Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-33393
Northwest Biotherapeutics, Inc.
(Exact Name of Registrant as Specified in its Charter)
     
Delaware   I.R.S. Employer Identification No. 94-3306718
(State or other Jurisdiction of Incorporation or Organization)    
7600 Wisconsin Avenue, Suite 750
Bethesda, Maryland 20814

(Address of Principal Executive Offices)
(240) 497-9024
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer o   Smaller reporting company þ
        (do not check if a smaller reporting company)    
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No þ
As of November 14, 2008, the total number of shares of common stock, par value $0.001 per share, outstanding was 42,492,853.
 
 

 

 


 

TABLE OF CONTENTS
NORTHWEST BIOTHERAPEUTICS, INC.
TABLE OF CONTENTS
         
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Item 1. Financial Statements
       
 
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  Exhibit 10.1
  Exhibit 10.2
  Exhibit 10.3
  Exhibit 10.4
  Exhibit 10.5
  Exhibit 10.6
  Exhibit 31.1
  Exhibit 32.1

 

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Part I — Financial Information
NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company)
Condensed Consolidated Balance Sheets
(in thousands)
                 
    December 31,     September 30,  
    2007     2008  
            (Unaudited)  
Assets
               
Current assets:
               
Cash
  $ 7,861     $ 23  
Prepaid expenses and other current assets
    823       1,662  
 
           
Total current assets
    8,684       1,685  
 
           
Property and equipment:
               
Laboratory equipment
    29       29  
Office furniture and other equipment
    94       82  
Construction in progress
          241  
 
           
 
    123       352  
Less accumulated depreciation and amortization
    (104 )     (104 )
 
           
Property and equipment, net
    19       248  
Deposit and other non-current assets
    3       6  
 
           
Total assets
  $ 8,706     $ 1,939  
 
           
Liabilities And Stockholders’ Equity
               
Current liabilities:
               
Accounts payable
  $ 846     $ 2,782  
Accounts payable, related party
    161       1,220  
Accrued expenses
    1,006       1,043  
Accrued expense, related party
    886       297  
Notes payable to related parties, net of discount
          5,212  
 
           
Total liabilities
    2,899       10,554  
 
           
Stockholders’ equity (deficit):
               
Preferred stock, $0.001 par value; 20,000,000 shares authorized at December 31, 2007 and September 30, 2008 and 0 shares issued and outstanding at December 31, 2007 and September 30, 2008
               
Common stock, $0.001 par value; 100,000,000 shares authorized at December 31, 2007 and September 30, 2008 and 42,346,085 and 42,492,853 shares issued and outstanding at December 31, 2007 and September 30, 2008, respectively
    42       42  
Additional paid-in capital
    148,064       150,723  
Deficit accumulated during the development stage
    (142,295 )     (159,384 )
Cumulative translation adjustment
    (4 )     4  
 
           
Total stockholders’ equity (deficit)
    5,807       (8,615 )
 
           
Total liabilities and stockholders’ equity
  $ 8,706     $ 1,939  
 
           
See accompanying notes to condensed consolidated financial statements.

 

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NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company)
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
                                         
                                    Period from  
                                    March 18, 1996  
    Three Months Ended     Nine Months Ended     (Inception) to  
    September 30,     September 30,     September 30,  
    2007     2008     2007     2008     2008  
Revenues:
                                       
Research material sales
  $ 10     $ 10     $ 10     $ 10     $ 550  
Contract research and development from related parties
                            1,128  
Research grants
                            1,061  
 
                             
Total revenues
    10       10       10       10       2,739  
 
                             
Operating expenses:
                                       
Cost of research material sales
                            382  
Research and development
    1,873       3,129       5,342       9,334       53,956  
General and administrative
    1,697       2,171       3,643       7,629       47,767  
Depreciation and amortization
    2             18       22       2,344  
Loss on facility sublease
                            895  
Asset impairment loss
                            2,056  
 
                             
Total operating costs and expenses
    3,572       5,300       9,003       16,985       107,400  
 
                             
Loss from operations
    (3,562 )     (5,290 )     (8,993 )     (16,975 )     (104,661 )
 
                             
Other income (expense):
                                       
Warrant valuation
                            6,759  
Gain on sale of intellectual property and property and equipment
          8             8       3,664  
Interest expense
    (697 )     (143 )     (5,561 )     (224 )     (21,554 )
Interest income and other
    350       11       738       102       1,217  
 
                             
Net loss
    (3,909 )     (5,414 )     (13,816 )     (17,089 )     (114,575 )
Issuance of common stock in connection with elimination of Series A and Series A-1 preferred stock preferences
                (12,349 )           (12,349 )
Modification of Series A preferred stock warrants
                (2,306 )           (2,306 )
Modification of Series A-1 preferred stock warrants
                (16,393 )           (16,393 )
Series A preferred stock dividends
                (334 )           (334 )
Series A-1 preferred stock dividends
                (917 )           (917 )
Warrants issued on Series A and Series A-1 preferred stock dividends
                (4,664 )           (4,664 )
Accretion of Series A preferred stock mandatory redemption obligation
                            (1,872 )
Series A preferred stock redemption fee
                            (1,700 )
Beneficial conversion feature of Series D preferred stock
                            (4,274 )
 
                             
Net loss applicable to common stockholders
  $ (3,909 )   $ (5,414 )   $ (50,779 )   $ (17,089 )   $ (159,384 )
 
                             
Net loss per share applicable to common stockholders — basic and diluted
  $ (0.09 )   $ (0.13 )   $ (2.76 )   $ (0.40 )        
 
                               
Weighted average shares used in computing basic and diluted net loss per share
    42,298       42,493       18,379       42,405          
 
                               
See accompanying notes to condensed consolidated financial statements.

 

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NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
                         
                    Period from  
                    March 18, 1996  
    Nine Months Ended     (Inception) to  
    September 30,     September 30,  
    2007     2008     2008  
Cash Flows from Operating Activities:
                       
Net Loss
  $ (13,816 )   $ (17,089 )   $ (114,575 )
Reconciliation of net loss to net cash used in operating activities:
                       
Depreciation and amortization
    18       22       2,344  
Amortization of deferred financing costs
                320  
Amortization of debt discount
    5,750             17,996  
Accrued interest converted to preferred stock
                260  
Accreted interest on convertible promissory note
    307             1,484  
Stock-based compensation costs
    4       2,434       6,225  
Gain on sale of intellectual property, property and equipment and royalty rights
          (8 )     (3,664 )
Loss on sale of property and equipment
                273  
Warrant valuation
                (6,759 )
Asset impairment loss
                2,066  
Loss on facility sublease
                895  
Increase (decrease) in cash resulting from changes in assets and liabilities:
                       
Accounts receivable
    3              
Prepaid expenses and other current assets
    (261 )     (617 )     (942 )
Accounts payable and accrued expenses
    (2,429 )     1,973       3,563  
Related party accounts payable and accrued expenses
          682       1,914  
Accrued loss on sublease
                (265 )
Deferred rent
                410  
 
                 
Net Cash used in Operating Activities
    (10,424 )     (12,603 )     (88,455 )
 
                 
Cash Flows from Investing Activities:
                       
Purchase of property and equipment, net
    (15 )     (251 )     (4,856 )
Proceeds from sale of property and equipment
          8       258  
Proceeds from sale of intellectual property
                1,816  
Proceeds from sale of marketable securities
                2,000  
Refund of security deposit
                (3 )
Transfer of restricted cash
                (1,035 )
 
                 
Net Cash used in Investing Activities
    (15 )     (243 )     (1,820 )
 
                 
Cash Flows from Financing Activities:
                       
Proceeds from issuance of notes payable to related parties
    2,600       5,000       10,750  
Repayment of note payable to stockholder
    (225 )           (6,700 )
Proceeds from issuance of convertible promissory note and warrants, net of issuance costs
                13,099  
Borrowing under line of credit, Northwest Hospital
                2,834  
Repayment of line of credit, Northwest Hospital
                (2,834 )
Repayment of convertible promissory note
                (119 )
Payment on capital lease obligations
    (2 )           (323 )
Payments on note payable
                (420 )
Payment of preferred stock dividends
    (1,252 )           (1,252 )
Proceeds from issuance of Series A cumulative preferred stock, net
                28,708  
Proceeds from exercise of stock options and warrants
                227  
Proceeds from issuance of common stock, net
    25,886             48,343  
Mandatorily redeemable Series A preferred stock redemption fee
                (1,700 )
Deferred financing costs
                (319 )
 
                 
Net Cash provided by Financing Activities
    27,007       5,000       90,294  
 
                 

 

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                    Period from  
                    March 18, 1996  
    Nine Months Ended     (Inception) to  
    September 30,     September 30,  
    2007     2008     2008  
Effect of exchange rates on cash
          8       4  
Net increase (decrease) in cash
    16,568       (7,846 )     23  
Cash at beginning of period
    307       7,861        
 
                 
Cash at end of period
  $ 16,875     $ 23     $ 23  
 
                 
Supplemental disclosure of cash flow information — Cash paid during the period for interest
  $ 8     $ 8     $ 1,879  
 
                 
Supplemental schedule of non-cash financing activities:
                       
Issuance of common stock in connection with elimination of Series A and Series A-1 preferred stock preferences
  $ 12,349     $     $ 12,349  
Modification of Series A preferred stock warrants
    2,306             2,306  
Modification of Series A-1 preferred stock warrants
    16,393             16,393  
Warrants issued on Series A and Series A-1 preferred stock dividends
    4,664             4,664  
Issuance of common stock for right to acquire license (prepaid expense)
                225  
Equipment acquired through capital leases
                285  
Common stock warrant liability
                11,841  
Accretion of mandatorily redeemable Series A preferred stock redemption obligation
                1,872  
Beneficial conversion feature of convertible promissory notes
                7,242  
Conversion of convertible promissory notes and accrued interest to Series D preferred stock
                5,324  
Conversion of convertible promissory notes and accrued interest to Series A-1 preferred stock
                7,707  
Conversion of convertible promissory notes and accrued interest to common stock
                269  
Issuance of Series C preferred stock warrants in connection with lease agreement
                43  
Issuance of common stock for license rights
                4  
Issuance of common stock and warrants to Medarex
                840  
Issuance of common stock to landlord
                35  
Deferred compensation on issuance of stock options and restricted stock grants
                759  
Cancellation of options and restricted stock
                849  
Stock subscription receivable
                480  
Financing of prepaid insurance through note payable
                491  
 
                 
See accompanying notes to condensed consolidated financial statements.

 

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Northwest Biotherapeutics, Inc.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Northwest Biotherapeutics, Inc. and its subsidiary, NW Bio Europe Sarl (collectively, the “Company” “we”, “us”, “our”). All material intercompany balances and transactions have been eliminated. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2007. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). All normal recurring adjustments which are necessary for the fair presentation of the results for the interim periods are reflected herein. Operating results for the three and nine month periods ended September 30, 2008 and 2007 are not necessarily indicative of results to be expected for a full year.
The independent registered public accounting firm’s report on the financial statements for the fiscal year ended December 31, 2007 states that because of recurring operating losses, net operating cash flow deficits, and a deficit accumulated during the development stage, there is substantial doubt about the Company’s ability to continue as a going concern. A “going concern” opinion indicates that the financial statements have been prepared assuming the Company will continue as a going concern and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
2. Summary of Significant Accounting Policies
The significant accounting policies used in the preparation of the Company’s condensed consolidated financial statements are disclosed in Note 3 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2007.
On April 1, 2008, we adopted a new policy for accounting for construction in progress. Construction in progress represents the cost of placing two clean rooms into service at the facility of our contract manufacturer. Upon completion of these clean rooms, depreciation will commence and be recognized over the estimated useful life of seven years.
Recent Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141(R), Business Combinations (“SFAS 141(R)”). SFAS 141(R) expands the scope of acquisition accounting to all transactions under which control of a business is obtained. Among other things, SFAS 141(R) requires that contingent consideration as well as contingent assets and liabilities be recorded at fair value on the acquisition date, that acquired in-process research and development be capitalized and recorded as intangible assets at the acquisition date, and also requires transaction costs and costs to restructure the acquired company be expensed. SFAS 141(R) is effective on a prospective basis as of January 1, 2009 for the Company. The Company is assessing the impact of the adoption of this standard on its financial position and results of operations.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (“SFAS 160”). The statement changes how noncontrolling interests in subsidiaries are measured to initially be measured at fair value and classified as a separate component of equity. SFAS 160 establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation. No gains or losses will be recognized on partial disposals of a subsidiary where control is retained. In addition, in partial acquisitions, where control is obtained, the acquiring company will recognize and measure at fair value all of the assets and liabilities, including goodwill, as if the entire target company had been acquired. The statement is to be applied prospectively for fiscal years beginning on or after December 15, 2008. We will adopt the statement on January 1, 2009. The Company is currently evaluating the impact the adoption of this statement will have, if any, on its consolidated financial position and results of operations.

 

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In December 2007, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) on Issue No. 07-1 (“EITF 07-1”), Accounting for Collaborative Arrangements . EITF 07-1 is effective for the Company beginning January 1, 2009 and will be applied retrospectively to all prior periods presented for all collaborative arrangements existing as of the effective date. EITF 07-1 defines collaborative arrangements and establishes reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. The Company is assessing the impact of adoption of EITF 07-1 on its financial position and results of operations.
On January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (“SFAS 157”), which clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the required disclosures on fair value measurements. In February 2008, the FASB issued Staff Position 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”) , that deferred the effective date of SFAS 157 for one year for nonfinancial assets and liabilities recorded at fair value on a non-recurring basis. The effect of adoption of SFAS 157 for financial assets and liabilities recognized at fair value on a recurring basis did not have a material impact on the Company’s financial position and results of operations (See Note 3). The Company is assessing the impact of the adoption of SFAS 157 for nonfinancial assets and liabilities on the Company’s financial position and results of operations.
On January 1, 2008, the Company adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits companies to irrevocably elect to measure certain financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. The Company did not elect the fair value option under SFAS 159 for any of its financial assets or liabilities upon adoption.
On January 1, 2008, the Company adopted EITF Issue No. 07-3, Accounting for Advance Payments for Goods or Services Received for Use in Future Research and Development Activities (“EITF 07-3”), which is being applied prospectively for new contracts. EITF 07-3 addresses nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities. EITF 07-3 requires these payments be deferred and capitalized and recognized as an expense as the related goods are delivered or the related services are performed. The effect of adoption of EITF 07-3 on the Company’s financial position and results of operations was not material.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”), which is effective January 1, 2009 for the Company. SFAS 161 requires enhanced disclosures about derivative instruments and hedging activities to allow for a better understanding of their effects on an entity’s financial position, financial performance, and cash flows. Among other things, SFAS 161 requires disclosure of the fair values of derivative instruments and associated gains and losses in a tabular format. Since SFAS 161 requires only additional disclosures about the Company’s derivatives and hedging activities, the adoption of SFAS 161 will not affect the Company’s financial position or results of operations, should the Company acquire derivatives in the future.
In May 2008, the FASB issued Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments that may be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”). FSP APB 14-1 states that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of Accounting Principles Board Opinion No. 14 and that issuers of such instruments should account separately for the liability and equity components of the instrument in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and must be applied retrospectively to all periods presented. The Company is assessing the impact of the adoption of this standard on its financial position and results of operations.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). The Company is assessing the impact of this Statement on its financial position and results of operations.
In May 2008, the FASB issued SFAS No.163, Accounting for Financial Guarantee Insurance Contracts, an interpretation of SFAS 60. The scope of this Statement is limited to financial guarantee insurance (and reinsurance) contracts, as described in this Statement, issued by enterprises included within the scope of SFAS 60. Accordingly, this Statement does not apply to financial guarantee contracts issued by enterprises excluded from the scope of SFAS 60 or to some insurance contracts that seem similar to financial guarantee contracts issued by insurance enterprises (such as mortgage guaranty insurance or credit insurance on trade receivables). This Statement does not apply to financial guarantee insurance contracts that are derivative instruments include within the scope of SFAS 133, Accounting for Derivative Instrument and Hedging Activities. The Company is assessing the impact of the adoption of this standard on its financial position and results of operations.

 

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In June 2008, the FASB ratified EITF Issue No. 07-5, Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity’s Own Stock (“EITF 07-5”). EITF 07-5 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. EITF 07-5 is effective for fiscal years beginning after December 15, 2008. The Company is assessing the impact of the adoption of EITF 07-5 on its financial position and results of operations.
In June 2008, the FASB issued EITF Issue No. 08-4, Transition Guidance for Conforming Changes to Issue No. 98-5 (EITF 08-4”). The objective of EITF 08-4 is to provide transition guidance for conforming changes made to EITF Issue No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios that result from EITF Issue No. 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments, and SFAS Issue No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. EITF 08-4 is effective for financial statements issued for fiscal years ending after December 15, 2008 and early application is permitted. The Company is assessing the impact of the adoption of EITF 08-4 on its financial position and results of operations.
In June 2008, the FASB issued FSP EITF Issue No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”) . FSP EITF 03-6-1 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 is effective for fiscal years beginning December 15, 2008, and interim periods within those years. Upon adoption, a company is required to retrospectively adjust its earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial data) to conform with the provisions of FSP EITF 03-6-1. The Company is assessing the impact of the adoption of FSP EITF 03-6-1 on its financial position and results of operations.
3. Fair Value Measurements
As discussed in Note 2 above, effective January 1, 2008, the Company adopted SFAS 157 for all financial assets and liabilities and for nonfinancial assets and liabilities recognized or disclosed at fair value in the consolidated financial statements on a recurring basis (at least annually). SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The standard also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. SFAS 157 describes three levels of inputs that may be used to measure fair value:
     
Level 1  
Quoted market prices in active markets for identical assets or liabilities.
   
 
Level 2  
Observable market based inputs or unobservable inputs that are corroborated by market data.
   
 
Level 3  
Unobservable inputs that are not corroborated by market data.
If the inputs used to measure the financial assets and liabilities fall within the different levels described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
As of September 30, 2008, the Company did not hold any assets and liabilities which were required to be measured at fair value on a recurring basis.
4. Stock-Based Compensation Plans
The Company has share-based compensation plans under which employees and non-employee directors may be granted options to purchase shares of Company common stock at the fair market value at the time of grant. Stock-based compensation cost is measured by the Company at the grant date, based on the fair value of the award, over the requisite service period. For options and warrants issued to non-employees, the Company recognizes stock compensation costs utilizing the fair value methodology prescribed in SFAS 123 (revised 2004), Share Based Payment (“SFAS 123(R)”), over the related period of benefit.
The stock-based compensation expense related to stock-based awards under SFAS 123(R) totaled approximately $220,000 and $0 for the three months ended September 30, 2008 and 2007, respectively. The stock-based compensation expense related to stock-based awards under SFAS 123(R) totaled approximately $2,434,000 and $4,000 for the nine months ended September 30, 2008 and 2007, respectively. As of September 30, 2008, the Company had $6.6 million of total unrecognized compensation cost related to non-vested stock-based awards granted under all equity compensation plans.

 

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Options to purchase 870,000 shares of the Company’s common stock were granted to new employees in April and May 2008. No options to purchase the Company’s common stock were granted during the nine month period ended September 30, 2007. The fair value of each option grant is estimated on the grant date using the Black-Scholes option pricing model.
Stock Option Plans
The Company established a stock option plan, which became effective on June 22, 2007 (the “2007 Stock Option Plan”). In April 2008, the Company increased the number of shares reserved for issuance under the 2007 Stock Option Plan by 519,132 shares of its common stock for an aggregate of 6,000,000 shares of its common stock, par value $0.001 per share (“Common Stock”), reserved for issue in respect of options granted under the plan. The plan provides for the grant to employees of the Company, including officers and employee directors, of “incentive stock options” within the meaning of Section 422 of the U.S. Internal Revenue Code of 1986, as amended, and for the grant of non-statutory stock options to the employees, officers, directors, including non-employee directors, and consultants of the Company. 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 the Company’s plans and determined as of the grant date, in excess of $100,000, any such excess options will be treated as non-statutory options.
5. Liquidity
The Company has experienced recurring losses from operations, and, as of September 30, 2008, had a working capital deficit of $8.9 million (including the various debt financings executed by the Company) and a deficit accumulated during the development stage of $159 million (including both cash expended and non cash items such as the value of stock option compensation).
Since 2004, the Company has undergone a significant recapitalization pursuant to which Toucan Capital Fund II, L.P. (“Toucan Capital”) loaned the Company an aggregate of $6.75 million and Toucan Partners, LLC (“Toucan Partners”) loaned the Company an aggregate of $4.825 million (excluding $225,000 in proceeds from a demand note that was received on June 13, 2007 and repaid on June 27, 2007). The Board’s Chairperson is the managing director of Toucan Capital and the managing member of Toucan Partners. During this period of time, the Company also borrowed funds from certain members of management. In addition, the Company raised capital in March 2006 through a closed equity financing with unrelated investors (the “PIPE Financing”) and in June 2007 sold shares of Common Stock to foreign institutional investors. In May 2008, the Company borrowed $4 million from Al Rajhi Holdings W.L.L. (“Al Rajhi”), which beneficially owns greater than 10% of our issued and outstanding common stock. On August 19, 2008, the Company borrowed $1 million from Toucan Partners. On October 1, 2008, the Company borrowed $1 million from SDS Capital Group SPC, Ltd. (“SDS”). On November 6, 2008, the Company borrowed an additional $1 million from SDS and $650,000 from a group of private investors.

 

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Management Loans
On November 13, 2003, the Company borrowed an aggregate of $335,000 from certain members of its management and issued warrants to acquire an aggregate of approximately 247,000 shares of Common Stock at an exercise price of $0.60 per share, which enabled the Company to continue operating into the first quarter of 2004. As of December 31, 2005, $111,000 of outstanding principal balance and the related accrued interest was repaid to certain prior members of management. On April 17, 2006, the final $224,000 of outstanding principal balance on these notes, and the related accrued interest, was converted into 146,385 and 32,796 shares, respectively, of our Common Stock, and in conjunction with the PIPE Financing, members of management exercised their warrants (200% warrant coverage) on a net exercise basis for 126,365 and 28,311 shares of our Common Stock, respectively. Accordingly, as of December 31, 2006, all of these loans were either repaid or converted into Common Stock.
During March and April 2006, warrants for the purchase of an aggregate of approximately 247,000 shares of Common Stock were exercised on a net exercise basis resulting in the issuance of approximately 227,000 shares of Common Stock to current and prior members of management.
Two former members of the Company’s management, who had participated as lenders in the Company’s management loans, have claimed that they are entitled to receive, for no additional cash consideration, an aggregate of up to approximately 630,000 additional shares of Common Stock due to the alleged triggering of an anti-dilution provision in the warrant agreements. The Company does not believe that these claims have merit, and intends to vigorously defend such claims.
Toucan Capital and Toucan Partners
Toucan Capital loaned the Company an aggregate of $6.75 million during 2004 and 2005. On January 26, 2005, the Company entered into a securities purchase agreement with Toucan Capital pursuant to which it purchased 32.5 million shares of the Company’s Series A cumulative convertible preferred stock (the “Series A Preferred Stock”) at a purchase price of $0.04 per share, for a net purchase price of $1.276 million, net of offering related costs of approximately $24,000. In April 2006, the $6.75 million of notes payable plus all accrued interest due to Toucan Capital were converted into shares of the Company’s Series A-1 cumulative convertible Preferred Stock (the “Series A-1 Preferred Stock”).
Toucan Partners loaned the Company $4.825 million in a series of transactions. From November 14, 2005 through March 9, 2006, the Company issued three promissory notes to Toucan Partners, pursuant to which Toucan Partners loaned the Company an aggregate of $950,000. In addition to the $950,000 of promissory notes, Toucan Partners provided $3.15 million in cash advances from October 2006 through April 2007, which were converted into convertible notes (the “2007 Convertible Notes”) and related warrants (the “2007 Warrants”) in April 2007. In April 2007, the three promissory notes were amended and restated to conform to the 2007 Convertible Notes. Payment was due under the notes upon written demand on or after June 30, 2007. Interest accrued at 10% per annum, compounded annually, on a 365-day year basis. The principal amount of, and accrued interest on, these notes, as amended, was convertible at Toucan Partners’ election into Common Stock on the same terms as the 2007 Convertible Notes.
The Company and Toucan Partners also entered into two promissory notes to fix the terms of two additional cash advances provided by Toucan Partners to the Company on May 14, 2007 and May 25, 2007 in the aggregate amount of $725,000, and issued warrants to purchase shares of the Company’s capital stock to Toucan Partners in connection with each such note. These notes and warrants are on the same terms as the 2007 Convertible Notes and 2007 Warrants and the proceeds of these notes enabled the Company to continue to operate and advance programs while raising additional equity financing.
During the fourth quarter of 2007, the Company repaid $5.3 million of principal and related accrued interest due to Toucan Partners pursuant to the convertible notes.
On August 19, 2008, the Company entered into a loan agreement with Toucan Partners, under which Toucan Partners provided the Company with debt financing in the amount of $1.0 million (the “Toucan Loan”). Under the terms of the Toucan Loan, the Company received $1.0 million in return for an unsecured promissory note in the principal amount of $1,060,000 (reflecting an original issue discount of six percent, or $60,000). The Toucan Loan has a term of six months. The note may be paid at any time without a prepayment penalty and the term may be extended in Toucan Partners discretion upon the Company’s request. At September 30, 2008, the carrying value of the Loan was $1,014,000, net of unamortized discount of $46,000. The Company amortizes the discount using the effective interest method over the term of the loan. During the three months ended September 30, 2008, the Company recorded interest expense related to the amortization of the discount of $14,000. Toucan Partners may elect to have the original issue discount amount paid at maturity in shares of common stock, at a price per share equal to the average closing price of the Company’s common stock on the NASD Over-The-Counter Bulletin Board during the ten trading days prior to the execution of the loan agreement. The intrinsic value of the Toucan Loan did not result in a beneficial conversion feature.

 

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Conversion of Preferred Stock and Related Matters
On June 1, 2007, the Company issued to Toucan Capital a new warrant to purchase the Company’s Series A-1 Preferred Stock (“Toucan Capital Series A-1 Warrant”) in exchange for the cancellation of all previously issued warrants to purchase Series A-1 Preferred Stock (or, at the election of Toucan Capital, any other equity or debt security of the Company) held by Toucan Capital. The new Toucan Capital Series A-1 Warrant was exercisable for 6,471,333 shares of Series A-1 Preferred Stock plus shares of Series A-1 Preferred Stock attributable to accrued dividends on the shares of Series A-1 Preferred Stock held by Toucan Capital (with each such Series A-1 Preferred Share convertible into 2.67 shares of Common Stock at $0.60 per share), compared to the 3,062,500 shares of Series A-1 Preferred Stock (with each such Series A-1 Preferred Share convertible into 2.67 shares of Common Stock at $0.60 per share) that were previously issuable to Toucan Capital upon exercise of the warrants being cancelled.
Also on June 1, 2007, the Company and Toucan Capital amended Toucan Capital’s warrant to purchase Series A Preferred Stock (the “Toucan Capital Series A Warrant”) to increase the number of shares of Series A Preferred Stock that are issuable upon exercise of the warrant to 32,500,000 shares of Series A Preferred Stock (plus shares of Series A Preferred Stock attributable to accrued dividends on the shares of Series A Preferred Stock held by Toucan Capital) from 13,000,000 shares of Series A Preferred Stock.
In connection with the modifications of the Series A and Series A-1 Preferred Stock warrants, the Company recognized reductions in earnings applicable to common stockholders in June 2007 of $2.3 million and $16.4 million, respectively. The fair value of the warrant modifications was determined using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%, risk-free interest rate of 5.0% volatility of 398%, and a contractual life of seven years.
On June 15, 2007, the Company, Toucan Capital, and Toucan Partners entered into a conversion agreement (“Conversion Agreement”) which became effective on June 22, 2007 upon the admission of the Company’s Common Stock to trade on Alternative Investment Market (“AIM”) of the London Stock Exchange (“Admission”).
Pursuant to the terms of the Conversion Agreement (i) Toucan Capital agreed to convert and has converted all of its shares of the Company’s Series A Preferred Stock and Series A-1 Preferred Stock (in each case, excluding any accrued and unpaid dividends) into Common Stock and agreed to eliminate a number of rights, preferences and protections associated with the Series A Preferred Stock and Series A-1 Preferred Stock, including the liquidation preference entitling Toucan Capital to certain substantial cash payments and (ii) Toucan Partners agreed to eliminate all of its existing rights to receive Series A-1 Preferred Stock under certain notes and warrants (and thereafter to receive shares of Common Stock rather than shares of Series A-1 Preferred Stock), and the rights, preferences and protections associated with the Series A-1 Preferred Stock, including the liquidation preference that would entitle Toucan Partners to certain substantial cash payments. In return for these agreements, the Company issued to Toucan Capital and Toucan Partners 4,287,851 and 2,572,710 shares of Common Stock, respectively. In connection with the issuance of these shares, the Company recognized a further reduction of earnings applicable to common stockholders of $12.3 million in June 2007.
Under the terms of the Conversion Agreement (i) the Toucan Capital Series A Warrant is exercisable for 2,166,667 shares of Common Stock rather than shares of Series A Preferred Stock (plus shares of Common Stock, rather than shares of Series A Preferred Stock, attributable to accrued dividends on the shares of Series A Preferred Stock previously held by Toucan Capital that were converted into Common Stock upon Admission, subject to the further provisions of the Conversion Agreement as described below) and (ii) the Toucan Capital Series A-1 Warrant became exercisable for an aggregate of 17,256,888 shares of Common Stock rather than shares of Series A-1 Preferred Stock (plus shares of Common Stock, rather than shares of Series A-1 Preferred Stock, attributable to accrued dividends on the shares of Series A-1 Preferred Stock previously held by Toucan Capital that were converted into Common Stock upon Admission), subject to further provisions of the Conversion Agreement as described below.
As noted above, the 32,500,000 shares of Series A Preferred Stock held by Toucan Capital converted, in accordance with their terms, into 2,166,667 shares of Common Stock and the 4,816,863 shares of Series A-1 Preferred Stock held by Toucan Capital converted, in accordance with their terms, into 12,844,968 shares of Common Stock.
Under the terms of the Conversion Agreement, Toucan Capital also agreed to temporarily defer receipt of the accrued and unpaid dividends on its shares of Series A Preferred Stock and Series A-1 Preferred Stock of an amount equal to $334,340 and $917,451, respectively, until not later than September 30, 2007. In September 2007, the Company paid these dividends in full to Toucan Capital.

 

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As a result of the financings described above, as of September 30, 2008, Toucan Capital held:
   
an aggregate of 19,299,486 shares of Common Stock;
 
   
warrants to purchase 14,150,732 shares of Common Stock at an exercise price of $0.60 per share; and
 
   
warrants to purchase 7,884,357 shares of Common Stock at an exercise price of $0.15 per share
As a result of the financings described above, as of September 30, 2008, Toucan Partners and its managing member Ms. Linda Powers held:
   
an aggregate of 2,572,710 shares of Common Stock; and
 
   
warrants to purchase 8,832,541 shares of Common Stock at an exercise price of $0.60 per share
The investments made by Toucan Capital and Toucan Partners described above were made pursuant to the terms and conditions of a Recapitalization Agreement originally entered into on April 26, 2004 with Toucan Capital (the “Recapitalization Agreement”). The Recapitalization Agreement originally contemplated the investment of up to $40 million through the issuance of new securities to Toucan Capital and a syndicate of other investors to be determined.
We and Toucan Capital amended the Recapitalization Agreement in conjunction with each successive loan agreement. The amendments generally (i) updated certain representations and warranties of the parties made in the Recapitalization Agreement, and (ii) made certain technical changes in the Recapitalization Agreement in order to facilitate the bridge loans described therein.
As of September 30, 2008, Toucan Capital, including the holdings of Toucan Partners and Ms. Linda Powers, held 21,872,196 shares of our capital stock, representing approximately 51.5% of our outstanding Common Stock. Further, as of September 30, 2008, Toucan Capital, including the holdings of Toucan Partners and Ms. Linda Powers, beneficially owned (including unexercised warrants) 52,739,826 shares of our capital stock, representing a beneficial ownership interest of approximately 71.9%.
Private Placement
On March 30, 2006, the Company entered into a securities purchase agreement with a group of accredited investors pursuant to which the Company agreed to sell an aggregate of approximately 2.6 million shares of its Common Stock, at a price of $2.10 per share, and to issue, for no additional consideration, warrants to purchase up to an aggregate of approximately 1.3 million shares of the Company’s Common Stock. The PIPE Financing closed and stock was issued to the new investors in early April and the Company received gross proceeds of approximately $5.5 million, before cash offering expenses of approximately $442,000. The total cost of the offering recorded, including both cash and non-cash costs, was approximately $837,000. The relative fair value of the Common Stock was estimated to be approximately $3.7 million and the relative fair value of the warrants was estimated to be $1.8 million as determined based on the relative fair value allocation of the proceeds received. The warrants were valued using the Black-Scholes option pricing model.
In connection with the securities purchase agreement, the Company issued approximately 67,000 warrants to its investment bank valued at approximately $395,000. The fair value of the warrants issued to the investment bank was determined using the Black-Scholes option pricing model based on the following assumptions: risk free interest rate of 4.8%, contractual life of five years, expected volatility of 382% and a dividend yield of 0%.
The warrants expire five years after issuance, and are initially exercisable at a price of $2.10 per share, subject to adjustments under certain circumstances.
Placement of Common Stock with Foreign Institutional Investors
On June 22, 2007, we placed 15,789,473 shares of our Common Stock with foreign institutional investors at a price of £0.95 per share. The gross proceeds from the placement were approximately £15.0 million, or $29.9 million, while net proceeds from the offering, after deducting commissions and expenses, were approximately £13.0 million, or $25.9 million. The net proceeds from the placement were used to fund clinical trials, product and process development, working capital needs and repayment of certain existing debt.

