SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

        (Mark One)

For The Quarterly Period Ended March 31, 2004

OR

Commission File Number 0-26825

NORTHWEST BIOTHERAPEUTICS, INC.

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

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

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   [X]   No   [   ]   

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes   [   ]   No   [X]

     As of May 11, 2004, the registrant had outstanding 19,028,779 shares of common stock, $0.001 par value.

TABLE OF CONTENTS

NORTHWEST BIOTHERAPEUTICS, INC.

TABLE OF CONTENTS

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Part I – Financial Information

     Item 1. Financial Statements

NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company)

BALANCE SHEETS

See accompanying notes to financial statements.

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NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company)

STATEMENTS OF OPERATIONS

See accompanying notes to financial statements.

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NORTHWEST BIOTHERAPEUTICS, INC.
(A Development Stage Company)

STATEMENTS OF CASH FLOWS

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See accompanying notes to financial statements.

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Northwest Biotherapeutics, Inc.

(A Development Stage Company)

Notes to Condensed Financial Statements

(unaudited)

1. Basis of Presentation

     The accompanying unaudited financial statements for Northwest Biotherapeutics, Inc. (the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

     For further information, refer to the financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, as filed with the Securities and Exchange Commission.

     The auditor’s report on the foregoing financial statements of the Company for the fiscal year ended December 31, 2003 states that because of recurring operating losses, a working capital deficit, and a deficit accumulated during the development stage, there is substantial doubt about our ability to continue as a going concern. A “going concern” opinion indicates that the financial statements have been prepared assuming we will continue as a going concern and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

Stock-Based Compensation

     The Company accounts for its stock option plans for employees in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense related to employee stock options is recorded if, on the date of grant, the fair value of the underlying stock exceeds the exercise price. The Company applies the disclosure-only requirements of SFAS No. 123, Accounting for Stock-Based Compensation, which allows entities to continue to apply the provisions of APB Opinion No. 25 for transactions with employees, and to provide pro-forma results of operations disclosures for employee stock option grants as if the fair-value-based method of accounting in SFAS No. 123 had been applied to those transactions.

     Stock compensation costs related to fixed employee awards with pro rata vesting are recognized on a straight-line basis over the period of benefit, generally the vesting period of the options. For options and warrants issued to non-employees, the Company recognizes stock compensation costs utilizing the fair value methodology prescribed in SFAS No. 123 over the related period of benefit.

     Had the Company recognized the compensation cost of employee stock options based on the fair value of the options on the date of grant as prescribed by SFAS No. 123, the pro-forma net loss applicable to common stockholders and related loss per share would have been adjusted to the pro-forma amounts indicated below:

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     There were no stock options granted during the three months ended March 31, 2004. The per share weighted average fair value of stock options granted during the three months ended March 31, 2003 was $0.09. These weighted average fair values were determined on the dates of grants using the following weighted average assumptions:

2. Liquidity

     On April 26, 2004 we entered into a Recapitalization Agreement with Toucan Capital Fund II, L.P. (“Toucan”). The Recapitalization Agreement calls for the possible recapitalization of the Company. At Toucan’s option, and if successfully implemented, the recapitalization could potentially provide the company with up to $40 million through the issuance of new securities to Toucan and a syndicate of investors selected by Toucan. Following the recapitalization, Toucan and the investor syndicate would potentially own, on a combined basis, over 90% of the outstanding capital stock of the Company. The proposed recapitalization would occur in two stages, a bridge period which expires July 23, 2004, unless earlier terminated or extended by Toucan, followed by a potential equity financing.

     On April 26, 2004 Toucan loaned the Company $500,000. Since February 1, 2004 Toucan has loaned the Company a total of $600,000, including the $500,000 loan on April 26, 2004. The recent borrowing from Toucan should allow the Company to fund its operations for approximately 30 days, or until approximately May 26, 2004. Toucan has the option to loan additional amounts to the Company during this bridge period, but is not obligated to do so. These loans accrue interest at 10% per year and are also convertible into capital stock of the Company.

