors has the authority to amend or terminate this plan,
but such action will not adversely affect any outstanding option without the
optionee's consent. If not terminated earlier, this plan will terminate in July
2008.
1999 EXECUTIVE STOCK OPTION PLAN
The 1999 Executive Stock Option Plan was adopted by our board of directors
in November 1999. This plan provides for the grant of non-statutory stock
options to our employees, officers, directors, including non-employee directors,
and consultants. A total of 586,166 shares of our common stock have been
reserved for issuance under this plan, and, as of September 30, 2001, all of
these 586,166 reserved shares are subject to outstanding options.
The compensation committee of our board of directors serves as the
administrator of this plan. Subject to the terms of this plan, the administrator
determines the terms of options granted, including the number of shares subject
to the option, exercise price, term and exercisability. The exercise price of
options under this plan cannot be less than 85% of the fair market value of our
common stock on the date of grant and, in the case of 10% stockholders, the
exercise price cannot be less than 110% of the fair market value of our
53
common stock on the date of grant. The term of options granted under this plan
may not exceed 10 years. An option may not be transferred by the optionee other
than by will or the laws of descent or distribution. Each option may be
exercised during the lifetime of the optionee only by such optionee. Generally,
each option granted under this plan becomes exercisable as to 25% of the total
number of shares subject to the option on the first anniversary following the
date of grant, with subsequent equal monthly vesting over three years, subject
to the optionee's continued relationship with us as an employee or consultant.
Our board of directors has the authority to amend or terminate this plan,
but such action will not adversely affect any outstanding option without the
optionee's consent. If not terminated earlier, this plan will terminate in
November 2009.
2001 STOCK OPTION PLAN
The 2001 Stock Option Plan was both adopted by our board of directors and
approved by our stockholders in June 2001. A total of 1,800,000 shares of our
common stock have been initially reserved for issuance under this plan. This
plan is intended to provide for the grant to our employees, including officers
and employee directors, of "incentive stock options" within the meaning of
Section 422 of the Internal Revenue Code and for the grant of non-statutory
stock options to our employees and consultants. The number of shares available
for grant under this plan is subject to an automatic annual increase in an
amount equal to the lesser of (i) 15% of the aggregate number of shares
available for granting for the immediately preceding year; or (ii) 300,000
shares. As of September 30, 2001, 23,958 options have been granted under this
plan.
The compensation committee of our board of directors serves as the
administrator of this plan. Subject to the terms of this plan, the administrator
determines the terms of options granted, including the number of shares subject
to the option, exercise price, term and exercisability. The exercise price of
all incentive stock options granted under this plan must be at least equal to
the fair market value of our common stock on the date of grant. The term of
incentive stock options granted under this plan generally may not exceed 10
years.
Our board of directors has the authority to amend or terminate this plan,
but such action may not adversely affect any outstanding option previously
granted under the plan. If this plan is not terminated earlier, no incentive
stock options can be granted under the plan on or after the later of June 2011
or the 10th anniversary of the date when our board of directors adopted, subject
to approval by our stockholders, the most recent increase in the number of
shares available for grant under the plan.
2001 NONEMPLOYEE DIRECTOR STOCK INCENTIVE PLAN
The 2001 Nonemployee Director Stock Incentive Plan was adopted by our board
of directors in June 2001. This plan provides for the automatic grant to each of
our nonemployee directors of a nonstatutory stock option to purchase 5,000
shares of our common stock on the third business day following each annual
meeting of our stockholders. A total of 200,000 shares of common stock have been
reserved for issuance under this plan and, as of September 30, 2001, no grants
have been made under this plan.
This plan is administered by the compensation committee of our board of
directors. The exercise price of each option granted pursuant to this plan is
the fair market value of the underlying shares of our common stock on the date
of grant. Each option granted pursuant to this plan generally becomes
exercisable upon six months after the date of grant, subject to certain
limitations. Our board of directors has the authority to amend or terminate this
plan, but such action may not adversely affect any outstanding option without
the optionee's consent.
EMPLOYEE STOCK PURCHASE PLAN
Our Employee Stock Purchase Plan was adopted by our board of directors and
approved by our stockholders in June 2001. A total of 500,000 shares of common
stock have been reserved for issuance under this plan and, as of September 30,
2001, no shares have been issued under this plan.
This plan is administered by the compensation committee of our board of
directors and provides a mechanism for eligible employees to purchase shares of
our common stock. To facilitate these purchases, eligible participants are
assigned plan accounts, to which they may contribute funds via payroll
deduction. The purchases are accomplished through the use of six-month offering
periods. Purchases pursuant to this
54
plan are made at a price equal to the lower of (a) 85% of the fair market value
of our common stock on the last trading day in the offering period or (b) 85% of
the fair market value of our common stock on the last trading day before the
commencement of such offering period. No participant may purchase more than
1,000 shares of our common stock during any offering period. Additionally,
purchases under the plan are limited such that no participant may purchase under
the plan, in any offering period that commenced in that calendar year, shares
with a fair market value in excess of $25,000 minus the fair market value of any
shares that the participant previously purchased in that calendar year. In the
case of shares purchased during an offering period that commenced in the
preceding calendar year, the limitation is $50,000 minus the fair market value
of any shares that the participant purchased during the calendar year of the
purchase and the calendar year immediately preceding such purchase.
Our board of directors has the authority to amend or terminate this plan at
any time. Amendments to the plan are subject to approval by our stockholders to
the extent required by applicable law.
55
RELATED PARTY TRANSACTIONS
RELATIONSHIP WITH NORTHWEST HOSPITAL
Northwest Hospital owns in excess of 5% of our voting stock. C. William
Schneider, a member of our board of directors, is the President and Chief
Executive Officer of Northwest Hospital. Northwest Hospital has extended a $2.9
million line of credit to us. Interest accrues on amounts we borrow at a rate
equal to the sum of 1% plus the large business prime rate as reported by Bank of
America. Prior to the closing of this offering, we intend to fully repay the
outstanding balance of this loan, which was $2.8 million at September 30, 2001.
Simultaneously, Northwest Hospital will exercise warrants to purchase 1,101,402
shares of our common stock at a purchase price of $198,252. In August 2001, we
entered into an agreement with Northwest Hospital pursuant to which they agreed
to forego their option to require us to repurchase their 550,700 shares of
redeemable series A convertible preferred stock and we agreed to pay them $1.7
million within 30 days following the closing of this offering. Additionally,
Northwest Hospital agreed to extend the maturity date of the line of credit
until the earlier of the date of closing of this offering or June 30, 2002.
Alton L. Boynton, our Executive Vice President, Chief Operating Officer,
Chief Scientific Officer, Secretary and a member of our board of directors,
founded the Northwest Hospital Department of Molecular Medicine in 1995. Our
initial research into the application of dendritic cell technology to the
treatment of cancer stemmed from Dr. Boynton's association with the Northwest
Hospital Department of Molecular Medicine and Pacific Northwest Cancer
Foundation. The department is funded primarily through grants from the National
Institute of Health and the National Cancer Institute, and Dr. Boynton has
received two such grants during his association with us. Additionally, Dr. Eric
Holmes, one of our named executive officers, has received such a grant.
Pursuant to a sublease terminating on August 31, 2003, the Northwest
Hospital Department of Molecular Medicine currently leases approximately 10,000
square feet of office, laboratory and storage space from us at our corporate
headquarters, at a monthly rate of approximately $2.28 per square foot, subject
to an annual 3.5% increase. In addition, we have recently entered into an
agreement with the department whereby we have obtained a right of first refusal
to cancer and infectious disease related technologies in return for certain
financial considerations.
RELATIONSHIP WITH HOLMES HARBOR COMPANY, INC.
Holmes Harbor Company, Inc. is a Washington corporation controlled by
Robert M. Trimble. Mr. Trimble owns in excess of 5% of our voting stock. On July
12, 2000, Holmes Harbor loaned us $1,650,000 to fund certain leasehold
improvements at our headquarters. The loan was secured by substantially all of
our assets. Interest accrued on the loan at a rate of 13% per annum, and
principal and interest were due on July 11, 2001. On April 24, 2001, as a
condition of our entering into our collaborative agreement with Medarex, Inc.,
we restructured the loan. As part of our restructuring of this loan, we repaid
$825,000 in principal and paid $74,047 of accrued interest on May 15, 2001.
Additionally, we issued to Holmes Harbor a convertible promissory note in the
amount of $825,000 and a warrant to purchase up to 50,000 shares of our series D
convertible preferred stock. The convertible promissory note is secured by all
our assets except certain intellectual property, and bears interest at the rate
of 13% per annum. Under the terms of the convertible promissory note, we are
required to make quarterly payments in the amount of $121,603 commencing on
September 30, 2001 and we must pay the balance of all principal and interest on
the earlier of June 30, 2003 or the closing of this offering. The warrant we
issued as a result of restructuring this loan entitles Holmes Harbor to purchase
33,000 shares of our series D convertible preferred stock at a price of $5.00
per share if we repay the outstanding loan and all accrued interest on or before
June 30, 2002, or 50,000 shares of our series D convertible preferred stock if
we repay the balance thereafter. The warrants will expire upon completion of the
offering if they are not exercised.
56
RELATIONSHIP WITH MEDAREX, INC.
Medarex Inc. owns in excess of 5% of our voting stock. In April 2001, we
entered into a collaboration agreement with Medarex to produce fully human
monoclonal antibodies to certain antigen targets identified by us. The agreement
calls for joint development of antibodies to at least eight cancer-associated
antigen targets. Under our agreement, certain profits, losses and costs
associated with the development of our HuRx products will be shared equally by
both of us, and certain other costs will be borne entirely by each party. From
our inception through September 30, 2001, we have incurred approximately $91,000
in expenses relating to this agreement. This relationship is governed by a joint
steering committee composed of representatives of both companies to make
development and commercialization decisions concerning jointly developed fully
human monoclonal antibody product candidates. Each of us has the right to elect
not to participate in the joint development of antibodies to a given antigen
target and receive instead certain milestone and royalty payments on net sales.
The agreement terminates upon the later of one year after completion of the
research activities thereunder, or the date on which neither party is exploiting
any products developed thereunder. The agreement is also subject to termination
if either party breaches its material obligations under the agreement.
RELATIONSHIP WITH DUNSFORD HILL CAPITAL PARTNERS, INC.
Dunsford Hill Capital Partners, Inc. is a California corporation owned and
controlled by Randall L-W. Caudill, a member of our board of directors. On July
31, 1998, we entered into an agreement with Dunsford Hill, pursuant to which
Dunsford Hill was to provide financial and advisory services to us in connection
with our series C convertible preferred stock financing. In return for these
services, Dunsford Hill received compensation in the form of $263,201 and a
warrant to purchase 106,247 shares of our series C convertible preferred stock
at an exercise price of $2.50 per share. This agreement terminated on December
31, 1999.
Additionally, in return for services performed in connection with our
convertible promissory note and series D convertible preferred stock offerings,
Dunsford Hill received compensation in the form of $105,000 and a warrant to
purchase 45,000 shares of our series D convertible preferred stock at an
exercise price of $5.00 per share.
Dunsford Hill frequently works in association with The Paisley Group LLC, a
Washington limited liability company. In connection with our retention of The
Paisley Group as a placement agent for our series D convertible preferred stock
financing, The Paisley Group requested that $30,000 of their fee and a warrant
to purchase 20,000 shares of our series D convertible preferred stock be paid to
Dunsford Hill.
From the time of the initial agreement to the present date, we have paid
Dunsford Hill a total of $398,201 and issued to Dunsford Hill warrants to
purchase an aggregate of 171,247 shares of our series C and D convertible
preferred stock.
RELATIONSHIP WITH PROSTAGEN, INC.
Prostagen, Inc. is a Delaware corporation that was controlled by S. Leslie
Misrock until June 1999. Mr. Misrock was a member of our board of directors from
inception until June 1999. In July 1998, we acquired exclusive rights from
Prostagen to manufacture and sell the PSMA protein in our DCVax-Prostate,
subject to contingent future milestone payments of $2.9 million. In connection
with this transaction, we formed Northwest Clinicals, LLC, of which we shared
equal ownership interest with Prostagen.
In connection with our agreement with Prostagen, we issued 550,700 shares
of our common stock and paid $100,000 to Mr. Misrock. Mr. Misrock was also a
senior partner in a law firm that provided us with legal services. During 1999,
we paid approximately $157,000 to this law firm for services. In June 1999, Mr.
Misrock tendered his resignation from our board of directors and Cytogen
Corporation acquired all of the outstanding capital stock of Prostagen.
In August 2000, we entered into a release and settlement agreement with
Northwest Clinicals and Cytogen, which effectively terminated the agreement
between us and Prostagen, including the $2.9 million of milestone payments that
were to be paid to Prostagen. In addition, this agreement dissolved Northwest
57
Clinicals and transferred all of the assets of Northwest Clinicals to us. The
terms of the agreement also provided for the release and return to us of 275,350
shares of common stock held in escrow for Mr. Misrock.
Under the terms of a separate sublicense agreement with Cytogen, we
obtained the exclusive right to make, use and sublicense PSMA for the
development, manufacture and sale of DCVax-Prostate. The terms of the sublicense
agreement include milestone payments, which require us to pay Cytogen $250,000
after the first product approval, and $750,000 to Cytogen in the form of a 2%
royalty on the first two years of net product sales. In addition, we are
required to pay a 5% royalty to Cytogen on future net sales of products that
include PSMA and agreed to make minimum annual payments of $10,000 to Cytogen
until the commencement of a Phase III clinical trial of a product candidate
involving PSMA.
PREFERRED STOCK FINANCINGS
From July 1998 through September 2001, we issued the following securities
to various investors in private placement transactions:
- 550,700 shares of series A convertible preferred stock at a purchase
price of $5.45 per share in 1998;
- 897,489 shares of series B convertible preferred stock at a purchase
price of $2.33 per share in 1998;
- 3,350,600 shares of series C convertible preferred stock at a purchase
price of $2.50 per share in 1999; and
- 4,135,823 shares of series D convertible preferred stock at a purchase
price of $5.00 per share in 2000 and 2001.
Each share of series C and D convertible preferred stock will convert
automatically into one share of common stock upon the closing of this offering.
Northwest Hospital has agreed to allow each of its shares of series A
convertible preferred stock to convert upon the closing of this offering into
one share of common stock. Each share of series B preferred stock will convert
into approximately 1.93785 shares of common stock upon the closing of this
offering. The purchasers of the above shares of preferred stock are entitled to
certain registration rights. See "Description Of Capital Stock -- Registration
Rights." Holders of shares purchased in these financings include the following
directors, executive officers and holders of more than 5% of our outstanding
stock and their affiliates:
<Table>
<Caption>
SERIES A SERIES B SERIES C SERIES D
CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE
PURCHASER PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
--------- --------------- --------------- --------------- ---------------
DIRECTORS AND EXECUTIVE OFFICERS
George P. Hutchinson.................. -- -- 50,000 9,909
Haakon Ragde.......................... -- 5,732 -- 1,137
PRINCIPAL STOCKHOLDERS
Northwest Hospital(1)................. 550,700 -- -- --
Robert Trimble(2)..................... -- -- 400,000 158,817
Medarex, Inc. ........................ -- -- -- 800,000
Progress Enterprises S.A. ............ -- 429,794 -- 85,224
</Table>
- ------------------------------
(1) C. William Schneider, a member of our board of directors, is President and
Chief Executive Officer of Northwest Hospital.