 

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Shareholder Loan
On May 12, 2008, the Company entered into a loan agreement with Al Rajhi, under which Al Rajhi provided the Company with debt financing in the amount of $4.0 million (the “Loan”). Under the terms of the Loan, the Company received $4.0 million in return for an unsecured promissory note in the principal amount of $4,240,000 (reflecting an original issue discount of six percent, or $240,000). The Loan has a term of six months. The note may be paid at any time without a prepayment penalty and the term may be extended in Al Rajhi’s discretion upon the Company’s request. At September 30, 2008, the carrying value of the Loan was $4,198,000, net of unamortized discount of $42,000. The Company amortizes the discount using the effective interest method over the term of the Loan. During the nine months ended September 30, 2008, the Company recorded interest expense related to the amortization of the discount of $198,000. Al Rajhi may elect to have the original issue discount amount paid at maturity in shares of Common Stock, at a price per share equal to the average closing price of the Company’s Common Stock on the NASD Over-The-Counter Bulletin Board during the ten trading days prior to the execution of the Loan agreement. The intrinsic value of the Loan did not result in a beneficial conversion feature on the maturity date of the Loan. On November 12, 2008 Al Rajhi agreed to extend the term of the Loan on terms that are currently being negotiated.
Other Loans
On October 1, 2008, the Company entered into a Loan Agreement (the “SDS Loan”) and Promissory Note (the “Note”) with SDS. Under the Note, SDS has loaned the Company $1.0 million. The Note is an unsecured obligation of the Company and accrues interest at the rate of 12% per year. The term of the Note is six months, with a maturity date of April 1, 2009. The Note may not be prepaid without the consent of SDS. The Note contains customary representations and warranties. In connection with the Note, the Company issued to SDS a warrant (the “Investment Warrant”) to purchase 299,046 shares of the Company’s common stock at an exercise price equal to $0.53 per share, which was the closing price of the Company’s Common Stock on the AIM on October 1, 2008. The Investment Warrant expires 5 years from the date of issuance.
In addition to the Investment Warrant, under the terms of the Note, the Company issued SDS an additional warrant as a placement fee (the “Placement Warrant”) to purchase 398,729 shares of the Company’s Common Stock at an exercise price equal to $0.53 per share. The Placement Warrant, which is in substantially the same form as the Investment Warrant, also expires 5 years after issuance.
Upon issuing the note to SDS, the Company recognized the note and warrants based on their relative fair values of $1.0 million and $0.6 million, respectively, in accordance with APB Opinion No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants ” (“APB 14”). The fair value of the note was determined using the Black-Scholes option pricing model. The relative fair value of the warrants was classified as a component of additional paid-in capital in accordance with SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“SFAS 150”) and EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock (“EITF 00-19”), with the corresponding amount reflected as a contra-liability to the debt. The fair value of the warrants was determined using the Black Scholes model, assuming a term of five years, volatility of 194%, no dividends, and a risk-free interest rate of 2.87%.
On dates between October 21, 2008 and November 6, 2008, the Company entered into Loan Agreements (the “Private Investor Loans”) and Promissory Notes (the “Private Investor Promissory Notes”) with SDS and a group of private investors (the “Private Investors”). Under the Private Investor Promissory Notes, SDS loaned the Company $1 million and the Private Investors loaned the Company $650,000 for an aggregate of $1.65 million. The Private Investor Promissory Notes are unsecured obligations of the Company and accrue interest at the rate of 12% per year. The term of the Private Investor Promissory Notes is six months, with maturity dates in April 2009. The Private Investor Promissory Notes may be prepaid at the discretion of the Company any time prior to maturity. However, prepayment of the Note(s) will not affect the warrants. The Private Investor Promissory Notes contain customary representations and warranties. The Company granted SDS and the Private Investors piggyback registration rights for any shares of the Company’s Common Stock issued to such investors upon exercise of the warrants issued to them in connection with the Private Investor Promissory Notes. Additionally, SDS received certain rights relating to subsequent financings, subject to the Company’s right to pre-pay SDS and avoid the rights being triggered.

 

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In connection with the Private Investor Promissory Notes, the Company issued to SDS and the Private Investors warrants to purchase, in the aggregate, 2,132,927 shares of the Company’s Common Stock at an exercise price of $0.41 per share. The Warrants expire five years from the date of issuance.
Upon issuing the notes to SDS, the Company recognized the note and warrants based on their relative fair values of $1.65 million and $0.9 million, respectively, in accordance with APB 14. The fair value of the notes and warrants was determined using the Black-Scholes option pricing model. The relative fair value of the warrants was classified as a component of additional paid-in capital in accordance with SFAS 150 and EITF 00-19, with the corresponding amount reflected as a contra-liability to the debt. The fair value of the warrants was determined using the Black Scholes model, assuming a term of five years, volatility of 196%, no dividends, and a risk-free interest rate of 2.50%.
Going Concern
The Company has raised $2.65 million since the quarter ended on September 30, 2008. These funds should be sufficient to fund operations into December 2008. We need to raise additional capital to fund our clinical trials and other operating activities and repay our indebtedness under the Loan, the Toucan Loan, the SDS Loan and the Private Investors Promissory Notes described in Note 10 “Subsequent Events”. The amount of additional funding required will depend on many factors, including the speed with which we are able to identify and hire people to fill key positions, the speed of patient enrollment in our DCVax ® -Brain cancer trial, and the potential adoption of DCVax ® -Brain in selected hospitals in Switzerland, and unanticipated developments, including adverse developments in pending litigation matters. However, without additional capital, we will not be able to complete our DCVax ® -Brain clinical trial or move forward with any of our other product candidates for which investigational new drug applications have been cleared by the U.S. Food and Drug Administration, or FDA. We will also not be to develop our second generation manufacturing processes, which offer substantial product cost reductions.
We will require additional funding before we achieve profitability. We are in late stage discussions with several parties in regard to additional financing transactions, which we hope to complete later in the year. There can be no assurance that our efforts to seek such funding will be successful. We may raise additional funds by issuing additional common stock or securities (equity or debt) convertible into shares of Common Stock, in which case, the ownership interest of our stockholders will be diluted. Any debt financing, if available, could include restrictive covenants that could limit our ability to take certain actions. Further, we may seek funding from Toucan Capital or Toucan Partners or their affiliates or other third parties. Such parties are under no obligation to provide us any additional funds, and any such funding may be dilutive to stockholders and may contain restrictive covenants. We currently are exploring additional financings with several other parties; however, there can be no assurance that we will be able to complete any such financings or that the terms of such financings will be attractive to us. If our capital raising efforts are unsuccessful, our inability to obtain additional cash as needed could have a material adverse effect on our financial position, results of operations and our ability to continue our existence. Our independent registered public accounting firm has indicated in its report on our consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2007 that there is substantial doubt about our ability to continue as a going concern.
6. Net Income (Loss) Per Share Applicable to Common Stockholders
Effective June 19, 2007, all shares of Common Stock issued and outstanding were combined and reclassified on a one-for-fifteen basis (the “Reverse Stock Split”). The effect of the Reverse Stock Split has been retroactively applied to all periods presented in the accompanying condensed consolidated financial statements and notes thereto.
For the three months ended September 30, 2008 and 2007 options to purchase 5,600,000 and 51,000 shares, respectively, of Common Stock and warrants to purchase 32 million shares of Common Stock were not included in the computation of diluted net loss per share because they were antidilutive. For the nine months ended September 30, 2008 and 2007 options to purchase 5,600,000 and 51,000 shares, respectively, of Common Stock and warrants to purchase 32 million shares of Common Stock were not included in the computation of diluted net loss per share because they were antidilutive.

 

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7. Related Party Transactions
Cognate Agreement
On July 30, 2004, the Company entered into a service agreement with Cognate Therapeutics, Inc. (now known as Cognate BioServices, Inc., or Cognate), a contract manufacturing and services organization in which Toucan Capital has a majority interest. In addition, two of the principals of Toucan Capital are members of Cognate’s board of directors and, on May 17, 2007, the managing director of Toucan Capital was appointed to serve as a director of the Company and to serve as the non-executive Chairperson of the Company’s Board of Directors. Under the service agreement, the Company agreed to utilize Cognate’s services for an initial two-year period, related primarily to manufacturing DCVax ® product candidates, regulatory advice, research and development preclinical activities and managing clinical trials. The agreement expired on July 30, 2006; however, the Company continued to utilize Cognate’s services under the same terms as set forth in the expired agreement. On May 17, 2007, the Company entered into a new service agreement with Cognate pursuant to which Cognate will provide certain consulting and, when needed, manufacturing services to the Company for its DCVax ® -Brain Phase II clinical trial. Under the terms of the new contract, the Company paid a non-refundable contract initiation fee of $250,000 and committed to pay budgeted monthly service fees of $400,000, subject to quarterly true-ups, and monthly facility fees of $150,000. The Company may terminate this agreement with 180 days notice and payment of all reasonable wind-up costs and Cognate may terminate the contract in the event that the brain cancer clinical trial fails to complete enrollment by July 1, 2009. However, if such termination by the Company occurs at any time prior to the earlier of the submission of an FDA biological license application/new drug application on the Company’s brain cancer clinical trial or July 1, 2010 or, such termination by Cognate results from failure of the brain cancer clinical trial to complete patient enrollment by July 1, 2009, the Company is obligated to make an additional termination fee payment to Cognate equal to $2 million.
During the three months ended September 30, 2008 and 2007, the Company recognized approximately $3.1 million and $1.9 million, respectively, of research and development costs related to these service agreements. During the nine months ended September 30, 2008 and 2007, respectively, the Company recognized approximately $6.0 million and $4.1 million of research and development costs related to these service agreements. As of September 30, 2008 and December 31, 2007, the Company owed Cognate approximately $1,126,000 and $0, respectively.
Toucan Capital
In accordance with a recapitalization agreement dated April 26, 2004 between the Company and Toucan Capital, as amended and restated on July 30, 2004 and further amended ten times between October 22, 2004 and November 14, 2005, pursuant to which Toucan Capital agreed to recapitalize the Company by making loans to the Company, the Company accrued and paid certain legal and other administrative costs on Toucan Capital’s behalf. Pursuant to the terms of the Conversion Agreement discussed above, the recapitalization agreement was terminated on June 22, 2007. Subsequent to the termination of the recapitalization agreement, Toucan Capital continues to incur costs on behalf of the Company. These costs primarily relate to consulting costs and travel expenses incurred in support of the Company’s international expansion efforts. In addition, since July 1, 2007, the Company has paid and recorded rent expense due to Toucan Capital Corporation, an affiliate of Toucan Capital and Toucan Partners, for its office space in Bethesda, Maryland.
During the three months ended September 30, 2008 and 2007, respectively, the Company recognized approximately $103,875 and $0 of general and administrative costs related to the recapitalization agreement, rent expense, as well as legal, travel and other costs incurred by Toucan Capital on the Company’s behalf. During the nine months ended September 30, 2008 and 2007, respectively, the Company recognized approximately $402,000 and $493,000 of general and administrative costs related to the recapitalization agreement, rent expense, as well as legal, travel and other costs incurred by Toucan Capital on the Company’s behalf. At September 30, 2008 and December 31, 2007, accrued expenses payable to Toucan Capital amounted to $50,000 and $900,000 respectively, and are included in the accompanying consolidated balance sheets.
Toucan Partners
On August 19, 2008, the Company entered into a loan agreement with Toucan Partners. See “Toucan Capital and Toucan Partners” in Note 5 above.
Al Rajhi
See “Shareholder Loan” in Note 5 above.

 

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8. Contingencies
Private Placement
On March 30, 2006, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with a group of accredited investors pursuant to which the Company sold an aggregate of approximately 2.63 million shares of its Common Stock, at a price of $2.10 per share (the “PIPE Shares”), and issued, for no additional consideration, warrants to purchase up to an aggregate of approximately 1.3 million shares of Company’s Common Stock (the “Warrant Shares”).
Under the Purchase Agreement, the Company agreed to register for resale under the Securities Act of 1933, as amended (the “Securities Act”), both the PIPE Shares and the Warrant Shares. The Company also agreed to other customary obligations regarding registration, including matters relating to indemnification, maintenance of the registration statement, payment of expenses, and compliance with state “blue sky” laws. The Company may be liable for liquidated damages if the registration statement (after being declared effective) ceases to be effective in a manner, and for a period of time, that violates the Company’s obligations under the Purchase Agreement. The amount of the liquidated damages payable to the investors is, in aggregate, one percent (1%) of the aggregate purchase price of the shares per month, subject to a cap of ten percent (10%) of the aggregate purchase price of the shares.
As of April 30, 2008, the Company’s registration statement ceased to be effective. The Company filed a post-effective amendment to the registration statement on April 29, 2008 which was declared effective by the SEC on May 7, 2008. Therefore, liquidated damages accrued for the period between May 1, 2008 and May 6, 2008. In addition, liquidated damages were accrued for the period from April 30, 2007 to February 8, 2008, when the Company’s registration statement ceased to be effective. As of September 30, 2008, the Company has accrued liquidated damages amounting to an aggregate of approximately $180,000, $12,353 of which was expensed during the nine months ended September 30, 2008.
Legal Proceedings
Soma Arbitration
The Company signed an engagement letter, dated October 15, 2003, with Soma Partners, LLC, or Soma, a New Jersey-based investment bank, pursuant to which the Company engaged them to locate potential investors. Pursuant to the terms of the engagement letter, any disputes arising between the parties would be submitted to arbitration in the New York metropolitan area. A dispute arose between the parties. Soma filed an arbitration claim against us with the American Arbitration Association in New York, NY claiming unpaid commission fees of $186,000 and seeking declaratory relief regarding potential fees for future transactions that may be undertaken by us with Toucan Capital. We vigorously disputed Soma’s claims on multiple grounds. We contended that we only owed Soma approximately $6,000.
Soma subsequently filed an amended arbitration claim, claiming unpaid commission fees of $339,000 and warrants to purchase 6% of the aggregate securities issued to date, and seeking declaratory relief regarding potential fees for future financing transactions which may be undertaken by us with Toucan Capital and others, which could potentially be in excess of $4 million. Soma also requested the arbitrator award its attorneys’ fees and costs related to the proceedings. We strongly disputed Soma’s claims and defended ourselves.
The arbitration proceedings occurred from March 8-10, 2005 and on May 24, 2005; the arbitrator ruled in our favor and denied all claims of Soma. In particular, the arbitrator decided that we did not owe Soma the fees and warrants sought by Soma, that we would not owe Soma fees in connection with future financings, if any, and that we had no obligation to pay any of Soma’s attorneys’ fees or expenses. The arbitrator agreed with us that the only amount we owed Soma was $6,702.87, which payment we made on May 27, 2005.
On August 29, 2005, Soma filed a notice of petition to vacate the May 24, 2005 arbitration award with the Supreme Court of the State of New York. On December 30, 2005, the Supreme Court of the State of New York dismissed Soma’s petition.
On February 3, 2006, Soma filed another notice of appeal with the Supreme Court of the State of New York. On December 6, 2006, we filed our brief for this appeal and on December 12, 2006, Soma filed its reply brief. On June 19, 2007, the Appellate Division, First Department of the Supreme Court of the State of New York, reversed the December 30, 2005 decision and ordered a new arbitration proceeding. On July 26, 2007, we filed a Motion for Leave to Appeal with the Court of Appeals of the State of New York and on August 3, 2007 Soma filed its reply brief. On October 16, 2007, the Court of Appeals of the State of New York denied our motion to appeal. The Company is waiting for the determination of a hearing date. We intend to continue to vigorously defend ourselves against Soma’s claims.

 

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Lonza Patent Infringement Claim
On July 27, 2007, Lonza Group AG (“Lonza”) filed a complaint against us in the U. S. District Court for the District of Delaware alleging patent infringement relating to recombinant DNA methods, sequences, vectors, cell lines and host cells. The complaint sought temporary and permanent injunctions enjoining us from infringing Lonza’s patents and unspecified damages. We strongly disputed all of the claims in Lonza’s complaint, sought dismissal of the complaint and also filed counterclaims against Lonza for damages. On November 27, 2007, the complaint was dismissed by the U.S. District Court for the District of Delaware. Also on November 27, 2007, a new complaint was filed by Lonza in the U.S. District Court for the District of Maryland alleging the same patent infringement relating to recombinant DNA methods, sequences, vectors, cell lines and host cells by the Company’s DCVax ® product candidates. On December 13, 2007, Lonza withdrew all claims relating to all of our products other than our DCVax ® -Prostate product. We continued to dispute these remaining claims concerning DCVax ® -Prostate and continue to seek dismissal of them. On April 14, 2008, we and Lonza entered into a binding agreement to settle the dispute. Under the terms of the settlement, we did not pay any monetary or other consideration to Lonza nor did we acquire any license from Lonza.
The only action to which we agreed was to destroy any recombinant modified prostate specific membrane antigen or cell lines using Lonza’s GS Expression System currently in our possession which had been manufactured by and purchased from Medarex Inc. more than six years ago, as well as any documentation received from Medarex on know-how regarding the use of the GS Expression System and cell lines. On May 14, 2008 the parties filed a Joint Stipulation of Dismissal of the Lawsuit with Prejudice, including all claims and counterclaims therein.
Stockholder Class Action Lawsuits
On August 13, 2007, a complaint was filed in the U.S. District Court for the Western District of Washington naming the Company, the Chairperson of its Board of Directors, Linda F. Powers, and its Chief Executive Officer, Alton L. Boynton, as defendants in a class action for violation of federal securities laws. After this complaint was filed, five additional complaints were filed in other jurisdictions alleging similar claims. The complaints were filed on behalf of purchasers of the Company’s Common Stock between July 9, 2007 and July 18, 2007 and allege violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The complaints seek unspecified compensatory damages, costs and expenses. On December 18, 2007, a consolidated complaint was filed in the U.S. District Court for the Western District of Washington consolidating the stockholder actions previously filed. We dispute these claims and intend to vigorously defend these actions.
SEC Inquiry
On August 13, 2007, we were notified that the SEC had initiated a non-public informal inquiry regarding the events surrounding our application for Swiss regulatory approval and related press releases dated July 9, 2007 and July 16, 2007. On March 3, 2008, the Company was notified that the SEC had initiated a formal investigation regarding this matter. We have been cooperating with the SEC in connection with the inquiry, and will continue to do so.
Management Warrants
On November 13, 2003, we borrowed an aggregate of $335,000 from certain members of our management. As part of the consideration for this loan, the lenders received warrants exercisable to acquire an aggregate of 0.25 million shares of our Common Stock. From March 2006 through May 2006, all of these warrants were exercised for Common Stock on a net exercise basis, pursuant to the terms of the warrants.
Two former members of management who had participated as lenders in our management loans have claimed that they are entitled to receive, for no additional cash consideration, an aggregate of up to approximately 630,000 additional shares of our Common Stock due to the alleged triggering of an anti-dilution provision in the warrant agreements. We do not believe that these claims have merit and, in the event such claims are pursued, we intend to vigorously defend against them.
We have no other legal proceedings pending at this time.
9. Common Stock
During the nine months ended September 30, 2008, the Company issued 24,578 shares of common stock upon the cashless exercise of options to purchase 33,334 shares of common stock.
On June 17, 2008, the Company issued 122,190 shares of common stock pursuant to a letter agreement under which we received an exclusive right to negotiate the terms of a potential transaction in which we would obtain the rights, title and interest to and under a certain license agreement. The fair value of the stock issued amounting to $225,000 is recorded as a prepaid expense at September 30, 2008, since the license agreement is expected to benefit future periods.

 

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10. Subsequent Events
On October 1, 2008, the Company entered into a Loan Agreement and Promissory Note with SDS. Under the Note, SDS has loaned the Company $1 million. The Note is an unsecured obligation of the Company and accrues interest at the rate of 12% per year. The term of the Note is six months, with a maturity date of April 1, 2009. The Note may not be prepaid without the consent of SDS. The Note contains customary representations and warranties. In connection with the Note, the Company issued to SDS a warrant to purchase 299,046 shares of the Company’s common stock at an exercise price equal to $0.53 per share, which was the closing price of the Company’s Common Stock on AIM on October 1, 2008. The Investment Warrant expires five years from the date of issuance.
In addition to the Investment Warrant, under the terms of the Note, the Company issued SDS an additional warrant as a placement fee to purchase 398,729 shares of the Company’s Common Stock at an exercise price equal to $0.53 per share. The Placement Warrant, which is in substantially the same form as the Investment Warrant, also expires five years after issuance.
Upon issuing the note to SDS, the Company recognized the note and warrants based on their relative fair values of $1.0 million and $0.6 million, respectively, in accordance with APB 14. The fair value of the notes and warants was determined using the Black-Scholes option pricing model. The relative fair value of the warrants was classified as a component of additional paid-in capital in accordance with SFAS 150, and EITF 00-19, with the corresponding amount reflected as a contra-liability to the debt. The fair value of the warrants was determined using the Black Scholes model, assuming a term of five years, volatility of 194%, no dividends, and a risk-free interest rate of 2.87%.
On dates between October 21, 2008 and November 6, 2008, the Company entered into Private Investor Loans and Promissory Notes with SDS and the Private Investors whereby SDS and the Private Investors loaned the Company $1 million and $650,000, respectively, for an aggregate of $1.65 million. The Private Investor Promissory Notes are unsecured obligations of the Company and accrue interest at the rate of 12% per year. The term of the Private Investor Promissory Notes is six months, with maturity dates in April 2009. The Private Investor Promissory Notes may be prepaid at the discretion of the Company any time prior to maturity. However, prepayment of the note(s) will not affect the warrants. The Private Investor Promissory Notes contain customary representations and warranties. The Company granted SDS and the Private Investors piggyback registration rights for any shares of the Company’s Common Stock issued to such investors upon exercise of the warrants issued to them in connection with the Private Investor Promissory Notes. Additionally, SDS received certain rights relating to subsequent financings, subject to the Company’s right to pre-pay SDS and avoid the rights being triggered.
In connection with the Private Investor Promissory Notes, the Company issued to SDS and the Private Investors warrants to purchase, in the aggregate, 2,132,927 shares of the Company’s Common Stock at an exercise price of $0.41 per share. The Warrants expire five years from the date of issuance.
Upon issuing the note to SDS and the Private Investors, the Company recognized the notes and warrants based on their relative fair values of $1.65 million and $0.9 million, respectively, in accordance with APB 14. The fair value of the notes and warrants was determined using the Black-Scholes option pricing model. The relative fair value of the warrants was classified as a component of additional paid-in capital in accordance with SFAS 150 and EITF 00-19, with the corresponding amount reflected as a contra-liability to the debt. The fair value of the warrants was determined using the Black Scholes model, assuming a term of five years, volatility of 196%, no dividends, and a risk-free interest rate of 2.50%.
On November 12, 2008, the term of the Loan expired. Al Rajhi has agreed to extend the term of the note and terms of the extension are currently being negotiated.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes to those statements included with this report. In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. The words “believe,” “expect,” “intend,” “anticipate,” and similar expressions are used to identify forward-looking statements, but some forward-looking statements are expressed differently. Many factors could affect our actual results, including those factors described under “Risk Factors” elsewhere in this report. These factors, among others, could cause results to differ materially from those presently anticipated by us. You should not place undue reliance on these forward-looking statements.
Overview
Northwest Biotherapeutics, Inc. was formed in 1996 and incorporated in Delaware in July 1998. We are a development stage 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, can cause undesirable side effects and provide marginal clinical benefits. Our approach in developing cancer therapies utilizes our expertise in the biology of dendritic cells, which are a type of white blood cell that activate the immune system. Our primary activities since incorporation have been focused on advancing proprietary dendritic cell immunotherapies for prostate and brain cancer, together with strategic and financial planning, and raising capital to fund our operations.
We have two basic technology platforms applicable to cancer therapeutics: dendritic cell-based cancer vaccines, which we call DCVax ® , and monoclonal antibodies for cancer therapeutics. DCVax ® is our registered trademark. Our DCVax ® dendritic cell-based cancer vaccine program is our main technology platform.
Our platform technology, DCVax ® , uses a patient’s own dendritic cells, the starter engine of the immune system. The dendritic cells are extracted from the body, loaded with tumor biomarkers or “antigens,” thereby creating a personalized therapeutic vaccine. Injection of these cells back into the patient initiates a potent immune response against cancer cells, resulting in delayed time to progression and prolonged survival.
We are currently recruiting patients with newly diagnosed GBM in a 240 patient Phase II DCVax ® -Brain clinical trial. Subject to our receipt of sufficient funding to carry out the study we plan to carry out the study at 40 to 50 clinical sites. The study was initially designed as an open-label 141 patient randomized study, in which patients received either DCVax ® -Brain in addition to standard of care or standard of care alone. After discussions with the Food and Drug Administration (“FDA”) the study was redesigned as a randomized, placebo controlled, double blinded study with a cross-over arm allowing control patients to be treated with DCVax ® -Brain in the event that their cancer progresses. As of November 14, 2008, 12 sites are active and an additional 24 sites are at various stages of the start-up process.
DCVax ® -Brain has been granted orphan drug status in the U.S., the European Union and Switzerland. Such status will afford DCVax ® -Brain 7 years of market exclusivity in the U.S. and 10 years in the European Union and Switzerland, if DCVax ® -Brain is the first product of its type to reach product approval.
We are also conducting a Phase I/II clinical trial using DCVax ® -L for recurrent ovarian cancer at The University of Pennsylvania Center for Research on Early Detection and Cure of Ovarian Cancer and the Abramson Cancer Center. The trial involves two sequential studies, and comprises an innovative combination of multiple treatment modalities. DCVax ® -L forms the cornerstone of the treatment regimen, and is complemented by administration of low doses of certain existing approved drugs to help improve the immune system environment, as well as by adoptive transfer of patients’ DCVax ® -L primed T cells. The funding for the study is being provided by the Ovarian Cancer Vaccine Initiative (a private philanthropic organization).

 

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In February 2007, we, through our legal representative, applied to the Bundesamt für Gesundheit (“BAG” or “Office Fédéral de la Santé Publique”) in Switzerland for an Authorization for Use (“Autorisation”). In June 2007, we, through our legal representative, received such Autorisation from the BAG to make DCVax ® -Brain available at limited selected medical centers in Switzerland, as well as an authorization (“Autorisation pour activités transfrontalières avec des transplants”) to export patients’ cells and tissues from Switzerland, for vaccine manufacturing in the United States, and to import patients’ DCVax ® -Brain finished vaccines into Switzerland. These authorizations are conditional upon certain implementation commitments which must be fulfilled to the satisfaction of Swissmedic (“Institut Suisse des Agents Thérapeutiques”) before the product may be made available (e.g., finalizing our arrangements for a clean-room suite for processing of patients’ immune cells). We believe we have fulfilled these commitments and are awaiting Swissmedic confirmation.
In fulfillment of a condition of the BAG authorization, a Marketing Authorisation Application (“MAA”) was submitted to Swissmedic in December 2007. The MAA differs from the Authorisation of Use granted by the BAG in that if Swissmedic approves an MAA the applicant is granted unrestricted marketing and commercialization rights within Switzerland. To date, Swissmedic has conducted, as part of the MAA review process, an inspection of the Company’s manufacturing facility in Switzerland in August 2008, and of NWBio Europe (our wholly owned subsidiary in Switzerland) with respect to the Company’s Pharmaceutical License Application in October 2008. The assessment by Swissmedic of our MAA will continue and include a full review by Swissmedic of the safety and efficacy data generated in our DCVax ® -Brain clinical studies to date. This review is underway and we are addressing inquiries from Swissmedic concerning our application. This review is likely to take at least one year from our submission in December 2007. Until such an MAA is granted, and assuming we complete our implementation commitments to the satisfaction of Swissmedic under the Authorisation of Use, DCVax ® -Brain may only be made available at the selected Medical Centers in Switzerland under the Autorisation as granted by the BAG. The term of the BAG authorization is five years from June 2007.
We completed an initial public offering of our common stock on the NASDAQ Stock Market (“NASDAQ”) in December 2001 and an initial public offering of our common stock on the Alternative Investment Market (“AIM”) of the London Stock Exchange in June 2007.

 

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As described in further detail elsewhere in this report, since 2004 we have undergone a significant recapitalization pursuant to which (i) Toucan Capital Fund II, L.P. (“Toucan Capital”) loaned us an aggregate of $6.75 million, which notes payable and accrued interest thereon were converted into shares of our Series A-1 cumulative convertible preferred stock (the “Series A-1 Preferred Stock”) in April 2006 and subsequently converted into common stock in June 2007; and (ii) Toucan Partners, LLC (“Toucan Partners”) loaned us an aggregate of $4.825 million (excluding $225,000 in proceeds from a demand note that was received on June 13, 2007 and repaid on June 27, 2007), which borrowings have, in a series of transactions, been converted into convertible notes with an aggregate outstanding principal of $4.825 million and related warrant coverage. In the fourth quarter of 2007, we repaid all of the remaining outstanding principal and accrued interest pursuant to these convertible notes in the aggregate amount of $5.3 million to Toucan Partners.
In addition, on January 26, 2005, Toucan Capital purchased 32.5 million shares of our Series A cumulative convertible preferred stock (the “Series A Preferred Stock”) at a purchase price of $0.04 per share, for a net purchase price of $1.276 million, net of offering related costs of approximately $24,000. In June 2007, this Series A Preferred Stock was converted into common stock.
On March 30, 2006, we sold approximately 2.6 million shares of common stock at a purchase price of $2.10 per share and raised aggregate gross proceeds of approximately $5.5 million in a closed equity financing with unrelated investors (the “PIPE Financing”) The total cost of the offering recorded, including both cash and non-cash costs, was approximately $837,000.
On June 22, 2007, we placed 15,789,473 shares of our common stock with foreign institutional investors at a price of £0.95 per share. The gross proceeds from the placement were approximately £15.0 million, or $29.9 million, while net proceeds from the offering, after deducting commissions and expenses, were approximately £13.0 million, or $25.9 million.
On May 12, 2008, the Company entered into a loan agreement with Al Rajhi Holdings W.L.L. (“Al Rajhi”) under which Al Rajhi provided the Company with debt financing in the amount of $4.0 million (the “Loan”). Under the terms of the Loan, the Company received $4.0 million in return for an unsecured promissory note in the principal amount of $4,240,000 (reflecting an original issue discount of six percent, or $240,000). The Loan has a term of six months. The note may be paid at any time without a prepayment penalty and the term may be extended in Al Rajhi’s discretion upon the Company’s request. At September 30, 2008, the carrying value of the Loan was $4,198,000, net of unamortized discount of $42,000. The Company amortizes the discount using the effective interest method over the term of the Loan. During the nine months ended September 30, 2008 the Company recorded interest expense related to the amortization of the discount of $198,000. Al Rajhi may elect to have the original issue discount amount paid at maturity in shares of common stock, at a price per share equal to the average closing price of the Company’s Common Stock on the NASD Over-The-Counter Bulletin Board during the ten trading days prior to the execution of the Loan agreement. The intrinsic value of the Loan did not result in a beneficial conversion feature. On November 12, 2008 Al Rajhi, agreed to extend the term of the loan on terms that are currently being negotiated.
On August 19, 2008, the Company entered into a loan agreement with Toucan Partners, under which Toucan Partners provided the Company with debt financing in the amount of $1.0 million (the “Toucan Loan”). Under the terms of the Toucan Loan, the Company received $1.0 million in return for an unsecured promissory note in the principal amount of $1,060,000 (reflecting an original issue discount of six percent, or $60,000). The Toucan Loan has a term of six months. The note may be paid at any time without a prepayment penalty and the term may be extended in Toucan Partners’ discretion upon the Company’s request. Toucan Partners may elect to have the original issue discount amount paid at maturity in shares of common stock, at a price per share equal to the average closing price of the Company’s common stock on the NASD Over-The-Counter Bulletin Board during the ten trading days prior to the execution of the loan agreement. The intrinsic value of the Toucan Loan did not result in a beneficial conversion feature.
On October 1, 2008, the Company entered into a Loan Agreement (the “SDS Loan”) and Promissory Note (the “Note”) with SDS Capital Group SPC, Ltd. (“SDS”). Under the Note, SDS has loaned the Company $1.0 million. The Note is an unsecured obligation of the Company and accrues interest at the rate of 12% per year. The term of the Note is six months, with a maturity date of April 1, 2009. The Note may not be prepaid without the consent of SDS. The Note contains customary representations and warranties, and affirmative and negative covenants regarding the operation of the Company’s business during the term of the Note. In connection with the Note, the Company issued to SDS a warrant (the “Investment Warrant”) to purchase 299,046 shares of the Company’s common stock at an exercise price equal to $0.53 per share, which was the closing price of the Company’s common stock on AIM on October 1, 2008. The Investment Warrant expires five years from the date of issuance.
In addition to the Investment Warrant, under the terms of the Note, the Company issued SDS an additional warrant as a placement fee (the “Placement Warrant”) to purchase 398,729 shares of the Company’s common stock at an exercise price equal to $0.53 per share. The Placement Warrant, which is in substantially the same form as the Investment Warrant, also expires 5 years after issuance.