     Generally, Toucan may, in its sole discretion, elect to convert the principal and interest due under the notes into any equity security and/or debt security of the Company at any time prior to full repayment. The conversion price for any conversion of a note at the election of Toucan will be the lowest of (i) with certain exceptions, the lowest nominal or effective price per share paid by any investor of the Company at any time on or after one year prior to April 26, 2004, (ii) with certain exceptions, the lowest nominal or effective price at which any investor of the Company has a right to acquire shares of the Company pursuant to any security, instrument, or promise, undertaking, commitment, agreement or letter of intent outstanding on or after April 26, 2004 or granted, issued, extended or otherwise made available by the Company at any time on or after one year prior to April 26, 2004 and (iii) the lesser of $0.10 per share or 35% discount to the average closing price per share of the Company’s common stock during any 20 consecutive trading days (beginning with the 20 consecutive trading days prior to the effective date of the Recapitalization Agreement), but not less than $0.04 per share under this clause (iii). In addition to these conversion rights, the notes will automatically be converted into convertible preferred stock of the Company in the event the Company raises $15 million through the issuance of convertible preferred stock. In this event the conversion price would be the lowest nominal or effective price per share paid by investors other than Toucan who purchase shares of convertible preferred stock (excluding shares issuable upon exercise of the bridge warrants). If the outstanding loans, including principal and interest were converted into common stock on May 12, 2004 the conversion price would be $0.04 per share and Toucan would own 15,113,000 million shares (or 44.3%) of the Company’s outstanding capital stock.

     In connection with the loans, Toucan has received warrants to purchase up to 36.0 million shares of the Company’s capital stock at an exercise price of $0.01 per share. Any future bridge loans by Toucan up to an additional $500,000, or $1.1 million in the aggregate, would include similar conversion features and warrant coverage. Therefore, if Toucan were to loan the Company an additional $500,000, it would receive warrants to purchase an additional 30 million share of the Company’s capital stock. The warrants are exercisable for up to seven years from the date of issuance and have an exercise price of one cent ($0.01) per share. The warrants are exercisable upon the earliest of (i) the time at which the Company has raised at least $2 million through the issuance of any class or series of equity securities, debt securities or any combination thereof, (ii) at such time as the Company breaches any provision of the Recapitalization Agreement or any documents executed in connection with the Recapitalization Agreement, (iii) the time at which the Company elects to exercise its fiduciary out under the Recapitalization Agreement

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and accepts an unsolicited proposal, or (iv) 61 days after the date Toucan provides the Company with notice that it intends to exercise the warrant. In the event that the Company commences the proposed equity financing and issues at least $15 million of convertible preferred stock to investors other than Toucan, then the bridge warrants will automatically be exercisable for such convertible preferred stock. If, for any reason, the convertible preferred stock is not approved or authorized, or if authorized and the Company fails to issue at least $15 million of convertible preferred stock, then the bridge warrants will be exercisable for any equity security and/or debt security of the Company in any combination thereof at the election of Toucan.

     As part of the Recapitalization Agreement, at the election of Toucan, the Company will be required to enter into an equity financing with Toucan and other investors to be determined by Toucan. If Toucan elects to pursue the equity financing, the parties have agreed that the Company will sell to Toucan and other investors up to $40 million of convertible preferred stock. The preferred stock would be priced at the lower of $0.10 per share or a 35% discount to the average closing price of the Company’s common stock during the 20 trading days prior to the first closing of the equity financing, but not less than $0.04 per share. The equity financing is contingent upon the Company complying with certain covenants in the Recapitalization Agreement and locating investors who are willing to invest in the Company on the terms proposed. The equity financing is also subject to a number of closing conditions, including approval of the Company’s stockholders.

     As of May 14, 2004, including the $600,000 borrowed from Toucan, we had approximately $313,000 in cash and cash equivalents. We believe, based on recurring operating and associated financing costs, our cash will be sufficient to fund our operations through approximately May 26, 2004. After that date we will have to seek additional funds from Toucan which Toucan is not obligated to provide to us. Under the terms of the Recapitalization Agreement, if Toucan elects not to provide additional funding to us, we are prohibited from seeking funds from any party other than Toucan for up to ten business days after May 26, 2004.

     Any additional financing with Toucan and any other third party is likely to be dilutive to stockholders, and debt financing, if available, may include additional restrictive covenants.

     Unless we receive significant additional funding in the future, continuing our operations would require us to use assets that otherwise would be required to liquidate the Company and pay our obligations. For this reason, if we are unable to obtain additional capital, we may choose to cease operations at any time to meet our obligations and to maximize the value, if any, to be paid to our stockholders following a potential liquidation.