(2) All shares are held by the marital community of Robert and Kathleen Trimble.
We believe that we have executed all of the transactions set forth above on
terms no less favorable to us than terms we could have obtained from
unaffiliated third parties. It is our intention to ensure that all future
transactions, including loans, between us and our officers, directors and
principal stockholders and their affiliates, are approved by a majority of the
board of directors, including a majority of the independent and disinterested
members of the board of directors, and are on terms no less favorable to us than
those that we could obtain from unaffiliated third parties.
58
PRINCIPAL STOCKHOLDERS
The following table shows information known to us with respect to the
beneficial ownership of our common stock as of September 30, 2001, adjusted to
reflect the sale of the shares of common stock offered under this prospectus by:
- each of our directors;
- each named executive officer;
- each person or group of affiliated persons who is known by us to own
beneficially 5% or more of our common stock; and
- all of our directors and executive officers as a group.
Except as indicated in the footnotes to this table and subject to community
property laws where applicable, the persons named in the table have sole voting
and investment power with respect to all shares of our common stock shown as
beneficially owned by them. Beneficial ownership and percentage ownership are
determined in accordance with the rules of the SEC. The table below includes the
number of shares underlying options and warrants which are exercisable within 60
days from September 30, 2001 adjusted to reflect the conversion of all shares of
our preferred stock into an aggregate of 9,776,321 shares of our common stock
and exercise of 1,134,402 preferred and common stock warrants into an equivalent
number of common shares upon completion of this offering. It is therefore based
on 12,848,305 shares of our common stock outstanding on a pro forma basis prior
to this offering and 16,848,305 shares outstanding immediately after this
offering. The address for those individuals for which an address is not
otherwise indicated is: c/o Northwest Biotherapeutics, Inc., 21720 - 23rd Drive
S.E., Suite 100, Bothell, Washington 98021.
<Table>
<Caption>
NUMBER OF SHARES PERCENT OWNED PERCENT OWNED
NUMBER OF UNDERLYING OPTIONS BEFORE THIS AFTER THIS
BENEFICIAL OWNER SHARES OWNED(1) OR WARRANTS OFFERING OFFERING
---------------- --------------- ------------------ ------------- -------------
Directors and named executive
officers
Daniel O. Wilds.................... -- 355,601 2.7% 2.1%
Alton L. Boynton................... 385,490 96,542 3.7 2.8
C. William Schneider............... -- -- --* --*
George P. Hutchinson............... 59,909 9,909 --* --*
Randall L-W. Caudill(2)............ -- 186,247 1.4 1.1
Haakon Ragde....................... 12,245 8,238 --* --*
Eric Holmes........................ 82,605 9,451 --* --*
Michael Salgaller.................. -- 12,420 --* --*
Patricia A. Lodge.................. -- 8,935 --* --*
All executive officers and
directors as a group (9
persons)........................ 540,249 687,343 9.1 7.0
Five percent stockholders
Northwest Hospital(3)(4)........... 1,101,400 1,101,402 15.8% 12.3%
Robert Trimble(5)(6)............... 558,817 158,817 5.5 4.2
Medarex, Inc.(7)................... 800,000 -- 6.2 4.7
Progress Enterprises S.A.(8)....... 918,100 85,224 7.8 5.9
</Table>
- ------------------------------
* Represents beneficial ownership of less than 1%.
(1) Shares of preferred stock are shown on an as-converted basis.
(2) Dunsford Hill Capital Partners, controlled by Dr. Caudill, owns warrants to
purchase 171,247 shares of our series C and series D convertible preferred
stock. The remaining 15,000 warrants are held by Dr. Caudill as co-trustee
of the JPS Irrevocable Trust, under Agreement dated April 1, 1998.
(3) 1550 North 115th Street, Seattle, WA 98133.
59
(4) C. William Schneider, a member of our board of directors, is President and
Chief Executive Officer for Northwest Hospital and, in such capacity, has
voting and investment power of our securities held by Northwest Hospital.
(5) 4640 95th Avenue N.E., Bellevue, WA 98004.
(6) All holdings are held as part of the marital community of Robert and Kathy
Trimble.
(7) 707 State Road, Suite 206, Princeton, NJ 08540. We have been advised that
Medarex's chief executive officer and chief financial officer, who are
currently Donald L. Drakeman and Christian S. Schade, have voting and
investment power over our securities held by Medarex.
(8) P.O. Box 626, National Westminster House, Le Truchot St. Peter, Port
Guernsey, GY1 4PW, Channel Islands. We have been advised that the executive
officers of Progress Enterprises S.A. have voting and investment power over
our securities held by that entity. Currently, these individuals are David
C. Jeffreys, Neil J. Crocker and Wayne Tallowin.
60
DESCRIPTION OF CAPITAL STOCK
The following describes our common stock and preferred stock, as well as
options to purchase our common stock, and provisions of our certificate of
incorporation and our bylaws, all as will be in effect upon the completion of
this offering. This description is only a summary. You should also refer to our
certificate of incorporation and bylaws, which have been filed with the
Securities and Exchange Commission as exhibits to our registration statement, of
which this prospectus forms a part. The descriptions of the common stock and
preferred stock, as well as options to purchase our common stock, reflect
changes to our capital structure that will occur upon the completion of this
offering in accordance with the terms of the certificate of incorporation.
Our authorized capital stock consists of 30,000,000 shares of common stock,
$0.001 par value per share, and 12,500,000 shares of preferred stock, $0.001 par
value per share.
COMMON STOCK
We are authorized to issue 30,000,000 shares of common stock, par value
$0.001 per share. Options to purchase an aggregate of 1,176,617 shares of our
common stock, and warrants to purchase 2,808,742 shares of our common stock and
convertible preferred stock were outstanding as of September 30, 2001. There
will be 16,848,305 shares of our common stock outstanding after giving effect to
the shares offered in this offering.
Voting rights. The holders of our common stock are entitled to one vote for
each share held of record.
Dividends. Holders of record of shares of our common stock are entitled to
receive dividends when, if and as may be declared by the board of directors out
of funds legally available for such purposes, subject to the rights of preferred
stockholders. We presently intend to retain future earnings, if any, for use in
the operation and expansion of our business and do not anticipate paying cash
dividends in the foreseeable future.
Liquidation rights. Upon our liquidation, dissolution or winding-up, the
holders of our common stock are entitled to share ratably in all assets
available for distributions after payment in full to creditors and holders of
preferred stock.
Other provisions. The holders of our common stock are not entitled to
cumulative voting, preemptive rights, subscription rights or the right to
convert their common stock into any other securities. There are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
are, and the shares of our common stock sold in the offering will be validly
issued, fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of our series C
convertible preferred stock and series D convertible preferred stock will be
automatically converted on a 1:1 basis into shares of common stock. Each
outstanding share of our series B convertible preferred stock will convert on an
approximately 1:1.93785 basis. Northwest Hospital has agreed to allow all
outstanding shares of series A convertible preferred stock to convert on a 1:1
basis as provided in the original agreement. Thereafter, our board of directors
has the authority, without action by our stockholders, to issue up to 3,565,388
shares of preferred stock in one or more series and to designate the rights,
preferences and privileges of each series, any or all of which may be greater
than the rights of common stock. The effect of the issuance of any shares of
preferred stock upon the rights of holders of common stock may include diluting
the voting power of the common stock, impairing the liquidation rights of the
common stock and delaying or preventing a change in control of our company
without further action by the stockholders. We have no plans to issue any shares
of preferred stock upon completion of this offering.
OPTIONS
As of September 30, 2001, options to purchase a total of 1,176,617 shares
of common stock were outstanding. Additional options to purchase a total of
1,976,042 shares of common stock may be granted under the 2001 Stock Option Plan
and 2001 Nonemployee Director Stock Incentive Plan.
61
WARRANTS
As of September 30, 2001, warrants to purchase a total of 2,808,742 shares
of common stock and convertible preferred stock were outstanding at exercise
prices ranging from $0.18 to $5.50, of which holders of 1,134,402 warrants have
agreed to exercise their warrants upon completion of the offering and an
additional 1,105,815 warrants must either be exercised or expire upon completion
of the offering.
AUTHORIZED BUT UNISSUED CAPITAL STOCK
Following the completion of this offering, there will be 13,151,695 shares
of authorized but unissued common stock, or 12,551,695 shares if the
underwriters' over-allotment option is exercised in full. Of this amount at
September 30, 2001, 1,176,617 shares of common stock are reserved for issuance
upon exercise of options outstanding and 1,976,042 shares are available for
future grant under our 2001 Stock Option Plan and 2001 Nonemployee Director
Stock Incentive Plan and 500,000 shares of common stock are available for
purchase under our Employee Stock Purchase Plan. A total of 2,808,742 shares of
common stock are also issuable upon the exercise of warrants that were
outstanding as of September 30, 2001. In addition, following the completion of
this offering, there will be 3,565,388 shares of authorized preferred stock.
Delaware law does not require stockholder approval for the issuance of
authorized shares. However, the listing requirements of The Nasdaq Stock Market,
Inc., which apply so long as the common stock remains included in that inter-
dealer quotation system, require prior stockholder approval of specified
issuances, including issuances of shares bearing voting power equal to or
exceeding 20% of the pre-issuance outstanding voting power or pre-issuance
outstanding number of shares of common stock. These additional shares could be
used for a variety of corporate purposes, including, but not limited to,
facilitating corporate acquisitions. One of the effects of the unissued and
unreserved common stock and preferred stock may be to enable our board of
directors to issue shares to persons who may agree or be inclined to vote in
concert with current management on issues put to consideration of stockholders,
which issuance could render more difficult or discourage an attempt to obtain
control of us by means of a merger, tender offer, proxy contest or otherwise,
and protect the continuity of our management and possibly deprive our
stockholders of the opportunity to sell their shares of our common stock at
prices higher than prevailing market prices.
DELAWARE AND WASHINGTON ANTI-TAKEOVER LAW AND CHARTER AND BYLAW PROVISIONS
Provisions of the Delaware General Corporation Law and our charter
documents could make our acquisition and the removal of incumbent officers and
directors more difficult. These provisions are expected to discourage certain
types of coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control to negotiate with us first. We
believe that the benefits of increased protection of our potential ability to
negotiate with the proponent of an unfriendly or unsolicited proposal to acquire
or restructure us outweigh the disadvantages of discouraging such proposals
because, among other things, negotiation of such proposals could result in an
improvement of their terms.
We are subject to the provisions of Section 203 of Delaware General
Corporation Law. In general, the statute prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the time that the person became
an interested stockholder unless, subject to exceptions, the business
combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" incudes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the stockholder. Generally, an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within three years prior, did own, 15% or more of the corporation's voting
stock. These provisions may have the effect of delaying, deferring or preventing
a change in control without further action by our stockholders.
Furthermore, the laws of the State of Washington, where our principal
executive offices are located, impose restrictions on certain transactions
between certain foreign corporations and significant stockholders. Chapter
23B.19 of the Washington Business Corporation Act prohibits a "target
corporation," with certain exceptions, from engaging in certain "significant
business transactions" with a person or group of persons who beneficially own
10% or more of the voting securities of the target corporation, or an "acquiring
62
person," for a period of five years after such acquisition, unless the
transaction or acquisition of such shares is approved by a majority of the
members of the target corporation's board of directors prior to the time of
acquisition. Such prohibited transactions include, among other things, a merger
or consolidation with, disposition of assets to, or issuance or redemption of
stock to or from, the acquiring person, termination of 5% or more of the
employees of the target corporation as a result of the acquiring person's
acquisition of 10% or more of the shares or allowing the acquiring person to
receive disproportionate benefit as a stockholder. After the five-year period, a
significant business transaction may take place as long as it complies with
certain fair price provisions of the statute. A target corporation includes a
foreign corporation if:
- the corporation has a class of voting stock registered pursuant to
Section 12 or 15 of the Exchange Act,
- the corporation's principal executive office is located in Washington,
and
- any of (a) more than 10% of the corporation's stockholders of record are
Washington residents, (b) more than 10% of its shares are owned of record
by Washington residents, (c) 1,000 or more of its stockholders of record
are Washington residents, (d) a majority of the corporation's employees
are Washington residents or more than 1,000 Washington residents are
employees of the corporation or (e) a majority of the corporation's
tangible assets are located in Washington or the corporation has more
than $50.0 million of tangible assets located in Washington.
A corporation may not opt out of this statute and, therefore, we anticipate
this statute will apply to us. Depending upon whether we meet the definition of
a target corporation, Chapter 23B.19 of the Washington Business Corporation Act
may have the effect of delaying, deferring or preventing a change in control of
us.
Our bylaws provide that stockholder action can be taken only at an annual
or special meeting of stockholders and may not be taken by written consent and
further provide that special meetings of stockholders can be called only by the
board of directors, the chairman of the board, if any, and the Chief Executive
Officer. Moreover, the business permitted to be conducted at any special meeting
of stockholders is limited to the purposes stated in the notice of the meeting.
Our bylaws set forth an advance notice procedure with regard to the nomination,
other than by or at the direction of the board of directors, of candidates for
election as directors and with regard to business to be brought before a meeting
of stockholders.
In addition, in July 2000, our board of directors formed an executive
committee, charged with the task of evaluating the merits of implementing a
stockholder rights plan, intended to deter coercive takeover practices. Such a
plan typically involves the award to each stockholder, as a dividend, of the
right to acquire a certain number of shares in the event of activity that may
indicate an impending takeover attempt. While such a plan is not currently in
place, our board of directors may adopt such a plan in the future. The adoption
of such a plan could discourage certain types of coercive takeover practices and
make it necessary for a potential acquiror to negotiate with our board.
REGISTRATION RIGHTS
The holders of 9,776,321 shares of common stock, assuming the conversion of
all outstanding preferred stock upon the closing of this offering, are entitled
to certain rights with respect to the registration of such shares under the
Securities Act. These rights are provided under the terms of agreements between
us and the holders of these securities. If we register any of our common stock
for our own account, the holders of these securities are entitled to include
their shares of common stock in that registration, subject to the ability of the
underwriters to limit the number of shares included in the offering. We will be
responsible for paying all registration expenses, and the holders selling their
shares will be responsible for paying all selling expenses.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Mellon Investor
Services LLC.
63
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 16,848,305 shares of common
stock outstanding based on shares outstanding as of September 30, 2001. Of these
shares, the 4,000,000 shares sold in this offering will be freely transferable
without restriction under the Securities Act, unless they are held by our
"affiliates" as that term is used under the Securities Act and the regulations
promulgated thereunder.