 

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Upon issuing the note to SDS, the Company recognized the note and warrants based on their relative fair values of $1.0 million and $0.6 million, respectively, in accordance with APB Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants (“APB 14”). The fair value of the notes and warrants was determined using the Black-Scholes option pricing model. The relative fair value of the warrants was classified as a component of additional paid-in capital in accordance with SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of the Liabilities and Equity” (“SFAS 150”) and EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”), with the corresponding amount reflected as a contra-liability to the debt. The fair value of the warrants was determined using the Black Scholes model, assuming a term of five years, volatility of 194%, no dividends, and a risk-free interest rate of 2.87%.
On dates between October 21, 2008 and November 6, 2008, the Company entered into Loan Agreements (the “Private Investor Loans”) and Promissory Notes (the “Private Investor Promissory Notes”) with SDS and a group of private investors (the “Private Investors”). Under the Private Investor Promissory Notes, SDS and the Private Investors have loaned the Company $1 million and $650,000 respectively for an aggregate of $1.65 million. The Private Investor Promissory Notes are unsecured obligations of the Company and accrue interest at the rate of 12% per year. The term of the Private Investor Promissory Notes is six months, with maturity dates in April 2009. The Private Investor Promissory Notes may be prepaid at the discretion of the Company any time prior to maturity. The Private Investor Promissory Notes contain customary representations and warranties. The Company granted SDS and the Private Investors piggyback registration rights for any of the Company’s common stock issued to such investors upon exercise of the warrants issued to them in connection with the Private Investor Promissory Notes. Additionally, SDS will receive certain rights relating to subsequent financings, subject to the Company’s right to pre-pay SDS and avoid the rights being triggered.
In connection with the Private Investor Promissory Notes, the Company issued to SDS and the Private Investors warrants to purchase, in the aggregate, 2,132,927 shares of the Company’s common stock at an exercise price of $0.41 per share. The Warrants expire five years from the date of issuance.
Upon issuing the note to SDS and the Private Investors, the Company recognized the notes and warrants based on their relative fair values of $1.65 million and $0.9 million, respectively, in accordance with APB 14. The fair value of the notes and warrants was determined using the Black-Scholes option pricing model. The relative fair value of the warrants was classified as a component of additional paid-in capital in accordance with SFAS 150 and EITF 00-19 with the corresponding amount reflected as a contra-liability to the debt. The fair value of the warrants was determined using the Black Scholes model, assuming a term of five years, volatility of 196%, no dividends, and a risk-free interest rate of 2.50%.
The Company has raised $2.65 million since the quarter ended on September 30, 2008. These funds should be sufficient to fund operations into December 2008. We need to raise additional capital to fund our clinical trials and other operating activities and to repay our indebtedness under the Loan, the Toucan Loan the SDS Loan and the Private Investor Promissory Notes. We are in late stage discussions with several parties in regard to additional financing transactions with several other parties, which we hope to complete later this year. However, there can be no assurance that we will be able to complete any of the financings, or that the terms for such financings will be favorable to us. Our independent auditors have indicated in their report on our December 31, 2007 financial statements that there is substantial doubt about our ability to continue as a going concern. See “— Liquidity and Capital Resources” for additional information regarding our liquidity, cash flow and financings.

 

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Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. The critical accounting policies that involve significant judgments and estimates used in the preparation of our financial statements are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2007.
Recent Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141(R), Business Combinations (“SFAS 141(R)”). SFAS 141(R) expands the scope of acquisition accounting to all transactions under which control of a business is obtained. Among other things, SFAS 141(R) requires that contingent consideration as well as contingent assets and liabilities be recorded at fair value on the acquisition date, that acquired in-process research and development be capitalized and recorded as intangible assets at the acquisition date, and also requires transaction costs and costs to restructure the acquired company be expensed. SFAS 141(R) is effective on a prospective basis as of January 1, 2009 for the Company. The Company is assessing the impact of the adoption of this standard on its financial position and results of operations.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (“SFAS 160”). The statement changes how noncontrolling interests in subsidiaries are measured to initially be measured at fair value and classified as a separate component of equity. SFAS 160 establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation. No gains or losses will be recognized on partial disposals of a subsidiary where control is retained. In addition, in partial acquisitions, where control is obtained, the acquiring company will recognize and measure at fair value all of the assets and liabilities, including goodwill, as if the entire target company had been acquired. The statement is to be applied prospectively for fiscal years beginning on or after December 15, 2008. We will adopt the statement on January 1, 2009. The Company is currently evaluating the impact the adoption of this statement will have, if any, on its consolidated financial position or results of operations.

 

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In December 2007, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) on Issue No. 07-1 (“EITF 07-1”), Accounting for Collaborative Arrangements . EITF 07-1 is effective for the Company beginning January 1, 2009 and will be applied retrospectively to all prior periods presented for all collaborative arrangements existing as of the effective date. EITF 07-1 defines collaborative arrangements and establishes reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. The Company is assessing the impact of adoption of EITF 07-1 on its financial position and results of operations.
On January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (“SFAS 157”), which clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the required disclosures on fair value measurements. In February 2008, the FASB issued Staff Position 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”) , that deferred the effective date of SFAS 157 for one year for nonfinancial assets and liabilities recorded at fair value on a non-recurring basis. The effect of adoption of SFAS 157 for financial assets and liabilities recognized at fair value on a recurring basis did not have a material impact on the Company’s financial position and results of operations (See Note 3). The Company is assessing the impact of the adoption of SFAS 157 for nonfinancial assets and liabilities on the Company’s financial position and results of operations.
On January 1, 2008, the Company adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits companies to irrevocably elect to measure certain financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. The Company did not elect the fair value option under SFAS 159 for any of its financial assets or liabilities upon adoption.
On January 1, 2008, the Company adopted EITF Issue No. 07-3, Accounting for Advance Payments for Goods or Services Received for Use in Future Research and Development Activities (“EITF 07-3”), which is being applied prospectively for new contracts. EITF 07-3 addresses nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities. EITF 07-3 requires these payments be deferred and capitalized and recognized as an expense as the related goods are delivered or the related services are performed. The effect of adoption of EITF 07-3 on the Company’s financial position and results of operations was not material.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”), which is effective January 1, 2009 for the Company. SFAS 161 requires enhanced disclosures about derivative instruments and hedging activities to allow for a better understanding of their effects on an entity’s financial position, financial performance, and cash flows. Among other things, SFAS 161 requires disclosure of the fair values of derivative instruments and associated gains and losses in a tabular format. Since SFAS 161 requires only additional disclosures about the Company’s derivatives and hedging activities, the adoption of SFAS 161 will not affect the Company’s financial position or results of operations, should the Company acquire derivatives in the future.
In May 2008, the FASB issued Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments that may be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”). FSP APB 14-1 states that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of Accounting Principles Board Opinion No. 14 and that issuers of such instruments should account separately for the liability and equity components of the instrument in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and must be applied retrospectively to all periods presented. The Company is assessing the impact of the adoption of this standard on its financial position and results of operations.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). The Company is assessing the impact of this Statement on its financial position and results of operations.
In May 2008, the FASB issued SFAS No.163, Accounting for Financial Guarantee Insurance Contracts, an interpretation of SFAS 60. The scope of this Statement is limited to financial guarantee insurance (and reinsurance) contracts, as described in this Statement, issued by enterprises included within the scope of SFAS 60. Accordingly, this Statement does not apply to financial guarantee contracts issued by enterprises excluded from the scope of SFAS 60 or to some insurance contracts that seem similar to financial guarantee contracts issued by insurance enterprises (such as mortgage guaranty insurance or credit insurance on trade receivables). This Statement does not apply to financial guarantee insurance contracts that are derivative instruments include within the scope of SFAS 133, Accounting for Derivative Instrument and Hedging Activities. The Company is assessing the impact of the adoption of this standard on its financial position and results of operations.

 

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In June 2008, the FASB ratified EITF Issue No. 07-5, Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity’s Own Stock (“EITF 07-5”). EITF 07-5 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. EITF 07-5 is effective for fiscal years beginning after December 15, 2008. The Company is assessing the impact of the adoption of EITF 07-5 on its financial position and results of operations.
In June 2008, the FASB issued EITF Issue No. 08-4, Transition Guidance for Conforming Changes to Issue No. 98-5 (EITF 08-4”). The objective of EITF 08-4 is to provide transition guidance for conforming changes made to EITF Issue No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios that result from EITF Issue No. 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments, and SFAS Issue No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. EITF 08-4 is effective for financial statements issued for fiscal years ending December 15, 2008 and early application is permitted. The Company is assessing the impact of the adoption of EITF 08-4 on its financial position and results of operations.
In June 2008, the FASB issued FSP EITF Issue No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”) . FSP EITF 03-6-1 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. Upon adoption, a company is required to retrospectively adjust its earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial data) to conform with the provisions of FSP EITF 03-6-1. The Company is assessing the impact of the adoption of FSP EITF 03-6-1 on its financial position and results of operations.
Results of Operations
Operating expenses:
Operating costs and expenses consist primarily of research and development expenses, including clinical trial expenses, which increase when we are actively participating in clinical trials, and general and administrative expenses.
Research and development:
Discovery and preclinical research and development expenses include scientific personnel-related salary and benefit expenses, costs of laboratory supplies used in our internal research and development projects, travel, regulatory compliance, and expenditures for preclinical and clinical trial operation and management when we are actively engaged in clinical trials.
Because we are a development stage company, we do not allocate research and development costs on a project basis. We adopted this policy, in part, due to the unreasonable cost burden associated with accounting at such a level of detail and our limited number of financial and personnel resources. We shifted our focus, starting in 2002, from discovering, developing, and commercializing immunotherapy products to conserving cash and primarily concentrating on securing new working capital to re-activate our two DCVax ® clinical trial programs.
General and administrative:
General and administrative expenses include administrative personnel related salary and benefit expenses, cost of facilities, insurance, travel, legal support, property and equipment and amortization of stock options and warrants.
Three Months Ended September 30, 2007 and 2008
We recognized a net loss of $5.4 million for the three months ended September 30, 2008 compared to a net loss of $3.9 million for the three months ended September 30, 2007. The increase in net loss was primarily attributable to an increase in operating expenses for the three months ended September 30, 2008 as compared to the same period in 2007, offset by a decrease in net interest expense for the three months ended September 30, 2008 compared to the same period in 2007.

 

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Research and Development Expense. Research and development expense increased from $1.9 million for the three months ended September 30, 2007 to $3.1 million for the three months ended September 30, 2008. This increase was primarily due to:
   
increased monthly contract manufacturing costs for our DCVax ® product due to the increased number of participants in the DCVax ® - Brain clinical trial;
 
   
increased support costs related to the development of a clinical trial program and potential compassionate use/named patient programs in certain countries outside the U.S.;
 
   
increased clinical trials costs in the U.S. due to the initiation of additional clinical sites and screening and enrollment of patients in our Phase II DCVax ® -Brain clinical trial; and
 
   
increased personnel costs as we build our clinical organization.
General and Administrative Expense. General and administrative expense increased from $1.7 million for the three months ended September 30, 2007 to $2.2 million for the three months ended September 30, 2008. This increase was primarily due to:
   
increased costs associated with our AIM listing in the United Kingdom;
 
   
potentially non-recurring start-up costs (mainly consulting and travel costs) for international programs, locations such as in Switzerland, Spain and Israel;
 
   
higher staffing costs associated with expansion of our business activities in the U.S. and internationally;
 
   
legal costs associated with ongoing litigation; and
 
   
SFAS 123(R) expense associated with stock option grants to executives.
Depreciation and Amortization. Depreciation and amortization decreased from $2,000 during the three months ended September 30, 2007 to $0 for the three months ended September 30, 2008. The decrease in the quarter was due to a true-up adjustment of accumulated depreciation at September 30, 2008.
Interest Income (Expense), Net. Interest expense net decreased from $347,000 for the three months ended September 30, 2007 to approximately $132,000 for the three months ended September 30, 2008. Interest expense for the three-month period ended September 30, 2007 was primarily related to the debt discount and interest accretion associated with our then-outstanding convertible promissory notes and related warrants. As of December 31, 2007, all of the related notes were repaid. Accordingly, we did not accrue interest expense on those notes during the three months ended September 30, 2008.
Nine Months Ended September 30, 2007 and 2008
We recognized a net loss of $17.1 million for the nine months ended September 30, 2008 compared to a net loss of $13.8 million for the nine months ended September 30, 2007. The increase in net loss was primarily attributable to an increase in operating expenses for the nine months ended September 30, 2008 compared to the same period in 2007, offset by a decrease in interest expense for the nine months ended September 30, 2008 as compared to the same period in 2007.
Research and Development Expense. Research and development expense increased from $5.3 million for the nine months ended September 30, 2007 to $9.3 million for the nine months ended September 30, 2008. This increase was primarily due to:
   
increased monthly contract manufacturing costs for our DCVax ® product; due to the increased number of participants in our DCVax ® -Brain clinical trial
 
   
increased costs in Switzerland relating to the Authorization for Use, and the application for Marketing Authorization, relating to DCVax ® -Brain;
 
   
increased support costs related to the development of a clinical trial program and potential compassionate use/named patient programs in certain countries outside the U.S.;
 
   
increased clinical trial costs due to the initiation of additional clinical sites and screening and enrollment of patients in our Phase II DCVax ® -Brain clinical trial; and
 
   
increased personnel costs as we build our clinical organization.

 

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General and Administrative Expense. General and administrative expense increased from $3.6 million for the nine months ended September 30, 2007 to $7.6 million for the nine months ended September 30, 2008. This increase was primarily due to:
   
costs associated with our AIM listing in the United Kingdom which were higher in 2008 than in 2007 when the initial listing occurred;
 
   
potentially non-recurring start-up costs (mainly consulting and travel costs) for international programs, locations such as in Switzerland, Spain and Israel;
 
   
higher staffing costs associated with expansion of our business activities in the United States and internationally;
 
   
legal costs associated with ongoing litigation;
 
   
additional rent expense related to our new headquarters located in Bethesda, Maryland; and
 
   
SFAS 123(R) expense associated with stock option grants to executives.
Depreciation and Amortization. Depreciation and amortization increased from $18,000 during the nine months ended September 30, 2007 to $22,000 for the nine months ended September 30, 2008 due to more assets being placed into service in 2008 compared to 2007.
Interest Income (Expense), Net. Interest expense net decreased from $4.8 million for the nine months ended September 30, 2007 to approximately $122,000 for the nine months ended September 30, 2008. Interest expense for the nine-month period ended September 30, 2007 was primarily related to the debt discount and interest accretion associated with our then-outstanding convertible promissory notes and related warrants. As of December 31, 2007, all of the related notes were repaid. Accordingly, we did not accrue interest expense on those notes during the nine months ended September 30, 2008.
Liquidity and Capital Resources
Toucan Capital and Toucan Partners
Since 2004, we have undergone a significant recapitalization pursuant to which Toucan Capital loaned us an aggregate of $6.75 million and Toucan Partners loaned us an aggregate of $4.825 million (excluding $225,000 in proceeds from a demand note that was received on June 13, 2007 and repaid on June 27, 2007). Our Chairperson is the managing director of Toucan Capital and the managing member of Toucan Partners.
On January 26, 2005, we entered into a securities purchase agreement with Toucan Capital pursuant to which it purchased 32.5 million shares of our Series A Preferred Stock at a purchase price of $0.04 per share, for a net purchase price of $1.276 million, net of offering related costs of approximately $24,000. In April 2006, the $6.75 million of notes payable plus all accrued interest due to Toucan Capital were converted into shares of the Company’s Series A-1 Preferred Stock.
Simultaneously with Toucan Capital’s notes payable conversion, our President and Chief Executive Officer, and our Chief Technical Officer, each elected to convert the principal and accrued interest on certain convertible promissory notes held by each of them into 146,385 and 32,796 shares, respectively, of our common stock. In conjunction with the PIPE Financing, our President and Chief Executive Officer and our Chief Technical Officer exercised certain warrants held by each of them on a net exercise basis for 126,365 and 28,311 shares of our common stock, respectively.
The $4.825 million loaned to us by Toucan Partners was advanced in a series of transactions. From November 14, 2005 through March 9, 2006, we issued three promissory notes to Toucan Partners, pursuant to which Toucan Partners loaned us an aggregate of $950,000. In addition to the $950,000 of promissory notes, Toucan Partners provided $3.15 million in cash advances from October 2006 through April 2007, which were converted into convertible notes (the “2007 Convertible Notes”) and related warrants (the “2007 Convertible Warrants”) in April 2007. In April 2007, the three promissory notes were amended and restated to conform to the 2007 Convertible Notes. Payment was due under the notes upon written demand on or after June 30, 2007. Interest accrued at 10% per annum, compounded annually, on a 365-day year basis. The principal amount of, and accrued interest on, these notes, as amended, was convertible at Toucan Partners’ election into common stock on the same terms as the 2007 Convertible Notes.

 

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Toucan Partners also entered into two promissory notes with us to fix the terms of two additional cash advances provided by Toucan Partners to us on May 14, 2007 and May 25, 2007 in the aggregate amount of $725,000, and we issued warrants to purchase shares of our common stock to Toucan Partners in connection with each such note. These notes and warrants are on the same terms as the 2007 Convertible Notes and 2007 Warrants and the proceeds of these notes enabled us to continue to operate and advance programs while raising additional equity financing.
During the fourth quarter of 2007, we repaid the entire $5.3 million in principal and related accrued interest due to Toucan Partners pursuant to the convertible notes.
Conversion of Preferred Stock and Related Matters
On June 1, 2007, we issued to Toucan Capital a new warrant to purchase our Series A-1 Preferred Stock (“Toucan Capital Series A-1 Warrant”) in exchange for the cancellation of all previously issued warrants to purchase Series A-1 Preferred Stock (or, at the election of Toucan Capital, any other equity or debt security of ours) held by Toucan Capital. The Toucan Capital Series A-1 Warrant was exercisable for 6,471,333 shares of Series A-1 Preferred Stock plus shares of Series A-1 Preferred Stock attributable to accrued dividends on the shares of Series A-1 Preferred Stock held by Toucan Capital (with each such Series A-1 Preferred Share convertible into 2.67 shares of common stock at $0.60 per share), compared to the 3,062,500 shares of Series A-1 Preferred Stock (with each such Series A-1 Preferred Share convertible into 2.67 shares of common stock at $0.60 per share) that were previously issuable to Toucan Capital upon exercise of the warrants being cancelled.
Also on June 1, 2007, we and Toucan Capital amended Toucan Capital’s warrant to purchase Series A Preferred Stock (the “Toucan Capital Series A Warrant”) to increase the number of shares of Series A Preferred Stock that were issuable upon exercise of the warrant to 32,500,000 shares of Series A Preferred Stock (plus shares of Series A Preferred Stock attributable to accrued dividends on the shares of Series A Preferred Stock held by Toucan Capital) from 13,000,000 shares of Series A Preferred Stock.
In connection with the modifications of the Series A and Series A-1 Preferred Stock warrants, we recognized reductions in earnings applicable to common stockholders in June 2007 of $2.3 million and $16.4 million, respectively. The fair value of the warrant modifications was determined using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%, risk-free interest rate of 5.0% volatility of 398%, and a contractual life of seven years.
On June 15, 2007, we, Toucan Capital, and Toucan Partners entered into a conversion agreement (“Conversion Agreement”) which became effective on June 22, 2007 upon the admission of our common stock to trade on AIM (“Admission”).
Pursuant to the terms of the Conversion Agreement (i) Toucan Capital agreed to convert and has converted all of its shares of the Company’s Series A Preferred Stock and Series A-1 Preferred Stock (in each case, excluding any accrued and unpaid dividends) into common stock and agreed to eliminate a number of rights, preferences and protections associated with the Series A Preferred Stock and Series A-1 Preferred Stock, including the liquidation preference entitling Toucan Capital to certain substantial cash payments and (ii) Toucan Partners agreed to eliminate all of its existing rights to receive Series A-1 Preferred Stock under certain notes and warrants (and thereafter to receive shares of common stock rather than shares of Series A-1 Preferred Stock), and the rights, preferences and protections associated with the Series A-1 Preferred Stock, including the liquidation preference that would entitle Toucan Partners to certain substantial cash payments. In return for these agreements, we issued to Toucan Capital and Toucan Partners 4,287,851 and 2,572,710 shares of common stock, respectively. In connection with the issuance of these shares, we recognized a further reduction of earnings applicable to common stockholders of $12.3 million in June 2007.
Under the terms of the Conversion Agreement (i) the Toucan Capital Series A Warrant became exercisable for 2,166,667 shares of common stock rather than shares of Series A Preferred Stock (plus shares of common stock, rather than shares of Series A Preferred Stock, attributable to accrued dividends on the shares of Series A Preferred Stock previously held by Toucan Capital that were converted into common stock upon Admission, subject to the further provisions of the Conversion Agreement as described below) and (ii) the Toucan Capital Series A-1 Warrant became exercisable for an aggregate of 17,256,888 shares of common stock rather than shares of Series A-1 Preferred Stock (plus shares of common stock, rather than shares of Series A-1 Preferred Stock, attributable to accrued dividends on the shares of Series A-1 Preferred Stock previously held by Toucan Capital that were converted into common stock upon Admission), subject to further provisions of the Conversion Agreement as described below.
As noted above, the 32,500,000 shares of Series A Preferred Stock held by Toucan Capital converted, in accordance with their terms, into 2,166,667 shares of common stock and the 4,816,863 shares of Series A-1 Preferred Stock held by Toucan Capital converted, in accordance with their terms, into 12,844,968 shares of common stock.

 

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Under the terms of the Conversion Agreement, Toucan Capital also agreed to temporarily defer receipt of the accrued and unpaid dividends on its shares of Series A Preferred Stock and Series A-1 Preferred Stock of an amount equal to $334,340 and $917,451, respectively, until not later than September 30, 2007. In September 2007, we paid these dividends in full to Toucan Capital.
As a result of the financings described above, as of September 30, 2008, Toucan Capital held:
   
an aggregate of 19,299,486 shares of common stock;
 
   
warrants to purchase 14,150,732 shares of common stock at an exercise price of $0.60 per share; and
 
   
warrants to purchase 7,884,357 shares of common stock at an exercise price of $0.15 per share.
As a result of the financings described above, as of September 30, 2008, Toucan Partners and its managing member Ms. Linda Powers held:
   
an aggregate of 2,572,710 shares of common stock; and
 
   
warrants to purchase 8,832,541 shares of common stock at an exercise price of $0.60 per share.
The investments made by Toucan Capital and Toucan Partners described above were made pursuant to the terms and conditions of a Recapitalization Agreement originally entered into on April 26, 2004 with Toucan Capital (the “Recapitalization Agreement”). The Recapitalization Agreement originally contemplated the investment of up to $40 million through the issuance of new securities to Toucan Capital and a syndicate of other investors to be determined.
We and Toucan Capital amended the Recapitalization Agreement in conjunction with each successive loan agreement. The amendments generally (i) updated certain representations and warranties of the parties made in the Recapitalization Agreement, and (ii) made certain technical changes in the Recapitalization Agreement in order to facilitate the bridge loans described therein.
In accordance with the Recapitalization Agreement, we accrued and paid certain legal and other administrative costs on Toucan Capital’s behalf. During the three months ending September 30, 2008 and 2007, respectively, the Company recognized approximately $103,875 and $0 of general and administrative costs related to the recapitalization agreement, rent expense, as well as legal, travel and other costs incurred by Toucan Capital on the Company’s behalf. During the nine months ending September 30, 2008 and 2007, respectively, the Company recognized approximately $402,000 and $493,000 of general and administrative costs related to the recapitalization agreement, rent expense, as well as legal, travel and other costs incurred by Toucan Capital on the Company’s behalf.
As of September 30, 2008, Toucan Capital and Toucan Partners collectively, held 21,872,196 shares of our common stock, representing approximately 51.5% of our outstanding common stock. Further, as of September 30, 2008, Toucan Capital and Toucan Partners collectively, beneficially owned (including unexercised warrants) 52,739,826 shares of our common stock, representing a beneficial ownership interest of approximately 71.9%.
Other Financings
On November 13, 2003, we borrowed an aggregate of $335,000 from certain members of our current and former management. These notes were either been repaid or converted into common stock prior to December 31, 2006.
On March 30, 2006, we completed the PIPE Financing pursuant to which we raised aggregate gross proceeds of approximately $5.5 million.
On June 22, 2007, we placed 15,789,473 shares of our common stock with foreign institutional investors at a price of £0.95 per share. The gross proceeds from the placement were approximately £15.0 million, or $29.9 million, while net proceeds from the offering, after deducting commissions and expenses, were approximately £13.0 million, or $25.9 million. The net proceeds from the placement were used to fund clinical trials, product and process development, working capital needs and repayment of certain existing debt.

 

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On May 12, 2008, the Company entered into a loan agreement with Al Rajhi, which beneficially owns more than 10 percent of our common stock, under which Al Rajhi provided the Company with debt financing in the amount of $4.0 million. (See"- Overview” above.)
On August 19, 2008, the Company entered into a loan agreement with Toucan Partners, under which Toucan Partners provided the Company with debt financing in the amount of $1.0 million. (See "- Overview” above).
On October 1, 2008, the Company entered into a Loan Agreement and Promissory Note with SDS. (See “- Overview” above).
On dates between October 21, 2008 and November 6, 2008, the Company entered into Loan Agreements and Promissory Notes with SDS and a group of Private Investors. (See “- Overview” above).
The Company has raised $2.65 million since the quarter ended on September 30, 2008. These funds should be sufficient to fund operations into December 2008. We need to raise additional capital to fund our clinical trials and other operating activities and repay our indebtedness under the Loan, the Toucan Loan, the SDS Loan and the Private Investors Promissory Notes described above and in Note 10 “Subsequent Events”. The amount of additional funding required will depend on many factors, including the speed with which we are able to identify and hire people to fill key positions, the speed of patient enrollment in our DCVax ® -Brain cancer trial, and the potential adoption of DCVax ® -Brain in the selected hospitals in Switzerland, and unanticipated developments, including adverse developments in pending litigation matters. However, without additional capital, we will not be able to complete our DCVax ® -Brain clinical trial or move forward with any of our other product candidates for which investigational new drug applications have been cleared by the U.S. Food and Drug Administration, or FDA. We will also not be to develop our second generation manufacturing processes, which offer substantial product cost reductions.
We are in late stage discussions with several parties in regard to additional financing transactions, which we hope to complete later in the year. There can be no assurance that our efforts to seek such funding will be successful. We may raise additional funds by issuing additional common stock or securities (equity or debt) convertible into shares of common stock, in which case, the ownership interest of our stockholders will be diluted. Any debt financing, if available, is likely to include restrictive covenants that could limit our ability to take certain actions. Further, we may seek funding from Toucan Capital or Toucan Partners or their affiliates or other third parties. Such parties are under no obligation to provide us any additional funds, and any such funding may be dilutive to stockholders and may contain restrictive covenants. We currently are exploring additional financings with several other parties; however, there can be no assurance that we will be able to complete any such financings or that the terms of such financings will be attractive to us. If our capital raising efforts are unsuccessful, our inability to obtain additional cash as needed could have a material adverse effect on our financial position, results of operations and our ability to continue our existence. Our independent registered public accounting firm has indicated in its report on our consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2007 that there is substantial doubt about our ability to continue as a going concern.
Sources of Cash
During the nine months ended September 30, 2007, we received $2.375 million in cash advances from Toucan Partners, which were converted into the 2007 Convertible Notes and 2007 Warrants discussed above. Additionally, we received $225,000 from Toucan Partners on June 13, 2007 in the form of a $225,000 demand note bearing interest of 10% (“Demand Note”). The Demand Note was repaid on June 27, 2007.
On June 22, 2007, we placed 15,789,473 shares of our Common Stock with foreign institutional investors at a price of £0.95 per share. The gross proceeds from the placement were approximately £15.0 million, or $29.9 million, while net proceeds from the offering, after deducting commissions and expenses, were approximately £13.0 million, or $25.9 million.
On May 12, 2008, we received a $4.0 million unsecured loan from Al Rajhi.
On August 19, 2008, we received a $1.0 million unsecured loan from Toucan Partners.
On October 1, 2008, we received a $1.0 million unsecured loan from SDS.
On dates between October 21, 2008 and November 6, 2008, we received a $1.65 million unsecured loan from SDS and a group of Private Investors.

 

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Uses of Cash
We used $12.6 million in cash for operating activities during the nine months ended September 30, 2008, compared to $10.4 million for the nine months ended September 30, 2007. The increase in cash used in operating activities was a result of the significant increase in development activities, including increased staffing and consulting support related to manufacturing start-up, conducting the Phase II clinical trial for DCVax ® -Brain, progressing preparations for the commercialization of DCVax ® -Brain in Switzerland, exploring compassionate use/named patient programs outside of the United States, and payments of accounts payable and accrued liability balances at September 30, 2008.
We utilized $243,000 in cash for investing activities during the nine months ended September 30, 2008 compared to $15,000 used in investing activities during the nine months ended September 30, 2007. The cash utilized during the nine month periods ended September 30, 2007 and 2008 consisted of purchases of property and equipment primarily for computer and other equipment and acquisition of property and equipment required to expand production capacity, net of proceeds of the sale of assets from the Company’s former headquarters.
On March 21, 2008, we executed a sublease agreement with Toucan Capital Corporation, an affiliate of Toucan Capital and Toucan Partners, for our corporate headquarters located at 7600 Wisconsin Avenue, Suite 750, Bethesda, Maryland 20814. This sublease agreement was effective as of July 1, 2007 and expires on October 31, 2016, unless sooner terminated according to its terms. Previously, we had been occupying our Bethesda headquarters under an oral arrangement with Toucan Capital Corporation, whereby we were required to pay base rent of $32,949 per month through December 31, 2007. Under the sublease agreement, we are required to pay base rent of $34,000 per month during 2008, which monthly amount increases by $1,000 on an annual basis, to a maximum of $42,000 per month during 2016, the last year of the term of the lease. In addition to monthly base rent, we are obligated to pay operating expenses allocable to the subleased premises under Toucan Capital Corporation’s master lease. During the nine months ended September 30, 2008, we paid approximately $432,000 to Toucan Capital Corporation pursuant to this sublease agreement.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Interest Rate Risk
Our exposure to market risk is presently limited to the interest rate sensitivity of our cash which is affected by changes in the general level of U.S. and Swiss interest rates. We are exposed to interest rate changes primarily as a result of our investment activities. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive without significantly increasing risk. To minimize risk, we maintain our cash in interest-bearing instruments, primarily money market funds. Due to the short-term nature of our cash, we believe that our exposure to market interest rate fluctuations is minimal. A hypothetical 10% change in short-term interest rates from those in effect at September 30, 2008 would not have a significant impact on our financial position or our expected results of operations. 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. Our debt is carried at a fixed 12% annual rate of interest. We do not have any foreign currency or other derivative financial instruments.
Foreign Currency Exchange Rate Risk
As a corporation with contractual arrangements overseas, we are exposed to changes in foreign exchange rates. These exposures may change over time and could have a material adverse impact on our financial results. At this time we do not have a program to hedge this exposure.
Item 4. Controls and Procedures
Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our President and Chief Executive Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating these disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

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Evaluation of disclosure controls and procedures
Our President and Chief Executive Officer, after evaluating the effectiveness of our “disclosure controls and procedures” (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), has concluded that as of September 30, 2008, our disclosure controls and procedures were not effective due to the existence of several material weaknesses in our internal control over financial reporting, as discussed below.
Material Weaknesses Identified
In connection with the preparation of our financial statements for the year ended December 31, 2007, certain significant deficiencies in internal control became evident to management that, in the aggregate, represent material weaknesses, including:
(i) Lack of a sufficient number of independent directors for our board and audit committee. We currently do not have an independent director on our board, which is comprised of two directors, and on our audit committee, which is comprised of one director. We are considered a controlled company, whereby a group holds more than 50% of our voting power, and as such are not required to have a majority of our board of directors be independent. However, it is our intention to have a majority of our directors be independent in due course.
(ii) Lack of an audit committee financial expert on our audit committee. We currently do not have an audit committee financial expert, as defined by SEC regulations, on our audit committee.