3.  Net Loss Per Share Applicable to Common Stockholders

     Basic and diluted net loss per share applicable to common stockholders has been computed using the weighted-average number of shares of common stock outstanding during the period, less, for the three months ended March 31, 2004, 2,000 issued and outstanding restricted shares of common stock that were subject to repurchase. Options to purchase 1,151,480 shares of common stock and warrants to purchase 5,090,748 shares of common and preferred stock were excluded from the calculation of diluted net loss per share for the three months ended March 31, 2004 as such securities were antidilutive. Options to purchase 1,736,574 shares of common stock and warrants to purchase 1,368,525 shares of common and preferred stock were excluded from the calculation of diluted net loss per share for the three months ended March 31, 2003 as such securities were antidilutive.

4.  Notes Payable to Related Parties

     The initial bridge funding period commenced on February 2, 2004 when we issued Toucan an unsecured convertible promissory note, in the amount of $50,000. On March 1, 2004, we issued Toucan a secured convertible promissory note, in the amount of $50,000. The notes were convertible at prices below the current price of our common stock at the date of issuance resulting in a beneficial conversion cost of approximately $100,000 which is being amortized over the term of the notes. On April 26, 2004, we issued Toucan a senior secured convertible promissory note and warrants, in the amount of $500,000.

     The Recapitalization Agreement stipulated that the February and March 2004 notes for $50,000 each were to be cancelled and reissued effective April 26, 2004 as two separate notes for $50,000 each and conforming to the conditions of the note signed for the April 26, 2004 bridge loan for $500,000. As a result, the notes issued in February and March 2004, respectively, have (i) a 12 month term, (ii) accrue interest at 10% per annum on a 365 day basis compounded annually from their respective original issuance dates, and are (iii) secured by a first priority senior security interest in all of the Company’s assets. The initial bridge funding period expires May 26, 2004, unless extended by Toucan.

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

     The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the notes to those statements included with this report. In addition to historical information, this report contains forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. The words “believe,” “expect,” “intend,” “anticipate,” and similar expressions are used to identify forward-looking statements, but some forward-looking statements are expressed differently. Many factors could affect our actual results, including those factors

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described under “Factors That May Affect Results of Operations and Financial Condition.” These factors, among others, could cause results to differ materially from those presently anticipated by us. You should not place undue reliance on these forward-looking statements.

Overview

     We believe that primarily due to the difficult financial markets of 2002, we were unable to raise the additional money needed to fund our ongoing operations and clinical trial activities. Consequently, on October 9, 2002, our Board of Directors authorized management to initiate immediate actions to conserve cash. For that purpose, we reduced staff, eliminated certain future commitments, and sold certain fixed assets. We are continuing to assess our alternatives.

     In November 2002, we suspended all clinical trial activity for our DCVax product candidates. We withdrew our Investigational New Drug Application (IND) for DCVax-Prostate, a prostate cancer treatment, and for DCVax-Lung, a potential treatment for non-small cell lung cancer. We maintained our FDA clearance and our Orphan Drug designation for a multi-site Phase II clinical trial to evaluate the DCVax-Brain product candidate as a possible treatment for Glioblastoma Multiforme. However, this trial cannot be initiated without additional funding. The DCVax-Brain trial was moved to an inactive status and no patients were recruited. That trial remains open with the FDA.

     Operating costs and expenses consist primarily of research and development expenses, including clinical trial expenses when the Company is actively participating in clinical trials, and general and administrative expenses.

     Research and development expenses include salary and benefit expenses and costs of laboratory supplies used in our internal research and development projects.

     From our inception through March 31, 2004, we incurred costs of approximately $24.2 million associated with our research and development activities. Because our technologies are unproven, we are unable to estimate with any certainty the costs we will incur in the continued development of our product candidates for commercialization.

     General and administrative expenses include salary and benefit expenses related to administrative personnel, cost of facilities, insurance, legal support, as well as amortization costs of stock options granted to employees and warrants issued to consultants for entering into commercial arrangements.