All of our shares outstanding as of September 30, 2001 were sold by us in
reliance on exemptions from the registration requirements of the Securities Act,
are restricted securities within the meaning of Rule 144 under the Securities
Act and become eligible for sale in the public market as follows:
- Approximately 5.5 million shares will be immediately eligible for sale in
the public market without restriction pursuant to Rule 144(k);
- Approximately 2.9 million additional shares will become eligible for sale
in the public market 90 days after this offering, subject to volume and
manner of sale restrictions, under Rule 144;
- Approximately 502,000 shares will be eligible for sale in the public
market without restriction 90 days after this offering under Rule 701;
and
- Remaining shares will become eligible for sale in the public market
pursuant to Rule 144 from time to time after completion of this offering.
The foregoing does not take into consideration the effect of the lock-up
agreements as described below. Our officers and directors and substantially all
of our stockholders have entered into lock-up agreements pursuant to which they
have agreed, subject to limited exceptions, not to offer or sell any shares of
common stock or securities convertible into or exchangeable or exercisable for
shares of common stock for a period of 180 days from the date of this prospectus
without the prior written consent of the underwriters. Any shares subject to
lock-up agreements may be released at any time without notice by the
underwriters.
In general, under Rule 144 as currently in effect, a person, or persons
whose shares are aggregated, including an affiliate, who has beneficially owned
restricted shares for at least one year is entitled to sell, within any
three-month period commencing 90 days after the date of completion of this
offering, a number of shares that does not exceed the greater of 1% of the then
outstanding shares of common stock, approximately 164,984 shares immediately
after this offering, or the average weekly trading volume in the common stock
during the four calendar weeks preceding such sale, subject to the filing of a
Form 144 with respect to such sale and certain other limitations and
restrictions. In addition, a person who is not deemed to have been an affiliate
of our company at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least two years, would
be entitled to sell such shares under Rule 144(k) without regard to the
requirements described above.
Any of our employees, officers, directors or consultants who purchased his
or her shares before the date of completion of this offering or who holds
options as of that date pursuant to a written compensatory plan or contract is
entitled to rely on the resale provisions of Rule 701, which permits
non-affiliates to sell their Rule 701 shares without having to comply with the
public-information, holding-period, volume-limitation or notice provisions of
Rule 144 and permits affiliates to sell their Rule 701 shares without having to
comply with Rule 144's holding-period restrictions, in each case commencing 90
days after the date of completion of this offering. However, as described above,
we and our officers, directors and substantially all of our stockholders have
agreed not to sell or otherwise dispose of any shares of our common stock for
the 180-day period after the date of this prospectus without the prior written
consent of the underwriters. Any shares subject to lock-up agreements may be
released at any time without notice by the underwriters.
We intend to file a registration statement on Form S-8 under the Securities
Act of 1933 to register shares of common stock reserved for issuance under our
employee benefit plans, thus permitting the resale of such shares by
non-affiliates in the public market without restriction under the Securities
Act. Such registration statements will become effective immediately upon filing.
64
Before this offering, there has been no public market for our common stock,
and any sale of substantial amounts in the open market may adversely affect the
market price of our common stock offered hereby.
In addition, after this offering, the holders of common stock and warrants
convertible into common stock totaling approximately 11.5 million shares will be
entitled to certain rights to cause us to register the sale of such shares under
the Securities Act. Registration of these shares under the Securities Act would
result in these shares, other than shares purchased by our affiliates, becoming
freely tradable without restriction under the Securities Act. See "Description
Of Capital Stock -- Registration Rights."
65
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in an underwriting agreement
among us and the underwriters, who are represented by C.E. Unterberg, Towbin,
each of the underwriters named below has severally agreed to purchase from us
and the selling stockholders the following respective number of shares of common
stock, less the underwriting discounts and commissions set forth on the cover
page of this prospectus, set forth below:
<Table>
<Caption>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
C.E. Unterberg, Towbin......................................
Fahnestock & Co. Inc........................................
Roth Capital Partners, LLC..................................
---------
Total............................................. 4,000,000
=========
</Table>
The underwriting agreement provides that the obligations of the
underwriters are subject to certain conditions, including the approval of legal
matters by their counsel. The nature of the underwriters' obligations is that
they are committed to purchase and pay for all of the above shares of common
stock, other than shares of our common stock covered by the over-allotment
option described below, if any are purchased.
PUBLIC OFFERING PRICE AND DEALERS CONCESSION
The underwriters propose initially to offer the shares of common stock
offered by this prospectus directly to the public at the initial public offering
price per share set forth on the cover page of this prospectus, and to certain
dealers at that price less a concession not in excess of $ per share. The
underwriters may allow, and these dealers may re-allow, a discount not in excess
of $ per share on sales to certain other dealers. After commencement of this
offering, the offering price, discount price and re-allowance may be changed by
the underwriters. No such change will alter the amount of proceeds to be
received by us.
OVER-ALLOTMENT OPTION
We have granted to the underwriters an option, which may be exercised
within 30 days after the date of this prospectus, to purchase in the aggregate
up to 600,000 additional shares of common stock to cover over-allotments, if
any, at the initial public offering price, less the underwriting discount and
commissions set forth on the cover page of this prospectus. If the underwriters
exercise their over-allotment option to purchase any of these 600,000 additional
shares of our common stock, these additional shares will be sold by the
underwriters on the same terms as those on which the shares offered by this
prospectus are being sold. We will be obligated, pursuant to the over-allotment
option, to sell shares to the underwriters if the underwriters exercise their
over-allotment option. The underwriters may exercise their over-allotment option
only to cover over-allotments made in connection with the sale of the shares of
common stock offered by this prospectus. To the extent the option is exercised,
the underwriters will be severally committed, subject to several conditions,
including the approval of legal matters by their counsel, to purchase the
additional shares of common stock in proportion to their respective purchase
commitments as indicated in the preceding table.
UNDERWRITING COMPENSATION
The underwriting fee is equal to the public offering price per share of
common stock less the amount paid by the underwriters to us per share of common
stock. The following table summarizes the compensation
66
to be paid to the underwriters by us in connection with this offering. The
following amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional shares.
<Table>
<Caption>
NO EXERCISE FULL EXERCISE
----------- -------------
Per share................................................... $ $
Total....................................................... $ $
</Table>
C.E. Unterberg, Towbin provided us with financial advisory and investment
banking services in connection with our series D convertible preferred stock
financing. In return for these services, C.E. Unterberg, Towbin received a fee
of approximately $240,000 and warrants to acquire 76,800 shares of series D
convertible preferred stock at an exercise price of $5.00 per share. In
connection with our series D convertible preferred stock financing, C.E.
Unterberg, Towbin and certain of its affiliates purchased approximately 386,000
shares of our series D convertible preferred stock at a purchase price of $5.00
per share. The underwriters and their affiliates beneficially own an aggregate
of 688,745 shares of our series D preferred stock. The National Association of
Securities Dealers, Inc., or the NASD, may deem a portion of the value of such
shares to represent "underwriting compensation" for purposes of the rules of the
NASD.
OTHER OFFERING EXPENSES; ACCEPTANCE AND DELIVERY
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $1,300,000. The offering of the
shares is made for delivery, when, as and if accepted by the underwriters and
subject to prior sale and to withdrawal, cancellation or modification of the
offering without notice. The underwriters reserve the right to reject an order
for the purchase of our shares in whole or in part.
INDEMNIFICATION OF UNDERWRITERS
We have agreed to indemnify the underwriters against certain civil
liabilities, including liabilities under the Securities Act, and, where such
indemnification is unavailable, contribute to payments the underwriters may be
required to make in connection with these liabilities.
LOCK-UP ARRANGEMENTS
We and all of our directors and officers and holders holding an aggregate
of approximately 10.5 million shares of our common stock and the holders of
options and warrants to purchase approximately 3.7 million shares of our common
stock have entered into lock-up agreements pursuant to which they have agreed
not to, directly or indirectly, issue, sell, agree to sell, grant any option or
contract for the sale of, pledge or otherwise dispose of, or, in any manner,
transfer all or a portion of any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock or any interest
therein owned as of the date hereof or hereafter acquired for a period of 180
days after the date of this prospectus without the prior written consent of the
underwriters. C.E. Unterberg, Towbin has advised us that it has no present
intention to release any of the shares subject to the lock-up agreements prior
to the expiration of the lock-up period.
SALES TO DISCRETIONARY ACCOUNTS
C.E. Unterberg, Towbin may sell shares of our common stock to accounts over
which it exercises discretionary authority after obtaining prior consent from
the account with respect to any sales to such accounts.
STABILIZATION AND OTHER TRANSACTIONS
In connection with this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the market price of
our common stock. These transactions may include stabilization transactions
effected in accordance with Rule 104 of Regulation M under the Securities
Exchange Act, pursuant to which the underwriters may bid for, or purchase,
common stock for the purpose of stabilizing the market price. The underwriters
also may create a short position by selling more common stock in connection
67
with this offering than they are committed to purchase from us, and in such case
may purchase common stock in the open market following completion of this
offering to cover all or a portion of such short position. In addition, the
underwriters may impose "penalty bids" whereby they may reclaim from a dealer
participating in this offering, the selling concession with respect to the
common stock that it distributed in this offering, but which was subsequently
purchased for the accounts of the underwriters in the open market. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the common stock at a level above that which might otherwise prevail in
the open market. None of the transactions described in this paragraph is
required and, if they are taken, they may be discontinued at any time.
DETERMINATION OF OFFERING PRICE
Prior to this offering, there has been no market for our common stock.
Accordingly, the initial public offering price for the common stock was
determined by negotiation between us and the underwriters.
The primary factors considered in determining the public offering price
were:
- our financial and operating history and condition;
- market valuations of other companies engaged in activities similar to
ours;
- our prospects and prospects for the industry in which we do business in
general;
- our management;
- prevailing equity market conditions; and
- the demand for securities considered comparable to ours.
68
LEGAL MATTERS
Lane Powell Spears Lubersky LLP, Seattle, Washington will pass for us on
the validity of the common stock offered hereby. Jim D. Johnston, a partner of
Lane Powell Spears Lubersky LLP, is the Assistant Secretary of Northwest
Biotherapeutics. Principals of Lane Powell Spears Lubersky LLP beneficially own
an aggregate of 16,626 shares of our common stock and warrants to purchase 5,126
shares of our common stock. Dewey Ballantine LLP, Menlo Park, California, is
acting as counsel for the underwriters in connection with selected legal
matters.
EXPERTS
Our consolidated financial statements as of December 31, 1999 and 2000 and
for each of the years in the three-year period ended December 31, 2000 and the
period from March 18, 1996 (inception) through December 31, 2000 have been
included in this prospectus and registration statement in reliance upon the
report of KPMG LLP, independent auditors, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
The report of KPMG LLP covering our December 31, 2000 consolidated
financial statements contains an explanatory paragraph that states that we have
incurred losses from operations, have a net capital deficiency and, at December
31, 2000, a net working capital deficit that raise substantial doubt about our
ability to continue as a going concern. Our consolidated financial statements do
not include any adjustments that might result from the outcome of that
uncertainty.
CHANGE IN INDEPENDENT AUDITORS
In November 2000, we dismissed Arthur Andersen LLP as our independent
auditors. This dismissal was approved by our board of directors. The report of
Arthur Andersen LLP covering our December 31, 1999 financial statements
contained an explanatory paragraph stating that we incurred losses from
operations and had a net capital deficiency that raised substantial doubt about
our ability to continue as a going concern. We had no disagreements with Arthur
Andersen LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures during our two most recent
fiscal years and interim period prior to our change in independent auditors
which, if not resolved to the satisfaction of Arthur Andersen LLP, would have
caused them to make reference to the matter in their report. Arthur Andersen LLP
has no association with the financial statements presented in this registration
statement nor has it read the registration statement.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission under the Securities Act with respect to the shares of
common stock offered in this offering. This prospectus, which is a part of the
registration statement, does not contain all of the information set forth in the
registration statement, or the exhibits, which are part of the registration
statement, parts of which are omitted as permitted by the rules and regulations
of the Securities and Exchange Commission. For further information about us and
the shares of our common stock to be sold in this offering, please refer to the
registration statement and the exhibits, which are part of the registration
statement. Statements contained in this prospectus as to the contents of any
contract or any other document are not necessarily complete. Each statement in
this prospectus regarding the contents of the referenced contract or other
document is qualified in all respects by our reference to the copy filed with
the registration statement.
For further information about us and our common stock, we refer you to our
registration statement and its attached exhibits, copies of which may be
inspected without charge at the Securities and Exchange Commission's public
reference room at 450 Fifth Street, N. W., Washington, D.C. 20549 and at the
regional offices of the Commission located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. You can request copies of these
documents by writing to the Securities and Exchange Commission
69
and paying a duplicating fee. Please call the Securities and Exchange Commission
at 1-800-SEC-0330 for further information about the public reference rooms. The
Commission maintains a World Wide Web site on the Internet at http://www.sec.gov
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Exchange Act and, in accordance
therewith, will file periodic reports, proxy and information statements and
other information with the Commission. Our periodic reports, proxy and
information statements and other information will be available for inspection
and copying at the regional offices, public references facilities and web site
of the Commission referred to above.
We intend to furnish our stockholders with annual reports containing
audited financial statements and an opinion thereon expressed by independent
certified public accountants. We also intend to furnish other reports as we may
determine or as required by law.
This prospectus includes statistical data that were obtained from industry
publications. These industry publications generally indicate that the authors of
these publications have obtained information from sources believed to be
reliable, but do not guarantee the accuracy and completeness of their
information. While we believe these industry publications to be reliable, we
have not independently verified their data.