 

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(iii) Insufficient segregation of duties in our finance and accounting functions due to limited personnel. During the year ended December 31, 2007, we had one person on staff that performed, and following the resignation of our Chief Financial Officer on August 12, 2008 we again have only one person on staff that performs, nearly all aspects of our financial reporting process, including, but not limited to, having access to the underlying accounting records and systems, the ability to post and record journal entries and responsibility for the preparation of the financial statements. This creates certain incompatible duties and a lack of review over the financial reporting process that would likely result in a failure to detect errors in spreadsheets, calculations, or assumptions used to compile the financial statements and related disclosures filed with the SEC. These control deficiencies could result in a material misstatement to our interim or annual consolidated financial statements that would not be prevented or detected.
(iv) Insufficient corporate governance policies. Although we have a code of ethics which provides broad guidelines for corporate governance, our corporate governance activities and processes are not always formally documented. Specifically, we do not have detailed procedures for communication and implementation of Board of Directors’ decisions.
(v) Inadequate internal approval and communication about transactions and commitments made on our behalf by related parties. Specifically, during 2007, and continuing into early 2008, in the absence of detailed procedures as noted in item (iv) above, certain related party transactions were not effectively communicated to all internal personnel who needed to be involved to account for and report the transaction in a timely manner. This resulted in material adjustments during the quarterly reviews and annual audit, respectively, that otherwise would have been avoided.
As part of the communications by Peterson Sullivan, PLLC (“Peterson Sullivan”) with our Audit Committee with respect to Peterson Sullivan’s audit procedures for fiscal 2007, Peterson Sullivan informed the audit committee that these deficiencies constituted material weaknesses, as defined by Auditing Standard No. 5, “An Audit of Internal Control Over Financial Reporting that is Integrated with an Audit of Financial Statements and Related Independence Rule and Conforming Amendments,” established by the Public Company Accounting Oversight Board.
Plan for Remediation of Material Weaknesses
We intend to take appropriate and reasonable steps to make the necessary improvements to remediate these deficiencies. We intend to consider the results of our remediation efforts and related testing as part of our year-end 2008 assessment of the effectiveness of our internal control over financial reporting.
We have implemented certain remediation measures and are in the process of designing and implementing additional remediation measures for the material weaknesses described above. Such remediation activities include the following:
   
We plan to recruit two or more additional independent board members to join our board of directors in due course. Such recruitment will include at least one person who qualifies as an audit committee financial expert to join as an independent board member and as an audit committee member.
 
   
We have hired additional qualified and experienced accounting personnel to perform the month-end review and closing processes as well as provide additional oversight and supervision within the accounting department. In February 2008, we hired a full-time controller who has assisted us in documenting the majority of our processes. We are in the process of establishing more rigorous review procedures. In addition, we have changed our accounting system to make it simpler and more appropriate for a company our size.
 
   
We are initiating a formal commitment review process to establish and document the accounting events and methodology at the time the transactions are entered into, so that there is a clear understanding of what events will trigger an accounting event and establish the amounts to be recognized for each event.
 
   
We are initiating a formal monthly reporting and approval process with our related parties to ensure timely provision of information affecting our quarterly and annual consolidated financial statements.
In addition to the foregoing remediation efforts, we will continue to update the documentation of our internal control processes, including formal risk assessment of our financial reporting processes.

 

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Changes in Internal Control over Financial Reporting
There were no changes in internal control over financial reporting during the third quarter of 2008 that materially affected, or are reasonably likely to materially affect, our internal control over financing reporting.
As part of a continuing effort to improve our business processes, management is evaluating our internal controls and intends to update certain controls to accommodate modifications to our business processes or accounting procedures.
Part II — Other Information
Item 1. Legal Proceedings
From time to time, we are involved in claims and suits that arise in the ordinary course of our business. Although management currently believes that resolving any such claims against us will not have a material adverse impact on our business, financial position or results of operations, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. In addition to any such claims and suits, we are involved in the following legal proceedings.
SOMA Arbitration
We signed an engagement letter, dated October 15, 2003, with Soma Partners, LLC, or Soma, a New Jersey-based investment bank, pursuant to which we engaged them to locate potential investors. Pursuant to the terms of the engagement letter, any disputes arising between the parties would be submitted to arbitration in the New York metropolitan area. A dispute arose between the parties. Soma filed an arbitration claim against us with the American Arbitration Association in New York, NY claiming unpaid commission fees of $186,000 and seeking declaratory relief regarding potential fees for future transactions that may be undertaken by us with Toucan Capital. We vigorously disputed Soma’s claims on multiple grounds. We contended that we only owed Soma approximately $6,000.
Soma subsequently filed an amended arbitration claim, claiming unpaid commission fees of $339,000 and warrants to purchase 6% of the aggregate securities issued to date, and seeking declaratory relief regarding potential fees for future financing transactions which may be undertaken by us with Toucan Capital and others, which could potentially be in excess of $4 million. Soma also requested the arbitrator award its attorneys’ fees and costs related to the proceedings. We strongly disputed Soma’s claims and defended ourselves.
The arbitration proceedings occurred from March 8-10, 2005 and on May 24, 2005 the arbitrator ruled in our favor and denied all claims of Soma. In particular, the arbitrator decided that we did not owe Soma the fees and warrants sought by Soma, that we would not owe Soma fees in connection with future financings, if any, and that we had no obligation to pay any of Soma’s attorneys’ fees or expenses. The arbitrator agreed with us that the only amount we owed Soma was $6,702.87, which payment we made on May 27, 2005.
On August 29, 2005, Soma filed a notice of petition to vacate the May 24, 2005 arbitration award with the Supreme Court of the State of New York. On December 30, 2005, the Supreme Court of the State of New York dismissed Soma’s petition.
On February 3, 2006, Soma filed another notice of appeal with the Supreme Court of the State of New York. On December 6, 2006, we filed our brief for this appeal and on December 12, 2006, Soma filed its reply brief. On June 19, 2007, the Appellate Division, First Department of the Supreme Court of the State of New York, reversed the December 30, 2005 decision and ordered a new arbitration proceeding. On July 26, 2007, we filed a Motion for Leave to Appeal with the Court of Appeals of the State of New York and on August 3, 2007 Soma filed its reply brief. On October 16, 2007, the Court of Appeals of the State of New York denied our motion to appeal. We intend to continue to vigorously defend ourselves against the claims of Soma.

 

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Lonza Patent Infringement Claim
On July 27, 2007, Lonza Group AG (“Lonza”) filed a complaint against us in the U. S. District Court for the District of Delaware alleging patent infringement relating to recombinant DNA methods, sequences, vectors, cell lines and host cells. The complaint sought temporary and permanent injunctions enjoining us from infringing Lonza’s patents and unspecified damages. We strongly disputed all of the claims in Lonza’s complaint, sought dismissal of the complaint and also filed counterclaims against Lonza for damages. On November 27, 2007, the complaint was dismissed by the U.S. District Court for the District of Delaware. Also on November 27, 2007, a new complaint was filed by Lonza in the U.S. District Court for the District of Maryland alleging the same patent infringement relating to recombinant DNA methods, sequences, vectors, cell lines and host cells by the Company’s DCVax ® product candidates. On December 13, 2007, Lonza withdrew all claims relating to all of our products other than our DCVax ® -Prostate product. We continued to dispute these remaining claims concerning DCVax ® -Prostate and continued to seek dismissal of them. On April 14, 2008, we and Lonza entered into a binding agreement to settle the dispute. Under the terms of the settlement, we did not pay any monetary or other consideration to Lonza nor did we acquire any license from Lonza.
The only action to which we agreed was to destroy any recombinant modified prostate specific membrane antigen or cell lines using Lonza’a GS Expression System currently in our possession which had been manufactured by and purchased from Medarex Inc. more than six years ago, as well as any documentation received from Medarex on know-how regarding the use of the GS Expression System and cell lines. On May 14, 2008 the parties filed a Joint Stipulation of Dismissal of the Lawsuit with Prejudice, including all claims and counterclaims therein.
Stockholder Class Action Lawsuits
On August 13, 2007, a complaint was filed in the U.S. District Court for the Western District of Washington naming the Company, the Chairperson of the Board, Linda F. Powers, and our Chief Executive Officer, Alton L. Boynton, as defendants in a class action for violation of federal securities laws. After this complaint was filed, five additional complaints were filed in other jurisdictions alleging similar claims. The complaints were filed on behalf of purchasers of the Company’s common stock between July 9, 2007 and July 18, 2007, and allege violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The complaints seek unspecified compensatory damages, costs and expenses. On December 18, 2007, a consolidated complaint was filed in the U.S. District Court for the Western District of Washington consolidating the stockholder actions previously filed. We dispute these claims and intend to vigorously defend these actions.
SEC Inquiry
On August 13, 2007, we were notified that the SEC had initiated a non-public informal inquiry regarding the events surrounding our application for Swiss regulatory approval and related press releases dated July 9, 2007 and July 16, 2007. On March 3, 2008 we were notified that the SEC had initiated a formal investigation regarding this matter. We have been cooperating with the SEC in connection with the inquiry, and will continue to do so.
Management Warrants
On November 13, 2003, we borrowed an aggregate of $335,000 from certain members of our management. As part of the consideration for this loan, the lenders received warrants exercisable to acquire an aggregate of 0.25 million shares of our common stock. From March 2006 through May 2006, all of these warrants were exercised for common stock on a net exercise basis, pursuant to the terms of the warrants.
Two former members of management who had participated as lenders in our management loans have claimed that they are entitled to receive, for no additional cash consideration, an aggregate of up to approximately 630,000 additional shares of our common stock due to the alleged triggering of an anti-dilution provision in the warrant agreements. We do not believe that these claims have merit and, in the event such claims are pursued, we intend to vigorously defend against them.
We have no other legal proceedings pending at this time.

 

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Item 1A. Risk Factors
Our business, operations and financial condition are subject to various risks and uncertainties that should be considered by our stockholders and prospective investors. This section discusses factors that, individually or in the aggregate, we think could cause our actual results to differ materially from expected and historical results. You should carefully consider the risks described below, together with all other information included in this Form 10-Q and those risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2007. Our business, operations or financial condition could be materially adversely affected by the occurrence of any of these risks. In such case, you could lose all of your investment.
We will need to raise additional capital, which may not be available.
The Company has raised $2.65 million since the quarter ended on September 30, 2008. These funds should be sufficient to fund operations into December 2008. As noted above, on May 12, 2008, Al Rajhi, a beneficial owner of more than 10% of our common stock, advanced to us $4.0 million pursuant to a loan agreement with an initial term of six months expiring on November 12, 2008. Al Rajhi has agreed to extend the term of the note and terms of the extension are currently being negotiated. On August 19, 2008, Toucan Partners advanced to us $1.0 million pursuant to a loan agreement. On October 1, 2008, SDS advanced to us $1.0 million pursuant to a loan agreement. On or about November 6, 2008, SDS and a group of Private Investors advanced to us $1.65 million pursuant to a loan agreement. Each of these loans has a term of six months, which may be extended in the lender’s sole discretion. Despite these financings, however, we need additional capital to support our ongoing operations, including to fund the research, development and commercialization of our product candidates (specifically, to complete our current DCVax ® -Brain Phase II clinical trial), to fund our other operating activities and to repay the Loan, the Toucan Loan the SDS Loan and the Private Investor Promissory Notes. We may raise additional funds by issuing additional common stock or securities (equity or debt) convertible into shares of common stock, in which case, the ownership interest of our stockholders will be diluted. We do not currently have any established third party bank credit arrangements. Any debt financing, if available, is likely to include restrictive covenants that could limit our ability to take certain actions. Further, we may seek additional funding from Toucan Capital or Toucan Partners or their affiliates or other third parties. Such parties are under no obligation to provide us any additional funds, and any such funding may be on unfavorable terms and dilutive to stockholders and may contain restrictive covenants. We are in late stage discussions with several parties in regard to additional financings; however, there can be no assurance that we will be able to complete any such financings or that the terms of such financings will be attractive to us. If we are unable to obtain additional funds on a timely basis or on acceptable terms, we may be required to curtail or cease certain or all of our operations.
We are likely to continue to incur substantial losses, and may never achieve profitability.
We have incurred net losses every year since our formation in March 1996 and had a deficit accumulated during the development stage of approximately $159.4 million as of September 30, 2008. We expect that these losses will continue and anticipate negative cash flows from operations for the foreseeable future. Despite the receipt of approximately $6.0 million from the loans discussed above and $25.9 million of net proceeds from an offering of our common stock on AIM in June 2007, we need additional funding, and over the medium term we will need to generate revenue sufficient to cover operating expenses, clinical trial expenses and some research and development costs to achieve profitability. We may never achieve or sustain profitability.
Our auditors have issued a “going concern” audit opinion.
Our independent auditors have indicated in their report on our December 31, 2007 financial statements that there is substantial doubt about our ability to continue as a going concern. A “going concern” opinion indicates that the financial statements have been prepared assuming we will continue as a going concern and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. Therefore, you should not rely on our consolidated balance sheet as an indication of the amount of proceeds that would be available to satisfy claims of creditors, and potentially be available for distribution to stockholders, in the event of liquidation.
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 we 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: $529,000 in 2003; $390,000 in 2004; $124,000 in 2005; $80,000 in 2006; $10,000 in 2007 and $10,000 in 2008. We have derived most of these limited revenues from the sale of research products to a single customer, contract research and development for related parties, research grants and royalties from licensing fees generated from a licensing agreement. Our limited operating history makes it difficult to assess our prospects for generating revenues.

 

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We may not be able to retain existing personnel.
We employ seven full-time employees. The uncertainty of our business prospects, limited access to capital to sustain our business operations and the volatility in the price of our common stock may create anxiety and uncertainty, which could adversely affect employee morale and cause us to lose employees whom we would prefer to retain. To the extent that we are unable to retain existing personnel, our business and financial results may suffer.
We may not be able to attract expert personnel.
In order to pursue our product development and marketing plans, we will need additional management personnel and personnel with expertise in clinical testing, government regulation, manufacturing and marketing. Attracting and retaining qualified personnel, consultants and advisors will be critical to our success. There can be no assurance that we will be able to attract personnel on acceptable terms given the competition for such personnel among biotechnology, pharmaceutical and healthcare companies, universities and non-profit research institutions. The failure to attract any of these personnel could impede the achievement of our development objectives.
We rely on a single relationship with a third-party contract manufacturer, which will limit our ability to control the availability of our product candidates in the near-term.
We rely upon a single contract manufacturer, Cognate. The majority owner of Cognate is Toucan Capital, one of our majority stockholders. Cognate provides consulting services to us and is the manufacturer of our product candidates. We have an agreement in place with Cognate pursuant to which Cognate has agreed to provide manufacturing and other services in connection with our pivotal Phase II clinical trial for DCVax ® -Brain. The agreement requires us to make minimum monthly payments to Cognate irrespective of whether any DCVax ® products are manufactured. The agreement does not extend to providing services in respect of commercialization of the DCVax ® -Brain product, nor for other clinical trials or commercialization of any of our other product candidates. If and to the extent we wish to engage Cognate to manufacture our DCVax ® -Brain for commercialization or any of our other product candidates (including DCVax ® -Prostate) for clinical trials or commercialization, we will need to enter into a new agreement with Cognate or another third-party manufacturer which might not be feasible on a timely or favorable basis. The failure to timely enroll patients in our clinical trials will have an adverse impact on our financial results due, in part, to the minimum monthly payments that we make to Cognate.
Problems with our contract manufacturer’s facilities or processes could result in a failure to produce, or a delay in production, of adequate supplies of our product candidates. Any prolonged interruption in the operations of our contract manufacturer’s facilities could result in cancellation of shipments or a shortfall in availability of a product candidate. A number of factors could cause interruptions, including the inability of a supplier to provide raw materials, equipment malfunctions or failures, damage to a facility due to natural disasters, changes in FDA regulatory requirements or standards that require modifications to our manufacturing processes, action by the FDA or by us that results in the halting or slowdown of production of components or finished products due to regulatory issues, the contract manufacturer going out of business or failing to produce product as contractually required or other similar factors. Because manufacturing processes are highly complex and are subject to a lengthy FDA approval process, alternative qualified production capacity may not be available on a timely basis or at all. Difficulties or delays in our contract manufacturer’s manufacturing and supply of components could delay our clinical trials, increase our costs, damage our reputation and, if our product candidates are approved for sale, cause us to lose revenue or market share if it is unable to timely meet market demands.
Our success partly depends on existing and future collaborators.
We work with scientists and medical professionals at academic and other institutions, including UCLA, the University of Pennsylvania, M.D. Anderson Cancer Centre and the H. Lee Moffitt Cancer Centre, among others, some of whom have conducted research for us or have assisted in developing our research and development strategy. We do not employ these scientists and medical professionals. 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 that they devote time to us as 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 our products. If these individuals do not devote sufficient time and resources to our programs, or if they provide substantial assistance to our competitors, our business could be seriously harmed.

 

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The success of our business strategy may partially depend upon our ability to develop and maintain our collaborations and to manage them effectively. Due to concerns regarding our ability to continue our operations or the commercial feasibility of our personalized DCVax ® product candidates, these third parties may decide not to conduct business with us or may conduct business with us on terms that are less favorable than those customarily extended by them. If either of these events occurs, our business could suffer significantly.
We may have disputes with our collaborators, which could be costly and time consuming. Failure to successfully defend our rights could seriously harm our business, financial condition and operating results. We intend to continue to enter into collaborations in the future. However, we may be unable to successfully negotiate any additional collaboration and any of these relationships, if established, may not be scientifically or commercially successful.
We are involved in legal proceedings that could result in an adverse outcome, or that could otherwise harm our business. In addition, future litigation could be costly to defend or pursue and uncertain in its outcome.
We are party to various legal actions, as more fully described above under Item 1. “Legal Proceedings.” These pending legal proceedings include a dispute with Soma Partners, LLC, an investment bank, regarding certain fees Soma claims it is entitled to under an engagement letter with us; a consolidated class action complaint filed against us alleging violations of Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, based on certain of our public announcements regarding the status of certain regulatory approvals for our DCVax ® -Brain vaccine in Switzerland; and a formal SEC investigation into the same matter. We can provide no assurances as to the outcome of the foregoing legal proceedings.
The defense of these or future legal proceedings has and could continue to divert management’s attention and resources from the needs of our business. We may be required to make substantial payments or incur other adverse effects in the event of adverse judgments or settlements of any such claims, investigations, or proceedings. Any legal proceeding, even if resolved in our favor, could result in negative publicity or cause us to incur significant legal and other expenses. Actual costs incurred in any legal proceedings may differ from our expectations and could exceed any amounts for which we have made reserves.
Clinical trials for our product candidates are expensive and time-consuming and their outcome is uncertain.
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 to assist us in managing and monitoring all 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 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 II clinical trial for DCVax ® -Brain.
Our product candidates will require a different distribution model than conventional therapeutic products.
The nature of our product candidates means that different systems and methods will need to be followed for the distribution and delivery of the products than is the case for conventional therapeutic products. The personalized nature of these products, the need for centralized storage, and the requirement to maintain the products in frozen form may mean that we are not able to take advantage of distribution networks normally used for conventional therapeutic products. If our product candidates are approved, it may take time for hospitals and physicians to adapt to the requirements for handling and storage of these products, which may adversely affect their sales.
We lack sales and marketing experience and as a result may experience significant difficulties commercializing our research product candidates.
The commercial success of any of our product candidates will depend upon the strength of our sales and marketing efforts. We do not have a sales force and have no experience in sales, marketing or distribution. To fully commercialize our product candidates, we will need a substantial marketing staff and sales force with technical expertise and the ability to distribute these products. As an alternative, we could seek assistance from a third party with a large distribution system and a large direct sales force. We may be unable to put either of these plans in place. In addition, if we arrange for others to market and sell our products, our revenues will depend upon the efforts of those parties. Such arrangements may not succeed.
Even if one or more of our product candidates is approved for marketing, if we fail to establish adequate sales, marketing and distribution capabilities, independently or with others, our business will be seriously harmed.

 

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Competition in the biotechnology and biopharmaceutical industry is intense and most of our competitors have substantially greater resources than us.
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, Immuno-Designed Molecules, Inc., Celldex Therapeutics, Inc., Ark Therapeutics plc, Oxford Biomedica plc, Argos Therapeutics, Inc. and Antigenics, are actively involved in the research and development of immunotherapies or cell-based cancer therapeutics. Of these companies, we believe that only Dendreon and Cell Genesys are carrying-out Phase III clinical trials with a cell-based therapy. To our knowledge, no DC-based therapeutic product is currently approved for commercial sale. Additionally, several companies, such as Medarex, Inc., Amgen, Inc., Agensys, Inc., and Genentech, Inc., are actively involved in the research and development of monoclonal antibody-based cancer therapies. Currently, at least seven 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.
Most 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 are actively 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: obtain additional funding, 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 partnerships.
Our competitors may develop more effective or affordable products, or achieve earlier patent protection or product marketing and sales. As a result, any products developed by us may be rendered obsolete and non-competitive.
Our intellectual property rights may not provide meaningful commercial protection for our research products or product candidates, which could enable third parties to use our technology, or very similar technology, and could reduce our ability to compete in the market.
We rely on patent, copyright, trade secret and trademark laws to limit the ability of others to compete with us using the same or similar technology in the United States and other countries. However, as described below, these laws afford only limited protection and may not adequately protect our rights to the extent necessary to sustain any competitive advantage we may have. The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and we may encounter significant problems in protecting our proprietary rights in these countries.
We have 28 issued and licensed patents (9 in the United States and 19 in other jurisdictions) and 134 patent applications pending (17 in the United States and 117 in other jurisdictions) which cover the use of dendritic cells in DCVax ® as well as targets for either our dendritic cell or fully human monoclonal antibody therapy candidates. The issued patents expire at various dates from 2015 to 2026.
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 in the United States 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 U.S. 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 the interpretations of patent laws in the United States and other countries may, therefore, diminish the value of our intellectual property.

 

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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 using 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 for our trade secrets or other proprietary information. We seek to protect our proprietary information by entering into confidentiality agreements with employees, partners and consultants. Nevertheless, employees, collaborators or consultants may still disclose our proprietary information, and we may not be able to protect our trade secrets in a meaningful way. In addition, others may independently develop substantially equivalent proprietary information or techniques or otherwise gain access to our trade secrets.
Our success will depend substantially on our ability to operate without infringing or misappropriating the proprietary rights of others.
Our success will depend to a substantial degree upon our ability to develop, manufacture, market and sell our research products and product candidates without infringing the proprietary rights of third parties and without breaching any licenses entered into by us regarding our product candidates.
There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and biopharmaceutical industries generally. Infringement and other intellectual property claims, with or without merit, can be expensive and time-consuming to litigate and can divert management’s attention from our core business. For example, we recently entered into a settlement agreement with Lonza of its claims of patent infringement against us. In addition, 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.
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 patents 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 claim, we could be prevented from selling our research products or product candidates unless we can obtain a license to use technology or ideas covered by such patent or we 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 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.
We may not receive regulatory approvals for our product candidates or there may be a delay in obtaining such approvals.
Our product candidates and our ongoing development activities are subject to regulation by governmental and other regulatory authorities in the countries in which we or our collaborators and distributors wish to test, manufacture or market our product candidates. For instance, the FDA will regulate our product candidates in the U.S. and equivalent authorities, such as the European Medicines Agency (“EMEA”), will regulate our product candidates in other jurisdictions. Regulatory approval by these authorities will be subject to the evaluation of data relating to the quality, efficacy and safety of each product candidate for its proposed use.
The time taken to obtain regulatory approval varies between countries. Different regulators may impose their own requirements and may refuse to grant, or may require additional data before granting, an approval, notwithstanding that regulatory approval may have been granted by other regulators. Regulatory approval may be delayed, limited or denied for a number of reasons, including insufficient clinical data, the product not meeting safety or efficacy requirements or any relevant manufacturing processes or facilities not meeting applicable requirements.

 

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Further trials and other costly and time-consuming assessments of our product candidates may be required to obtain or maintain regulatory approval.
Medicinal products are generally subject to lengthy and rigorous pre-clinical and clinical trials and other extensive, costly and time-consuming procedures mandated by regulatory authorities. We may be required to conduct additional trials beyond those currently planned, which could require significant time and expense. For example, the field of cancer treatment is evolving, and the standard of care for a particular cancer could change while we are in the process of conducting the clinical trials for our product candidates. Such a change in standard of care could make it necessary for us to conduct additional clinical trials, which could delay our opportunities to obtain regulatory approval of our product candidates.
As for all biological products, we may need to provide pre-clinical and clinical data evidencing the comparability of products before and after any changes in manufacturing process both during and after product approval. Regulators may require that we generate data to demonstrate that products before or after any such change are of comparable safety and efficacy if we are to rely on studies using earlier versions of the product. DCVax ® -Brain has been the subject of process changes during the early clinical phase of its development and regulators may require comparability data unless they are satisfied that changes in process do not affect the quality, and hence efficacy and safety, of the product.
We plan to rely on our current DCVax ® -Brain Phase II clinical trial as a single study in support of regulatory approval. However, to date, only eleven patients have enrolled in the clinical trial, which is designed to include 240 patients. Given our current lack of funding, it is unclear how quickly we will be able to increase enrollment, if at all. Further, while under certain circumstances, both EMEA and the FDA will accept a Phase II study as a single study in support of approval, it is not yet known whether they will do so in this case. If the regulators do not consider the Phase II study adequate on its own to support a finding of efficacy, we may be required to perform additional clinical trials in DCVax ® -Brain. There is some possibility that changes requested by the FDA could complicate the licensing application process. Only the data for DCVax ® -Brain has been discussed with European regulators. On an informal basis, a number of European national regulators have indicated that additional pre-clinical and clinical data could be required before the DCVax ® -Brain product would be approved. However, it is not clear whether such data will be required until formal scientific advice is sought from the EMEA, which is the regulator that will ultimately review any application for approval of this product candidate. Unless the EMEA grants a deferral or a waiver, we may also be obliged to generate clinical data in pediatric populations.
The FDA previously identified a number of deficiencies regarding the design of our original proposed Phase III clinical trial for DCVax ® -Prostate. We believe we remedied these deficiencies in the new trial design for a 600-patient Phase III clinical trial, which was cleared by the FDA in January 2005. However, we now intend to split this single 600-patient Phase III trial into two separate 300-patient Phase III trials. These revisions in trial design may cause delay in the development process for DCVax ® -Prostate. It is not yet known whether the FDA will consider the two-trial design sufficient for marketing approval, or whether the agency will require us to design and carry out additional studies. If, after the Phase III studies are carried out, the FDA is not satisfied that its concerns were adequately addressed, those studies could be insufficient to demonstrate efficacy and additional clinical studies could be required at that time.
Any delay in completing sufficient trials or other regulatory requirements, including from our inability to fund these trials will delay our ability to generate revenue from product sales and we may have insufficient capital resources to support its ongoing activities. Even if we do have sufficient capital resources, our ability to generate meaningful revenues or become profitable may be delayed.
Regulatory approval may be withdrawn at any time.
After regulatory approval has been obtained for medicinal products, the product and the manufacturer are subject to continual review and there can be no assurance that such approval will not be withdrawn or restricted. Regulators may also subject approvals to restrictions or conditions, or impose post-approval obligations on the holders of these approvals, and the regulatory status of such products may be jeopardized if we do not comply. Extensive post-approval safety studies are likely to be a condition of the approval and will commit us to significant time and expense.

 

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We may fail to comply with regulatory requirements.
Our success will be dependent upon our ability, and our collaborative partners’ abilities, to maintain compliance with regulatory requirements, including regulators’ current good manufacturing practices (“cGMP”) and safety reporting obligations. The failure to comply with applicable regulatory requirements can result in, among other things, fines, injunctions, civil penalties, total or partial suspension of regulatory approvals, refusal to approve pending applications, recalls or seizures of products, operating and production restrictions and criminal prosecutions.
We may be subject to sanctions if we are determined to be promoting our investigational products prior to regulatory approval or for unapproved uses.
Laws in both the U.S. and Europe prohibit us from promoting any product candidate that has not received approval from the appropriate regulator, or from promoting a product for an unapproved use. If any regulator determines that we have engaged in such pre-approval, or off-label promotion, through our website, press releases, or other communications, the authority could require us to change the content of those communications and could also take regulatory enforcement action, including the issuance of a warning letter, requirements for corrective action, civil fines, and criminal penalties. In the event of a product liability lawsuit, materials that appear to promote a product for unapproved uses may increase our product liability exposure.
We may not obtain or maintain orphan drug status and the associated benefits, including marketing exclusivity.
We may not receive the benefits associated with orphan drug designation. This may result from a failure to achieve or maintain orphan drug status or the development of a competing product that has an orphan designation for the same indication. In Europe, the orphan status of DCVax ® -Brain will be reassessed shortly prior to the product receiving any regulatory approval. The EMEA will need to be satisfied that there is evidence that DCVax ® -Brain offers a significant benefit relative to existing therapies for the treatment of glioma if DCVax ® -Brain is to maintain its orphan drug status.
New legislation may have an adverse effect on our business.
Changes in applicable legislation and/or regulatory policies may result in delays in bringing products to market, the imposition of restrictions on the product’s sale or manufacture, including the possible withdrawal of the product from the market, or may otherwise have an adverse effect on our business.
The availability and amount of reimbursement for our product candidates and the manner in which government and private payers may reimburse for our potential products is uncertain.
In many of the markets where we intend to operate, the prices of pharmaceutical products are subject to direct price controls (by law) and to drug reimbursement programs with varying price control mechanisms.
We expect that many of the patients in the United States who may seek treatment with our products that may be approved for marketing will be eligible for coverage under Medicare, the federal program that provides medical coverage for the aged and disabled. Other patients may be covered by private health plans or may be uninsured. The Medicare program is administered by the Centers for Medicare & Medicaid Services (“CMS”), an agency within the U.S. Department of Health and Human Services. Coverage and reimbursement for products and services under Medicare are determined pursuant to regulations promulgated by CMS and pursuant to CMS’s subregulatory coverage and reimbursement determinations. It is difficult to predict how CMS will apply those regulations and subregulatory determinations to novel products such as ours.
Moreover, the methodology under which CMS makes coverage and reimbursement determinations is subject to change, particularly because of budgetary pressures facing the Medicare program. For example, the Medicare Prescription Drug, Improvement, and Modernization Act (the “Medicare Modernization Act”), enacted in 2003, provided for a change in reimbursement methodology that has reduced the Medicare reimbursement rates for many drugs, including oncology therapeutics. Even if our product candidates are approved for marketing in the U.S., if we are unable to obtain or retain coverage and adequate levels of reimbursement from Medicare or from private health plans, our ability to successfully market such products in the U.S. will be adversely affected. The manner and level at which the Medicare program reimburses for services related to our product candidates (e.g., administration services) also may adversely affect our ability to market or sell any of our product candidates that may be approved for marketing in the U.S.

 

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In the U.S., efforts to contain or reduce health care costs have resulted in many legislative and regulatory proposals at both the federal and state level, and it is difficult to predict which, if any, of these proposals will be enacted, and, if so, when. Cost control initiatives by governments or third party payers could decrease the price that we receive for any one or all of our potential products or increase patient coinsurance to a level that makes our product candidates unaffordable for patients. In addition, government and private health plans are more persistently challenging the price and cost-effectiveness of therapeutic products. If third-party payers were to determine that one or more of our product candidates is not cost-effective, this could result in refusal to cover those products or in coverage at a low reimbursement level. Any of these initiatives or developments could prevent us from successfully marketing and selling any of our product candidates.
In the E.U., governments influence the price of pharmaceutical products through their pricing and reimbursement rules and control of national health care systems that fund a large part of the cost of such products to consumers. The approach taken varies from member state to member state. Some jurisdictions operate positive and/or negative list systems under which products may only be marketed once a reimbursement price has been agreed. Other member states allow companies to fix their own prices for medicines, but monitor and control company profits. The downward pressure on health care costs in general, particularly prescription drugs, has become very intense. As a result, increasingly high barriers are being erected to the entry of new products, as exemplified by the role of the National Institute for Health and Clinical Excellence in the U.K. which evaluates the data supporting new medicines and passes reimbursement recommendations to the government. In addition, in some countries cross-border imports from low-priced markets (parallel imports) exert commercial pressure on pricing within a country.
DCVax ® is our only technology in clinical development.
Unlike many pharmaceutical companies that have a number of products in development and which utilize many technologies, we are dependent on the success of our DCVax ® platform and, potentially, our CXCR4 antibody technology. While DCVax ® technology has a number of potentially beneficial uses, if that core technology is not commercially viable, we would have to rely on the CXCR4 technology, which is at an early pre-clinical stage of development, for our success. If the CXCR4 technology also fails, we currently do not have other technologies to fall back on and our business could fail.
We may be prevented from using the DCVax ® name in Europe.
The EMEA has indicated that DCVax ® may not be an acceptable name because of the suggested reference to a vaccine. Failure to obtain the approval for the use of the DCVax ® name in Europe would require us to market our product candidates in Europe under a different name which could impair the successful marketing of our product candidates and may have a material adverse effect on our results of operations and financial condition.
Competing generic medicinal products may be approved.
In the E.U., there exists a process for the approval of generic biological medicinal products once patent protection and other forms of data and market exclusivity have expired. If generic medicinal products are approved, competition from such products may reduce sales of our products once our patent protection has expired. Other jurisdictions, including the U.S., are considering adopting legislation that would allow the approval of generic biological medicinal products.
We may be exposed to potential product liability claims, and insurance against these claims may not be available to us at a reasonable rate in the future, if at all.
Our business exposes us to potential product liability risks that are inherent in the testing, manufacturing, marketing and sale of therapeutic products. Our insurance coverage may not be adequate to cover claims against us or may not be available to us at an acceptable cost, if at all. Regardless of their merit or eventual outcome, product liability claims may result in decreased demand for a product, injury to our reputation, withdrawal of clinical trial volunteers and loss of revenues. Thus, whether or not we are insured, a product liability claim or product recall may result in losses that could be material.
We use hazardous materials and must comply with environmental, health and safety laws and regulations, which can be expensive and restrict how we do business.
We store, handle, use and dispose of controlled hazardous, radioactive and biological materials in our business. Our current use of these materials generally is below thresholds giving rise to burdensome regulatory requirements. Our development efforts, however, may result in our becoming subject to additional requirements, and if we fail to comply with applicable requirements we could be subject to substantial fines and other sanctions, delays in research and production, and increased operating costs. In addition, if regulated materials were improperly released at our current or former facilities or at locations to which we send materials for disposal, we could be 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.