     To date, our revenues have primarily been derived from the manufacture and sale of research materials, contract research and development services, and research grants from the federal government. For the three months ended March 31, 2004, we earned approximately $24,000 in revenues from the manufacture and sale of research materials. All research material sales prior to 2002 were to one customer and sales to this one customer peaked at $129,000 in 2001. If we are to rely exclusively on revenues from the sale of our research products to fund our operations, we will need to significantly increase both the number of customers and the size of such sales. We lack high-volume manufacturing, sales and marketing experience and, as a result, we will experience significant difficulties in funding our operations through the manufacture and sale of research products.

     Our financial statements for the year ended December 31, 2003 and three months ended March 31, 2004 were prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. Nevertheless, we have experienced recurring losses from operations, have a working capital deficit, and have a deficit accumulated during the development stage of $65.1 million, as of March 31, 2004, that raises substantial doubt about our ability to continue as a going concern and our auditors have issued an opinion on the December 31, 2003 financial statements which states that there is substantial doubt about our ability to continue as a going concern.

Critical Accounting Policies and Estimates

     Accounting principles generally accepted in the United States of America require our management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our financial statements, as well as the amounts of revenues and expenses during periods covered by our financial statements. The actual amounts of these items could differ materially from those estimates.

     For example, previously under EITF 94-3, Accounting for Costs Associated with Exit or Disposal Activities, if an entity remains responsible, without realizing ongoing economic benefit, for continued rental payments for premises being vacated, an estimate of the loss over the remaining life of the primary lease must be made. Sublease rental income is an allowable offset against the total accrued cost of the rental payments that the entity continues to be liable for related to the vacated space.

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     Consequently, we recognized, for the year ended December 31, 2002, a liability of approximately $929,000 and a loss on facility sublease of $721,000, net of deferred rent write off in estimating the loss of economic benefit from vacating approximately 22,000 square feet of laboratory and administrative space at our prior facility.

     On June 30, 2003, we entered into a Settlement Agreement with Nexus Canyon Park, our prior landlord. Under this Settlement Agreement, Nexus Canyon Park agreed to permit premature termination of our prior lease and excuse us from future performance of lease obligations in exchange for 90,000 shares of our unregistered common stock with a fair value of $35,000 and Nexus’ retention of our $1.0 million lease security deposit. The Settlement Agreement resulted in an additional loss on facility sublease and lease termination of $174,000, net of deferred rent of $202,000. FASB 146 Accounting for Costs Associated with Exit or Disposal Activities has replaced EITF 94-3 but similar charges may occur if we have to cancel our current lease or enter into other restructuring transactions.

     We also determine our employee stock option compensation costs as the difference between the estimated fair value of our common stock and the exercise price of options on their date of grant. Prior to our initial public offering, our common stock was not actively traded. The fair value of our common stock for purposes of determining compensation expense for this period was determined based on our review of the primary business factors underlying the value of our common stock on the date such option grants were made, viewed in light of the expected initial public offering price per share prior to the initial public offering of our common stock. The actual initial public offering price was significantly lower than the expected price used in determining compensation expense. Also, on an ongoing basis the estimate of expense for stock options and warrants is dependant on factors such as expected life and volatility of our stock. To the extent actual expense is different than that estimated, the actual expense that would have been recorded may be substantially different.

Related Party Transactions

     On November 13, 2003, we entered into an Amended and Restated Employment Agreement with our President, Chief Operating Officer, Chief Science Officer and Secretary, wherein we eliminated any potential award of severance compensation in exchange for a one-time payment of $281,571. We also eliminated any potential award of severance compensation, totaling $33,635, to our Vice President of

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Vaccine Research and Development and our Controller. Subsequently, the after-tax portion of those payments, totaling $210,000, were invested in the November 13, 2003 completed Secured Convertible Promissory Note and Warrant financing.

     It was also Management’s understanding that Washington State law considers accrued, but unpaid, wages (including possibly severance payments) a personal liability of our Directors. Management, by electing to take potential severance payments in cash in November 2003, eliminated this potential personal liability on the part of our Directors.

     In addition to the above sums, our Vice President of Vaccine Research and Development invested an additional $25,000 and another $100,000 was received from non-employee investors. These additional funds, including the after-tax severance funds, brought the total invested in the November 13, 2003 secured convertible promissory note and warrants financing to $335,000.