70
NORTHWEST BIOTHERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
----
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Deficit and
Comprehensive Loss........................................ F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</Table>
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Northwest Biotherapeutics, Inc.:
We have audited the accompanying consolidated balance sheets of Northwest
Biotherapeutics, Inc. (a development stage company) and subsidiary (Company) as
of December 31, 1999 and 2000 and the related consolidated statements of
operations, stockholders' deficit and comprehensive loss, and cash flows for
each of the years in the three-year period ended December 31, 2000 and the
period from March 18, 1996 (inception) through December 31, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Northwest
Biotherapeutics, Inc. (a development stage company) and subsidiary as of
December 31, 1999 and 2000, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 2000 and
the period from March 18, 1996 (inception) through December 31, 2000 in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in note
3 to consolidated financial statements, the Company has incurred losses from
operations, has a net capital deficiency and, at December 31, 2000, a net
working capital deficit that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
described in note 3. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ KPMG LLP
Seattle, Washington
April 17, 2001, except as to notes 4(b) and
5(d),which are as of May 15, 2001
F-2
NORTHWEST BIOTHERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31,
----------------------------
1999 2000 SEPTEMBER 30, 2001
------------ ------------ ------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 648,847 $ 410,756 $ 4,974,038
Accounts receivable....................................... 29,602 18,933 31,412
Accounts receivable from affiliates....................... 77,300 56,692 3,693
Preferred stock subscription receivable................... -- 273,000 --
Prepaid expenses and other current assets................. 58,275 98,032 130,163
------------ ------------ ------------
Total current assets.................................... 814,024 857,413 5,139,306
------------ ------------ ------------
Property and equipment:
Leasehold improvements.................................... 61,181 1,693,660 1,710,121
Laboratory equipment...................................... 962,712 1,162,222 1,311,524
Office furniture and other equipment...................... 80,745 325,316 405,792
------------ ------------ ------------
1,104,638 3,181,198 3,427,437
Less accumulated depreciation and amortization............ 403,877 413,135 750,265
------------ ------------ ------------
Property and equipment, net............................. 700,761 2,768,063 2,677,172
------------ ------------ ------------
Restricted cash............................................. 1,003,968 1,003,968 1,003,968
Deferred stock offering costs............................... -- -- 500,936
------------ ------------ ------------
$ 2,518,753 4,629,444 9,321,382
============ ============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of note payable to stockholder............ $ -- $ 996,675 $ 111,267
Current portion of line of credit with Northwest
Hospital................................................ -- 2,834,262 2,834,262
Current portion of capital lease obligations.............. 29,240 50,176 61,236
Accounts payable.......................................... 410,340 604,617 579,676
Accounts payable to Northwest Hospital.................... 212,276 281,661 --
Accrued expenses.......................................... 371,622 577,836 834,759
------------ ------------ ------------
Total current liabilities............................... 1,023,478 5,345,227 4,421,200
Long-term liabilities:
Note payable to stockholder, less current portion......... -- 653,325 93,308
Line of credit with Northwest Hospital, less current
portion................................................. 2,834,262 -- --
Capital lease obligations, less current portion........... 46,717 148,024 181,755
Deferred rent............................................. -- 61,296 196,113
------------ ------------ ------------
Total liabilities....................................... 3,904,457 6,207,872 4,892,376
------------ ------------ ------------
Preferred stock, 12,500,000 shares authorized:
Mandatorily redeemable convertible preferred stock, $0.001
par value:
Series A, 550,700 shares authorized; 550,700 shares
issued and outstanding at December 31, 1999 and 2000
and September 30, 2001. Liquidation preference of
$3,000,000 at September 30, 2001...................... 4,062,635 4,492,999 4,805,341
Convertible preferred stock, $0.001 par value:
Series B, 897,513 shares authorized; 897,489 shares
issued and outstanding at December 31, 1999 and 2000
and September 30, 2001. Liquidation preference and
redemption value of $2,088,330 at September 30,
2001.................................................. 2,088,330 2,088,330 2,088,330
Series C, 3,609,062 shares authorized; 3,350,600 shares
issued and outstanding at December 31, 1999 and 2000
and September 30, 2001. Liquidation preference and
redemption value of $8,376,500 at September 30,
2001.................................................. 7,253,091 7,253,091 7,253,091
Series D, 6,500,000 shares authorized; 0, 1,532,355 and
4,135,823 shares issued and outstanding at December
31, 1999 and 2000 and September 30, 2001. Liquidation
preference and redemption value of $20,679,115 at
September 30, 2001.................................... -- 7,102,597 17,365,335
Stockholders' deficit:
Common stock, $0.001 par value; 30,000,000 shares
authorized, 2,202,800, 1,934,450 and 1,937,582 shares
issued and outstanding at December 31, 1999 and 2000 and
September 30, 2001...................................... 2,203 1,934 1,937
Additional paid-in capital................................ 394,031 5,878,200 14,506,268
Deferred compensation..................................... -- -- (1,116,631)
Deficit accumulated during the development stage.......... (15,185,994) (28,395,579) (40,474,665)
------------ ------------ ------------
Total stockholders' deficit............................. (14,789,760) (22,515,445) (27,083,091)
Commitments, contingencies and subsequent events............
------------ ------------ ------------
$ 2,518,753 $ 4,629,444 $ 9,321,382
============ ============ ============
</Table>
See accompanying notes to consolidated financial statements.
F-3
NORTHWEST BIOTHERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
PERIOD FROM
MARCH 18, 1996 NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, (INCEPTION) TO SEPTEMBER 30,
---------------------------------------- DECEMBER 31, --------------------------
1998 1999 2000 2000 2000 2001
----------- ----------- ------------ -------------- ----------- ------------
(UNAUDITED) (UNAUDITED)
Revenues:
Research material sales........ $ 47,507 $ 39,260 $ 110,757 $ 197,524 $ 101,507 $ 74,013
Contract research and
development from related
parties...................... 337,500 84,375 -- 1,127,638 -- --
Research grants and other...... -- 86,885 45,205 132,090 40,225 --
----------- ----------- ------------ ------------ ----------- ------------
Total revenues............... 385,007 210,520 155,962 1,457,252 141,732 74,013
----------- ----------- ------------ ------------ ----------- ------------
Operating costs and expenses:
Cost of research material
sales........................ 81,043 45,565 50,849 177,457 53,362 49,298
Research and development....... 2,860,323 2,885,332 3,114,160 11,486,478 2,210,475 3,469,985
General and administrative..... 1,765,360 2,535,200 3,682,015 9,563,110 2,313,427 3,395,561
Depreciation and
amortization................. 163,529 196,012 198,532 803,575 145,619 337,130
----------- ----------- ------------ ------------ ----------- ------------
Total operating costs and
expenses................... 4,870,255 5,662,109 7,045,556 22,030,620 4,722,883 7,251,974
----------- ----------- ------------ ------------ ----------- ------------
Loss from operations......... (4,485,248) (5,451,589) (6,889,594) (20,573,368) (4,581,151) (7,177,961)
Other income (expense):
Interest expense............... (261,791) (318,353) (6,055,806) (6,682,159) (3,847,499) (464,456)
Interest income................ 27,601 160,563 166,179 355,150 144,837 149,239
----------- ----------- ------------ ------------ ----------- ------------
Net loss................... (4,719,438) (5,609,379) (12,779,221) (26,900,377) (8,283,813) (7,493,178)
Accretion of Series A preferred
stock mandatory redemption
obligation..................... (328,560) (353,962) (430,364) (1,492,999) (314,327) (312,342)
Beneficial conversion feature of
Series D preferred stock....... -- -- -- -- -- (4,273,566)
----------- ----------- ------------ ------------ ----------- ------------
Net loss applicable to common
stockholders............... $(5,047,998) $(5,963,341) $(13,209,585) $(28,393,376) $(8,598,140) $(12,079,086)
=========== =========== ============ ============ =========== ============
Net loss per share -- basic and
diluted........................ $ (2.29) $ (2.71) $ (6.35) $ (4.04) $ (6.24)
=========== =========== ============ =========== ============
Weighted average shares used in
computing basic and diluted net
loss per share................. 2,202,800 2,202,800 2,080,405 2,130,582 1,935,395
=========== =========== ============ =========== ============
Pro forma net loss per
share -- basic and diluted..... $ (1.82) $ (1.19)
============ ============
Weighted average shares used in
computing basic and diluted pro
forma net loss per share....... 7,244,366 10,108,504
============ ============
<Caption>
PERIOD FROM
MARCH 18, 1996
(INCEPTION) TO
SEPTEMBER 30,
2001
--------------
(UNAUDITED)
Revenues:
Research material sales........ $ 271,537
Contract research and
development from related
parties...................... 1,127,638
Research grants and other...... 132,090
------------
Total revenues............... 1,531,265
------------
Operating costs and expenses:
Cost of research material
sales........................ 226,755
Research and development....... 14,956,463
General and administrative..... 12,958,671
Depreciation and
amortization................. 1,140,705
------------
Total operating costs and
expenses................... 29,282,594
------------
Loss from operations......... (27,751,329)
Other income (expense):
Interest expense............... (7,146,615)
Interest income................ 504,389
------------
Net loss................... (34,393,555)
Accretion of Series A preferred
stock mandatory redemption
obligation..................... (1,805,341)
Beneficial conversion feature of
Series D preferred stock....... (4,273,566)
------------
Net loss applicable to common
stockholders............... $(40,472,462)
============
Net loss per share -- basic and
diluted........................
Weighted average shares used in
computing basic and diluted net
loss per share.................
Pro forma net loss per
share -- basic and diluted.....
Weighted average shares used in
computing basic and diluted pro
forma net loss per share.......
</Table>
See accompanying notes to consolidated financial statements.
F-4
NORTHWEST BIOTHERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT AND COMPREHENSIVE LOSS
<Table>
<Caption>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE TOTAL
------------------ PAID-IN DEFERRED DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION STAGE DEFICIT
--------- ------ ----------- ------------ ------------ -------------
Balance at March 18, 1996....................... -- $ -- $ -- $ -- $ -- $ --
Accretion of membership units mandatory
redemption obligation......................... -- -- -- -- (105,574) (105,574)
Comprehensive loss -- net loss.................. -- -- -- -- (1,232,589) (1,232,589)
--------- ------ ----------- ----------- ------------ ------------
Balance at December 31, 1996.................... -- -- -- -- (1,338,163) (1,338,163)
Accretion of membership units mandatory
redemption obligation......................... -- -- -- -- (274,539) (274,539)
Comprehensive loss -- net loss.................. -- -- -- -- (2,559,750) (2,559,750)
--------- ------ ----------- ----------- ------------ ------------
Balance at December 31, 1997.................... -- -- -- -- (4,172,452) (4,172,452)
Conversion of membership units to common
stock......................................... 2,202,800 2,203 -- -- (2,203) --
Accretion of Series A preferred stock mandatory
redemption obligation......................... -- -- -- -- (328,560) (328,560)
Comprehensive loss -- net loss.................. -- -- -- -- (4,719,438) (4,719,438)
--------- ------ ----------- ----------- ------------ ------------
Balances at December 31, 1998................... 2,202,800 2,203 -- -- (9,222,653) (9,220,450)
Issuance of Series C preferred stock warrants
for services related to sale of Series C
preferred shares.............................. -- -- 394,031 -- -- 394,031
Accretion of Series A preferred stock mandatory
redemption obligation......................... -- -- -- -- (353,962) (353,962)
Comprehensive loss -- net loss.................. -- -- -- -- (5,609,379) (5,609,379)
--------- ------ ----------- ----------- ------------ ------------
Balances at December 31, 1999................... 2,202,800 2,203 394,031 -- (15,185,994) (14,789,760)
Issuance of Series C preferred stock warrants in
connection with lease agreement............... -- -- 43,130 -- -- 43,130
Exercise of stock options for cash.............. 2,000 2 998 -- -- 1,000
Issuance of common stock at $0.85 per share for
license rights................................ 5,000 5 4,245 -- -- 4,250
Issuance of Series D preferred stock warrants in
convertible promissory note offering.......... -- -- 4,038,525 -- -- 4,038,525
Beneficial conversion feature of convertible
promissory notes.............................. -- -- 1,025,575 -- -- 1,025,575
Issuance of Series D preferred stock warrants
for services related to sale of Series D
preferred shares.............................. -- -- 368,182 -- -- 368,182
Issuance of common stock warrants in conjunction
with issuance of promissory note.............. -- -- 3,238 -- -- 3,238
Cancellation of common stock.................... (275,350) (276) 276 -- -- --
Accretion of Series A preferred stock mandatory
redemption obligation......................... -- -- -- -- (430,364) (430,364)
Comprehensive loss -- net loss.................. -- -- -- -- (12,779,221) (12,779,221)
--------- ------ ----------- ----------- ------------ ------------
Balances at December 31, 2000................... 1,934,450 1,934 5,878,200 -- (28,395,579) (22,515,445)
Issuance of Series D preferred stock warrants in
conjunction with refinancing of note payable
to stockholder (unaudited).................... -- -- 224,935 -- -- 224,935
Beneficial conversion feature of convertible
promissory note (unaudited)................... -- -- 455,935 -- -- 455,935
Beneficial conversion feature of Series D
preferred stock (unaudited)................... -- -- 4,273,566 -- (4,273,566) --
Issuance of Series D preferred stock warrants
for services related to the sale of Series D
preferred shares (unaudited).................. -- -- 2,287,112 -- -- 2,287,112
Exercise of stock options for cash
(unaudited)................................... 3,132 3 2,379 -- -- 2,382
Issuance of stock options to nonemployees for
services (unaudited).......................... -- -- 54,244 -- -- 54,244
Deferred compensation related to employee stock
options (unaudited)........................... -- -- 1,329,897 (1,329,897) -- --
Amortization of deferred compensation
(unaudited)................................... -- -- -- 213,266 -- 213,266
Accretion of Series A preferred stock mandatory
redemption obligation (unaudited)............. -- -- -- -- (312,342) (312,342)
Comprehensive loss -- net loss (unaudited)...... -- -- -- -- (7,493,178) (7,493,178)
--------- ------ ----------- ----------- ------------ ------------
Balances at September 30, 2001 (unaudited)...... 1,937,582 $1,937 $14,506,268 $(1,116,631) $(40,474,665) $(27,083,091)
========= ====== =========== =========== ============ ============
</Table>
See accompanying notes to consolidated financial statements.