 

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Toucan Capital and Toucan Partners beneficially own a majority of our shares of common stock and, as a result, the trading price for our common stock may be depressed and these stockholders can take actions that may be adverse to the interests of other investors.
As of November 13, 2008, Toucan Capital and its affiliates, Toucan Partners and Linda F. Powers, collectively owned an aggregate of 21,872,196 shares of our common stock, representing approximately 51.5% of our outstanding common stock. In addition, as of November 13, 2008, Toucan Capital may acquire an aggregate of approximately 22.0 million shares of common stock upon exercise of warrants and Toucan Partners may acquire an aggregate of approximately 8.8 million shares of common stock upon the exercise of warrants, constituting an aggregate beneficial ownership interest of 71.9%, or 52,739,826 shares of common stock. This significant concentration of ownership may adversely affect the trading price of our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. Together, Toucan Capital, Toucan Partners and Linda F. Powers 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, the managing director of Toucan Capital and the managing member of Toucan Partners is the Chairperson of our Board. In light of the foregoing, Toucan Capital and Toucan Partners collectively can significantly influence the management of our business and affairs. This concentration of ownership could result in unfavorable future financing terms or 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 investors.
Our Certificate of Incorporation and Bylaws and stockholder rights plan may delay or prevent a change in our management.
Our Seventh Amended and Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”), Third Amended and Restated Bylaws (the “Bylaws”) and stockholder rights plan contain provisions that could delay or prevent a change in our management team. Some of these provisions:
   
authorize the issuance of preferred stock that can be created and issued by the Board without prior stockholder approval, commonly referred to as “blank check” preferred stock, with rights senior to those of the common stock;
 
   
allow the Board to call special meetings of stockholders at any time but restrict the stockholders from calling special meetings;
 
   
authorize the Board to issue dilutive common stock upon certain events; and
 
   
provide for a classified Board.
These provisions could allow our Board to affect the rights of an investor since the Board can make it more difficult for holders of common stock to replace members of the Board. Because the Board is responsible for appointing the members of the management team, these provisions could in turn affect any attempt to replace the current management team.
There may not be an active, liquid trading market for our common stock.
Our common stock is currently traded on the Over-The-Counter Bulletin Board, or OTCBB, and on AIM, which are generally recognized as being less active markets than NASDAQ, the stock exchange on which our common stock previously was listed. You may not be able to sell your shares at the time or at the price desired. There may be significant consequences associated with our stock trading on the OTCBB rather than a national exchange. The effects of not being able to list our securities on a national exchange include:
   
limited release of the market price of our securities;
 
   
limited news coverage;
 
   
limited interest by investors in our securities;
 
   
volatility of our stock price due to low trading volume;
 
   
increased difficulty in selling our securities in certain states due to “blue sky” restrictions; and
 
   
limited ability to issue additional securities or to secure additional financing.

 

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The resale, or the availability for resale, of the shares placed in the PIPE Financing could have a material adverse impact on the market price of our common stock.
The PIPE Financing, completed in March 2006, included the private placement of an aggregate of approximately 2.6 million shares of common stock and accompanying warrants to purchase an aggregate of approximately 1.3 million shares of common stock. In connection with the PIPE Financing, we agreed to register, and subsequently did register, the resale of the shares of common stock sold in the PIPE Financing and the shares underlying the warrants issued in the PIPE Financing. The resale of a substantial number of the shares placed in the PIPE Financing or even the availability of these shares for resale, could have a material adverse impact on our stock price.
Because our common stock is subject to “penny stock” rules, the market for the common stock may be limited.
Because our common stock is subject to the SEC’s “penny stock” rules, broker-dealers may experience difficulty in completing customer transactions and trading activity in our securities may be adversely affected. Under the “penny stock” rules promulgated under the Exchange Act, broker-dealers who recommend such securities to persons other than institutional accredited investors must:
   
make a special written suitability determination for the purchaser;
 
   
receive the purchaser’s written agreement to a transaction prior to sale;
 
   
provide the purchaser with risk disclosure documents which identify certain risks associated with investing in “penny stocks” and which describe the market for these “penny stocks” as well as a purchaser’s legal remedies; and
 
   
obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before a transaction in a “penny stock” can be completed.
As a result of these rules, broker-dealers may find it difficult to effectuate customer transactions and trading activity in our common stock may be adversely affected. As a result, the market price of our common stock may be depressed, and stockholders may find it more difficult to sell our common stock.
The price of our common stock may be highly volatile.
The share price of publicly traded biotechnology and emerging pharmaceutical companies, particularly companies without earnings and consistent product revenues, can be highly volatile and are likely to remain highly volatile in the future. The price at which our common stock is quoted and the price which investors may realize in sales of their shares of our common stock will be influenced by a large number of factors, some specific to us and our operations and some unrelated to our operating performance. These factors could include the performance of our marketing programs, large purchases or sales of the shares, currency fluctuations, legislative changes and general economic conditions. In the past, shareholder class action litigation has often been brought against companies that experience volatility in the market price of their shares. Whether or not meritorious, litigation brought against us following fluctuations in the trading price of our common stock could result in substantial costs, divert management’s attention and resources and harm our financial condition and results of operations.

 

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The requirements of the Sarbanes-Oxley Act of 2002 and other U.S. securities laws reporting requirements impose cost and operating challenges on us.
We are subject to certain of the requirements of the Sarbanes-Oxley Act of 2002 in the U.S. and the reporting requirements under the Exchange Act. These laws require, among other things, an attestation report of our independent auditor on the effectiveness of our internal control over financial reporting, currently expected to begin with our annual report for the year ended December 31, 2008, as well as the filing of annual reports on Form 10-K, quarterly reports on Form 10-Q and periodic reports on Form 8-K following the happening of certain material events. To meet these compliance deadlines, we will need to have our internal controls designed, tested and operational to ensure compliance with applicable standards. We initiated the process of documenting and evaluating our internal controls and financial reporting procedures in early 2008. This process is ongoing and likely will continue to be time consuming and will result in us having to significantly change our controls and reporting procedures due to our small number of employees and lack of governance controls. Most similarly-sized companies registered with the SEC have had to incur significant costs to ensure compliance. Moreover, any failure by us to comply with such provisions would be required to be disclosed publicly, which could lead to a loss of public confidence in our internal controls and could harm the market price of our common stock.
Our management has identified significant internal control deficiencies, which management and our independent auditor believe constitute material weaknesses.
In connection with the preparation of our financial statements for the year ended December 31, 2007, certain significant internal control deficiencies became evident to management that, in the aggregate, represent material weaknesses, including:
   
lack of a sufficient number of independent directors on our audit committee;
 
   
insufficient segregation of duties in our finance and accounting function due to limited personnel;
 
   
insufficient corporate governance policies; and
 
   
inadequate approval and control over transactions and commitments made on our behalf by related parties.
As part of the communications by our independent auditors with our audit committee with respect to audit procedures for the year ended December 31, 2007, our independent auditors informed the audit committee that these deficiencies constituted material weaknesses, as defined by Auditing Standard No. 5, “An Audit of Internal Control Over Financial Reporting that is Integrated with an Audit of Financial Statements and Related Independence Rule and Conforming Amendments,” established by the Public Company Accounting Oversight Board. We intend to take appropriate and reasonable steps to make the necessary improvements to remediate these deficiencies but we cannot be certain that we will have the necessary financing to address these deficiencies or that we will be able to attract qualified individuals to serve on our Board and to take on key management roles within the Company. Our failure to successfully remediate these issues could lead to heightened risk for financial reporting mistakes and irregularities and a further loss of public confidence in our internal controls that could harm the market price of our common stock.
Our business could be adversely affected by animal rights activists.
Our business activities have involved animal testing. These types of activities have been the subject of controversy and adverse publicity. Some organizations and individuals have attempted to stop animal testing by pressing for legislation and regulation in these areas. To the extent the activities of such groups are successful, our business could be adversely affected. Negative publicity about us, our pre-clinical trials and our product candidates could have an adverse impact on our sales and profitability.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Shareholders
None
Item 5. Other Information
None

 

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Item 6. Exhibits
         
  3.1    
Seventh Amended and Restated Certificate of Incorporation (3.1)(1)
       
 
  3.2    
Third Amended and Restated Bylaws (3.1)(2)
       
 
  3.3    
Amendment to the Seventh Amended and Restated Certificate of Incorporation (3.2)(2)
       
 
  3.4    
Amendment to Seventh Amended and Restated Certificate of Incorporation (3.4)(3)
       
 
  *10.1    
Loan Agreement and Promissory Note, dated August 19, 2008, between the Company and Toucan Partners, LLC.
       
 
  *10.2    
Loan Agreement and Promissory Note, dated October 1, 2008, between the Company and SDS Capital Group SPC, Ltd.
       
 
  *10.3    
Warrant, dated October 1, 2008, between the Company and SDS Capital Group SPC, Ltd.
       
 
  *10.4    
Loan Agreement and Promissory Note, dated October 21, 2008, between the Company and SDS Capital Group SPC, Ltd.
       
 
  *10.5    
Form of Loan Agreement and Promissory Note, dated November 6, 2008, between the Company and a Group of Private Investors.
       
 
  *10.6    
Form of Warrant, dated November 6, 2008, between the Company and SDS Capital Group SPC, Ltd. and a Group of Private Investors.
       
 
  *31.1    
Certification of President and Chief Executive Officer (Principal executive officer and principal financial and accounting officer) Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
 
  *32.1    
Certification of President and Chief Executive Officer (Principal executive officer and principal financial and accounting officer) Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
     
(1)  
Incorporated by reference to the exhibit shown in the preceding parentheses filed with the Registrant’s registration statement Form S-1 (File No. 333-67350) on July 17, 2006.
 
(2)  
Incorporated by reference to the exhibit shown in the preceding parentheses filed with the Registrant’s Current Report on Form 8-K on June 22, 2007.
 
(3)  
Incorporated by reference to the exhibit shown in the preceding parentheses filed with the Post-Effective Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 on January 28, 2008.
 
*  
Filed herewith.

 

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  NORTHWEST BIOTHERAPEUTICS, INC
 
 
Dated: November 19, 2008  By:   /s/ Alton L. Boynton    
    Alton L. Boynton   
    President and Chief Executive Officer
(Principal Executive, Financial and Accounting Officer) 
 

 

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NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company)
EXHIBIT INDEX
         
  3.1    
Seventh Amended and Restated Certificate of Incorporation (3.1)(1)
       
 
  3.2    
Third Amended and Restated Bylaws (3.1)(2)
       
 
  3.3    
Amendment to the Seventh Amended and Restated Certificate of Incorporation (3.2)(2)
       
 
  3.4    
Amendment to Seventh Amended and Restated Certificate of Incorporation (3.4)(3)
       
 
  *10.1    
Loan Agreement and Promissory Note, dated August 19, 2008, between the Company and Toucan Partners, LLC.
       
 
  *10.2    
Loan Agreement and Promissory Note, dated October 1, 2008, between the Company and SDS Capital Group SPC, Ltd.
       
 
  *10.3    
Warrant, dated October 1, 2008, between the Company and SDS Capital Group SPC, Ltd.
       
 
  *10.4    
Loan Agreement and Promissory Note, dated October 21, 2008, between the Company and SDS Capital Group SPC, Ltd.
       
 
  *10.5    
Form of Loan Agreement and Promissory Note, dated November 6, 2008, between the Company and a Group of Private Investors.
       
 
  *10.6    
Form of Warrant, dated November 6, 2008, between the Company and SDS Capital Group SPC, Ltd. and a Group of Private Investors.
       
 
  *31.1    
Certification of President and Chief Executive Officer (Principal executive officer and principal financial and accounting officer) Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
 
  *32.1    
Certification of President and Chief Executive Officer (Principal executive officer and principal financial and accounting officer) Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
     
(1)  
Incorporated by reference to the exhibit shown in the preceding parentheses filed with the Registrant’s registration statement Form S-1 (File No. 333-67350) on July 17, 2006.
 
(2)  
Incorporated by reference to the exhibit shown in the preceding parentheses filed with the Registrant’s Current Report on Form 8-K on June 22, 2007.
 
(3)  
Incorporated by reference to the exhibit shown in the preceding parentheses filed with the Post-Effective Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 on January 28, 2008.
 
*  
Filed herewith.

 

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Exhibit 10.1
NORTHWEST BIOTHERAPEUTICS, INC.
LOAN AGREEMENT and
PROMISSORY NOTE
     
US $1 million   August 19, 2008
SECTION 1. GENERAL .
Toucan Partners, LLC, a Delaware limited liability company (“ Toucan Partners ” or the “ Holder ”) hereby grants to Northwest Biotherapeutics, Inc. , a Delaware corporation (the “ Maker ” or the “ Company ”), an unsecured bridge term loan facility of One Million Dollars (US$1.0 million) (the “ Principal Amount ”) subject to the terms of this Loan Agreement and Promissory Note (this “ Note ”). The funding at closing of this Note will be US$1.0 million, and the repayment on the Maturity Date will be US$1,060,000.00 (the “ Repayment Amount ”). The Repayment Amount minus the Principal Amount shall constitute original issue discount (“ OID ”). At the Maturity Date, up to US$60,000 of the Repayment Amount may, at the election of the Holder in its sole discretion, be paid in common stock of the Company on the terms set forth in this Note (including, without limitation, the pricing set forth in Section 11 hereof). Toucan Partners shall forthwith following execution of this Note advance the Principal Amount to the Company at the account notified to Toucan Partners by the Company.
Following receipt of the Principal Amount and for value received, the Company hereby promises to pay the Repayment Amount to the order of the Toucan Partners or its assigns, in accordance with this Note, on February 19, 2009, or such earlier date as may be applicable under Sections 3 and 4 hereof (the “ Maturity Date ”).
SECTION 2. PRE-PAYMENT .
This Note may be pre-paid in whole or in part prior to the Maturity Date, at the election of the Maker. Any such pre-payment shall have no effect upon the Repayment Amount.
SECTION 3. DEFAULT PAYMENT .
Upon the occurrence of an Event of Default (as defined in Section 4 hereof) after notice as provided in Section 17.1 hereof (“ Event of Default ”), default payments shall become due and payable on any unpaid Repayment Amount that remains outstanding after the applicable Maturity Date (the “ Default Principal ”). The default payments shall be assessed on a monthly basis at the beginning of each month or partial month in which any Default Principal remains outstanding. Such default payments shall be a fixed amount relating to such month or partial month, and shall not be pro rated if the Default Principal is repaid by the Maker during such month. The amount of such default payments shall be equal to the lowest of (i) 0.25% percent of the Default Principal per month or partial month that such Default Principal remains outstanding, representing an annualized rate of Default Payments of three percent (3%) per annum, or (ii) the maximum rate permitted under applicable rules and regulations of the United States Small Business Administration (the “ SBA ”), or (iii) the maximum rate allowed by law (the “ Default Payments ”). Such Default Payments shall commence upon the occurrence of an Event of Default and continue until such Event of Default is fully cured or waived. The Default Payments shall be paid in common stock of the Company, at a price per share as provided in Section 11 hereof.

 

 


 

SECTION 4. DEFAULTS .
4.1 Definitions . Each occurrence of any of the following events shall constitute an “ Event of Default ”:
(a) if a default occurs in the payment of any Repayment Amount, or other amounts due under this Note, whether at the due date thereof or upon acceleration thereof, and such default remains uncured for ten (10) business days after written notice thereof from Holder;
(b) if any representation or warranty of Maker made herein shall have been false or misleading in any material respect, or shall have contained any material omission, as of the date hereof;
(c) if a material default occurs in the due observance or performance on the part of Maker of any covenant or agreement to be observed or performed pursuant to the terms of this Note and such default remains uncured for ten (10) business days after written notice thereof from Holder;
(d) if Maker shall (i) discontinue its business, (ii) apply for or consent to the appointment of a receiver, trustee, custodian or liquidator of Maker or any of its property, (iii) make a general assignment for the benefit of creditors, or (iv) file a voluntary petition in bankruptcy, or a petition or an answer seeking reorganization or an arrangement with creditors, or take advantage of any bankruptcy, reorganization, insolvency, readjustment of debt, dissolution or liquidation laws or statutes, or file an answer admitting the material allegations of a petition filed against it in any proceeding under any such law;
(e) if there shall be filed against Maker an involuntary petition seeking reorganization of Maker or the appointment of a receiver, trustee, custodian or liquidator of Maker or a substantial part of its assets, or an involuntary petition under any bankruptcy, reorganization or insolvency law of any jurisdiction, whether now or hereafter in effect (any of the foregoing petitions being hereinafter referred to as an “ Involuntary Petition ”) and such Involuntary Petition shall not have been dismissed within ninety (90) days after it was filed;
4.2 Remedies on Default.
(a) Upon each and every such Event of Default and at any time thereafter during the continuance of such Event of Default: (i) any and all indebtedness and related amounts (including, without limitation, Default Payments) due from Maker to Holder under this Note or otherwise shall immediately become due and payable; and (ii) Holder may exercise all the rights of a creditor under applicable law.

 

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(b) In case any one or more Events of Default shall occur and be continuing, and acceleration of this Note or any other indebtedness or obligation of Maker to Holder shall have occurred, Holder may, inter alia , proceed to protect and enforce its rights by an action at law, suit in equity and/or other appropriate proceeding, whether for the specific performance of any agreement contained in this Note, or for an injunction against a violation of any of the terms hereof or thereof or in furtherance of the exercise of any power granted hereby or thereby or by law. No right conferred upon Holder by this Note shall be exclusive of any other right referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise.
SECTION 5. DEFENSES .
5.1 No Offsets . The obligations of Maker under this Note shall not be subject to reduction, limitation, impairment, termination, defense, set-off, counterclaim or recoupment for any reason.
SECTION 6. [INTENTIONALLY OMITTED]
SECTION 7. EXTENSION OF MATURITY .
Should the Repayment Amount or any other amounts due under this Note become due and payable on other than a business day, the due date thereof shall be extended to the next succeeding business day. For the purposes of the preceding sentence, a business day shall be any day that is not a Saturday or Sunday, or a legal holiday in the State of Delaware.
SECTION 8. ATTORNEYS’ FEES AND COLLECTION FEES .
In the event that all or part of the indebtedness evidenced by this Note is collected at law or in equity, or in bankruptcy, receivership or other court proceedings, arbitration or mediation, or any settlement of any of the foregoing, Maker agrees to pay, in addition to the Repayment Amount and any other amounts due and payable hereunder, all costs of collection incurred by Holder in collecting or enforcing this Note, including, without limitation, reasonable attorneys’ fees and expenses.
SECTION 9. WAIVERS, DISPUTES, JURISDICTION .
9.1 Waivers by Maker . Maker hereby waives presentment, demand for payment, notice of dishonor, notice of protest and all other notices or demands in connection with the delivery, acceptance, performance or default of this Note.
9.2 Actions of Holder not a Waiver . No delay by Holder in exercising any power or right hereunder shall operate as a waiver of any power or right, nor shall any single or partial exercise of any power or right preclude other or further exercise thereof, or the exercise of any other power or right hereunder or otherwise; and no waiver or modification of the terms hereof shall be valid unless set forth in writing by Holder and then only to the extent set forth therein.

 

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9.3 Consent to Jurisdiction . Maker hereby irrevocably submits to the jurisdiction of any state or federal court sitting in the State of New York over any suit, action, or proceeding arising out of or relating to this Note or any other agreements or instruments with respect to Holder. Maker hereby irrevocably waives, to the fullest extent permitted by law, any objection that Maker may now or hereafter have to the laying of venue of any such suit, action, or proceeding brought in any such court and any claim that any such suit, action, or proceeding brought in any such court has been brought in an inconvenient forum. Final judgment in any such suit, action, or proceeding brought in any such court shall be conclusive and binding upon Maker and may be enforced in any court in which Maker is subject to jurisdiction by a suit upon such judgment, provided that service of process is effected upon Maker as provided in this Note or as otherwise permitted by applicable law.
9.4 Waiver of Jury Trial . MAKER WAIVES ANY RIGHTS IT MAY HAVE TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF THIS AGREEMENT OR ANY DEALINGS BETWEEN MAKER AND HOLDER RELATING TO THE SUBJECT MATTER OF THIS NOTE. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS NOTE, INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR TO ANY OTHER DOCUMENT OR AGREEMENT RELATING TO THE LOAN.
9.5 Service of Process . Maker hereby consents to process being served in any suit, action, or proceeding instituted in connection with this Note by delivery of a copy thereof by certified mail, postage prepaid, return receipt requested, to Maker, and/or by delivery of a copy thereof to a registered agent of Maker. Refusal to accept delivery, and/or avoidance of delivery, shall be deemed to constitute delivery. Maker irrevocably agrees that service in accordance with this Section 9.5 shall be deemed in every respect effective service of process upon Maker in any such suit, action or proceeding, and shall, to the fullest extent permitted by law, be taken and held to be valid personal service upon Maker. Nothing in this Section 9.5 shall affect the right of Holder to serve process in any manner otherwise permitted by law or limit the right of Holder otherwise to bring proceedings against Maker in the courts of any jurisdiction or jurisdictions.
SECTION 10. COVENANTS .
10.1 Affirmative Covenants . So long as this Note shall remain outstanding:
(a) Office . Maker shall maintain its head office in the United States.

 

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(b)  Use of Proceeds . Maker shall use the proceeds from this Note for operating expenses and other obligations of the Company incurred in pursuing the Company’s business plan and strategy including, without limitation, clinical trial expenses, research and development expenses, expenses related to regulatory filings and processes with the US Food and Drug Administration (“ FDA ”) and applicable regulators in various international markets, preparations for commercial delivery of the Company’s products in various international markets, expenses related to US Securities and Exchange Commission (“ SEC ”) filings and processes, expenses related to salaries and other general and administrative operations, expenses related to litigation, and expenses of accountants, attorneys, consultants and other professionals.
(c)  Seniority . The indebtedness evidenced by this Note: (i) shall be pari passu with that certain bridge loan in the amount of $4.0 million provided by The Al Rajhi Group pursuant to the Loan Agreement and Promissory Note dated as of May 6, 2008, as well as any bridge loan financing provided by Toucan Capital, Cognate BioServices or their assigns hereafter on substantially the same terms and conditions as this Note, and any other indebtedness or obligations of Maker to Holder, Toucan Capital and/or Cognate BioServices; and (ii) shall be senior in all respects to all other existing indebtedness or obligations of Maker of any kind, direct or indirect, contingent or otherwise, other than obligations of Maker owed directly to state or federal government and other than as provided in this Section 10.1(c)(i).
(d)  Regulatory Information . So long as any principal or other obligation under this Note shall remain outstanding, Maker shall provide to Holder, within the applicable timeframe specified by Holder, all such information and assessments as may be necessary or desirable in order for Holder to comply with its reporting obligations to any governmental agency or authority including, without limitation, the SBA. To the extent that any such information constitutes material non-public information, Holder agrees to keep such information confidential in accordance with applicable securities laws.
(e)  Business Activity . So long as any principal or other obligation under this Note shall remain outstanding, Maker shall make no change in its business activity that would render it or any of its business activities non-compliant with SBA regulations and guidelines.
10.2 Negative Covenants . So long as any principal or other obligation under this Note shall remain outstanding:
(a)  No Liens . Maker shall not grant to any person or entity a security interest, lien, license, or other encumbrance of any kind, direct or indirect, contingent or otherwise, in, to or upon any assets of Maker, including, without limitation, any intellectual property of any kind (collectively, “ Liens ”), except (i) Liens to secure further financing for the purpose of (x) repaying the Principal Amount and any other amounts due pursuant to this Note and any other notes under which the repayment of principal and other consideration is pari passu with the repayment under this Note, or (y) funding the further operations of the Company, or (ii) Liens imposed by law for taxes that are not yet due or are being contested in good faith by the Company.
(b)  No Conflicting Agreements . Maker shall not enter into any agreement that would materially impair, interfere or conflict with Maker’s obligations hereunder.

 

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(c)  No Distributions or Redemptions . Maker shall not declare or pay any dividends or make any distributions of cash, property or securities of Maker with respect to any shares of its common stock, preferred stock or any other class or series of its stock, or, directly or indirectly (except for repurchases of common stock by Maker in accordance with the terms of employee benefit plans or written agreement between Maker and any of its employees approved by the Board of Directors of Maker prior to August 19, 2008), redeem, purchase, or otherwise acquire for any consideration any shares of its common stock or any other class of its stock.
(d) Other Limitations .
(i) Maker shall not change the nature of its business activity in a manner that would cause a violation of 13 C.F.R. Section 107.720 and/or Section 107.760(b) (including, without limitation, by undertaking real estate, film production or oil and gas exploration activities).
(ii) Maker will at all times comply with the non-discrimination requirements of 13 C.F.R. Parts 112, 113 and 117.
(iii) For a period of at least one year after the date of this Note, Maker will locate no more than 49 percent of the employees or tangible assets of Maker outside the United States.
SECTION 11. STOCK ISSUANCE, STOCK PRICE
11.1 Partial Repayment in Stock . For the issuance of any common stock which Holder may elect, in its sole discretion, to receive in partial satisfaction of the Company’s obligation to pay the Repayment Amount on the Maturity Date, as provided in Section 1, the price per share of such common stock shall be the average of the closing price on the US Nasdaq Over the Counter Bulletin Board Market on each of the ten (10) trading days preceding the date of execution of this Note.
11.2 Default Payments . In the event that a Default Payment becomes due from Maker to Holder as provided in Section 3, the issuance of common stock in satisfaction of such Default Payments shall be at the price per share equal to the average of the closing price of the Company’s common stock on the US Nasdaq Over the Counter Bulletin Board Market on each of the ten (10) trading days preceding (a) the date on which such Default Payment becomes due, or (b) the date on which such Default Payment is made, whichever is lower.
11.3 Adjustments for Stock Splits, Dividends, Etc. In the event of changes in the Company’s common stock by reason of stock dividends, splits, recapitalizations, reclassifications, combinations or exchanges of shares, separations, reorganizations, liquidations, or the like, the number of shares of common stock issuable to the Holder hereunder shall be correspondingly adjusted to give the Holder, upon such issuance, the total number, class, and kind of shares as the Holder would have owned had such shares of common stock been issued immediately prior to such changes, and had the Holder continued to hold such shares until after the changes requiring such adjustment.

 

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SECTION 12. MAKER’S REPRESENTATIONS AND WARRANTIES .
Except as disclosed in the Maker’s public filings with the SEC, Maker represents and warrants the following:
12.1 Organization, Good Standing and Qualification . Maker is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware in the United States, and has all requisite corporate power and authority to carry on its business. Maker is duly qualified to transact business and is in good standing in each jurisdiction in which the failure so to qualify would have a material adverse effect on its business, properties, operations, prospects or condition (financial or otherwise).
12.2 Authorization . The execution, delivery and performance by Maker of this Note, and the transactions contemplated hereunder (including, without limitation, the issuance of common stock), have been duly authorized by all requisite corporate action by Maker in accordance with Delaware law. This Note is a valid and binding obligation of Maker, enforceable against Maker in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium, or other laws of general application affecting enforcements of creditors’ rights or general principles of equity.
12.3 No Conflicts . The execution, delivery, performance, issuance, sale and delivery of this Note and compliance with the provisions hereof by Maker will not, to the knowledge of Maker, (a) violate any provision of any law, statute, rule or regulation applicable to Maker or any order, judgment or decree of any court, arbitrator, administrative agency or other governmental body applicable to Maker or any of its assets or (b) conflict with or result in any material breach of any of the terms or conditions of any agreement or instrument to which Maker is a party, or give rise to any right of termination, cancellation or acceleration under any such agreement or instrument, or result in the creation of any lien or other encumbrance upon any of the material assets of Maker.
12.4 Litigation . There is no action, suit, proceeding or investigation pending or, to the knowledge of Maker, currently threatened against Maker, and/or its directors, officers, advisers, agents, properties, assets or business, in each case relating to Maker and/or its business, assets, operations or properties.
12.5 No Liens . The material assets of Maker are not subject to any existing lien, pledge, security interest or other encumbrance, direct or indirect, contingent or otherwise.
12.6 “Small Business”.
(a)  Small Business Status . Maker together with its “affiliates” (as that term is defined in Section 121.103 of Title 13 of Code of Federal Regulations (the “ Federal Regulations ”)) is a “small business concern” within the meaning of the Small Business Investment Act of 1958, as amended (the “ Small Business Act ” or “ SBIA ”), and the regulations promulgated thereunder, including Section 121.301(c) of Title 13, Code of Federal Regulations.

 

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(b)  Information for SBA Reports . Maker has delivered and/or will deliver to Holder certain information, set forth by and regarding the Maker and its affiliates in connection with this Note, on SBA Forms 480, 652 and Part A and B of Form 1031. This information delivered was true, accurate, complete and correct in all material respects, and any information yet to be delivered will be true, accurate, complete and correct in all material respects, and in form and substance acceptable to Holder.
(c)  Eligibility . Maker is eligible for financing by Holder pursuant to Section 107.720 of Title 13 of the Federal Regulations and any other SBA regulations.
SECTION 13. HOLDER’S REPRESENTATIONS AND WARRANTIES
Holder understands that the shares of common stock to be issued to Holder hereunder have not been and will not be registered within any designated timeframe under the Securities Act of 1933, as amended (the “ Securities Act ”). Holder also understands that the common stock is being offered and sold pursuant to an exemption from registration contained in the Securities Act based in part upon Holder’s representations contained in this Note. Holder hereby represents and warrants as follows:
13.1 Investment Experience . Holder has substantial experience in evaluating and investing in private placement transactions of securities, and is capable of evaluating the merits and risks of its investment in Maker and has the capacity to protect its own interests.
13.2 Investment Purpose . Holder is acquiring the common stock for its own account for investment only, and not with a view towards distribution.
13.3 No Solicitation . Holder is not aware of publication of any advertisement in connection with the issuance of shares of common stock contemplated hereby.
13.4 Accredited Investor . Holder is an “accredited investor” within the meaning of Regulation D under the Securities Act.
13.5 Access to Information . Holder has had access to publicly available financial statements and other information regarding Maker and has had an opportunity to discuss such publicly available information with authorized representatives of Maker. Holder has also had the opportunity to ask questions of and receive answers from, Maker and its management regarding the terms and conditions of the investment contemplated hereby.
13.6 Stock Legend . Holder understands that all certificates evidencing the common stock issued to Holder hereunder shall bear a legend, prominently stamped or printed thereon, reading substantially as follows:
“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE “ACT”) OR APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE SOLD, MORTGAGED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT.”

 

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SECTION 14. PIGGYBACK REGISTRATION RIGHTS.
14.1 Piggyback Registrations . The Company shall notify the Holder in writing at least fifteen (15) business days prior to the filing of any registration statement under the Securities Act for purposes of a public offering of securities of the Company (other than registration statements relating to employee benefit plans or with respect to corporate reorganizations or other transactions under Rule 145 of the Securities Act), and shall afford the Holder an opportunity to include in such registration statement all or part of the shares of common stock issued pursuant to Section 11 hereof and held at such time by Holder (the “ Registrable Securities ”). If Holder desires to include in any such registration statement all or any part of the Registrable Securities held by it, Holder shall so notify the Company in writing within ten (10) business days after the above-described notice from the Company. Holder’s notice to the Company shall state the number of shares of Registrable Securities that Holder wishes to include in such registration statement.
14.2 Underwriting . If the registration statement under which the Company gives notice under this Section 14 is for an underwritten offering, the Company shall so advise Holder. In such event, the right of Holder to include its Registrable Securities in a registration pursuant to this Section 14 shall be conditioned upon the Holder’s participation in such underwriting and the inclusion of the Holder’s Registrable Securities in the underwriting to the extent provided herein. Holder shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. If the underwriter determines in good faith that marketing factors require a limitation of the number of shares to be underwritten, the number of shares that may be included in the underwriting shall be allocated, first, to the Company; second, to all other holders of registration rights in effect as of the date hereof (the “ Pre-existing Rights Holders ”) that have elected to exercise such rights in connection with the registration statement; third, to Holder; and fourth, to any other shareholders of the Company (other than Holder and the Pre-Existing Rights Holders) on a pro rata basis.
14.4 Expenses Of Registration . All expenses incurred in connection with any registration, qualification or compliance pursuant to this Section 14 shall be borne by the Company, “ Registration Expenses ” including, without limitation, all registration and filing fees, printing expenses, attorneys’ fees for the Company’s counsel and Holder’s counsel, blue sky fees and expenses, provided, however, that all discounts and selling commissions applicable to the sale incurred in connection with any registrations of Registrable Securities hereunder, shall be borne by the Holder on the basis of the number of shares sold by Holder.