F-5
NORTHWEST BIOTHERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
PERIOD FROM
MARCH 18, 1996
YEARS ENDED DECEMBER 31, (INCEPTION) TO
---------------------------------------- DECEMBER 31,
1998 1999 2000 2000
----------- ----------- ------------ --------------
Cash flows from operating activities:
Net loss.................................. $(4,719,438) $(5,609,379) $(12,779,221) $(26,900,377)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization........... 163,529 196,012 198,532 803,575
Amortization of deferred financing
costs................................. -- -- 319,799 319,799
Amortization of debt discount........... -- -- 4,042,378 4,042,378
Amortization of beneficial conversion
feature of convertible promissory
notes................................. -- -- 1,025,575 1,025,575
Accrued interest converted to preferred
stock................................. -- -- 260,378 260,378
Stock-based compensation costs.......... -- -- -- --
Loss on retirement of equipment......... -- 82,553 -- 82,553
Changes in operating assets and
liabilities:
Accounts receivable................... (46,729) (117,171) 31,277 (75,625)
Prepaid expenses and other current
assets.............................. -- -- 7,008 (51,267)
Accounts payable and accrued
expenses............................ 395,784 239,104 400,491 1,182,453
Accounts payable to Northwest
Hospital............................ 1,352,038 (1,150,079) 69,385 281,661
Deferred revenue...................... 84,375 (84,375) -- --
Deferred rent......................... -- -- 61,296 61,296
----------- ----------- ------------ ------------
Net cash used in operating
activities........................ (2,770,441) (6,443,335) (6,363,102) (18,967,601)
----------- ----------- ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment,
net..................................... (187,134) (316,773) (2,105,608) (3,418,008)
Transfer of restricted cash............... -- (1,003,968) -- (1,003,968)
----------- ----------- ------------ ------------
Net cash used in investing
activities........................ (187,134) (1,320,741) (2,105,608) (4,421,976)
----------- ----------- ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of note payable to
stockholder............................. -- -- 1,650,000 1,650,000
Repayment of note payable to
stockholder............................. -- -- -- --
Proceeds from issuance of convertible
promissory notes and warrants, net of
issuance costs.......................... -- -- 5,064,100 5,064,100
Borrowings under line of credit with
Northwest Hospital...................... 1,371,471 -- -- 2,834,262
Payments on capital lease obligations..... -- -- (37,983) (37,983)
Proceeds from sales of preferred stock,
net of issuance costs................... 1,960,640 7,774,812 1,873,301 14,608,753
Proceeds from exercise of stock options... -- -- 1,000 1,000
Deferred stock offering costs............. -- -- -- --
Deferred financing costs.................. -- -- (319,799) (319,799)
----------- ----------- ------------ ------------
Net cash provided by financing
activities........................ 3,332,111 7,774,812 8,230,619 23,800,333
----------- ----------- ------------ ------------
Net increase (decrease) in cash and
cash equivalents.................. 374,536 10,736 (238,091) 410,756
Cash and cash equivalents at beginning of
period.................................... 263,575 638,111 648,847 --
----------- ----------- ------------ ------------
Cash and cash equivalents at end of
period.................................... $ 638,111 $ 648,847 $ 410,756 $ 410,756
=========== =========== ============ ============
Supplemental disclosure of cash flow
information -- cash paid during the period
for interest.............................. $ 154,872 $ 318,083 $ 412,567 $ 928,522
=========== =========== ============ ============
Supplemental schedule of noncash financing
activities:
Equipment acquired through capital
leases.................................. $ -- $ 75,957 $ 160,226 236,183
Accretion of Series A preferred stock
mandatory redemption obligation......... 328,560 353,962 430,364 1,492,999
Issuance of warrants attached to
convertible promissory note............. -- -- -- --
Conversion of convertible promissory notes
and accrued interest to Series D
preferred stock......................... -- -- 5,324,478 5,324,478
Issuance of Series C preferred stock
warrants in connection with lease
agreement............................... -- -- 43,130 43,130
Issuance of common stock for license
rights.................................. -- -- 4,250 4,250
Preferred stock subscription receivable... $ -- $ -- $ 273,000 $ 273,000
=========== =========== ============ ============
<Caption>
PERIOD FROM
NINE MONTHS ENDED MARCH 18, 1996
SEPTEMBER 30, (INCEPTION) TO
-------------------------- SEPTEMBER 30,
2000 2001 2001
----------- ------------ --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net loss.................................. $(8,283,813) $ (7,493,178) $(34,393,555)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization........... 145,619 337,130 1,140,705
Amortization of deferred financing
costs................................. 205,762 -- 319,799
Amortization of debt discount........... 2,617,322 45,100 4,087,478
Amortization of beneficial conversion
feature of convertible promissory
notes................................. 663,841 90,020 1,115,595
Accrued interest converted to preferred
stock................................. -- -- 260,378
Stock-based compensation costs.......... -- 267,510 267,510
Loss on retirement of equipment......... -- -- 82,553
Changes in operating assets and
liabilities:
Accounts receivable................... 1,224 40,520 (35,105)
Prepaid expenses and other current
assets.............................. (111,073) (32,131) (83,398)
Accounts payable and accrued
expenses............................ 517,271 231,982 1,414,435
Accounts payable to Northwest
Hospital............................ (212,276) (281,661) --
Deferred revenue...................... -- -- --
Deferred rent......................... -- 134,817 196,113
----------- ------------ ------------
Net cash used in operating
activities........................ (4,456,123) (6,659,891) (25,627,492)
----------- ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment,
net..................................... (1,847,832) (157,085) (3,575,093)
Transfer of restricted cash............... -- -- (1,003,968)
----------- ------------ ------------
Net cash used in investing
activities........................ (1,847,832) (157,085) (4,579,061)
----------- ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of note payable to
stockholder............................. 1,650,000 -- 1,650,000
Repayment of note payable to
stockholder............................. -- (899,675) (899,675)
Proceeds from issuance of convertible
promissory notes and warrants, net of
issuance costs.......................... 5,064,100 -- 5,064,100
Borrowings under line of credit with
Northwest Hospital...................... -- -- 2,834,262
Payments on capital lease obligations..... (25,660) (44,363) (82,346)
Proceeds from sales of preferred stock,
net of issuance costs................... -- 12,822,850 27,431,603
Proceeds from exercise of stock options... 1,000 2,382 3,382
Deferred stock offering costs............. -- (500,936) (500,936)
Deferred financing costs.................. (319,799) -- (319,799)
----------- ------------ ------------
Net cash provided by financing
activities........................ 6,369,641 11,380,258 35,180,591
----------- ------------ ------------
Net increase (decrease) in cash and
cash equivalents.................. 65,686 4,563,282 4,974,038
Cash and cash equivalents at beginning of
period.................................... 648,847 410,756 --
----------- ------------ ------------
Cash and cash equivalents at end of
period.................................... $ 714,533 $ 4,974,038 $ 4,974,038
=========== ============ ============
Supplemental disclosure of cash flow
information -- cash paid during the period
for interest.............................. $ 160,657 $ 232,844 $ 1,161,366
=========== ============ ============
Supplemental schedule of noncash financing
activities:
Equipment acquired through capital
leases.................................. $ 89,551 $ 89,154 $ 325,337
Accretion of Series A preferred stock
mandatory redemption obligation......... 314,327 312,342 1,805,341
Issuance of warrants attached to
convertible promissory note............. -- 224,935 224,935
Conversion of convertible promissory notes
and accrued interest to Series D
preferred stock......................... -- -- 5,324,478
Issuance of Series C preferred stock
warrants in connection with lease
agreement............................... 43,130 -- 43,130
Issuance of common stock for license
rights.................................. 4,250 -- 4,250
Preferred stock subscription receivable... $ -- $ -- $ --
=========== ============ ============
</Table>
See accompanying notes to consolidated financial statements.
F-6
NORTHWEST BIOTHERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000
(INFORMATION AS OF SEPTEMBER 30, 2001 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 2001 IS UNAUDITED)
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
Northwest Biotherapeutics, Inc. (Company) was organized to discover and
develop innovative diagnostics and immunotherapies for prostate cancer. During
1998, the Company reincorporated as a Delaware corporation. Prior to 1998, the
Company was a limited liability company (LLC) formed on March 18, 1996. The
Company is a development stage company, has yet to generate significant revenues
from its intended business purpose and has no assurance of future revenues.
While in the development stage, the Company's principal activities have included
defining and conducting research programs, conducting clinical trials, raising
capital and recruiting scientific and management personnel.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION
The Company had a 50% ownership interest in Northwest Clinicals, LLC
(Northwest Clinicals), which has been consolidated in these financial
statements through its August 2000 dissolution, as the Company exercised
control over this entity. See note 5(c). All significant intercompany
balances and transactions have been eliminated in consolidation.
(b) INTERIM FINANCIAL STATEMENTS
The financial information as of September 30, 2001, for the nine months
ended September 30, 2000 and 2001, and for the period from March 18, 1996
(inception) through September 30, 2001 is unaudited, except as to notes
4(b) and 5(d) through May 15, 2001. These interim financial statements have
been prepared on substantially the same basis as the audited financial
statements and in the opinion of management contain all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
presentation of the financial information set forth herein.
(c) INITIAL PUBLIC OFFERING, NET LOSS PER SHARE AND PRO FORMA NET LOSS PER
SHARE
In July 2001, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission (SEC)
that would permit the Company to sell shares of its common stock in
connection with a proposed initial public offering of securities (IPO).
If the offering is consummated under the terms presently anticipated, each
of the outstanding shares of Series B, C and D preferred stock will
automatically convert into shares of common stock upon closing of the
proposed IPO. The pro forma net loss per share is calculated as if the
series B, C and D preferred stock had converted into shares of common stock
on January 1 of the respective period presented or at the original issuance
date of the preferred stock, if later.
(d) USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
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.
F-7
NORTHWEST BIOTHERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(INFORMATION AS OF SEPTEMBER 30, 2001 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 2001 IS UNAUDITED)
(e) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
three months or less at the time of purchase to be cash equivalents. Cash
equivalents consists of a money market account in the accompanying
consolidated balance sheets.
(f) FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF RISK
The Company's financial instruments consist of cash and cash equivalents,
receivables, restricted cash, accounts payable, and a note payable to a
stockholder. The fair values of these instruments approximate their
financial statement carrying amounts due to their short maturities or
current market indicators.
Credit is extended based on an evaluation of a customer's financial
condition and collateral is generally not required. Accounts receivable are
generally derived from revenue earned from entities located in the United
States. The Company records an allowance for potential credit losses based
upon the expected collectibility of the accounts receivable. To date, the
Company has not experienced any material credit losses.
Two customers accounted for substantially all of the Company's revenues
from contract research and development and research material sales
recognized since its inception. For the years ended December 31, 1999 and
2000 and the nine months ended September 30, 2000, approximately 85%, 56%
and 62%, respectively, of revenues from research grants and other were from
research grants from the Federal Government. No research grant revenue was
recognized in 1998 or the nine months ended September 30, 2001. No active
grants exist at September 30, 2001.
(g) INVENTORIES
Inventories are included in prepaid expenses and other current assets and
are stated at the lower of cost, primarily determined by the first-in,
first-out method, or market.
(h) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Property and equipment are
depreciated or amortized over the following estimated useful lives using
the straight-line method:
<Table>
Leasehold improvements............... Shorter of life of the lease or
useful life
Laboratory equipment................. 5 years
Office furniture and other 3-5 years
equipment..........................
</Table>
(i) RESTRICTED CASH
Restricted cash represents a deposit to secure a letter of credit required
under a lease agreement entered into by the Company in 1999. The deposit is
restricted in full for five years and will be released over the remaining
five year term of the lease.
(j) DEFERRED RENT
The Company's lease for its main operating facility includes increases
yearly through the ten year term. The Company recognizes expense for the
lease using the straight-line method. Additional expense recognized in
excess of cash payments is recorded as deferred rent.
F-8
NORTHWEST BIOTHERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(INFORMATION AS OF SEPTEMBER 30, 2001 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 2001 IS UNAUDITED)
(k) REVENUE RECOGNITION
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." Management believes the Company's revenue recognition policies
are in accordance with the guidance provided by the SEC and therefore the
Company's adoption of SAB No. 101 in the fourth quarter of 2000 had no
impact on the Company's results of operations or financial position.
The Company earns revenues through sale of research materials, providing
research services to third parties and through research grants.
Revenues from sale of research materials are to a single customer with whom
there is no other contractual relationship and are recognized when shipped
to the customer and title has passed.
Research contracts and grants require the Company to perform research
activities as specified in each respective contract or grant on a best
efforts basis, and the Company is reimbursed based on the fees stipulated
in the respective contracts and grants which approximate the costs incurred
by the Company in performing such activities. The Company recognizes
revenue under the research contracts and grants based on completion of
performance under the respective contracts and grants where no ongoing
obligation on the part of the Company exists. Direct costs related to these
contracts and grants are reported as research and development expenses.
(l) RESEARCH AND DEVELOPMENT EXPENSES
Research and development costs are expensed as incurred.
(m) INCOME TAXES
Deferred income taxes are provided based on the estimated future tax
effects of carryforward and temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those carryforwards and temporary differences are expected to be
recovered or settled. The effect on the deferred tax assets and liabilities
of a change in tax rates is recognized in the period that includes the
enactment date. A valuation allowance is recorded for deferred tax assets
when it is more likely than not that such deferred tax assets will not be
realized. Prior to 1998, the Company was an LLC and the Company's tax
losses and credits generally flowed directly to the members.
(n) 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.
F-9
NORTHWEST BIOTHERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(INFORMATION AS OF SEPTEMBER 30, 2001 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 2001 IS UNAUDITED)
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.
(o) NET LOSS PER SHARE
Basic net loss per share is computed on the basis of the weighted average
number of shares outstanding for the reporting period including for 1998
reflecting LLC membership units as converted for the entire year using the
actual ratio at incorporation. Diluted loss per share is computed on the
basis of the weighted average number of common shares plus dilutive
potential common shares outstanding using the treasury stock method.
Potential dilutive common shares consists of shares issuable to holders of
unexercised stock options and warrants outstanding and shares issuable upon
conversion of preferred stock.
Net loss per share applicable to common stockholders has been adjusted for
the accretion of Series A preferred stock mandatory redemption obligation.
(p) OPERATING SEGMENTS
The Company is principally engaged in the discovery and development of
innovative diagnostics and immunotherapies for cancer and has a single
operating segment as management reviews financial information on a
consolidated basis for the purposes of making decisions and assessing the
financial performance of the company.
(q) RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
statement, as amended, is effective for the Company beginning January 1,
2001. Effective January 1, 2001, the Company adopted SFAS No. 133 which
establishes accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments embedded in
other contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement also requires that
changes in the derivative's fair value be recognized in earnings unless
specific hedge accounting criteria are met. The adoption of SFAS No. 133
had no effect on the Company's consolidated financial position or results
of operations.
(3) GOING CONCERN
The Company has incurred losses from operations and has a deficit
accumulated during the development stage which creates doubt that the Company
may be able to continue as a going concern. The consolidated financial
statements do not include any adjustments that might be necessary if the Company
were unable to continue as a going concern.
The Company will need to raise substantial additional 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.
F-10
NORTHWEST BIOTHERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(INFORMATION AS OF SEPTEMBER 30, 2001 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 2001 IS UNAUDITED)
The Company believes that its current cash balances, credit facilities, and
proceeds from the contemplated initial public offering of common stock will be
sufficient to meet its operating cash requirements and to fund budgeted capital
expenditures in fiscal year 2001 and beyond. The Company's actual cash needs
will depend on many unpredictable factors, including the time frame of
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 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 predict accurately
the amount or timing of future cash needs. If the Company cannot obtain
sufficient cash if and when needed, the Company may be unable to fund all
obligations as they become due or at all. Should the Company need to dispose of
assets to generate cash, the Company can offer no assurance that the carrying
values will be realizable upon liquidation outside the ordinary course of
business. Any inability to obtain additional cash if and when needed could have
a material adverse effect on its financial position, results of operations and
the Company's ability to continue in existence.
(4) STOCKHOLDERS' DEFICIT, CONVERTIBLE PREFERRED STOCK, AND MANDATORILY
REDEEMABLE CONVERTIBLE SERIES A PREFERRED STOCK
(a) MANDATORILY REDEEMABLE CONVERTIBLE SERIES A PREFERRED STOCK
The Company issued a total of 500,000 LLC membership units in 1996 for a
combination of cash and certain rights. The Company received cash of
$3,000,000 for 100,000 mandatorily redeemable LLC membership units. The
Company received rights to research and development revenues and future
royalties under a license agreement in exchange for 100,000 LLC units.
Other unit holders contributed research, know-how and intellectual property
rights for their 300,000 LLC units. The contributed royalty rights and
other intangibles were recorded at the contributing unit holders' reported
book value, which was zero.
During 1998, as part of the Company's reincorporation as a Delaware
corporation, the 100,000 mandatorily redeemable LLC membership units were
canceled and exchanged for 550,700 shares of Mandatorily Redeemable Series
A Preferred Shares (Series A shares). The Series A shares are entitled to
dividends at a rate of $0.08 per share per annum if and when declared by
the Board of Directors and in preference to dividends paid to common
stockholders. In the event of liquidation, the holders of the Series A
shares are entitled to receive $5.447 per share held plus declared and
unpaid dividends. Each share of the Series A Preferred Stock is convertible
into one share of common stock at the holder's option and converts
automatically upon an initial public offering (IPO) meeting certain
criteria if not earlier redeemed. At the holder's request, the Series A
shares may be redeemed between March 18, 1999 and March 18, 2002 with 60
days written notice for $5.447 per share plus an increasing redemption
premium based on the prime rate plus 1%. The Company accounts for the
difference between the carrying amount of the Series A shares and the
redemption value by increasing the carrying amount for periodic accretion,
so that the carrying amount will equal the redemption value, including
amounts accrued under the redemption premium, at the redemption date.
Also as part of the reincorporation, the 400,000 other LLC membership units
were canceled and exchanged for 2,202,800 shares of common stock. 550,700
shares of common stock were issued to a
F-11
NORTHWEST BIOTHERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(INFORMATION AS OF SEPTEMBER 30, 2001 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 2001 IS UNAUDITED)
stockholder of which 275,350 shares were held in escrow subject to certain
milestones being reached by the Company related to the originally
contributed intellectual property of that stockholder. These shares were
subsequently returned to the Company during 2000. See note 5(c).
(b) CONVERTIBLE PREFERRED STOCK AND 6% CONVERTIBLE PROMISSORY NOTES
In September 1998, the Company sold 897,489 shares of Series B Preferred
Stock at $2.33 per share resulting in proceeds, net of offering costs, of
$2,088,330.
During 1999, the Company sold 3,350,600 shares of Series C Preferred Stock
at $2.50 per share resulting in proceeds, net of offering costs, of
$7,647,122. In conjunction with the sale, the Company issued fully vested
warrants to purchase 234,542 shares of Series C Preferred Stock to third
parties for services performed related to the sale of the Series C shares.
The warrants are exercisable at $2.50 per share and will expire upon the
earlier of October 31, 2008 or a change of control of the Company. The fair
value of the warrants was $394,031 on the date of grant determined using
the Black-Scholes option pricing model with the following assumptions:
expected dividend yield of 0%, risk-free interest rate of 6.55%, volatility
of 50%, and an expected life of 9 years. The value of the warrants was
recorded as a reduction in the proceeds from the sale of the Series C
shares.
The Company closed a private placement offering of $5,064,100, 6%
convertible promissory notes (Notes) and warrants in May 2000 resulting in
proceeds, net of financing costs, of $4,744,301. The Notes, including
accrued interest, were required to be converted into shares of Series D
Preferred Stock no later than January 1, 2001. The purchasers of the Notes
also received fully vested warrants to purchase 1,064,895 shares of Series
D Preferred Stock. The warrants are exercisable at $5.00 per share and
expire upon the earlier of (i) January 31, 2004, (ii) an IPO, or (iii) a
change of control of the Company. The fair value of the warrants was
$4,038,525 on the date of grant determined using the Black-Scholes option
pricing model with the following assumptions: expected dividend yield of
0%, risk-free interest rate of 6.23%, volatility of 96%, and an expected
life of 5 years. The value of the warrants is included in interest expense
in 2000.
The Company recorded $1,025,575 as additional paid-in capital in 2000 for
the beneficial conversion feature on the Notes. In accordance with the
Emerging Issues Task Force Issue No. 98-5, "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios" (EITF 98-5), the beneficial conversion feature was
limited to the proceeds allocated to the Notes after the initial allocation
of the total proceeds to the warrants and Notes, and was charged to
interest expenses over the term of the Notes.
The Notes, plus accrued interest of $260,378, were converted at $5.00 per
share into 1,064,895 shares of Series D Preferred Stock in December 2000.
In the fourth quarter of 2000, the Company sold an additional 467,460
shares of the Series D Preferred Stock at $5.00 per share resulting in
proceeds, net of offering costs, of $2,146,301. In conjunction with the
sale, the Company issued 96,890 fully vested warrants to purchase shares of
Series D Preferred Stock to third parties for services performed related to
the sale of the Series D shares. The warrants are exercisable at $5.00 per
share and will expire upon the earlier of April 30, 2010 or a change in
control of the Company. The fair value of the warrants was $368,182 on the
date of grant determined using the Black-Scholes option pricing model with
the following assumptions: expected dividend yield of 0%, risk-free
interest rate of 6.59%, volatility of 96%,
F-12
NORTHWEST BIOTHERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(INFORMATION AS OF SEPTEMBER 30, 2001 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 2001 IS UNAUDITED)
and an expected life of 5 years. The value of the warrants was recorded as
a reduction in the proceeds from the sale of the Series D shares.
Through May 15, 2001, the Company sold an additional 2,251,668 shares of
Series D preferred stock at $5.00 per share resulting in proceeds, net of
offering costs, of $11,258,340. From May 15 through September 30, 2001, the
Company sold another 351,800 shares of Series D Preferred Stock at $5.00
per share resulting in additional proceeds, net of offering costs, of
$1,291,510. In conjunction with the sale of the Series D preferred shares
in 2001, the Company issued 227,093 fully vested warrants to purchase
shares of Series D Preferred Stock to third parties for services performed
related to the sale. The warrants are exercisable at $5.00 per share and
will expire upon the earlier of (i) ten years from the issuance date, (ii)
a change in control of the Company or (iii) an IPO. The fair value of the
warrants was $1,062,135 on the date of grant determined using the
Black-Scholes option pricing model with the following assumptions: expected
dividend yield of 0%, risk-free interest rate of 6.00%, volatility of 108%,
and an expected life of 10 years. The value of the warrants was recorded as
a reduction in the proceeds from the sale of the Series D shares. Of the
Series D preferred shares issued during the nine months ended September 30,
2001, 2,209,568 shares were issued with a conversion price which was less
than the fair value of the common stock into which the Series D preferred
stock is convertible. This beneficial conversion feature aggregated
$4,273,566 and was charged as an increase to the net loss applicable to
common stockholders immediately upon issuance of the related Series D
preferred shares since the Series D shares are immediately convertible at
the option of the stockholder. In August 2001, the Company eliminated the
provision that the warrants would expire upon completion of an IPO as both
the holders and the Company agreed that the original intent of the
agreement was to not include this provision. This change resulted in no
expense to the Company.
The following is a summary of the significant terms of the Company's Series
B, C and D Preferred Stock:
Conversion
Each share of Series B Preferred Stock is convertible, at the option of the
holder, into approximately 1.93785 shares of the Company's common stock.
Each share of Series C and D Preferred Stock is convertible, at the option
of the holder, into one share of the Company's common stock. Additionally,
shares of Series B, C and D Preferred Stock convert automatically into
common stock upon consummation of an initial public offering of the
Company's common stock in which gross proceeds exceed $7.5 million and are
subject to redemption in the event of a liquidation or change in control of
the Company.
Voting
Holders of Series B, C and D shares have voting rights equal to the number
of shares of common stock into which the preferred stock is convertible.
(c) STOCK PURCHASE WARRANTS
In connection with the founding of the Company, Northwest Hospital and
Pacific Northwest Cancer Foundation, each received an option to purchase
supplemental LLC membership interests in the Company. These options were
exchanged in September 1998 for fully vested warrants to purchase an
F-13
NORTHWEST BIOTHERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(INFORMATION AS OF SEPTEMBER 30, 2001 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 2001 IS UNAUDITED)
aggregate of 1,101,402 shares of the Company's common stock (each party
received 550,701 warrants). The foundation subsequently assigned its rights
to the warrants to Northwest Hospital. These warrants are exercisable at
$0.18 per share and expire upon the earlier of October 25, 2009 or a change
in control of the Company.
In September 2000, the Company issued 23,920 fully vested warrants to
purchase shares of Series C Preferred Stock to the owner of the building in
which it leases space in conjunction with signing a ten year lease. The
warrants are exercisable at $2.50 per share and expire upon the earlier of
(i) December 31, 2004, (ii) an IPO, or (iii) a change in control of the
Company. The fair value of the warrants of $43,130, which is being
amortized over the term of the lease, was determined on the date of grant
using the Black-Scholes option pricing model with the following
assumptions: expected dividend yield of 0%, risk-free interest rate of
5.92%, volatility of 96%, and an expected life of 4.3 years.
A summary of stock purchase warrants outstanding at December 31, 2000 is as
follows:
<Table>
<Caption>
WEIGHTED-
AVERAGE
NUMBER EXERCISE
TYPE OF WARRANT OUTSTANDING PRICE
--------------- ----------- ---------
Common stock warrants.................................. 1,111,402 $0.23
Series C preferred stock warrants...................... 258,462 2.50
Series D preferred stock warrants...................... 1,161,785 5.00
</Table>
All of the common and preferred stock warrants outstanding at December 31,
2000 are exercisable.
(d) STOCK OPTION PLANS
The Company has a 1998 Stock Option Plan (1998 Plan) under which 413,025
shares of common stock have been reserved for stock option grants to
employees, directors and consultants of the Company. As of December 31,
2000 and September 30, 2001, 43,342 and no shares, respectively, remained
available for grant under the 1998 Plan. The Company also has a 1999
Executive Stock Option Plan (1999 Plan) under which 586,166 shares of
common stock were reserved for issuance, none of which remained available
for grant at December 31, 2000 and September 30, 2001.
In June 2001, the Company adopted the 2001 Stock Option Plan (2001 Plan)
and the 2001 Nonemployee Director Stock Incentive Plan (2001 Director
Plan). Under the 2001 Plan, 1,800,000 shares of the Company's common stock
have been reserved for grant of stock options to employees and consultants.
Additionally, on January 1 of each year commencing January 1, 2002, the
number of shares reserved for grant under the 2001 Plan will increase by
the lesser of (i) 15% of the aggregate number of shares available for grant
under the 2001 Plan or (ii) 300,000 shares. Under the 2001 Director Plan,
200,000 shares of the Company's common stock have been reserved for grant
of stock options to nonemployee directors of the Company. As of September
30, 2001, 23,958 stock options have been granted under the 2001 Plan and no
stock options have been granted under the 2001 Director Plan.
The plans are administered by the Board of Directors, which determines the
terms and conditions of the options granted, including exercise price,
number of options granted and vesting period of such options. Options
granted under the plans are generally priced at or above the estimated fair
market value of the
F-14
NORTHWEST BIOTHERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(INFORMATION AS OF SEPTEMBER 30, 2001 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 2001 IS UNAUDITED)
Company's common stock on the date of grant and generally vest over four
years. Compensation expense, if any, is charged over the period of service.
All options, if not previously exercised or canceled, expire ten years from
the date of grant, or the expiration date specified in the individual
option agreement, if earlier.
During the nine months ended September 30, 2001, the Company granted
options to purchase an aggregate of 221,900 shares of common stock to
various employees with exercise prices which were less than the fair value
of the underlying common stock on the date of grant resulting in deferred
compensation of $1,329,897.
A summary of stock option activity is as follows:
<Table>
<Caption>
OPTIONS OUTSTANDING
---------------------------
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
Balance at December 31, 1997........................ -- $ --
Granted........................................... 182,147 0.80
--------- -----
Balance at December 31, 1998........................ 182,147 0.80
Granted........................................... 681,766 0.85
Forfeited......................................... (18,600) 0.56
--------- -----
Balance at December 31, 1999........................ 845,313 0.84
Granted........................................... 114,336 1.09
Exercised......................................... (2,000) 0.50
Forfeited......................................... (3,800) 0.70
--------- -----
Balance at December 31, 2000........................ 953,849 0.86
Granted........................................... 228,900 1.25
Exercised......................................... (3,132) 0.76
Forfeited......................................... (3,000) 1.25
--------- -----
Balance at September 30, 2001....................... 1,176,617 $0.94
========= =====
</Table>
F-15
NORTHWEST BIOTHERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(INFORMATION AS OF SEPTEMBER 30, 2001 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 2001 IS UNAUDITED)
Total exercisable options to purchase common shares and their weighted
average exercise prices per share at December 31, 1998, 1999 and 2000 were
66,742, 115,800 and 187,972 shares, and $0.80, $0.80 and $0.80,
respectively. Additional information regarding stock options outstanding
and exercisable at December 31, 2000 is as follows:
<Table>
<Caption>
OPTIONS OUTSTANDING
-------------------------------------------
WEIGHTED- OPTIONS EXERCISABLE
AVERAGE ----------------------------
REMAINING WEIGHTED- WEIGHTED-
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ------------ -------------- ----------- --------------
$ 0.50 54,300 8.2 $0.50 45,698 $0.50
0.85 - 0.91 831,113 8.9 0.86 142,274 0.89
1.25 68,436 9.9 1.25 -- --
------------- ------- --- ----- ------- -----
0$.50 - 1.25... 953,849 8.9 $0.86 187,972 $0.80
============= ======= === ===== ======= =====
</Table>
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 available to common stockholders
and net loss per share would have been adjusted to the pro forma amounts
indicated below:
<Table>
<Caption>
1998 1999 2000
----------- ----------- ------------
Net loss applicable to common stockholders,
as reported............................... $(5,047,998) $(5,963,341) $(13,209,585)
Net loss applicable to common stockholders,
pro forma................................. (5,056,195) (6,020,172) (13,271,666)
Basic and diluted net loss per share, as
reported.................................. (2.29) (2.71) (6.35)
Basic and diluted net loss per share, pro
forma..................................... (2.30) (2.73) (6.38)
</Table>
The per share weighted average fair value of stock options granted during
the years ended December 31, 1998, 1999 and 2000 was $0.18, $0.23 and
$0.24, respectively, on the date of grant using the minimum-value method
with the following assumptions:
<Table>
<Caption>
1998 1999 2000
------- ------- -------
Risk-free interest rate................................. 5.15% 6.55% 4.99%
Expected life........................................... 5 years 5 years 5 years
Expected volatility..................................... 0% 0% 0%
Dividend yield.......................................... 0% 0% 0%
</Table>
For purposes of disclosing future SFAS No. 123 pro forma results, the fair
value of stock options granted to employees after August 13, 2001, the date
of the Company's initial filing of its registration statement with the
Securities and Exchange Commission, will be measured using an option
valuation method that considers expected volatility.