 

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SECTION 15. INDEMNIFICATION
15.1 Indemnification.
(a) In addition to all rights and remedies available to Holder at law or in equity, Maker shall, to the fullest extent permitted by law, indemnify Holder and each subsequent holder of this Note, and their respective affiliates, stockholders, limited partners, general partners, officers, directors, managers, employees, agents, representatives, successors and assigns (collectively, the “ Indemnified Persons ”) and pay on behalf of or reimburse such party for any losses, damages, or expenses, including, without limitation, reasonable attorneys’ fees and all amounts paid in investigation, defense or settlement of any of the foregoing which any Indemnified Person may suffer, sustain or become subject to as a result of or in connection with any material misrepresentation in, or material omission from, any of the representations and warranties, or any material breach of any covenant or agreement on the part of Maker under this Note; provided, however, that notwithstanding the foregoing or any other agreement to the contrary, in no event shall Maker be liable for indirect or consequential losses or damages of any kind, and in no event shall Maker be liable for any losses or damages resulting from the Holder’s or any other Indemnified Person’s gross negligence, willful misconduct, lack of good faith, or breach of such person’s duty of loyalty to the Maker (if any). Notwithstanding any other provision of this Agreement, the Maker shall not be obligated pursuant to the terms of this Agreement to indemnify Holder or another Indemnified Person for acts, omissions or transactions from which such Indemnified Person may not be indemnified under applicable law.
(b) Within five (5) business days after receipt of notice of commencement of any action or the assertion of any claim by a third party, Holder shall give Maker written notice thereof together with a copy of such claim, process or other legal pleading of such claim. Maker shall have the right to assist in the defense thereof by representation of its own choosing, at its own expense. Maker shall not be liable under this Agreement to make any payment to Holder or another Indemnified Person in connection with the indemnification provisions set forth in sub-paragraph (a) of this Section 15.1 to the extent Holder or such other Indemnified Person has otherwise actually received payment (under any insurance policy or otherwise) of the amounts otherwise indemnifiable hereunder. Both the Maker and Holder acknowledge that in certain instances, federal law or applicable public policy may prohibit the Maker from indemnifying Holder or other Indemnified Persons under this Agreement or otherwise. Holder understands and acknowledges that the Maker has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Maker’s right under public policy to indemnify Holder or other Indemnified Persons.
15.2 Survival . All indemnification rights hereunder shall survive the execution and delivery of this Note and the consummation of the transactions contemplated hereunder, for a period of two (2) years, regardless of any investigation, inquiry or examination made for or on behalf of, or any knowledge of Holder and/or any of the Indemnified Persons, or the acceptance by Holder of any certificate or opinion.

 

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SECTION 16. REPLACEMENT OF NOTE .
Upon receipt by Maker of reasonable evidence of the loss, theft, destruction, or mutilation of this Note, Maker will deliver a new Note containing the same terms and conditions in lieu of this Note. Any Note delivered in accordance with the provisions of this Section 6 shall be dated as of the date of this Note.
SECTION 17. MISCELLANEOUS .
17.1 Notices . All notices, demands and requests of any kind to be delivered to any party in connection with this Note shall be in writing and shall be deemed to be effective upon delivery if (i) personally delivered, (ii) sent by confirmed facsimile with a copy sent by nationally or internationally recognized overnight courier, (iii) sent by nationally or internationally recognized overnight courier, or (iv) sent by registered or certified mail, return receipt requested and postage prepaid, addressed as follows:
     
if to Maker:
  Northwest Biotherapeutics, Inc.
 
  7600 Wisconsin Avenue
 
  Suite 750
 
  Bethesda, MD 20814
 
  Tel: (240) 497-4060
 
  Fax: (240) 497-4065
 
  Attention: Alton L. Boynton
 
  aboynton@nwbio.com
 
   
with a copy to:
  David Engvall, Esq.
 
  Covington & Burling LLP
 
  1201 Pennsylvania Avenue, N.W.
 
  Washington, DC 20004-2401
 
  Tel: (202) 662-5307
 
  Fax: (202) 778-5307
 
  dengvall@cov.com
 
   
if to Holder:
  Toucan Partners, LLC
 
  7600 Wisconsin Avenue
 
  Bethesda, MD 20814
 
  Tel:
 
  Fax: (240) 497-4065
 
  Attention: Linda F. Powers
 
  lpowers@toucancapital.com
or to such other address as the party to whom notice is to be given may have furnished to the other parties hereto in writing in accordance with the provisions of this Section.

 

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17.2 Parties In Interest; Assignment . This Note shall bind and inure to the benefit of Holder, Maker and their respective successors and permitted assigns. Maker shall not transfer or assign this Note without the prior written consent of Holder. Holder may transfer and assign this note without the prior consent of Maker.
17.3 Entire Agreement . This Note contains the entire understanding of the parties with respect to the subject matter hereof and supersedes all prior agreements and understandings among the parties with respect thereto.
17.4 Severability . If one or more provisions of this Note are held to be unenforceable under applicable law, then (i) such provision shall be excluded from this Note, (ii) the balance of the Note shall be interpreted as if such provision were so excluded, (iii) the balance of the Note shall be enforceable in accordance with its terms, and (iv) the parties shall negotiate in good faith to amend or add to the provisions of this Note to effectuate as nearly as reasonably practicable, and as nearly as permitted under applicable law, the original intent of the parties with respect to the provision excluded.
17.5 Amendments . No provision of this Note may be amended or waived without the express written consent of both Maker and Holder, provided, however, that Holder may waive any provision hereof that inures to the benefit of Holder without the prior written consent of Maker.
17.6 Headings . The section and paragraph headings contained in this Note are for reference purposes only and shall not affect in any way the meaning or interpretation of this Note.
17.7 Governing Law . This Note shall be governed by and construed in accordance with the laws of the U.S. State of New York, other than any rules relating to choice of law.
17.8 Nature of Obligation . This Note is being made for business and investment purposes, and not for household or other purposes.
17.9 Expenses . Maker shall pay, reimburse or otherwise satisfy, upon demand of Holder, all fees, costs and expenses incurred and/or undertaken, and to be incurred and/or undertaken, by Holder relating to the preparation, development and execution of this Note.
17.10 No Third Party Rights . A person who is not a party to this Note shall not have any rights under or in connection with it by virtue of the Contracts (Rights of Third Parties) Act 1999. The rights of the parties to terminate, rescind or agree any variation, waiver or settlement under this Note is not subject to the consent of any person that is not a party to this Note.
17.11 Counterparts . This Note may be executed and delivered in any number of counterparts, each of which is an original and which, together, have the same effect as if each party had signed the same document.

 

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IN WITNESS WHEREOF , Maker has caused this Note to be duly executed by its duly authorized person(s) as of the date first written above.
                 
NORTHWEST BIOTHERAPEUTICS, INC.   TOUCAN PARTNERS, LLC    
 
               
By:
  /s/Alton Boynton   By:   /s/ Linda F. Powers    
 
 
 
     
 
   
    Name: Alton Boynton       Name: Linda F. Powers    
    Title: President       Title: Managing Member    

 

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Exhibit 10.2
NORTHWEST BIOTHERAPEUTICS, INC.
LOAN AGREEMENT and
PROMISSORY NOTE
     
US $1 million   October 1, 2008
SECTION 1. GENERAL .
SDS Capital Group SPC, Ltd. , a Cayman Islands company with an office at 53 Forest Avenue, Suite 201, Old Greenwich, Connecticut 06870, (“ SDS ” or the “ Holder ”) hereby grants to Northwest Biotherapeutics, Inc. , a Delaware corporation (the “ Maker ” or the “ Company ”) an unsecured bridge term loan facility of One Million Dollars (US$1.0 million) (the “ Principal Amount ”) subject to the terms of this Loan Agreement and Promissory Note (this “ Note ”). The funding at closing of this Note will be US$1.0 million, and the repayment on the Maturity Date will be US$1.06 million (the “Repayment Amount”). In addition, upon execution of this Note, Maker will issue to Holder a Warrant exercisable for common stock of Maker as provided in Section 10 hereof. Holder shall advance the Principal Amount to the Company promptly following execution of this Note at the account notified to Holder by the Company.
Upon receipt of the Principal Amount and for value received, the Company hereby promises to promptly issue the Warrant, and promises to pay the Repayment Amount to the order of the Holder or its assigns, in accordance with this Note, on April 1, 2009, or such earlier date as may be applicable under Sections 3 and 4 hereof (the “ Maturity Date ”).
SECTION 2. PRE-PAYMENT .
This Note may not be pre-paid prior to the Maturity Date, except with the consent of the Holder. Any such pre-payment shall have no effect upon the Warrant.
SECTION 3. DEFAULT PAYMENT .
Upon the occurrence of an Event of Default (as defined in Section 4 hereof) after notice as provided in Section 15.1 hereof (“ Event of Default ”), default payments shall become due and payable on any unpaid Repayment Amount that remains outstanding after the applicable Maturity Date (the “ Default Principal ”). The default payments shall be assessed on a monthly basis at the beginning of each month or partial month in which any Default Principal remains outstanding. Such default payments shall be a fixed amount relating to such month or partial month, and shall not be pro rated if the Default Principal is repaid by the Maker during such month. The amount of such default payments shall be equal to the lowest of (i) 0.25% percent of the Default Principal per month or partial month that such Default Principal remains outstanding, representing an annualized rate of Default Payments of three percent (3%) per annum, or (ii) the maximum rate permitted under applicable rules and regulations of the United States Small Business Administration (“ SBA ”), or (iii) the maximum rate allowed by law (the “ Default Payments ”). Such Default Payments shall commence upon the occurrence of an Event of Default and continue until such Event of Default is fully cured or waived.

 

 


 

SECTION 4. DEFAULTS .
4.1 Definitions . Each occurrence of any of the following events shall constitute an “ Event of Default ”:
(a) if a default occurs in the issuance of the Warrant or in the payment of any Repayment Amount, or other amounts due under this Note, whether at the due date thereof or upon acceleration thereof, and such default remains uncured for ten (10) business days after written notice thereof from Holder;
(b) if any representation or warranty of Maker made herein shall have been false or misleading in any material respect, or shall have contained any material omission, as of the date hereof;
(c) if a material default occurs in the due observance or performance on the part of Maker of any covenant or agreement to be observed or performed pursuant to the terms of this Note and such default remains uncured for ten (10) business days after written notice thereof from Holder;
(d) if Maker shall (i) discontinue its business, (ii) apply for or consent to the appointment of a receiver, trustee, custodian or liquidator of Maker or any of its property, (iii) make a general assignment for the benefit of creditors, or (iv) file a voluntary petition in bankruptcy, or a petition or an answer seeking reorganization or an arrangement with creditors, or take advantage of any bankruptcy, reorganization, insolvency, readjustment of debt, dissolution or liquidation laws or statutes, or file an answer admitting the material allegations of a petition filed against it in any proceeding under any such law; or
(e) if there shall be filed against Maker an involuntary petition seeking reorganization of Maker or the appointment of a receiver, trustee, custodian or liquidator of Maker or a substantial part of its assets, or an involuntary petition under any bankruptcy, reorganization or insolvency law of any jurisdiction, whether now or hereafter in effect (any of the foregoing petitions being hereinafter referred to as an “ Involuntary Petition ”) and such Involuntary Petition shall not have been dismissed within ninety (90) days after it was filed.
4.2 Remedies on Default .
(a) Upon each and every such Event of Default and at any time thereafter during the continuance of such Event of Default: (i) any and all indebtedness and related amounts (including, without limitation, Default Payments) due from Maker to Holder under this Note or otherwise shall immediately become due and payable; and (ii) Holder may exercise all the rights of a creditor under applicable law.
(b) In case any one or more Events of Default shall occur and be continuing, and acceleration of this Note or any other indebtedness or obligation of Maker to Holder shall have occurred, Holder may, inter alia , proceed to protect and enforce its rights by an action at law, suit in equity and/or other appropriate proceeding, whether for the specific performance of any agreement contained in this Note, or for an injunction against a violation of any of the terms hereof or thereof or in furtherance of the exercise of any power granted hereby or thereby or by law. No right conferred upon Holder by this Note shall be exclusive of any other right referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise.

 

 


 

SECTION 5. DEFENSES .
The obligations of Maker under this Note shall not be subject to reduction, limitation, impairment, termination, defense, set-off, counterclaim or recoupment for any reason.
SECTION 6. EXTENSION OF MATURITY .
Should the Repayment Amount or any other amounts due under this Note become due and payable on other than a business day, the due date thereof shall be extended to the next succeeding business day. For the purposes of the preceding sentence, a business day shall be any day that is not a Saturday or Sunday, or a legal holiday in the State of New York in the United States.
SECTION 7. ATTORNEYS’ FEES AND COLLECTION FEES .
In the event that all or part of the indebtedness evidenced by this Note is collected at law or in equity, or in bankruptcy, receivership or other court proceedings, arbitration or mediation, or any settlement of any of the foregoing, Maker agrees to pay, in addition to the Repayment Amount and any other amounts due and payable hereunder, all costs of collection incurred by Holder in collecting or enforcing this Note, including, without limitation, reasonable attorneys’ fees and expenses.
SECTION 8. WAIVERS, DISPUTES, JURISDICTION .
8.1 Waivers by Maker . Maker hereby waives presentment, demand for payment, notice of dishonor, notice of protest and all other notices or demands in connection with the delivery, acceptance, performance or default of this Note.
8.2 Actions of Holder not a Waiver . No delay by Holder in exercising any power or right hereunder shall operate as a waiver of any power or right, nor shall any single or partial exercise of any power or right preclude other or further exercise thereof, or the exercise of any other power or right hereunder or otherwise; and no waiver or modification of the terms hereof shall be valid unless set forth in writing by Holder and then only to the extent set forth therein.

 

 


 

8.3 Consent to Jurisdiction . Maker hereby submits to the jurisdiction of any state or federal court sitting in the State of New York over any suit, action, or proceeding arising out of or relating to this Note or any other agreements or instruments with respect to Holder. Maker hereby waives, to the fullest extent permitted by law, any objection that Maker may now or hereafter have to the laying of venue of any such suit, action, or proceeding brought in any such court and any claim that any such suit, action, or proceeding brought in any such court has been brought in an inconvenient forum. Final judgment in any such suit, action, or proceeding brought in any such court shall be conclusive and binding upon Maker, and may be enforced in any court in which Maker is subject to jurisdiction by a suit upon such judgment, provided that service of process is effected upon Maker as provided in this Note or as otherwise permitted by applicable law.
8.4 Waiver of Jury Trial . MAKER WAIVES ANY RIGHTS IT MAY HAVE TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF THIS AGREEMENT OR ANY DEALINGS BETWEEN MAKER AND HOLDER RELATING TO THE SUBJECT MATTER OF THIS NOTE. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS NOTE, INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR TO ANY OTHER DOCUMENT OR AGREEMENT RELATING TO THE LOAN.
8.5 Service of Process . Maker hereby consents to process being served in any suit, action, or proceeding instituted in connection with this Note by delivery of a copy thereof by certified mail, postage prepaid, return receipt requested, to Maker, and/or by delivery of a copy thereof to a registered agent of Maker. Refusal to accept delivery, and/or avoidance of delivery, shall be deemed to constitute delivery. Maker irrevocably agrees that service in accordance with this Section 8.5 shall be deemed in every respect effective service of process upon Maker in any such suit, action or proceeding, and shall, to the fullest extent permitted by law, be taken and held to be valid personal service upon Maker. Nothing in this Section 8.5 shall affect the right of Holder to serve process in any manner otherwise permitted by law or limit the right of Holder otherwise to bring proceedings against Maker in the courts of any jurisdiction or jurisdictions.
SECTION 9. COVENANTS .
9.1 Affirmative Covenants . So long as this Note shall remain outstanding:
(a)  Office . Maker shall maintain its head office in the United States.
(b)  Use of Proceeds . Maker shall use the proceeds from this Note for operating expenses and other obligations of the Company incurred in pursuing the Company’s business plan and strategy including, without limitation, clinical trial expenses, research and development expenses, expenses related to regulatory filings and processes with the US Food and Drug Administration (“ FDA ”) and applicable regulators in various international markets, preparations for commercial delivery of the Company’s products in various international markets, expenses related to US Securities and Exchange Commission (“ SEC ”) filings and processes, expenses related to salaries and other general and administrative operations, expenses related to litigation, and expenses of accountants, attorneys, consultants and other professionals.

 

 


 

(c)  Regulatory Information . So long as any principal or other obligation under this Note shall remain outstanding, Maker shall provide to Holder, within the applicable timeframe specified by Holder, all such information and assessments as may be necessary or desirable in order for Holder to comply with its reporting obligations to any governmental agency or authority including, without limitation, the SBA. To the extent that any such information constitutes material non-public information, Holder agrees to keep such information confidential in accordance with applicable securities laws.
(d)  Business Activity . So long as any principal or other obligation under this Note shall remain outstanding, Maker shall make no change in its business activity that would render it or any of its business activities non-compliant with SBA regulations and guidelines.
9.2 Negative Covenants . So long as any principal or other obligation under this Note shall remain outstanding:
(a)  No Liens . Maker shall not grant to any person or entity a security interest, lien, license, or other encumbrance of any kind, direct or indirect, contingent or otherwise, in, to or upon any assets of Maker, including, without limitation, any intellectual property of any kind (collectively, “ Liens ”), except (i) Liens to secure further financing for the purpose of (x) repaying the Principal Amount and any other amounts due pursuant to this Note and any other notes under which the repayment of principal and other consideration is pari passu with the repayment under this Note, or (y) funding the further operations of the Company, or (ii) Liens imposed by law for taxes that are not yet due or are being contested in good faith by the Company.
(b)  No Conflicting Agreements . Maker shall not enter into any agreement that would materially impair, interfere or conflict with Maker’s obligations hereunder.
SECTION 10. WARRANT .
In partial consideration for the loan made by Holder pursuant to this Note, Maker will issue to Holder at Closing a warrant exercisable for the purchase of common stock of the Maker, in the form attached hereto as Exhibit A (the “Warrant”). As provided in the Warrant, the exercise price will be equal to the lowest closing price of Maker’s common stock on the US NASDAQ OTC Bulletin Board market or the London AIM market on the trading day of the execution of this Note (the “Exercise Price”). The number of shares for which the Warrant will be exercisable will be the number of shares of Maker’s common stock which, when multiplied by the Exercise Price, have a value equal to thirty-five percent (35%) of the Repayment Amount.

 

 


 

SECTION 11. MAKER’S REPRESENTATIONS AND WARRANTIES .
Except as disclosed in the Maker’s public filings with the SEC, Maker represents and warrants the following:
11.1 Organization, Good Standing and Qualification . Maker is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware in the United States, and has all requisite corporate power and authority to carry on its business. Maker is duly qualified to transact business and is in good standing in each jurisdiction in which the failure so to qualify would have a material adverse effect on its business, properties, operations, prospects or condition (financial or otherwise).
11.2 Authorization . The execution, delivery and performance by Maker of this Note, and the transactions contemplated hereunder (including, without limitation, the issuance of common stock pursuant to exercise of the Warrant), have been duly authorized by all requisite corporate action by Maker in accordance with Delaware law. This Note is a valid and binding obligation of Maker, enforceable against Maker in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium, or other laws of general application affecting enforcements of creditors’ rights or general principles of equity.
11.3 No Conflicts . The execution, delivery, performance, issuance, sale and delivery of this Note and compliance with the provisions hereof by Maker will not, to the knowledge of Maker, (a) violate any provision of any law, statute, rule or regulation applicable to Maker or any order, judgment or decree of any court, arbitrator, administrative agency or other governmental body applicable to Maker or any of its assets or (b) conflict with or result in any material breach of any of the terms or conditions of any agreement or instrument to which Maker is a party, or give rise to any right of termination, cancellation or acceleration under any such agreement or instrument, or result in the creation of any lien or other encumbrance upon any of the material assets of Maker.
11.4 “Small Business” .
(a)  Small Business Status . Maker together with its “affiliates” (as that term is defined in Section 121.103 of Title 13 of Code of Federal Regulations (the “ Federal Regulations ”)) is a “small business concern” within the meaning of the Small Business Investment Act of 1958, as amended (the “ Small Business Act ” or “ SBIA ”), and the regulations promulgated thereunder, including Section 121.301(c) of Title 13, Code of Federal Regulations.
(b)  Information for SBA Reports . Maker has delivered and/or will deliver to Holder certain information, set forth by and regarding the Maker and its affiliates in connection with this Note, on SBA Forms 480, 652 and Part A and B of Form 1031. This information delivered was true, accurate, complete and correct in all material respects, and any information yet to be delivered will be true, accurate, complete and correct in all material respects, and in form and substance acceptable to Holder.
(c)  Eligibility . Maker is eligible for financing by Holder pursuant to Section 107.720 of Title 13 of the Federal Regulations and any other SBA regulations.

 

 


 

SECTION 12. HOLDER’S REPRESENTATIONS AND WARRANTIES .
12.1 Unregistered Shares . Holder understands that the shares of common stock to be issued to Holder pursuant to the Warrant (the “ Warrant Shares ”) will not be registered within any designated timeframe thereafter under the Securities Act of 1933, as amended (the “ Securities Act ”). Holder also understands that issuance of the Warrant Shares will be pursuant to an exemption from registration contained in the Securities Act based in part upon Holder’s representations herein.
12.2 Accredited Investor . Holder hereby represents and warrants that Holder has substantial experience in evaluating and investing in securities, and is capable of evaluating the merits and risks of its loan to Maker under this Note and any investmentin the Warrant Shares, and has the capacity to protect its own interests. Holder is an “accredited investor” within the meaning of Regulation D under the Securities Act.
12.3 Investment Purpose . Holder is acquiring the Warrant and the Warrant Shares for its own account for investment only, and not with a view towards distribution. Holder is not aware of publication of any advertisement in connection with the issuance of the Warrant or the Warrant Shares.
SECTION 13. INDEMNIFICATION .
13.1 Indemnification .
(a) In addition to all rights and remedies available to Holder at law or in equity, Maker shall indemnify Holder and each subsequent holder of this Note, and their respective affiliates, stockholders, limited partners, general partners, officers, directors, managers, employees, agents, representatives, successors and assigns (collectively, the “ Indemnified Persons ”) and pay on behalf of or reimburse such party for any losses, damages, or expenses, including, without limitation, reasonable attorneys’ fees and all amounts paid in investigation, defense or settlement of any of the foregoing which any Indemnified Person may suffer, sustain or become subject to as a result of or in connection with any material misrepresentation in, or material omission from, any of the representations and warranties, or any material breach of any covenant or agreement on the part of Maker under this Note, provided, however, that notwithstanding the foregoing or any other agreement or provision to the contrary, in no event shall Maker be liable for indirect or consequential losses or damages of any kind, and in no event shall Maker be liable for any losses or damages resulting from the gross negligence or willful misconduct of Holder or a subsequent holder of this Note.
(b) Within five (5) business days after receipt of notice of commencement of any action or the assertion of any claim by a third party, Holder shall give Maker written notice thereof together with a copy of such claim, process or other legal pleading of such claim. Maker shall have the right to assist in the defense thereof by representation of its own choosing, at its own expense.
13.2 Survival . All indemnification rights hereunder shall survive the execution and delivery of this Note and the consummation of the transactions contemplated hereunder, for a period of two (2) years, regardless of any investigation, inquiry or examination made for or on behalf of, or any knowledge of Holder and/or any of the Indemnified Persons, or the acceptance by Holder of any certificate or opinion.

 

 


 

SECTION 14. REPLACEMENT OF NOTE .
Upon receipt by Maker of reasonable evidence of the loss, theft, destruction, or mutilation of this Note, Maker will deliver a new Note containing the same terms and conditions in lieu of this Note. Any Note delivered in accordance with the provisions of this Section 14 shall be dated as of the date of this Note.
SECTION 15. MISCELLANEOUS .
15.1 Notices . All notices, demands and requests of any kind to be delivered to any party in connection with this Note shall be in writing and shall be deemed to be effective upon delivery if (i) personally delivered, (ii) sent by confirmed facsimile with a copy sent by nationally or internationally recognized overnight courier, (iii) sent by nationally or internationally recognized overnight courier, or (iv) sent by registered or certified mail, return receipt requested and postage prepaid, addressed as follows:
     
if to Maker:
  Northwest Biotherapeutics, Inc.
 
  7600 Wisconsin Avenue
 
  Suite 750
 
  Bethesda, MD 20814
 
  Tel: +1-240-497-4060
 
  Fax: +1-240-497-4065
 
  Attention: Alton Boynton
 
  aboynton@nwbio.com
 
   
with a copy to:
  David Engvall, Esq.
 
  Covington & Burling
 
  1201 Pennsylvania Avenue, N.W.
 
  Washington, DC 20004-2401
 
  Tel: +1-202-662-5307
 
  Fax: +1- 202-778-5307
 
  dengvall@cov.com
 
   
if to Holder:
  SDS Capital Group SPC, Ltd.
 
  53 Forest Avenue, Suite 201
 
  Old Greenwich, CT 06870
 
  Attn: Michael O’Brien
 
  Tel: +1-203-967-5850
 
  Fax: +1-203-967-5851
 
  mobrien@sdscapital.com

 

 


 

or to such other address as the party to whom notice is to be given may have furnished to the other parties hereto in writing in accordance with the provisions of this Section.
15.2 Parties In Interest; Assignment . This Note shall bind and inure to the benefit of Holder, Maker and their respective successors and permitted assigns. Maker shall not transfer or assign this Note without the prior written consent of Holder. Holder may transfer and assign this note without the prior consent of Maker.
15.3 Entire Agreement . This Note contains the entire understanding of the parties with respect to the subject matter hereof and supersedes all prior agreements and understandings among the parties with respect thereto.
15.4 Severability . If one or more provisions of this Note are held to be unenforceable under applicable law, then (i) such provision shall be excluded from this Note, (ii) the balance of the Note shall be interpreted as if such provision were so excluded, (iii) the balance of the Note shall be enforceable in accordance with its terms, and (iv) the parties shall negotiate in good faith to amend or add to the provisions of this Note to effectuate as nearly as reasonably practicable, and as nearly as permitted under applicable law, the original intent of the parties with respect to the provision excluded.
15.5 Amendments . No provision of this Note may be amended or waived without the express written consent of both Maker and Holder, provided, however, that Holder may waive any provision hereof that inures to the benefit of Holder without the prior written consent of Maker.
15.6 Headings . The section and paragraph headings contained in this Note are for reference purposes only and shall not affect in any way the meaning or interpretation of this Note.
15.7 Governing Law . This Note shall be governed by and construed in accordance with the laws of the State of New York, other than any rules relating to choice of law.
15.8 Nature of Obligation . This Note is being made for business and investment purposes, and not for household or other purposes.
15.9 No Third Party Rights . A person who is not a party to this Note shall not have any rights under or in connection with it by virtue of the Contracts (Rights of Third Parties) Act 1999. The rights of the parties to terminate, rescind or agree any variation, waiver or settlement under this Note is not subject to the consent of any person that is not a party to this Note.

 

 


 

15.10 Counterparts . This Note may be executed and delivered in any number of counterparts, each of which is an original and which, together, have the same effect as if each party had signed the same document.
15.11 Replacement . Upon receipt of a duly executed, notarized, and unsecured written statement from the Holder with respect to the loss, theft or destruction of this Note (or any replacement hereof), and without requiring an indemnity bond or other security, or, in the case of a mutilation of this Note, upon surrender and cancellation of such Note, the Company shall issue a new Note, of like tenor and amount, in lieu of such lost, stolen, destroyed or mutilated Note.
IN WITNESS WHEREOF , Maker has caused this Note to be duly executed by its duly authorized person(s) as of the date first written above.
                 
NORTHWEST BIOTHERAPEUTICS, INC.   SDS CAPITAL GROUP SPC, LTD.    
 
               
By:
  /s/ Alton Boynton   By:   /s/ Steve Derby    
 
 
 
     
 
   
    Name: Alton Boynton       Name: Steve Derby    
    Title: President       Title: Chief Investment Officer    

 

 

Exhibit 10.3
THIS WARRANT AND THE UNDERLYING SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”). THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO SUCH SECURITIES UNDER THE ACT OR UNLESS SUCH TRANSACTION IS IN COMPLIANCE WITH APPLICABLE FEDERAL AND STATE SECURITIES LAWS.
NORTHWEST BIOTHERAPEUTICS, INC.
WARRANT
     
No. BW-2008-_____    October 1, 2008
This Certifies That , for value received, SDS Capital Group SPC, Ltd. , with its principal office in Old Greenwich, CT 06870, and/or its assigns (collectively, the “ Holder ”), is entitled to subscribe for and purchase from Northwest Biotherapeutics, Inc. , a Delaware corporation, with its principal office in Bethesda, Maryland (the “ Company ”), such number of Exercise Shares as provided herein at the Exercise Price as provided herein. This Warrant is being issued pursuant to the terms of that certain Loan Agreement and Promissory Note, of even date herewith, by and among the Company and Holder (the Note ”).
1. Definitions. Capitalized terms used but not defined herein shall have the meanings set forth in the Note, as applicable. As used herein, the following terms shall have the following respective meanings:
(a) Common Stock ” shall mean the common stock of the Company, par value $0.001 per share.
(b)  Exercise Period ” shall mean the period commencing on the date of issuance of this Warrant and ending five (5) years after the date of issuance of this Warrant.
(c)  Exercise Price ” of this Warrant shall be equal to $0.53 per share, subject to adjustment as provided herein.
(d)  “Exercise Share” shall mean each of the 697,775 shares of Common Stock for which this Warrant is exercisable.
2. Exercise of Warrant. This Warrant will be fully vested and exercisable upon issuance. The rights represented by this Warrant may be exercised in whole or in part at any time or times during the Exercise Period, by delivery of the following to the Company at its address set forth above (or at such other address as it may designate by notice in writing to the Holder):
(a) An executed Notice of Exercise in the form attached hereto;
(b)  Payment of the Exercise Price either (i) in cash or by check, or (ii) by cancellation of indebtedness; and
(c) This Warrant.

 

 


 

Upon the exercise of the rights represented by this Warrant, a certificate or certificates for the Exercise Shares so purchased, registered in the name of the Holder or Holder’s designee(s), shall be issued and delivered to the Holder within a reasonable time after the rights represented by this Warrant shall have been so exercised. In the event that this Warrant is being exercised for less than all of the then-current number of Exercise Shares purchasable hereunder, the Company shall, concurrently with the issuance by the Company of the number of Exercise Shares for which this Warrant is then being exercised, issue a new Warrant exercisable for the remaining number of Exercise Shares purchasable hereunder.
The person in whose name any certificate or certificates for Exercise Shares are to be issued upon exercise of this Warrant shall be deemed to have become the holder of record of such shares on the date on which this Warrant was surrendered and payment of the Exercise Price was made, irrespective of the date of delivery of such certificate or certificates, except that, if the date of such surrender and payment is a date when the stock transfer books of the Company are closed, such person shall be deemed to have become the holder of such shares at the close of business on the next succeeding date on which the stock transfer books are open.
2.1 Net (Cashless) Exercise . Notwithstanding any provisions herein to the contrary, if the fair market value of one Exercise Share is greater than the Exercise Price (at the date of calculation as set forth below), in lieu of exercising this Warrant by payment of cash, the Holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company together with the properly endorsed Notice of Exercise in which event the Company shall issue to the Holder a number of Exercise Shares computed using the following formula:
     
 
  X = Y (A-B)
           A
 
   
Where X =
  the number of Exercise Shares to be issued to the Holder
 
   
Y =
  the number of Exercise Shares purchasable under the Warrant or, if only a portion of the Warrant is being exercised, that portion of the Warrant being canceled (at the date of such calculation)
 
   
A =
  the fair market value of one Exercise Share (at the date of such calculation)
 
   
B =
  Exercise Price (as adjusted to the date of such calculation)
For purposes of the above calculation, the fair market value of one Exercise Share shall be determined by the Company’s Board of Directors in good faith; provided, however, that in the event that this Warrant is exercised pursuant to this Section 2.1 in connection with a public offering of Common Stock, the fair market value per share shall be the product of (i) the per share offering price to the public in such public offering, and (ii) the number of shares of Common Stock into which each Exercise Share is convertible at the time of such exercise.

 

2.


 

2.2 Securities for Which Warrant is Exercisable. This Warrant shall be exercisable, in whole or in part, and from time to time, for Common Stock of the Company.
3. Covenants of the Company.
3.1 Covenants as to Exercise Shares . The Company covenants and agrees that all Exercise Shares that may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be validly issued and outstanding, fully paid and nonassessable, and free from all taxes, liens and charges with respect to the issuance thereof. The Company further covenants and agrees that the Company will at all times during the Exercise Period, have authorized and reserved, free from preemptive rights, a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant. If at any time during the Exercise Period the number of authorized but unissued shares of Common Stock shall not be sufficient to permit exercise of this Warrant, then, in addition to such other remedies as may be available to Holder, including, without limitation, pursuant to the Note, the Company will take such corporate action as shall be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes.
3.2 Notices of Record Date. In the event of any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, the Company shall mail to the Holder, at least ten (10) days prior to the date specified herein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend or distribution.
3.3 No Impairment. The Company shall not, by amendment of its Charter or through a reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, omission or agreement, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed by the Company under and/or in connection with this Warrant, but shall at all times in good faith use best efforts to assist in carrying out of all the provisions of and/or relating to this Warrant and in taking all such action as may be necessary or appropriate to protect Holder’s rights, preferences and privileges under and/or in connection with this Warrant against impairment. The Holder’s rights, preferences and privileges granted under and/or in connection with this Warrant may not be amended, modified or waived without the Holder’s prior written consent, and the documentation providing for such rights, preferences and privileges will specifically provide as such.
3.4 Registration Rights. The Company will use commercially reasonable best efforts to obtain treatment of the Exercise Shares as “registrable securities” (or terms of similar impact) under any agreement executed by the Company for financing of the Company, for purposes of providing registration rights under the Securities Act of 1933, as amended (the “Act” ) to holders of the Warrant and/or Common Stock issued pursuant to exercise of the Warrant.

 

3.