F-16
NORTHWEST BIOTHERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(INFORMATION AS OF SEPTEMBER 30, 2001 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 2001 IS UNAUDITED)
(e) NET LOSS PER SHARE
The following presents the reconciliation of the Company's reported net
loss to net loss applicable to common stockholders used for basic and
diluted net loss per share:
<Table>
<Caption>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------- --------------------------
1998 1999 2000 2000 2001
----------- ----------- ------------ ----------- ------------
Net loss............... $(4,719,438) $(5,609,379) $(12,779,221) $(8,283,813) $ (7,493,178)
Accretion of Series A
preferred stock
mandatory redemption
obligation........... (328,560) (353,962) (430,364) (314,327) (312,342)
Beneficial conversion
feature of Series D
preferred stock...... -- -- -- -- (4,273,566)
----------- ----------- ------------ ----------- ------------
Net loss applicable to
common
stockholders......... (5,047,998) (5,963,341) (13,209,585) (8,598,140) (12,079,086)
Weighted average common
shares outstanding
during the period
used to compute basic
and diluted net loss
per share............ 2,202,800 2,202,800 2,080,405 2,130,582 1,935,395
----------- ----------- ------------ ----------- ------------
Basic and diluted net
loss per share....... $ (2.29) $ (2.71) $ (6.35) $ (4.04) $ (6.24)
=========== =========== ============ =========== ============
</Table>
The following common stock equivalents on an as-converted basis were
excluded from the calculation of diluted net loss per share as the effect
would be antidilutive:
<Table>
<Caption>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------- ----------------------
1998 1999 2000 2000 2001
--------- --------- --------- --------- ---------
Common stock options.......... 182,147 845,813 953,849 882,313 1,176,617
Common stock warrants......... 1,101,402 1,101,402 1,111,402 1,111,402 1,111,402
Convertible preferred stock... 2,289,898 5,640,498 7,172,853 5,640,498 9,776,321
Convertible preferred stock
warrants.................... -- 234,542 1,420,247 1,323,357 1,697,340
Convertible promissory note
and accrued interest........ -- -- -- 1,050,078 150,065
</Table>
(f) EMPLOYEE STOCK PURCHASE PLAN
In June 2001, the Company adopted an employee stock purchase plan to become
effective upon consummation of an IPO and reserved 500,000 shares of common
stock for issuance under this plan. Under this plan, employees may purchase
up to 1,000 shares of the Company's common stock during
F-17
NORTHWEST BIOTHERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(INFORMATION AS OF SEPTEMBER 30, 2001 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 2001 IS UNAUDITED)
each six-month offering period commencing on April 1 and October 1 of each
year. The purchase price of the common stock is equal to the lower of 85%
of the market price on the first and last day of each offering period. As
of September 30, 2001, no shares have been issued under the plan.
(5) RELATED PARTY TRANSACTIONS
(a) TRANSACTIONS WITH NORTHWEST HOSPITAL
The Company has a $2,900,000 line of credit through the Hospital, a
stockholder, of which $2,834,262 was outstanding at December 31, 1999 and
2000. Borrowings bear interest at the prime rate plus 1% (9.5% at December
31, 2000), becomes due upon the earlier of (i) June 30, 2001, (ii)
consummation of an IPO or (iii) consummation of a significant merger or
substantial sale of the Company's assets, and is secured by substantially
all the assets of the Company, subordinated to the note payable to
stockholder discussed in note 5(d). Interest expense related to the line of
credit was $261,791, $241,764, $289,116, $215,033 and $169,509 for the
years ended December 31, 1998, 1999 and 2000 and the nine months ended
September 30, 2000 and 2001, respectively.
Through 1999, the Company subleased office and laboratory space from the
Hospital. Rent expense totaled $40,209 and $49,059 for 1998 and 1999,
respectively. Also, the Company shares certain employees with the Hospital.
The Company received reimbursement for shared employees totaling $101,619,
$41,450 and $41,672 in 1998, 1999 and 2000, respectively, and paid expenses
for shared employees totaling $53,079 in 1999. In 2000, the Hospital began
subleasing office and laboratory space from the Company for which the
Company received $146,597.
The Hospital owns all of the Company's outstanding Series A preferred
stock. In August 2001, the Company entered into an agreement whereby the
Hospital agreed to not require redemption but allow for conversion of all
of the outstanding Series A preferred stock upon completion of the IPO, to
extend the line of credit through the earlier of June 30, 2002 or
completion of the IPO, and to exercise its 1,101,402 common stock warrants
in exchange for a $1.7 million fee. Such fee is considered to be a deemed
dividend and will increase the net loss applicable to common stockholders.
(b) TRANSACTIONS INVOLVING PACIFIC NORTHWEST CANCER FOUNDATION
In July 1996, the Pacific Northwest Cancer Foundation, then a member,
entered into an agreement with Hybritech, a wholly owned subsidiary of
Beckman Instruments, Inc., in which Hybritech licensed from the foundation
the patent rights for the diagnostic in-vitro use of PSMA. As part of this
agreement, the Pacific Northwest Cancer Foundation, was to receive research
funding of $1,350,000, in three equal annual installments through April 1,
1999. The foundation then entered into another agreement in 1996 with the
Company in which 75% of the research funding and all future royalties on
sales received from Hybritech would be transferred to the Company in
exchange for the Company performing certain research services. In 1998 and
1999, the Company recognized revenue of $337,500 and $84,375, respectively,
based on the research activities performed by the Company under the
agreement.
F-18
NORTHWEST BIOTHERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(INFORMATION AS OF SEPTEMBER 30, 2001 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 2001 IS UNAUDITED)
(c) AGREEMENT WITH PROSTAGEN, INC.
In July 1998, the Company acquired exclusive rights from Prostagen to
manufacture and sell the PSMA protein in the Company's dendritic cell-based
immunotherapy for prostate cancer, subject to contingent future milestone
payments of $2,900,000.
In connection with the Prostagen agreement, the Company issued 550,700
shares of the Company's common stock to a director of the Company who was
also an affiliate of Prostagen with a controlling interest in Prostagen.
The Company also paid the director $100,000 in connection with the
Prostagen agreement. This director is also a senior partner in a law firm
that provided legal services to the Company. During 1999, the Company paid
approximately $157,000 to this law firm for services. In 1999, the director
tendered his resignation from the Company.
In June 1999, Cytogen Corporation (Cytogen) acquired all of the outstanding
capital stock of Prostagen.
In August 2000, the Company, Northwest Clinicals and Cytogen entered into a
Release and Settlement Agreement which effectively terminated the agreement
between the Company and Prostagen, including the $2.9 million of milestone
payments that were to be paid to Prostagen. In addition, this agreement
dissolved Northwest Clinicals with all of its assets going to the Company.
The terms of the agreement also provided the release and return to the
Company of 275,350 shares of common stock held in escrow for the above
former director of the Company.
Under the terms of a separate sublicense agreement, the Company obtained
the right to make, use and sublicense PSMA. The sublicense agreement terms
include milestone payments, which require the Company to pay Cytogen
$250,000 after the first product approval, and another $750,000 to Cytogen
in the form of a 2% royalty on the first two years of net product sales. In
addition, the Company is to pay a 5% royalty to Cytogen on future net sales
of products that include PSMA and agreed to make minimum annual payments of
$10,000 to Cytogen until the commencement of a Phase III clinical trial
involving PSMA.
(d) NOTE PAYABLE TO STOCKHOLDER
In July 2000, the Company obtained $1.65 million in financing in the form
of a promissory note from Holmes Harbor Company, Inc., a stockholder of the
Company. The note was secured by substantially all assets of the Company
and bore interest at 13% with interest only payments until due on July 11,
2001. Interest expense on the note amounted to approximately $102,000 for
the year ended December 31, 2000.
As an inducement to obtain the note, the Company issued fully vested
warrants to purchase 10,000 shares of the Company's common stock to the
stockholder. The warrants are exercisable at $5.50 per share and expire
upon the earlier of July 10, 2010 or a change in control of the Company.
The fair value of the warrants was $3,238 on the date of grant determined
using the Black-Scholes option pricing model with the following
assumptions: expected dividend yield of 0%, risk-free interest rate of
6.09%, volatility of 96%, and an expected life of 10 years. The fair value
of the warrants was recorded as a discount on the note and is being
amortized to interest expense over the term of the note.
The note was restructured in April 2001. Under the terms of the
restructured loan agreement, the Company repaid $825,000 plus accrued and
unpaid interest. In addition, in settlement of the remaining
F-19
NORTHWEST BIOTHERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(INFORMATION AS OF SEPTEMBER 30, 2001 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 2001 IS UNAUDITED)
balance due, the Company issued a convertible promissory note in the amount
of $825,000 and a ten-year warrant to purchase up to 50,000 shares of the
Company's Series D preferred stock at an exercise price of $5.00 per share.
The note is secured by substantially all of the assets of the Company,
except for certain intellectual property, and bears interest at a rate of
13% per annum with quarterly principal and interest payments due beginning
on September 30, 2001. Any unpaid principal and interest on the note shall
be due in full on June 30, 2003. All obligations under the note are
accelerated upon a change of control or completion of an IPO. The note is
convertible into shares of the Company's Series D preferred stock at $5.00
per share at the option of the holder.
The warrant vests as follows: 10,000 shares vest if the note is paid in
full by June 30, 2001; 33,000 shares vest if the note is paid in full by
June 30, 2002; and 50,000 shares vest if the note is paid in full after
June 30, 2002. The warrants expire upon the earliest of (i) April 23, 2011,
(ii) completion of an IPO; or (iii) a change in control. The fair value of
the warrants was $224,935 on the date of grant determined using the
Black-Scholes option pricing model and the probability that the warrants
will vest. The following assumptions were used in the Black-Scholes
calculation: expected dividend yield of 0%, risk free interest rate of
6.00%, volatility of 108%, and an expected life equal to the contractual
term of 10 years. The fair value of the warrants was accounted for as a
discount on the note and is being recognized as interest expense over the
stated term of the note. Additionally, the Company recorded $455,935 as
additional paid-in capital for the beneficial conversion feature on the
note. The beneficial conversion amount was also accounted for as a discount
on the note being charged to interest expenses over the term of the note.
(6) INCOME TAXES
There was no income tax benefit attributable to net losses for 1998, 1999
and 2000. The difference between taxes computed by applying the U.S. federal
corporate tax rate of 34% and the actual income tax provision in 1998, 1999 and
2000 is primarily the result of establishing a valuation allowance on the
Company's deferred tax assets.
The tax effects of temporary differences and tax loss and credit
carryforwards that give rise to significant portions of deferred tax assets at
December 31 are comprised of the following:
<Table>
<Caption>
1999 2000
----------- -----------
Net operating loss carryforwards.................. $ 2,894,537 $ 5,576,190
Research and development credit carryforwards..... 328,249 484,146
Tax basis incorporation intangibles............... 740,633 677,338
Other............................................. 27,508 27,123
----------- -----------
Gross deferred tax assets............... 3,990,927 6,764,797
Less valuation allowance.......................... (3,990,927) (6,764,797)
----------- -----------
Net deferred tax assets................. $ -- $ --
=========== ===========
</Table>
The increase in the valuation allowance for deferred tax assets for 1998,
1999 and 2000 of $894,087, $940,445 and $2,773,870, respectively, was due
primarily to the inability to utilize net operating losses and research and
development credits.
F-20
NORTHWEST BIOTHERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(INFORMATION AS OF SEPTEMBER 30, 2001 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 2001 IS UNAUDITED)
At December 31, 2000, the Company had net operating loss carryforwards for
income tax purposes of approximately $16,400,000 and unused research and
development tax credits of approximately $484,146 available to offset future
taxable income and income taxes, respectively, expiring through 2018. The
Company's ability to utilize net operating loss and credit carryforwards is
limited pursuant to the Tax Reform Act of 1986, due to cumulative changes in
stock ownership in excess of 50%.
(7) SCIENTIFIC COLLABORATION ARRANGEMENTS
In April 2001, the Company entered into a collaboration agreement with
Medarex, Inc. (Medarex) to jointly research, development and commercialize
HuRx(TM) therapeutic human monoclonal antibodies for certain cancer targets.
Under the agreement, certain development costs will be incurred solely by each
party as specified in the agreement and certain costs will be shared equally by
each party. Either party has the right to elect not to participate in the joint
development of antibodies to a given antigen target and receive instead certain
milestone and royalty payments on net sales from the continuing party. The
agreement terminates upon the later of one year after completion of the research
activities thereunder, or the date on which neither party is exploiting any
products developed thereunder. The agreement is also subject to termination if
either party enters bankruptcy or breaches its material obligations thereunder.
In conjunction with the collaboration agreement, Medarex purchased 800,000
shares of the Company's Series D preferred stock at $5.00 per share.
Additionally, in the event the Company closes an IPO of its common stock,
Medarex agreed to invest $3.5 million in the IPO at the same terms as the
investors in the IPO. Medarex's obligation to invest in the IPO will terminate,
at the option of Medarex, if either (i) the IPO has not closed within one year
from the effective date of the agreement or (ii) as of the date of the closing
of the IPO, the Company has not satisfactorily obtained certain licenses from
third parties as specified in the collaboration agreement.
The Company has also entered into other collaborative arrangements under
which it may be obligated to pay royalties or milestone payments if product
development is successful. It is not anticipated that the aggregate amount of
any royalty or milestone obligations under these other arrangements will be
material to the Company's operations.
F-21
NORTHWEST BIOTHERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1999 AND 2000
(INFORMATION AS OF SEPTEMBER 30, 2001 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 2001 IS UNAUDITED)
(8) COMMITMENTS AND CONTINGENCIES
(a) LEASE OBLIGATIONS
The Company leases its facilities and certain equipment. Commitments for
minimum rentals under noncancelable leases in effect as of December 31,
2000 are as follows net of sublease income of $227,096 and $188,991 in 2001
and 2002, respectively:
<Table>
<Caption>
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
2001........................................... $ 52,176 $ 797,368
2002........................................... 58,246 923,081
2003........................................... 53,624 1,150,992
2004........................................... 27,382 1,191,276
2005........................................... 19,772 1,232,976
Thereafter..................................... -- 6,343,820
-------- -----------
Total minimum lease payments.............. 211,200 $11,639,513
===========
Less amount representing interest.............. 13,000
--------
Present value of minimum lease payments... 198,200
Less current portion........................... 50,176
--------
$148,024
========
</Table>
Included in property and equipment are assets under capital leases totaling
$90,366 and $250,592 and related accumulated amortization totaling $5,554
and $21,365 at December 31, 1999 and 2000, respectively.
Rent expense was $42,069, $73,042 and $505,177 in 1998, 1999 and 2000,
respectively, net of sublease income of $91,320 in 2000.
(b) LEGAL MATTERS
The Company is involved from time to time in claims, proceedings and
litigation arising in the normal course of business. The Company does not
believe that any present claims, proceedings or litigation, either alone or
in the aggregate, will have a material adverse effect on the Company's
financial position or results of operations.
F-22
- ------------------------------------------------------
- ------------------------------------------------------
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
Prospectus Summary.................... 1
The Offering.......................... 5
Summary Financial Data................ 6
Risk Factors.......................... 7
Forward-Looking Information........... 20
Use Of Proceeds....................... 21
Dividend Policy....................... 21
Capitalization........................ 22
Dilution.............................. 24
Selected Financial Data............... 25
Management's Discussion And Analysis
Of Financial Condition And Results
Of Operations....................... 26
Business.............................. 31
Management............................ 47
Related Party Transactions............ 56
Principal Stockholders................ 59
Description Of Capital Stock.......... 61
Shares Eligible For Future Sale....... 64
Plan Of Distribution.................. 66
Legal Matters......................... 69
Experts............................... 69
Change In Independent Auditors........ 69
Where You Can Find Additional
Information......................... 69
Index To Financial Statements......... F-1
</Table>
THROUGH AND INCLUDING , 2001 (THE 25TH DAY AFTER COMMENCEMENT
OF THIS OFFERING), FEDERAL SECURITIES LAW MAY REQUIRE ALL DEALERS SELLING SHARES
OF OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
4,000,000 SHARES
[NORTHWEST BIOTHERAPEUTICS LOGO]
COMMON STOCK
------------------------------
PROSPECTUS
------------------------------
C.E. UNTERBERG, TOWBIN
FAHNESTOCK & CO. INC.
ROTH CAPITAL PARTNERS, LLC
, 2001
- ------------------------------------------------------
- ------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Other expenses in connection with the issuance and distribution of the
securities registered by this prospectus, which will be paid by us, will be
substantially as follows:
<Table>
<Caption>
ITEM AMOUNT
---- ----------
Commission Registration Fee................................. $ 12,500
Nasdaq National Market Fee.................................. 90,000
NASD Filing Fee............................................. 5,330
Blue Sky Fees and Expenses (Including Legal Fees)........... 25,000
Accounting Fees and Expenses................................ 325,000
Legal Fees and Expenses..................................... 400,000
Printing and Engraving...................................... 350,000
Registrar and Transfer Agent Fees........................... 5,000
Miscellaneous Expenses...................................... 87,170
----------
Total............................................. 1,300,000
==========
</Table>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article VIII of the Bylaws of the Company, in accordance with the
provisions of Section 145 of the Delaware General Corporation Law, provides that
the Company shall indemnify any person in connection with any threatened,
pending or completed legal proceeding (other than a legal proceeding by or in
the right of the Company) by reason of the fact that such person is or was a
director or officer of the company or is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership or other enterprise against expenses (including attorneys' fees),
judgment, fines and amounts paid in settlement actually and reasonably incurred
in connection with such legal proceeding if such person acted in good faith and
in a manner that such person reasonably believed to be in or not opposed to the
best interests of the Company, and, in the case of any criminal action or
proceeding, if such person had no reasonable cause to believe that his or her
conduct was unlawful. If the legal proceeding is by or in the right of the
Company, the director or officer may be indemnified by the Company against
expenses (including attorneys' fees) actually and reasonably incurred in
connection with the defense or settlement of such legal proceeding if such
person acted in good faith and in a manner such person reasonably believed to be
in or not opposed to the best interests of the Company, except that such person
may not be indemnified in respect of any claim, issue or matter as to which such
person shall have been adjudged to be liable to the Company unless a court
determines otherwise.
Section 8.6 of the Bylaws allows the Company to maintain director and
officer liability insurance on behalf of any person who is or was a director or
officer of the Company or such person who serves or served as a director,
officer, employee or agent of another corporation, partnership or other
enterprise at the request of the Company.
Article VII of the Company's Fifth Amended and Restated Certificate of
Incorporation, in accordance with Section 102(b)(7) of the Delaware General
Corporation Law, provides that no director of the Company shall be personally
liable to the Company or it stockholders for monetary damages for any breach of
such director's fiduciary duty as a director; provided, however, that such
clause shall not apply to any liability of a director (1) for any breach of such
director's duty of loyalty to the Company or its stockholders, (2) for acts or
omissions that are not in good faith or that involve intentional misconduct or a
knowing violation of the law, (3) under Section 174 of the Delaware General
Corporation Law, or (4) for any transaction from which the director derived an
improper personal benefit.
II-1
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three year period ended September 30, 2001, we have issued and sold
unregistered securities as follows:
On September 30, 1998, we completed a private equity financing in which we
sold 897,489 shares of our series B convertible preferred stock to investors at
a purchase price of $2.33 per share resulting in proceeds net of offering costs
of $2,088,330 to 21 accredited purchasers and 1 non-accredited purchaser.
On September 14, 1999, we completed a private equity financing in which we
sold 3,350,600 shares of our series C convertible preferred stock to investors
at a purchase price of $2.50 per share resulting in proceeds net of offering
costs of $7,647,122.
The Company closed a private placement offering of $5,064,100 principal
amount 6% convertible promissory notes and warrants in May 2000, resulting in
proceeds, net of financing costs, of $4,744,301.
In July 2000, we issued a promissory note to Holmes Harbor Company, Inc. in
the amount of $1,650,000 that was payable in full in July 2001 and accrued
interest at a rate of 13% per annum. This loan was secured by substantially all
of the Company's assets. In conjunction with the loan, the Company issued a
warrant to purchase 10,000 shares of common stock at an exercise price of $5.50
per share and expiring on April 30, 2010. In April 2001, the note was
restructured whereby the Company repaid $825,000 of principal plus accrued
interest, and issued a convertible promissory note for the remaining $825,000 of
principal. Simultaneously, the Company issued an additional warrant to purchase
up to 33,000 shares of series D convertible preferred stock at an exercise price
of $5.00 per share if we repay the outstanding loan and accrued interest on or
before June 30, 2002 or up to 50,000 shares at $5.00 per share if we repay the
balance thereafter.
On April 24, 2001, we entered into a collaboration agreement with Medarex,
Inc., pursuant to which we sold to Medarex 800,000 shares of our series D
convertible preferred stock at a purchase price of $5.00 per share.
On June 15, 2001, we completed a private equity financing in which we sold
3,070,928 shares of our series D convertible preferred stock to investors at a
purchase price of $5.00 per share resulting in proceeds net of offering costs of
$14,696,151 to 186 accredited purchasers. As a result of this financing, all
existing convertible promissory notes, including both principal amount and
interest accrued thereon, converted into an aggregate of 1,064,895 shares of our
series D convertible preferred stock. C.E. Unterberg, Towbin acted as an
underwriter for a portion of this financing.
In August 2001, we entered into an agreement with Northwest Hospital, of
which C. William Schneider, a member of our board of directors, is President and
Chief Executive Officer, whereby Northwest Hospital agreed to exercise warrants
to purchase 1,101,402 shares of our common stock at a purchase price of
$198,252.
From July 19, 1998, the date of the first issuance of options under our
1998 Stock Option Plan, through September 30, 2001, we granted stock options to
purchase an aggregate of 1,207,149 shares of common stock, with exercise prices
ranging from $0.50 to $1.25 per share, to employees, consultants and directors
under our 1998 and 2001 Stock Option Plans, 1999 Executive Stock Option Plan and
outside of such plans. Of the total options granted under these plans, options
for an aggregate of 5,132 shares have been exercised, options for a total of
520,461 shares have vested and are outstanding, options for an aggregate of
25,400 shares have been canceled and options for an aggregate of 1,176,617
shares remain outstanding. The sales and issuances of these securities were
exempt from registration under the Securities Act under Rule 701 promulgated
thereunder on the basis that these options were offered and sold either under a
written compensatory benefit plan or pursuant to written contracts relating to
consideration, as provided by Rule 701.
Unless otherwise indicated, the issuances and sales of common stock,
preferred stock, convertible promissory notes and warrants to purchase our
capital stock described above were exempt under the Securities Act in reliance
upon Section 4(2) of the Securities Act or Regulation D promulgated thereunder.
The recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with view to or
for sale in connection with any distribution thereof and appropriate
II-2
legends were affixed to the share certificates issued in such transactions. All
recipients had adequate access to information about us.
ITEM 16. LIST OF EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
1.1++ Form of Underwriting Agreement.
3.1++ Fifth Amended and Restated Certificate of Incorporation.
3.2++ Bylaws of the Registrant.
4.1++ Specimen Common Stock Certificate.
5.1++ Opinion of Lane Powell Spears Lubersky LLP.
10.1+++ PSMA Sublicense Agreement by and between the Registrant and
Cytogen Corporation.
10.2+++ Collaboration Agreement by and between the Registrant and
Medarex, Inc.
10.3++ Development Agreement dated July 30, 1997 between the
Registrant and Medarex, Inc.
10.4++ Employment Agreement dated February 2, 2001 between the
Registrant and Daniel O. Wilds.
10.5++ Employment Agreement dated February 2, 2001 between the
Registrant and Alton L. Boynton.
10.6++ Office Lease dated October 22, 1999 between the Registrant
and Nexus Canyon Park LLC.
10.7++ Subordination, Nondisturbance and Attornment Agreement dated
November 10, 1999 between the Registrant, Nexus Canyon Park
LLC and Bank of America, N.A.
10.8++ Sublease Agreement dated as of September 1, 2000, between
the Registrant and Northwest Hospital Department of
Molecular Medicine.
10.9++ Loan Agreement dated April 24, 2001 between the Registrant
and Holmes Harbor Company, Inc.
10.10++ Master Note for Line of Credit dated July 1, 1997 between
the Registrant and Northwest Hospital.
10.11++ Amendment to Master Note for Line of Credit dated February
1, 2000 between the Registrant and Northwest Hospital.
10.12++ Second Amendment to Master Note for Line of Credit dated
August 9, 2001 between the Registrant and Northwest
Hospital.
10.13++ Clinical Trial Agreement dated January 7, 2000 between the
Registrant and the Regents of the University of California.
10.14++ Clinical Trial Agreement dated December 16, 1999 between the
Registrant and the University of Texas, M.D. Anderson Cancer
Center.
10.15++ 1998 Stock Option Plan.
10.16++ 1999 Executive Stock Option Plan.
10.17++ 2001 Stock Option Plan.
10.18++ 2001 Nonemployee Director Stock Incentive Plan.
10.19++ Employee Stock Purchase Plan
10.20++ Amended and Restated Investors' Rights Agreement dated March
1999.
10.21++ Series D Investors' Rights Agreement dated October 2000.
10.22++ Clinical Trial Agreement dated August 22, 2001 between the
Registrant and the Regents of the University of California.
10.23++ Agreement dated April 4, 2001 by and between the Registrant
and the Regents of the University of California.
10.24+++ Master Laboratory Services Agreement dated November 21, 2001
by and between the Registrant and Quintiles Laboratories
Limited.
16.1++ Letter of Arthur Andersen dated August 9, 2001.
16.2++ Letter of Arthur Andersen dated September 21, 2001.
23.1 Consent of KPMG LLP, Independent Auditors.
23.2++ Consent of Lane Powell Spears Lubersky LLP (contained in
exhibit 5.1).
24.1++ Powers of Attorney (included on signature page of
Registration Statement).
</Table>
- ---------------
+ Confidential treatment has been requested for portions of this exhibit
++ Previously filed.
II-3
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes.
(1) That for purposes of determining any liabilities under the Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) That for the purpose of determining any liability under the Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 7 to the Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Seattle, State of Washington, on December 14, 2001.
NORTHWEST BIOTHERAPEUTICS, INC.
By: /s/ DANIEL O. WILDS
------------------------------------
Daniel O. Wilds
------------------------------------
Its: Chairman of the Board,
President
----------------------------------
and Chief Executive Officer
----------------------------------
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 7 to the Registration Statement on Form S-1 has been signed
by the following persons in the capacities and on the dates indicated:
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DANIEL O. WILDS Chairman of the Board December 14, 2001
- ------------------------------------------------ of Directors,
Daniel O. Wilds President, Chief
Executive Officer and
Director (Principal
Executive Officer)
* Controller (Principal December 14, 2001
- ------------------------------------------------ Financial and
Larry Richards Accounting Officer)
* Director December 14, 2001
- ------------------------------------------------
Alton L. Boynton, Ph.D.
* Director December 14, 2001
- ------------------------------------------------
Randall L-W. Caudill, D.Phil.
* Director December 14, 2001
- ------------------------------------------------
George P. Hutchinson
* Director December 14, 2001
- ------------------------------------------------
Haakon Ragde, M.D.
* Director December 14, 2001
- ------------------------------------------------
C. William Schneider
*By: /s/ DANIEL O. WILDS
------------------------------------------
Daniel O. Wilds
As Attorney-In-Fact
</Table>
II-5
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
1.1++ Form of Underwriting Agreement.
3.1++ Fifth Amended and Restated Certificate of Incorporation.
3.2++ Bylaws of the Registrant.
4.1++ Specimen Common Stock Certificate.
5.1++ Opinion of Lane Powell Spears Lubersky LLP.
10.1+++ PSMA Sublicense Agreement by and between the Registrant and
Cytogen Corporation.
10.2+++ Collaboration Agreement by and between the Registrant and
Medarex, Inc.
10.3++ Development Agreement dated July 30, 1997 between the
Registrant and Medarex, Inc.
10.4++ Employment Agreement dated February 2, 2001 between the
Registrant and Daniel O. Wilds.
10.5++ Employment Agreement dated February 2, 2001 between the
Registrant and Alton L. Boynton.
10.6++ Office Lease dated October 22, 1999 between the Registrant
and Nexus Canyon Park LLC.
10.7++ Subordination, Nondisturbance and Attornment Agreement dated
November 10, 1999 between the Registrant, Nexus Canyon Park
LLC and Bank of America, N.A.
10.8++ Sublease Agreement dated as of September 1, 2000, between
the Registrant and Northwest Hospital Department of
Molecular Medicine.
10.9++ Loan Agreement dated April 24, 2001 between the Registrant
and Holmes Harbor Company, Inc.
10.10++ Master Note for Line of Credit dated July 1, 1997 between
the Registrant and Northwest Hospital.
10.11++ Amendment to Master Note for Line of Credit dated February
1, 2000 between the Registrant and Northwest Hospital.
10.12++ Second Amendment to Master Note for Line of Credit dated
August 9, 2001 between the Registrant and Northwest
Hospital.
10.13++ Clinical Trial Agreement dated January 7, 2000 between the
Registrant and the Regents of the University of California.
10.14++ Clinical Trial Agreement dated December 16, 1999 between the
Registrant and the University of Texas, M.D. Anderson Cancer
Center.
10.15++ 1998 Stock Option Plan.
10.16++ 1999 Executive Stock Option Plan.
10.17++ 2001 Stock Option Plan.
10.18++ 2001 Nonemployee Director Stock Incentive Plan.
10.19++ Employee Stock Purchase Plan
10.20++ Amended and Restated Investors' Rights Agreement dated March
1999.
10.21++ Series D Investors' Rights Agreement dated October 2000.
10.22++ Clinical Trial Agreement dated August 22, 2001 between the
Registrant and the Regents of the University of California.
10.23++ Agreement dated April 4, 2001 by and between the Registrant
and the Regents of the University of California.
10.24+++ Master Laboratory Services Agreement dated November 21, 2001
by and between the Registrant and Quintiles Laboratories
Limited.
16.1++ Letter of Arthur Andersen dated August 9, 2001.
16.2++ Letter of Arthur Andersen dated September 21, 2001.
23.1 Consent of KPMG LLP, Independent Auditors.
23.2++ Consent of Lane Powell Spears Lubersky LLP (contained in
exhibit 5.1).
24.1++ Powers of Attorney (included on signature page of
Registration Statement).
</Table>
- ---------------
+ Confidential treatment has been requested for portions of this exhibit
++ Previously filed.