 

4. Representations of Holder.
4.1 Acquisition of Warrant for Personal Account. The Holder represents and warrants that it is acquiring the Warrant and the Exercise Shares solely for its account for investment and not with a view to or for sale or distribution of said Warrant or Exercise Shares, or any part thereof, except in compliance with applicable federal and state securities laws. The Holder also represents and warrants that the all legal and beneficial interests in the Warrant and the Exercise Shares which the Holder is acquiring are being acquired for, and will be held for, its account only.
4.2 Securities Are Not Registered.
(a)  The Holder understands that the Warrant and the Exercise Shares have not been registered under the Act on the basis that no distribution or public offering of the stock of the Company is to be effected by the Holder. The Holder realizes that the basis for the exemption may not be present if, notwithstanding its representations, the Holder has a present intention of acquiring the securities for a fixed or determinable period in the future, selling (in connection with a distribution or otherwise), granting any participation in, or otherwise distributing the securities. The Holder represents and warrants that it has no such present intention.
(b)  The Holder recognizes that the Warrant and the Exercise Shares must be held indefinitely unless they are subsequently registered under the Act or an exemption from such registration is available.
(c)  The Holder is aware that neither the Warrant nor the Exercise Shares may be sold pursuant to Rule 144 adopted under the Act unless certain conditions are met, including, among other things, the availability of certain current public information about the Company, the resale following the required holding period under Rule 144 and the number of shares being sold during any three month period not exceeding specified limitations.
4.3 Disposition of Warrant and Exercise Shares.
The Holder understands and agrees that all certificates evidencing the shares to be issued to the Holder may bear the following legend:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”). THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER THE ACT OR UNLESS SUCH TRANSACTION IS IN COMPLIANCE WITH APPLICABLE FEDERAL AND STATE SECURITIES LAWS.
4.4 Accredited Investor Status. The Holder is an “accredited investor” as defined in Regulation D promulgated under the Act.
5. Adjustment of Exercise Price and Exercise Shares.
5.1 Changes in Securities. In the event of changes in the Common Stock by reason of stock dividends, splits, recapitalizations, reclassifications, combinations or exchanges of shares, separations, reorganizations, liquidations, or the like, the number of Exercise Shares available under the Warrant in the aggregate and the Exercise Price shall be correspondingly adjusted to give the Holder of the Warrant, on exercise for the same aggregate Exercise Price, the same shares as the Holder would have owned had the Warrant been exercised prior to the event and had the Holder continued to hold such shares until after the event requiring adjustment. For purposes of this Section 5, the “ Aggregate Exercise Price ” shall mean the aggregate Exercise Price payable in connection with the exercise in full of this Warrant. The form of this Warrant need not be changed because of any adjustment in the number of Exercise Shares subject to this Warrant.

 

4.


 

5.2 Certificate of Adjustments. Upon each adjustment of the Exercise Price and/or Exercise Shares, the Company shall promptly notify the Holder in writing and furnish the Holder with a certificate of its Chief Executive Officer or Chief Financial Officer setting forth such adjustment and the facts upon which such adjustment is based.
6. Fractional Shares. No fractional shares shall be issued upon the exercise of this Warrant as a consequence of any adjustment pursuant hereto. All Exercise Shares (including fractions) to be issued upon exercise of this Warrant shall be aggregated for purposes of determining whether the exercise would result in the issuance of any fractional share. If, after aggregation, the exercise would result in the issuance of a fractional share, the Company shall, in lieu of issuance of any fractional share, pay the Holder otherwise entitled to such fraction a sum in cash equal to the product resulting from multiplying the then current fair market value of one Exercise Share by such fraction.
7. Transfer of Warrant. Subject to applicable laws, this Warrant and all rights hereunder are transferable, in whole or in part, at any time or times by the Holder, upon delivery of this Warrant and the form of assignment attached hereto to any transferee designated by Holder. The transferee shall sign a customary investment letter in form and substance reasonably satisfactory to the Company.
8. Lost, Stolen, Mutilated or Destroyed Warrant. If this Warrant is lost, stolen, mutilated or destroyed, the Company may, on such terms as to indemnity or otherwise as it may reasonably impose (which shall, in the case of a mutilated Warrant, include the surrender thereof), issue a new Warrant of like denomination and tenor as the Warrant so lost, stolen, mutilated or destroyed. Any such new Warrant shall constitute an original contractual obligation of the Company, whether or not the allegedly lost, stolen, mutilated or destroyed Warrant shall be at any time enforceable by anyone.
9. Amendment. Any term of this Warrant may be amended or waived only with the written consent of the Company and the Holder.
10. Notices, etc. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given upon actual delivery to the recipient. All communications shall be sent to the Company and to the Holder at the addresses listed on the signature page hereof or at such other address as the Company or Holder may designate by written notice to the other parties hereto.

 

5.


 

11. Governing Law. This Warrant and all rights, obligations and liabilities hereunder shall be governed by and construed under the laws of the State of New York as applied to agreements among New York residents, made and to be performed entirely within the State of New York without giving effect to conflicts of laws principles.
[Signature Page Follows]

 

6.


 

In Witness Whereof , the Company has caused this Warrant to be executed by its duly authorized officer as of the date first written above.
         
  Northwest Biotherapeutics, Inc.
 
 
  By:   /s/ Alton Boynton    
    Name:  Alton Boynton   
    Title:  President  
 
    Address:  7600 Wisconsin Ave
Suite 750
Bethesda, MD 20814 
 
 
ACKNOWLEDGED AND AGREED:
SDS Capital GROUP SPC, LTD.
         
By:
  /s/ Steve Derby
 
   
 
  Name: Steve Derby    
 
  Title:   Chief Investment Officer    
 
       
   
Address: 53 Forest Avenue, Suite 201
Old Greenwich, CT 06870
   
[ Signature Page to Warrant No. BW-2007-___ ]

 


 

NOTICE OF EXERCISE
TO: Northwest Biotherapeutics, Inc.
(1)  o The undersigned hereby elects to purchase  _____  shares of Common Stock (the “ Exercise Shares ”) of Northwest Biotherapeutics, Inc. (the “ Company ”) pursuant to the terms of the attached Warrant, and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.
o The undersigned hereby elects to purchase  _____  shares of Common Stock (the “ Exercise Shares ”) of Northwest Biotherapeutics, Inc. (the “ Company ”) pursuant to the terms of the net exercise provisions set forth in Section 2.1 of the attached Warrant, and shall tender payment of all applicable transfer taxes, if any.
(2)  Please issue a certificate or certificates representing said Exercise Shares in the name of the undersigned or in such other name as is specified below:
         
 
 
 
(Name)
   
 
       
 
 
 
   
 
 
 
(Address)
   
(3)  The undersigned represents that (i) the aforesaid Exercise Shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares, except in accordance with applicable federal and state securities laws; (ii) the undersigned is aware of the Company’s business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision regarding its investment in the Company; (iii) the undersigned is experienced in making investments of this type and has such knowledge and background in financial and business matters that the undersigned is capable of evaluating the merits and risks of this investment and protecting the undersigned’s own interests; (iv) the undersigned understands that Exercise Shares issuable upon exercise of this Warrant have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), by reason of a specific exemption from the registration provisions of the Securities Act, which exemption depends upon, among other things, the bona fide nature of the investment intent as expressed herein, and, because such securities have not been registered under the Securities Act, they must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available; (v) the undersigned is aware that the aforesaid Exercise Shares may not be sold pursuant to Rule 144 adopted under the Securities Act unless certain conditions are met and until the undersigned has held the shares for the number of years prescribed by Rule 144, that among the conditions for use of the Rule is the availability of current information to the public about the Company; and (vi) the undersigned agrees not to make any disposition of all or any part of the aforesaid shares of Exercise Shares unless and until there is then in effect a registration statement under the Securities Act covering such proposed disposition or unless such transaction is in compliance with applicable federal and state securities laws.
     
 
   
(Date)
  (Signature)
 
   
 
   
 
  (Print name)

 

1.


 

ASSIGNMENT FORM
(To assign the foregoing Warrant, execute this form and
supply required information. Do not use this form to
purchase shares.)
For Value Received , the foregoing Warrant and all rights evidenced thereby are hereby assigned to
     
Name:
   
 
   
 
  (Please Print)
 
   
Address:
   
 
   
 
  (Please Print)
Dated:                      , 20__
         
Holder’s
       
Signature:
       
 
 
 
   
Holder’s
       
Address:
       
 
 
 
   
NOTE : The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatever. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.

 

2.

Exhibit 10.4
NORTHWEST BIOTHERAPEUTICS, INC.
LOAN AGREEMENT and
PROMISSORY NOTE
     
US $1 million   October 21, 2008
SECTION 1. GENERAL .
SDS Capital Group SPC, Ltd, a company, (“ SDS ” or the “ Holder ”) hereby grants to Northwest Biotherapeutics, Inc. , a Delaware company (the “ Maker ” or the “ Company ”) an unsecured bridge term loan facility of One Million Dollars (US$1.0 million) (the “ Principal Amount ”) subject to the terms of this Loan Agreement and Promissory Note (this “ Note ”). The funding at closing of this Note will be US$1.0 million, and the repayment on the Maturity Date will be US$1.06 million (the “Repayment Amount”). In addition, upon execution of this Note, Maker will issue to Holder a Warrant exercisable for common stock of Maker as provided in Section 10 hereof. Holder shall advance the Principal Amount to the Company promptly following execution of this Note at the account notified to Holder by the Company.
Upon receipt of the Principal Amount and for value received, the Company hereby promises to issue the Warrant, and promises to pay the Repayment Amount to the order of the Holder or its assigns, in accordance with this Note, on April 21, 2009, or such earlier date as may be applicable under Sections 3 and 4 hereof (the “ Maturity Date ”).
SECTION 2. PRE-PAYMENT .
This Note may be pre-paid prior to the Maturity Date at any time, at the election of the Maker in its discretion, provided however that any such pre-payment shall have no effect upon the Warrant.
SECTION 3. DEFAULT PAYMENT .
Upon the occurrence of an Event of Default (as defined in Section 4 hereof) after notice as provided in Section 17.1 hereof (“ Event of Default ”), default payments shall become due and payable on any unpaid Repayment Amount that remains outstanding after the applicable Maturity Date (the “ Default Principal ”). The default payments shall be assessed on a monthly basis at the beginning of each month or partial month in which any Default Principal remains outstanding. Such default payments shall be a fixed amount relating to such month or partial month, and shall not be pro rated if the Default Principal is repaid by the Maker during such month. The amount of such default payments shall be equal to the lowest of (i) 0.25% percent of the Default Principal per month or partial month that such Default Principal remains outstanding, representing an annualized rate of Default Payments of three percent (3%) per annum, or (ii) the maximum rate permitted under applicable rules and regulations of the United States Small Business Administration (“ SBA ”), or (iii) the maximum rate allowed by law (the “ Default Payments ”). Such Default Payments shall commence upon the occurrence of an Event of Default and continue until such Event of Default is fully cured or waived.

 

 


 

SECTION 4. DEFAULTS .
4.1 Definitions . Each occurrence of any of the following events shall constitute an “ Event of Default ”:
(a) if a default occurs in the issuance of the Warrant or in the payment of any Repayment Amount, or other amounts due under this Note, whether at the due date thereof or upon acceleration thereof, and such default remains uncured for ten (10) business days after written notice thereof from Holder;
(b) if any representation or warranty of Maker made herein shall have been false or misleading in any material respect, or shall have contained any material omission, as of the date hereof;
(c) if a material default occurs in the due observance or performance on the part of Maker of any covenant or agreement to be observed or performed pursuant to the terms of this Note and such default remains uncured for ten (10) business days after written notice thereof from Holder;
(d) if Maker shall (i) discontinue its business, (ii) apply for or consent to the appointment of a receiver, trustee, custodian or liquidator of Maker or any of its property, (iii) make a general assignment for the benefit of creditors, or (iv) file a voluntary petition in bankruptcy, or a petition or an answer seeking reorganization or an arrangement with creditors, or take advantage of any bankruptcy, reorganization, insolvency, readjustment of debt, dissolution or liquidation laws or statutes, or file an answer admitting the material allegations of a petition filed against it in any proceeding under any such law;
(e) if there shall be filed against Maker an involuntary petition seeking reorganization of Maker or the appointment of a receiver, trustee, custodian or liquidator of Maker or a substantial part of its assets, or an involuntary petition under any bankruptcy, reorganization or insolvency law of any jurisdiction, whether now or hereafter in effect (any of the foregoing petitions being hereinafter referred to as an “ Involuntary Petition ”) and such Involuntary Petition shall not have been dismissed within ninety (90) days after it was filed;
4.2 Remedies on Default.
(a) Upon each and every such Event of Default and at any time thereafter during the continuance of such Event of Default: (i) any and all indebtedness and related amounts (including, without limitation, Default Payments) due from Maker to Holder under this Note or otherwise shall immediately become due and payable; and (ii) Holder may exercise all the rights of a creditor under applicable law.
(b) In case any one or more Events of Default shall occur and be continuing, and acceleration of this Note or any other indebtedness or obligation of Maker to Holder shall have occurred, Holder may, inter alia , proceed to protect and enforce its rights by an action at law, suit in equity and/or other appropriate proceeding, whether for the specific performance of any agreement contained in this Note, or for an injunction against a violation of any of the terms hereof or thereof or in furtherance of the exercise of any power granted hereby or thereby or by law. No right conferred upon Holder by this Note shall be exclusive of any other right referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise.

 

 


 

SECTION 5. DEFENSES .
The obligations of Maker under this Note shall not be subject to reduction, limitation, impairment, termination, defense, set-off, counterclaim or recoupment for any reason.
SECTION 6. EXTENSION OF MATURITY .
Should the Repayment Amount or any other amounts due under this Note become due and payable on other than a business day, the due date thereof shall be extended to the next succeeding business day. For the purposes of the preceding sentence, a business day shall be any day that is not a Saturday or Sunday, or a legal holiday in the State of New York in the United States.
SECTION 7. ATTORNEYS’ FEES AND COLLECTION FEES .
In the event that all or part of the indebtedness evidenced by this Note is collected at law or in equity, or in bankruptcy, receivership or other court proceedings, arbitration or mediation, or any settlement of any of the foregoing, Maker agrees to pay, in addition to the Repayment Amount and any other amounts due and payable hereunder, all costs of collection incurred by Holder in collecting or enforcing this Note, including, without limitation, reasonable attorneys’ fees and expenses.
SECTION 8. WAIVERS, DISPUTES, JURISDICTION .
8.1 Waivers by Maker . Maker hereby waives presentment, demand for payment, notice of dishonor, notice of protest and all other notices or demands in connection with the delivery, acceptance, performance or default of this Note.
8.2 Actions of Holder not a Waiver . No delay by Holder in exercising any power or right hereunder shall operate as a waiver of any power or right, nor shall any single or partial exercise of any power or right preclude other or further exercise thereof, or the exercise of any other power or right hereunder or otherwise; and no waiver or modification of the terms hereof shall be valid unless set forth in writing by Holder and then only to the extent set forth therein.
8.3 Consent to Jurisdiction . Maker hereby submits to the jurisdiction of any state or federal court sitting in the State of New York over any suit, action, or proceeding arising out of or relating to this Note or any other agreements or instruments with respect to Holder. Maker hereby waives, to the fullest extent permitted by law, any objection that Maker may now or hereafter have to the laying of venue of any such suit, action, or proceeding brought in any such court and any claim that any such suit, action, or proceeding brought in any such court has been brought in an inconvenient forum. Final judgment in any such suit, action, or proceeding brought in any such court shall be conclusive and binding upon Maker, and may be enforced in any court in which Maker is subject to jurisdiction by a suit upon such judgment, provided that service of process is effected upon Maker as provided in this Note or as otherwise permitted by applicable law.

 

 


 

8.4 Waiver of Jury Trial . MAKER WAIVES ANY RIGHTS IT MAY HAVE TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF THIS AGREEMENT OR ANY DEALINGS BETWEEN MAKER AND HOLDER RELATING TO THE SUBJECT MATTER OF THIS NOTE. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS NOTE, INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR TO ANY OTHER DOCUMENT OR AGREEMENT RELATING TO THE LOAN.
8.5 Service of Process . Maker hereby consents to process being served in any suit, action, or proceeding instituted in connection with this Note by delivery of a copy thereof by certified mail, postage prepaid, return receipt requested, to Maker, and/or by delivery of a copy thereof to a registered agent of Maker. Refusal to accept delivery, and/or avoidance of delivery, shall be deemed to constitute delivery. Maker irrevocably agrees that service in accordance with this Section 8.5 shall be deemed in every respect effective service of process upon Maker in any such suit, action or proceeding, and shall, to the fullest extent permitted by law, be taken and held to be valid personal service upon Maker. Nothing in this Section 8.5 shall affect the right of Holder to serve process in any manner otherwise permitted by law or limit the right of Holder otherwise to bring proceedings against Maker in the courts of any jurisdiction or jurisdictions.
SECTION 9. COVENANTS .
9.1 Affirmative Covenants . So long as this Note shall remain outstanding:
(a) Office . Maker shall maintain its head office in the United States.
(b)  Use of Proceeds . Maker shall use the proceeds from this Note for operating expenses and other obligations of the Company incurred in pursuing the Company’s business plan and strategy for Israel including, without limitation, product rollout in Israel, activities involving countries outside Israel based upon the Israeli facilities and capacity, clinical trial expenses, research and development expenses, expenses related to regulatory filings and processes with the US Food and Drug Administration (“ FDA ”) and applicable regulators in various international markets, preparations for commercial delivery of the Company’s products in various international markets, expenses related to US Securities and Exchange Commission (“ SEC ”) filings and processes, expenses related to salaries and other general and administrative operations, expenses related to litigation, and expenses of accountants, attorneys, consultants and other professionals.

 

 


 

(c)  Regulatory Information . So long as any principal or other obligation under this Note shall remain outstanding, Maker shall provide to Holder, within the applicable timeframe specified by Holder, all such information and assessments as may be necessary or desirable in order for Holder to comply with its reporting obligations to any governmental agency or authority including, without limitation, the SBA. To the extent that any such information constitutes material non-public information, Holder agrees to keep such information confidential in accordance with applicable securities laws.
(d) Business Activity . So long as any principal or other obligation under this Note shall remain outstanding, Maker shall make no change in its business activity that would render it or any of its business activities non-compliant with SBA regulations and guidelines.
9.2 Negative Covenants . So long as any principal or other obligation under this Note shall remain outstanding:
(a)  No Liens . Maker shall not grant to any person or entity a security interest, lien, license, or other encumbrance of any kind, direct or indirect, contingent or otherwise, in, to or upon any assets of Maker, including, without limitation, any intellectual property of any kind (collectively, “ Liens ”), except (i) Liens to secure further financing for the purpose of (x) repaying the Principal Amount and any other amounts due pursuant to this Note and any other notes under which the repayment of principal and other consideration is pari passu with the repayment under this Note, or (y) funding the further operations of the Company, or (ii) Liens imposed by law for taxes that are not yet due or are being contested in good faith by the Company.
(b)  No Conflicting Agreements . Maker shall not enter into any agreement that would materially impair, interfere or conflict with Maker’s obligations hereunder.
SECTION 10. WARRANT
In partial consideration for the loan made by Holder pursuant to this Note, Maker will issue to Holder at Closing a warrant exercisable for the purchase of common stock of the Maker, in the form attached hereto as Exhibit A (the “Warrant”). As provided in the Warrant, the exercise price will be equal to the lowest closing price of Maker’s common stock on the US NASDAQ OTC Bulletin Board market or the London AIM market on the trading day prior to the date of execution of this Note (the “Exercise Price”). The number of shares for which the Warrant will be exercisable will be the number of shares of Maker’s common stock which, when multiplied by the Exercise Price, have a value equal to fifty percent (50%) of the Repayment Amount.

 

 


 

SECTION 11. MAKER’S REPRESENTATIONS AND WARRANTIES .
Except as disclosed in the Maker’s public filings with the SEC, Maker represents and warrants the following:
11.1 Organization, Good Standing and Qualification . Maker is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware in the United States, and has all requisite corporate power and authority to carry on its business. Maker is duly qualified to transact business and is in good standing in each jurisdiction in which the failure so to qualify would have a material adverse effect on its business, properties, operations, prospects or condition (financial or otherwise).
11.2 Authorization . The execution, delivery and performance by Maker of this Note, and the transactions contemplated hereunder (including, without limitation, the issuance of common stock pursuant to exercise of the Warrant), have been duly authorized by all requisite corporate action by Maker in accordance with Delaware law. This Note is a valid and binding obligation of Maker, enforceable against Maker in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium, or other laws of general application affecting enforcements of creditors’ rights or general principles of equity.
11.3 No Conflicts . The execution, delivery, performance, issuance, sale and delivery of this Note and compliance with the provisions hereof by Maker will not, to the knowledge of Maker, (a) violate any provision of any law, statute, rule or regulation applicable to Maker or any order, judgment or decree of any court, arbitrator, administrative agency or other governmental body applicable to Maker or any of its assets or (b) conflict with or result in any material breach of any of the terms or conditions of any agreement or instrument to which Maker is a party, or give rise to any right of termination, cancellation or acceleration under any such agreement or instrument, or result in the creation of any lien or other encumbrance upon any of the material assets of Maker.
11.4 “Small Business”.
(a)  Small Business Status . Maker together with its “affiliates” (as that term is defined in Section 121.103 of Title 13 of Code of Federal Regulations (the “ Federal Regulations ”)) is a “small business concern” within the meaning of the Small Business Investment Act of 1958, as amended (the “ Small Business Act ” or “ SBIA ”), and the regulations promulgated thereunder, including Section 121.301(c) of Title 13, Code of Federal Regulations.
(b)  Information for SBA Reports . Maker has delivered and/or will deliver to Holder certain information, set forth by and regarding the Maker and its affiliates in connection with this Note, on SBA Forms 480, 652 and Part A and B of Form 1031. This information delivered was true, accurate, complete and correct in all material respects, and any information yet to be delivered will be true, accurate, complete and correct in all material respects, and in form and substance acceptable to Holder.
(c)  Eligibility . Maker is eligible for financing by Holder pursuant to Section 107.720 of Title 13 of the Federal Regulations and any other SBA regulations.

 

 


 

SECTION 12. HOLDER’S REPRESENTATIONS AND WARRANTIES
12.1 Unregistered Shares . Holder understands that the shares of common stock to be issued to Holder pursuant to the Warrant (the “ Warrant Shares ”) will not be registered within any designated timeframe thereafter under the Securities Act of 1933, as amended (the “ Securities Act ”). Holder also understands that issuance of the Warrant Shares will be pursuant to an exemption from registration contained in the Securities Act based in part upon Holder’s representations herein.
12.2 Accredited Investor . Holder hereby represents and warrants that Holder has substantial experience in evaluating and investing in securities, and is capable of evaluating the merits and risks of its loan to Maker under this Note and any investmentin the Warrant Shares, and has the capacity to protect its own interests. Holder is an “accredited investor” within the meaning of Regulation D under the Securities Act.
12.3 Investment Purpose . Holder is acquiring the Warrant and the Warrant Shares for its own account for investment only, and not with a view towards distribution. Holder is not aware of publication of any advertisement in connection with the issuance of the Warrant or the Warrant Shares.
SECTION 13. INDEMNIFICATION
13.1 Indemnification.
(a) In addition to all rights and remedies available to Holder at law or in equity, Maker shall indemnify Holder and each subsequent holder of this Note, and their respective affiliates, stockholders, limited partners, general partners, officers, directors, managers, employees, agents, representatives, successors and assigns (collectively, the “ Indemnified Persons ”) and pay on behalf of or reimburse such party for any losses, damages, or expenses, including, without limitation, reasonable attorneys’ fees and all amounts paid in investigation, defense or settlement of any of the foregoing which any Indemnified Person may suffer, sustain or become subject to as a result of or in connection with any material misrepresentation in, or material omission from, any of the representations and warranties, or any material breach of any covenant or agreement on the part of Maker under this Note, provided, however, that notwithstanding the foregoing or any other agreement or provision to the contrary, in no event shall Maker be liable for indirect or consequential losses or damages of any kind, and in no event shall Maker be liable for any losses or damages resulting from the gross negligence or willful misconduct of Holder or a subsequent holder of this Note.
(b) Within five (5) business days after receipt of notice of commencement of any action or the assertion of any claim by a third party, Holder shall give Maker written notice thereof together with a copy of such claim, process or other legal pleading of such claim. Maker shall have the right to assist in the defense thereof by representation of its own choosing, at its own expense.

 

 


 

13.2 Survival . All indemnification rights hereunder shall survive the execution and delivery of this Note and the consummation of the transactions contemplated hereunder, for a period of two (2) years, regardless of any investigation, inquiry or examination made for or on behalf of, or any knowledge of Holder and/or any of the Indemnified Persons, or the acceptance by Holder of any certificate or opinion.
SECTION 14. SUBSEQUENT FINANCING.
Subject to Section 2 above, until the Repayment Amount has been paid in full, if and when Maker completes an offering (the “ Subsequent Financing ”) of (i) equity or equity-linked securities, or (ii) debt that is convertible into equity or in which there is an equity component (the “ Additional Securities ”), Maker shall offer participation in such Subsequent Financing to Holder in accordance with the following provisions:
A. At least three (3) trading days prior to, or within three (3) trading days after, the closing of the offering of Additional Securities, Maker shall deliver to Holder a written notice of such offering (the “ Subsequent Financing Notice ”), which Subsequent Financing Notice shall ask the Holder if it wants to review the details of such financing (the “ Subsequent Financing Description ”). Upon the request of Holder for a Subsequent Financing Description, Maker shall promptly, but no later than two (2) trading days after such request, deliver a Financing Description to Holder. The Financing Description shall describe in reasonable detail the proposed terms of such Subsequent Financing, the amount of proceeds intended to be raised thereunder, the Person(s) with whom such Subsequent Financing is proposed to be effected (provided that the name of such Person(s) is available, and provided further that Holder agrees not to make or receive with contact such Person(s) except with Maker’s prior written consent in its sole discretion), and attached to which shall be a term sheet or similar document relating thereto.
B. By written notification received by Maker by 6:30 p.m. (New York City time) on the second (2 nd ) trading day after its receipt of the Subsequent Financing Notice, Holder may elect to purchase or obtain, at the price and on the terms specified in the Subsequent Financing Description, such number of Additional Securities as is equal to the then outstanding portion of the principal amount pursuant to this Note on the terms and conditions set forth in the Subsequent Financing Description, subject to mutually acceptable documentation; provided, that Holder shall pay for the Additional Securities by surrendering, and Maker shall receive payment by accepting such surrender, of the then outstanding principal balance of this Note. Upon the surrender of such principal amount as payment for Additional Securities, Maker (itself, or through its transfer agent) shall, no later than the third business day following such surrender, issue and deliver (i.e., deposit with a nationally recognized overnight courier service postage prepaid) to Holder or its nominee certificates or other instruments evidencing the Additional Securities purchased by Holder.

 

 


 

SECTION 15. MISCELLANEOUS .
15.1 Notices . All notices, demands and requests of any kind to be delivered to any party in connection with this Note shall be in writing and shall be deemed to be effective upon delivery if (i) personally delivered, (ii) sent by confirmed facsimile with a copy sent by nationally or internationally recognized overnight courier, (iii) sent by nationally or internationally recognized overnight courier, or (iv) sent by registered or certified mail, return receipt requested and postage prepaid, addressed as follows:
     
if to Maker:
  Northwest Biotherapeutics, Inc.
 
  7600 Wisconsin Avenue
 
  Suite 750
 
  Bethesda, MD 20814
 
  Tel: +1-240-497-4060
 
  Fax: +1-240-497-4065
 
  Attention: Alton Boynton
 
  aboynton@nwbio.com
 
   
with a copy to:
  David Engvall, Esq.
 
  Covington & Burling
 
  1201 Pennsylvania Avenue, N.W.
 
  Washington, DC 20004-2401
 
  Tel: +1-202-662-5307
 
  Fax: +1- 202-778-5307
 
  dengvall@cov.com
 
   
if to Holder:
   
 
   
with a copy to:
   
or to such other address as the party to whom notice is to be given may have furnished to the other parties hereto in writing in accordance with the provisions of this Section.
15.2 Parties In Interest; Assignment . This Note shall bind and inure to the benefit of Holder, Maker and their respective successors and permitted assigns. Maker shall not transfer or assign this Note without the prior written consent of Holder. Holder may transfer and assign this note without the prior consent of Maker.

 

 


 

15.3 Entire Agreement . This Note contains the entire understanding of the parties with respect to the subject matter hereof and supersedes all prior agreements and understandings among the parties with respect thereto.
15.4 Severability . If one or more provisions of this Note are held to be unenforceable under applicable law, then (i) such provision shall be excluded from this Note, (ii) the balance of the Note shall be interpreted as if such provision were so excluded, (iii) the balance of the Note shall be enforceable in accordance with its terms, and (iv) the parties shall negotiate in good faith to amend or add to the provisions of this Note to effectuate as nearly as reasonably practicable, and as nearly as permitted under applicable law, the original intent of the parties with respect to the provision excluded.
15.5 Amendments . No provision of this Note may be amended or waived without the express written consent of both Maker and Holder, provided, however, that Holder may waive any provision hereof that inures to the benefit of Holder without the prior written consent of Maker.
15.6 Headings . The section and paragraph headings contained in this Note are for reference purposes only and shall not affect in any way the meaning or interpretation of this Note.
15.7 Governing Law . This Note shall be governed by and construed in accordance with the laws of the State of New York, other than any rules relating to choice of law.
15.8 Nature of Obligation . This Note is being made for business and investment purposes, and not for household or other purposes.
15.9 No Third Party Rights . A person who is not a party to this Note shall not have any rights under or in connection with it by virtue of the Contracts (Rights of Third Parties) Act 1999. The rights of the parties to terminate, rescind or agree any variation, waiver or settlement under this Note is not subject to the consent of any person that is not a party to this Note.
15.10 Counterparts . This Note may be executed and delivered in any number of counterparts, each of which is an original and which, together, have the same effect as if each party had signed the same document.
15.11 Replacment of Note. Upon receipt by Maker of reasonable evidence of the loss, theft, destruction, or mutilation of this Note, Maker will deliver a new Note containing the same terms and conditions in lieu of this Note. Any Note delivered in accordance with the provisions of this Section 14 shall be dated as of the date of this Note.

 

 


 

IN WITNESS WHEREOF , Maker has caused this Note to be duly executed by its duly authorized person(s) as of the date first written above.
                     
NORTHWEST BIOTHERAPEUTICS, INC.       SDS CAPITAL    
 
                   
By:
  /s/ Alton Boynton       By:   /s/ Steve Derby    
 
                   
 
  Name: Alton Boynton           Name: Steve Derby    
 
  Title: President           Title:    

 

 

Exhibit 10.5
NORTHWEST BIOTHERAPEUTICS, INC.
FORM OF LOAN AGREEMENT and
PROMISSORY NOTE
     
US $_____   October _____, 2008
SECTION 1. GENERAL .
_____, a _____ [company][resident] of _____, (the “ Holder ”) hereby grants to Northwest Biotherapeutics, Inc. , a Delaware company (the “ Maker ” or the “ Company ”) an unsecured bridge term loan facility of _____ Dollars (US$_____) (the “ Principal Amount ”) subject to the terms of this Loan Agreement and Promissory Note (this “ Note ”). Holder will deliver the Principal Amount to the Company promptly following execution of this Note, in US dollars in immediately available funds, at the account notified to Holder by the Company. The Principal Amount will bear interest until repaid at an annualized rate of twelve percent (12%) per annum (the Principal Amount and such interest together the “ Repayment Amount ”). The term of this Note will be _____ (_____) months from the date hereof (the “ Maturity Date ”), or such earlier date as may be applicable under Sections 2 and 4 hereof. In addition, upon execution of this Note, Maker will issue to Holder a warrant exercisable for common stock of Maker as provided in Section 10 hereof (the “ Warrant ”).
Upon receipt of the Principal Amount and for value received, the Company hereby promises to issue the Warrant, and promises to pay the Repayment Amount to the order of the Holder or its assigns, in accordance with this Note, on the Maturity Date.
SECTION 2. PRE-PAYMENT .
This Note may be pre-paid in whole or in part prior to the Maturity Date at any time, at the election of the Maker in its discretion, provided however that any such pre-payment will not reduce the number of shares for which the Warrant pursuant to Section 10 will be exercisable.
SECTION 3. DEFAULT PAYMENT .
Upon the occurrence of an Event of Default (as defined in Section 4 hereof) after notice as provided in Section 15.1 hereof (“ Event of Default ”), default payments shall become due and payable on any unpaid Repayment Amount that remains outstanding after the applicable Maturity Date (the “ Default Principal ”). The default payments shall be assessed on a monthly basis at the beginning of each month or partial month in which any Default Principal remains outstanding. Such default payments shall be a fixed amount relating to such month or partial month, and shall not be pro rated if the Default Principal is repaid by the Maker during such month. The amount of such default payments shall be equal to the lowest of (i) 0.25% percent of the Default Principal per month or partial month that such Default Principal remains outstanding, representing an annualized rate of Default Payments of three percent (3%) per annum, or (ii) the maximum rate permitted under applicable rules and regulations of the United States Small Business Administration (“ SBA ”), or (iii) the maximum rate allowed by law (the “ Default Payments ”). Such Default Payments shall commence upon the occurrence of an Event of Default and continue until such Event of Default is fully cured or waived.

 

 


 

SECTION 4. DEFAULTS .
4.1 Definitions . Each occurrence of any of the following events shall constitute an “ Event of Default ”:
(a) if a default occurs in the issuance of the Warrant or in the payment of any Repayment Amount, or other amounts due under this Note, whether at the due date thereof or upon acceleration thereof, and such default remains uncured for ten (10) business days after written notice thereof from Holder;
(b) if any representation or warranty of Maker made herein shall have been false or misleading in any material respect, or shall have contained any material omission, as of the date hereof;
(c) if a material default occurs in the due observance or performance on the part of Maker of any covenant or agreement to be observed or performed pursuant to the terms of this Note and such default remains uncured for ten (10) business days after written notice thereof from Holder;
(d) if Maker shall (i) discontinue its business, (ii) apply for or consent to the appointment of a receiver, trustee, custodian or liquidator of Maker or any of its property, (iii) make a general assignment for the benefit of creditors, or (iv) file a voluntary petition in bankruptcy, or a petition or an answer seeking reorganization or an arrangement with creditors, or take advantage of any bankruptcy, reorganization, insolvency, readjustment of debt, dissolution or liquidation laws or statutes, or file an answer admitting the material allegations of a petition filed against it in any proceeding under any such law;
(e) if there shall be filed against Maker an involuntary petition seeking reorganization of Maker or the appointment of a receiver, trustee, custodian or liquidator of Maker or a substantial part of its assets, or an involuntary petition under any bankruptcy, reorganization or insolvency law of any jurisdiction, whether now or hereafter in effect (any of the foregoing petitions being hereinafter referred to as an “ Involuntary Petition ”) and such Involuntary Petition shall not have been dismissed within ninety (90) days after it was filed;
4.2 Remedies on Default.
(a) Upon each and every such Event of Default and at any time thereafter during the continuance of such Event of Default: (i) any and all indebtedness and related amounts (including, without limitation, Default Payments) due from Maker to Holder under this Note or otherwise shall immediately become due and payable; and (ii) Holder may exercise all the rights of a creditor under applicable law.

 

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(b) In case any one or more Events of Default shall occur and be continuing, and acceleration of this Note or any other indebtedness or obligation of Maker to Holder shall have occurred, Holder may, inter alia , proceed to protect and enforce its rights by an action at law, suit in equity and/or other appropriate proceeding, whether for the specific performance of any agreement contained in this Note, or for an injunction against a violation of any of the terms hereof or thereof or in furtherance of the exercise of any power granted hereby or thereby or by law. No right conferred upon Holder by this Note shall be exclusive of any other right referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise.
SECTION 5. DEFENSES .
The obligations of Maker under this Note shall not be subject to reduction, limitation, impairment, termination, defense, set-off, counterclaim or recoupment for any reason.
SECTION 6. EXTENSION OF MATURITY .
Should the Repayment Amount or any other amounts due under this Note become due and payable on other than a business day, the due date thereof shall be extended to the next succeeding business day. For the purposes of the preceding sentence, a business day shall be any day that is not a Saturday or Sunday, or a legal holiday in the State of New York in the United States.
SECTION 7. ATTORNEYS’ FEES AND COLLECTION FEES .
In the event that all or part of the indebtedness evidenced by this Note is collected at law or in equity, or in bankruptcy, receivership or other court proceedings, arbitration or mediation, or any settlement of any of the foregoing, Maker agrees to pay, in addition to the Repayment Amount and any other amounts due and payable hereunder, all costs of collection incurred by Holder in collecting or enforcing this Note, including, without limitation, reasonable attorneys’ fees and expenses.
SECTION 8. WAIVERS, DISPUTES, JURISDICTION .
8.1 Waivers by Maker . Maker hereby waives presentment, demand for payment, notice of dishonor, notice of protest and all other notices or demands in connection with the delivery, acceptance, performance or default of this Note.
8.2 Actions of Holder not a Waiver . No delay by Holder in exercising any power or right hereunder shall operate as a waiver of any power or right, nor shall any single or partial exercise of any power or right preclude other or further exercise thereof, or the exercise of any other power or right hereunder or otherwise; and no waiver or modification of the terms hereof shall be valid unless set forth in writing by Holder and then only to the extent set forth therein.

 

3


 

8.3 Consent to Jurisdiction . Maker hereby submits to the jurisdiction of any state or federal court sitting in the State of New York over any suit, action, or proceeding arising out of or relating to this Note or any other agreements or instruments with respect to Holder. Maker hereby waives, to the fullest extent permitted by law, any objection that Maker may now or hereafter have to the laying of venue of any such suit, action, or proceeding brought in any such court and any claim that any such suit, action, or proceeding brought in any such court has been brought in an inconvenient forum. Final judgment in any such suit, action, or proceeding brought in any such court shall be conclusive and binding upon Maker, and may be enforced in any court in which Maker is subject to jurisdiction by a suit upon such judgment, provided that service of process is effected upon Maker as provided in this Note or as otherwise permitted by applicable law.
8.4 Waiver of Jury Trial . MAKER WAIVES ANY RIGHTS IT MAY HAVE TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF THIS AGREEMENT OR ANY DEALINGS BETWEEN MAKER AND HOLDER RELATING TO THE SUBJECT MATTER OF THIS NOTE. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS NOTE, INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR TO ANY OTHER DOCUMENT OR AGREEMENT RELATING TO THE LOAN.
8.5 Service of Process . Maker hereby consents to process being served in any suit, action, or proceeding instituted in connection with this Note by delivery of a copy thereof by certified mail, postage prepaid, return receipt requested, to Maker, and/or by delivery of a copy thereof to a registered agent of Maker. Refusal to accept delivery, and/or avoidance of delivery, shall be deemed to constitute delivery. Maker irrevocably agrees that service in accordance with this Section 8.5 shall be deemed in every respect effective service of process upon Maker in any such suit, action or proceeding, and shall, to the fullest extent permitted by law, be taken and held to be valid personal service upon Maker. Nothing in this Section 8.5 shall affect the right of Holder to serve process in any manner otherwise permitted by law or limit the right of Holder otherwise to bring proceedings against Maker in the courts of any jurisdiction or jurisdictions.
SECTION 9. COVENANTS .
9.1 Affirmative Covenants . So long as this Note shall remain outstanding:
(a) Office . Maker shall maintain its head office in the United States.
(b)  Use of Proceeds . Maker shall use the proceeds from this Note for operating expenses and other obligations of the Company incurred in pursuing the Company’s business plans and strategies inside or outside the U.S. including, without limitation, product rollouts, activities involving facilities and capacity, clinical trial expenses, research and development expenses, expenses related to regulatory filings and processes with the US Food and Drug Administration (“ FDA ”) and applicable regulators in various international markets, preparations for commercial delivery of the Company’s products in various international markets, expenses related to US Securities and Exchange Commission (“ SEC ”) filings and processes, expenses related to salaries and other general and administrative operations, expenses related to litigation, and expenses of accountants, attorneys, consultants and other professionals.

 

4


 

(c)  Regulatory Information . So long as any principal or other obligation under this Note shall remain outstanding, Maker shall provide to Holder, within the applicable timeframe specified by Holder, all such information and assessments as may be necessary or desirable in order for Holder to comply with its reporting obligations to any governmental agency or authority including, without limitation, the SBA. To the extent that any such information constitutes material non-public information, Holder agrees to keep such information confidential in accordance with applicable securities laws.
(d) Business Activity . So long as any principal or other obligation under this Note shall remain outstanding, Maker shall make no change in its business activity that would render it or any of its business activities non-compliant with SBA regulations and guidelines.
9.2 Negative Covenants . So long as any principal or other obligation under this Note shall remain outstanding:
(a)  No Liens . Maker shall not grant to any person or entity a security interest, lien, license, or other encumbrance of any kind, direct or indirect, contingent or otherwise, in, to or upon any assets of Maker, including, without limitation, any intellectual property of any kind (collectively, “ Liens ”), except (i) Liens to secure further financing for the purpose of (x) repaying the Principal Amount and any other amounts due pursuant to this Note and any other notes under which the repayment of principal and other consideration is pari passu with the repayment under this Note, or (y) funding the further operations of the Company, or (ii) Liens imposed by law for taxes that are not yet due or are being contested in good faith by the Company.
(b)  No Conflicting Agreements . Maker shall not enter into any agreement that would materially impair, interfere or conflict with Maker’s obligations hereunder.
SECTION 10. WARRANT
In partial consideration for the loan made by Holder pursuant to this Note, Maker will issue to Holder at Closing a warrant exercisable for the purchase of common stock of the Maker, in the form attached hereto as Exhibit A (the “Warrant”). As provided in the Warrant, the exercise price will be equal to the lowest closing price of Maker’s common stock on the US NASDAQ OTC Bulletin Board market or the London AIM market on the trading day prior to the date of execution of this Note (the “Exercise Price”). The number of shares for which the Warrant will be exercisable will be the number of shares of Maker’s common stock which, when multiplied by the Exercise Price, have a value equal to fifty percent (50%) of the Repayment Amount at the original Maturity Date of this Note as provided in Section 1 hereof. In the event that the Maturity Date is accelerated pursuant to Section 2 or 4 hereof, such acceleration shall not reduce the number of shares for which the Warrant will be exercisable.

 

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SECTION 11. MAKER’S REPRESENTATIONS AND WARRANTIES .
Except as disclosed in the Maker’s public filings with the SEC, Maker represents and warrants the following:
11.1 Organization, Good Standing and Qualification . Maker is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware in the United States, and has all requisite corporate power and authority to carry on its business. Maker is duly qualified to transact business and is in good standing in each jurisdiction in which the failure so to qualify would have a material adverse effect on its business, properties, operations, prospects or condition (financial or otherwise).
11.2 Authorization . The execution, delivery and performance by Maker of this Note, and the transactions contemplated hereunder (including, without limitation, the issuance of common stock pursuant to exercise of the Warrant), have been duly authorized by all requisite corporate action by Maker in accordance with Delaware law. This Note is a valid and binding obligation of Maker, enforceable against Maker in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium, or other laws of general application affecting enforcements of creditors’ rights or general principles of equity.
11.3 No Conflicts . The execution, delivery, performance, issuance, sale and delivery of this Note and compliance with the provisions hereof by Maker will not, to the knowledge of Maker, (a) violate any provision of any law, statute, rule or regulation applicable to Maker or any order, judgment or decree of any court, arbitrator, administrative agency or other governmental body applicable to Maker or any of its assets or (b) conflict with or result in any material breach of any of the terms or conditions of any agreement or instrument to which Maker is a party, or give rise to any right of termination, cancellation or acceleration under any such agreement or instrument, or result in the creation of any lien or other encumbrance upon any of the material assets of Maker.
11.4 “Small Business”.
(a)  Small Business Status . Maker together with its “affiliates” (as that term is defined in Section 121.103 of Title 13 of Code of Federal Regulations (the “ Federal Regulations ”)) is a “small business concern” within the meaning of the Small Business Investment Act of 1958, as amended (the “ Small Business Act ” or “ SBIA ”), and the regulations promulgated thereunder, including Section 121.301(c) of Title 13, Code of Federal Regulations.
(b)  Information for SBA Reports . Maker has delivered and/or will deliver to Holder certain information, set forth by and regarding the Maker and its affiliates in connection with this Note, on SBA Forms 480, 652 and Part A and B of Form 1031. This information delivered was true, accurate, complete and correct in all material respects, and any information yet to be delivered will be true, accurate, complete and correct in all material respects, and in form and substance acceptable to Holder.
(c)  Eligibility . Maker is eligible for financing by Holder pursuant to Section 107.720 of Title 13 of the Federal Regulations and any other SBA regulations.

 

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SECTION 12. HOLDER’S REPRESENTATIONS AND WARRANTIES
12.1 Unregistered Shares . Holder understands that the shares of common stock to be issued to Holder pursuant to the Warrant (the “ Warrant Shares ”) will not be registered within any designated timeframe thereafter under the Securities Act of 1933, as amended (the “ Securities Act ”). Holder also understands that issuance of the Warrant Shares will be pursuant to an exemption from registration contained in the Securities Act based in part upon Holder’s representations herein.
12.2 Accredited Investor . Holder hereby represents and warrants that Holder has substantial experience in evaluating and investing in securities, and is capable of evaluating the merits and risks of its loan to Maker under this Note and any investmentin the Warrant Shares, and has the capacity to protect its own interests. Holder is an “accredited investor” within the meaning of Regulation D under the Securities Act.
12.3 Investment Purpose . Holder is acquiring the Warrant and the Warrant Shares for its own account for investment only, and not with a view towards distribution. Holder is not aware of publication of any advertisement in connection with the issuance of the Warrant or the Warrant Shares.
SECTION 13. INDEMNIFICATION
13.1 Indemnification.
(a) In addition to all rights and remedies available to Holder at law or in equity, Maker shall indemnify Holder and each subsequent holder of this Note, and their respective affiliates, stockholders, limited partners, general partners, officers, directors, managers, employees, agents, representatives, successors and assigns (collectively, the “ Indemnified Persons ”) and pay on behalf of or reimburse such party for any losses, damages, or expenses, including, without limitation, reasonable attorneys’ fees and all amounts paid in investigation, defense or settlement of any of the foregoing which any Indemnified Person may suffer, sustain or become subject to as a result of or in connection with any material misrepresentation in, or material omission from, any of the representations and warranties, or any material breach of any covenant or agreement on the part of Maker under this Note, provided, however, that notwithstanding the foregoing or any other agreement or provision to the contrary, in no event shall Maker be liable for indirect or consequential losses or damages of any kind, and in no event shall Maker be liable for any losses or damages resulting from the gross negligence or willful misconduct of Holder or a subsequent holder of this Note.
(b) Within five (5) business days after receipt of notice of commencement of any action or the assertion of any claim by a third party, Holder shall give Maker written notice thereof together with a copy of such claim, process or other legal pleading of such claim. Maker shall have the right to assist in the defense thereof by representation of its own choosing, at its own expense.

 

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13.2 Survival . All indemnification rights hereunder shall survive the execution and delivery of this Note and the consummation of the transactions contemplated hereunder, for a period of two (2) years, regardless of any investigation, inquiry or examination made for or on behalf of, or any knowledge of Holder and/or any of the Indemnified Persons, or the acceptance by Holder of any certificate or opinion.
SECTION 14. REPLACEMENT OF NOTE .
Upon receipt by Maker of reasonable evidence of the loss, theft, destruction, or mutilation of this Note, Maker will deliver a new Note containing the same terms and conditions in lieu of this Note. Any Note delivered in accordance with the provisions of this Section 14 shall be dated as of the date of this Note.
SECTION 15. MISCELLANEOUS .
15.1 Notices . All notices, demands and requests of any kind to be delivered to any party in connection with this Note shall be in writing and shall be deemed to be effective upon delivery if (i) personally delivered, (ii) sent by confirmed facsimile with a copy sent by nationally or internationally recognized overnight courier, (iii) sent by nationally or internationally recognized overnight courier, or (iv) sent by registered or certified mail, return receipt requested and postage prepaid, addressed as follows:
     
if to Maker:
  Northwest Biotherapeutics, Inc.
 
  7600 Wisconsin Avenue
 
  Suite 750
 
  Bethesda, MD 20814
 
  Tel: +1-240-497-4060
 
  Fax: +1-240-497-4065
 
  Attention: Alton Boynton
 
  aboynton@nwbio.com
 
   
with a copy to:
  David Engvall, Esq.
 
  Covington & Burling
 
  1201 Pennsylvania Avenue, N.W.
 
  Washington, DC 20004-2401
 
  Tel: +1-202-662-5307
 
  Fax: +1- 202-778-5307
 
  dengvall@cov.com
 
   
if to Holder:
   
 
   
with a copy to:
   

 

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or to such other address as the party to whom notice is to be given may have furnished to the other parties hereto in writing in accordance with the provisions of this Section.
15.2 Parties In Interest; Assignment . This Note shall bind and inure to the benefit of Holder, Maker and their respective successors and permitted assigns. Maker shall not transfer or assign this Note without the prior written consent of Holder. Holder may transfer and assign this note without the prior consent of Maker.
15.3 Entire Agreement . This Note contains the entire understanding of the parties with respect to the subject matter hereof and supersedes all prior agreements and understandings among the parties with respect thereto.
15.4 Severability . If one or more provisions of this Note are held to be unenforceable under applicable law, then (i) such provision shall be excluded from this Note, (ii) the balance of the Note shall be interpreted as if such provision were so excluded, (iii) the balance of the Note shall be enforceable in accordance with its terms, and (iv) the parties shall negotiate in good faith to amend or add to the provisions of this Note to effectuate as nearly as reasonably practicable, and as nearly as permitted under applicable law, the original intent of the parties with respect to the provision excluded.
15.5 Amendments . No provision of this Note may be amended or waived without the express written consent of both Maker and Holder, provided, however, that Holder may waive any provision hereof that inures to the benefit of Holder without the prior written consent of Maker.
15.6 Headings . The section and paragraph headings contained in this Note are for reference purposes only and shall not affect in any way the meaning or interpretation of this Note.
15.7 Governing Law . This Note shall be governed by and construed in accordance with the laws of the State of New York, other than any rules relating to choice of law.
15.8 Nature of Obligation . This Note is being made for business and investment purposes, and not for household or other purposes.

 

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15.9 No Third Party Rights . A person who is not a party to this Note shall not have any rights under or in connection with it by virtue of the Contracts (Rights of Third Parties) Act 1999. The rights of the parties to terminate, rescind or agree any variation, waiver or settlement under this Note is not subject to the consent of any person that is not a party to this Note.
15.10 Counterparts . This Note may be executed and delivered in any number of counterparts, each of which is an original and which, together, have the same effect as if each party had signed the same document.
[signatures on following page]

 

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IN WITNESS WHEREOF , Maker has caused this Note to be duly executed by its duly authorized person(s) as of the date first written above.
                     
NORTHWEST BIOTHERAPEUTICS, INC.                
 
                   
By:
          By:        
 
                   
 
  Name: Alton Boynton           Name:    
 
  Title: President           Title:    

 

11

Exhibit 10.6
THIS WARRANT AND THE UNDERLYING SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”). THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO SUCH SECURITIES UNDER THE ACT OR UNLESS SUCH TRANSACTION IS IN COMPLIANCE WITH APPLICABLE FEDERAL AND STATE SECURITIES LAWS.
NORTHWEST BIOTHERAPEUTICS, INC.
FORM of WARRANT
No. BW-2008-_____   October _____, 2008
This Certifies That , for value received,  _____  and/or its assigns (collectively, the “ Holder ”), is entitled to subscribe for and purchase from Northwest Biotherapeutics, Inc. , a Delaware corporation, with its principal office in Bethesda, Maryland (the “ Company ”), such number of Exercise Shares as provided herein at the Exercise Price as provided herein. This Warrant is being issued pursuant to the terms of that certain Loan Agreement and Promissory Note, of even date herewith, by and among the Company and Holder (the Note ”).
1.  Definitions. Capitalized terms used but not defined herein shall have the meanings set forth in the Note, as applicable. As used herein, the following terms shall have the following respective meanings:
(a)  Common Stock ” shall mean the common stock of the Company, par value $0.001 per share.
(b)  Exercise Period ” shall mean the period commencing on the date of issuance of this Warrant and ending five (5) years after the date of issuance of this Warrant.
(c)  Exercise Price ” of this Warrant shall be equal to $_____ per share, subject to adjustment as provided herein. [price to be filled in immediately prior to closing – will be the lowest closing price on the US NASDAQ OTC Bulletin Board market or the London AIM market on the trading day prior to the date of execution of the Note Agreement]
(d)  “Exercise Share” shall mean each of the  _____  shares of Common Stock for which this Warrant is exercisable. [number of shares to be filled in immediately prior to closing – will be (_____ percent (_____%) of the Repayment Amount divided by the Warrant Exercise Price]

 

 


 

2.  Exercise of Warrant. This Warrant will be fully vested and exercisable upon issuance. The rights represented by this Warrant may be exercised in whole or in part at any time or times during the Exercise Period, by delivery of the following to the Company at its address set forth above (or at such other address as it may designate by notice in writing to the Holder):
(a)  An executed Notice of Exercise in the form attached hereto;
(b)  Payment of the Exercise Price either (i) in cash or by check, or (ii) by cancellation of indebtedness; and
(c)  This Warrant.
Upon the exercise of the rights represented by this Warrant, a certificate or certificates for the Exercise Shares so purchased, registered in the name of the Holder or Holder’s designee(s), shall be issued and delivered to the Holder within a reasonable time after the rights represented by this Warrant shall have been so exercised. In the event that this Warrant is being exercised for less than all of the then-current number of Exercise Shares purchasable hereunder, the Company shall, concurrently with the issuance by the Company of the number of Exercise Shares for which this Warrant is then being exercised, issue a new Warrant exercisable for the remaining number of Exercise Shares purchasable hereunder.
The person in whose name any certificate or certificates for Exercise Shares are to be issued upon exercise of this Warrant shall be deemed to have become the holder of record of such shares on the date on which this Warrant was surrendered and payment of the Exercise Price was made, irrespective of the date of delivery of such certificate or certificates, except that, if the date of such surrender and payment is a date when the stock transfer books of the Company are closed, such person shall be deemed to have become the holder of such shares at the close of business on the next succeeding date on which the stock transfer books are open.
2.1 Net (Cashless) Exercise. Notwithstanding any provisions herein to the contrary, if the fair market value of one Exercise Share is greater than the Exercise Price (at the date of calculation as set forth below), in lieu of exercising this Warrant by payment of cash, the Holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company together with the properly endorsed Notice of Exercise in which event the Company shall issue to the Holder a number of Exercise Shares computed using the following formula:
           
 
  X =   Y (A-B)  
 
      A  
     
Where X =
 
the number of Exercise Shares to be issued to the Holder
 
   
Y =
 
the number of Exercise Shares purchasable under the Warrant or, if only a portion of the Warrant is being exercised, that portion of the Warrant being canceled (at the date of such calculation)
 
   
A =
 
the fair market value of one Exercise Share (at the date of such calculation)
 
   
B =
 
Exercise Price (as adjusted to the date of such calculation)

 

2.


 

For purposes of the above calculation, the fair market value of one Exercise Share shall be determined by the Company’s Board of Directors in good faith; provided, however, that in the event that this Warrant is exercised pursuant to this Section 2.1 in connection with a public offering of Common Stock, the fair market value per share shall be the per share offering price to the public in such public offering.
2.2 Securities for Which Warrant is Exercisable. This Warrant shall be exercisable, in whole or in part, and from time to time, for Common Stock of the Company.
3.  Covenants of the Company.
3.1 Covenants as to Exercise Shares. The Company covenants and agrees that all Exercise Shares that may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be validly issued and outstanding, fully paid and nonassessable, and free from all taxes, liens and charges with respect to the issuance thereof. The Company further covenants and agrees that the Company will at all times during the Exercise Period, have authorized and reserved, free from preemptive rights, a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant. If at any time during the Exercise Period the number of authorized but unissued shares of Common Stock shall not be sufficient to permit exercise of this Warrant, then, in addition to such other remedies as may be available to Holder, including, without limitation, pursuant to the Note, the Company will take such corporate action as shall be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes.
3.2 Notices of Record Date. In the event of any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, the Company shall mail to the Holder, at least ten (10) days prior to the date specified herein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend or distribution.
3.3 No Impairment. The Company shall not, by amendment of its Charter or through a reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, omission or agreement, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed by the Company under and/or in connection with this Warrant, but shall at all times in good faith use best efforts to assist in carrying out of all the provisions of and/or relating to this Warrant and in taking all such action as may be necessary or appropriate to protect Holder’s rights, preferences and privileges under and/or in connection with this Warrant against impairment. The Holder’s rights, preferences and privileges granted under and/or in connection with this Warrant may not be amended, modified or waived without the Holder’s prior written consent, and the documentation providing for such rights, preferences and privileges will specifically provide as such.
3.4 Registration Rights. The Company will use commercially reasonable best efforts to provide the Holder with “piggyback” registration rights for the Exercise Shares under the same terms and conditions as in any agreement entered into between the Company and any investors after the date hereof that provides such investors with registration rights under the Securities Act of 1933, as amended (the “ Act ”).

 

3.


 

The Company will use commercially reasonable best efforts to provide the Holder with “piggyback” registration rights under the terms of any agreement entered into between the Company and any investors after the date hereof that provides such investors with registration rights under the Securities Act of 1933, as amended (the “Act”).
4.  Representations of Holder.
4.1 Acquisition of Warrant for Personal Account. The Holder represents and warrants that it is acquiring the Warrant and the Exercise Shares solely for its account for investment and not with a view to or for sale or distribution of said Warrant or Exercise Shares, or any part thereof, except in compliance with applicable federal and state securities laws. The Holder also represents and warrants that the all legal and beneficial interests in the Warrant and the Exercise Shares which the Holder is acquiring are being acquired for, and will be held for, its account only.
4.2 Securities Are Not Registered.
(a)  The Holder understands that the Warrant and the Exercise Shares have not been registered under the Act on the basis that no distribution or public offering of the stock of the Company is to be effected by the Holder. The Holder realizes that the basis for the exemption may not be present if, notwithstanding its representations, the Holder has a present intention of acquiring the securities for a fixed or determinable period in the future, selling (in connection with a distribution or otherwise), granting any participation in, or otherwise distributing the securities. The Holder represents and warrants that it has no such present intention.
(b)  The Holder recognizes that the Warrant and the Exercise Shares must be held indefinitely unless they are subsequently registered under the Act or an exemption from such registration is available.
(c)  The Holder is aware that neither the Warrant nor the Exercise Shares may be sold pursuant to Rule 144 adopted under the Act unless certain conditions are met, including, among other things, the availability of certain current public information about the Company, the resale following the required holding period under Rule 144 and the number of shares being sold during any three month period not exceeding specified limitations.
4.3 Disposition of Warrant and Exercise Shares.
The Holder understands and agrees that all certificates evidencing the shares to be issued to the Holder may bear the following legend:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ ACT ”). THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER THE ACT OR UNLESS SUCH TRANSACTION IS IN COMPLIANCE WITH APPLICABLE FEDERAL AND STATE SECURITIES LAWS.
4.4 Accredited Investor Status. The Holder is an “accredited investor” as defined in Regulation D promulgated under the Act.

 

4.


 

5.  Adjustment of Exercise Price and Exercise Shares.
5.1 Changes in Securities. In the event of changes in the Common Stock by reason of stock dividends, splits, recapitalizations, reclassifications, combinations or exchanges of shares, separations, reorganizations, liquidations, or the like, the number of Exercise Shares available under the Warrant in the aggregate and the Exercise Price shall be correspondingly adjusted to give the Holder of the Warrant, on exercise for the same aggregate Exercise Price, the same shares as the Holder would have owned had the Warrant been exercised prior to the event and had the Holder continued to hold such shares until after the event requiring adjustment. For purposes of this Section 5, the “ Aggregate Exercise Price ” shall mean the aggregate Exercise Price payable in connection with the exercise in full of this Warrant. The form of this Warrant need not be changed because of any adjustment in the number of Exercise Shares subject to this Warrant.
5.2 Certificate of Adjustments. Upon each adjustment of the Exercise Price and/or Exercise Shares, the Company shall promptly notify the Holder in writing and furnish the Holder with a certificate of its Chief Executive Officer or Chief Financial Officer setting forth such adjustment and the facts upon which such adjustment is based.
6.  Fractional Shares. No fractional shares shall be issued upon the exercise of this Warrant as a consequence of any adjustment pursuant hereto. All Exercise Shares (including fractions) to be issued upon exercise of this Warrant shall be aggregated for purposes of determining whether the exercise would result in the issuance of any fractional share. If, after aggregation, the exercise would result in the issuance of a fractional share, the Company shall, in lieu of issuance of any fractional share, pay the Holder otherwise entitled to such fraction a sum in cash equal to the product resulting from multiplying the then current fair market value of one Exercise Share by such fraction.
7.  Transfer of Warrant. Subject to applicable laws, this Warrant and all rights hereunder are transferable, in whole or in part, at any time or times by the Holder, upon delivery of this Warrant and the form of assignment attached hereto to any transferee designated by Holder. The transferee shall sign a customary investment letter in form and substance reasonably satisfactory to the Company.
8.  Lost, Stolen, Mutilated or Destroyed Warrant. If this Warrant is lost, stolen, mutilated or destroyed, the Company may, on such terms as to indemnity or otherwise as it may reasonably impose (which shall, in the case of a mutilated Warrant, include the surrender thereof), issue a new Warrant of like denomination and tenor as the Warrant so lost, stolen, mutilated or destroyed. Any such new Warrant shall constitute an original contractual obligation of the Company, whether or not the allegedly lost, stolen, mutilated or destroyed Warrant shall be at any time enforceable by anyone.

 

5.


 

9.  Amendment . Any term of this Warrant may be amended or waived only with the written consent of the Company and the Holder.
10.  Notices, etc. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given upon actual delivery to the recipient. All communications shall be sent to the Company and to the Holder at the addresses listed on the signature page hereof or at such other address as the Company or Holder may designate by written notice to the other parties hereto.
11.  Governing Law. This Warrant and all rights, obligations and liabilities hereunder shall be governed by and construed under the laws of the State of Delaware as applied to agreements among Delaware residents, made and to be performed entirely within the State of Delaware without giving effect to conflicts of laws principles.
[Signature Page Follows]

 

6.


 

In Witness Whereof , the Company has caused this Warrant to be executed by its duly authorized officer as of the date first written above.
                 
    Northwest Biotherapeutics, Inc.    
 
               
 
  By:            
             
 
      Name:   Alton Boynton    
 
      Title:   President    
 
               
 
      Address:   7600 Wisconsin Ave    
 
          Suite 750
Bethesda, MD 20814
   
ACKNOWLEDGED AND AGREED :
         
By:
       
 
 
 
Name:
   
 
  Title:    
 
 
  Address:    
[Signature Page to Warrant No. BW-2008-__]

 

 


 

NOTICE OF EXERCISE
TO: Northwest Biotherapeutics, Inc.
(1)  o The undersigned hereby elects to purchase  _____  shares of Common Stock (the “ Exercise Shares ”) of Northwest Biotherapeutics, Inc. (the “ Company ”) pursuant to the terms of the attached Warrant, and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.
o The undersigned hereby elects to purchase  _____  shares of Common Stock (the “ Exercise Shares ”) of Northwest Biotherapeutics, Inc. (the “ Company ”) pursuant to the terms of the net exercise provisions set forth in Section 2.1 of the attached Warrant, and shall tender payment of all applicable transfer taxes, if any.
(2)  Please issue a certificate or certificates representing said Exercise Shares in the name of the undersigned or in such other name as is specified below:
         
 
 
 
(Name)
   
 
       
 
 
 
   
 
 
 
(Address)
   
(3)  The undersigned represents that (i) the aforesaid Exercise Shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares, except in accordance with applicable federal and state securities laws; (ii) the undersigned is aware of the Company’s business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision regarding its investment in the Company; (iii) the undersigned is experienced in making investments of this type and has such knowledge and background in financial and business matters that the undersigned is capable of evaluating the merits and risks of this investment and protecting the undersigned’s own interests; (iv) the undersigned understands that Exercise Shares issuable upon exercise of this Warrant have not been registered under the Securities Act of 1933, as amended (the “ Securities Act ”), by reason of a specific exemption from the registration provisions of the Securities Act, which exemption depends upon, among other things, the bona fide nature of the investment intent as expressed herein, and, because such securities have not been registered under the Securities Act, they must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available; (v) the undersigned is aware that the aforesaid Exercise Shares may not be sold pursuant to Rule 144 adopted under the Securities Act unless certain conditions are met and until the undersigned has held the shares for the number of years prescribed by Rule 144, that among the conditions for use of the Rule is the availability of current information to the public about the Company; and (vi) the undersigned agrees not to make any disposition of all or any part of the aforesaid shares of Exercise Shares unless and until there is then in effect a registration statement under the Securities Act covering such proposed disposition or unless such transaction is in compliance with applicable federal and state securities laws.
             
 
(Date)
     
 
(Signature)
   
 
           
 
     
 
(Print name)
   

 

1.


 

ASSIGNMENT FORM
(To assign the foregoing Warrant, execute this form
and supply required information. Do not use this
form to purchase shares.)
For Value Received , the foregoing Warrant and all rights evidenced thereby are hereby assigned to
             
Name:
           
         
    (Please Print)    
 
           
Address:
           
         
    (Please Print)    
 
           
Dated: __________, 20__        
 
           
Holder’s
Signature:
           
 
 
 
       
Holder’s
Address:
           
NOTE : The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatever. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.

 

2.

EXHIBIT 31.1
SECTION 302 CERTIFICATION
I, Alton L. Boynton, certify that:
(1)  
I have reviewed this quarterly report on Form 10-Q of Northwest Biotherapeutics, Inc.;
 
(2)  
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
(3)  
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
(4)  
I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
  (a)  
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  (b)  
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  (c)  
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  (d)  
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
(5)  
I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):
  (a)  
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  (b)  
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 19, 2008
         
By:
  /s/ Alton L. Boynton    
 
 
 
Alton L. Boynton
   
 
  President and Chief Executive Officer    
 
  (Principal Executive, Financial and Accounting Officer)    

 

EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Northwest Biotherapeutics, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2008, as filed with the Securities and Exchange Commission (the “Report”), I, Alton L. Boynton, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)  
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2)  
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 19, 2008
     
/s/ Alton L. Boynton
   
 
Alton L. Boynton
   
President and Chief Executive Officer
   
(Principal Executive, Financial and Accounting Officer)