     The November 13, 2003 notes have a 12 month term, accrue interest at an annual rate equal to the prime rate plus 2% and initially were secured by substantially all of our assets. One of the notes is convertible into the number of shares of our common stock equal to the principal and accrued interest amount divided by (i) in the event that we complete a financing generating gross proceeds to us of at least $1 million, then the price per share paid by investors in that offering; or (ii) if we do not complete such an offering, then $0.18, which was the closing price of our common stock on the date of the financing. The principal amount of this note is $50,000. In connection with the Recapitalization Agreement with Toucan, note holders of 70% of the principal amount of the notes agreed to an amendment to their notes. The purpose of the amendment was to set the conversion price of the amended notes at $0.10 per share and change the maturity date to November 12, 2004 in the event the Company raises at least $15 million in a financing prior to that time or May 12, 2005 if the Company has not completed a $15 million financing by May 12, 2005.

     As part of the November 13, 2003 investment, the investors received warrants initially exercisable to acquire an aggregate of 3.7 million shares of our common stock, expiring November 2008 subject to certain antidilution adjustments, at an exercise price to be determined as follows: (i) in the event that we complete an offering of our common stock generating gross proceeds to us of at least $1 million, then the price per share paid by investors in that offering; or (ii) if we do not complete such an offering, then $0.18, which was the closing price of our common stock on the date of the financing. In connection with the Recapitalization Agreement discussed below, certain members of management who hold warrants agreed to an amendment to their warrants. The amendment applies to all warrants issued in the November 13, 2003 financing. The purpose of the amendment was to remove the economic anti-dilution provisions and set the warrant exercise price at the lesser of (i) $0.10 per share or (ii) a 35% discount to the average closing price during the twenty trading days prior to the first closing of the sale by the Company of convertible preferred stock as contemplated by the Recapitalization Agreement but not less than $0.04 per share.

     Proceeds from the November 13, 2004 offering were allocated between the notes and warrants on a relative fair value basis. The value allocated to the warrants on the date of the grant was approximately $221,000. The fair value of the warrants was determined using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%, risk-free interest rate of 3.36%, volatility of 194%, and an contractual life of 5-years. The value of the warrants was recorded as a deferred debt discount against the $335,000 proceeds of the notes. In addition, a beneficial conversion feature related to the notes was determined to be approximately $221,000 but is capped at the remaining value originally allocated to the notes of approximately $114,000. As a result, the total discount on the notes equaled the face value of $335,000 which is being amortized over the twelve-month term of the notes. Amortization of deferred debt discount of approximately $83,750, along with interest accretion on the note of approximately $5,134, was recorded during the three months ended March 31, 2004 resulting in notes payable to related parties, net of discount, at March 31, 2004 of approximately $133,000.

Toucan Financing

     In an effort to continue to fund our operations, on April 26, 2004 we entered into a Recapitalization Agreement with Toucan. In connection with the Recapitalization Agreement we issued Toucan three 10% convertible promissory notes in the aggregate principal amount of $600,000. We also issued Toucan a warrant to purchase 36.0 million shares of our capital stock.

     Pursuant to the Recapitalization Agreement, on April 26, 2004 Toucan loaned the Company $500,000. Since February 1, 2004 Toucan has loaned the Company a total of $600,000, including the $500,000 loan on April 26, 2004. The recent borrowing from Toucan should allow the Company to fund its operations for approximately 30 days, or until approximately May 26, 2004. Toucan has the option to loan additional amounts to the Company during this bridge period, but is not obligated to do so. These loans accrue interest at 10% per year and are also convertible into capital stock of the Company.

Initial Bridge Funding

     The initial bridge funding period commenced on February 2, 2004 when we issued Toucan an unsecured convertible promissory note, in the amount of $50,000. On March 1, 2004, we issued Toucan a secured convertible promissory note, in the amount of $50,000. The notes were convertible at prices below the current price of our common stock at the date of issuance resulting in a beneficial conversion cost of approximately $100,000 which is being amortized over the term of the notes. Amortization of beneficial conversion feature of $14,000 was recorded for the three months ended March 31, 2004. On April 26, 2004, we issued Toucan a

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senior secured convertible promissory note and warrants, in the amount of $500,000.

     The Recapitalization Agreement stipulated that the February and March 2004 notes for $50,000 each were to be cancelled and reissued effective April 26, 2004 as two separate notes for $50,000 each and conforming to the conditions of the note signed for the April 26, 2004 bridge loan for $500,000. As a result, the notes issued in February and March 2004, respectively, have (i) a 12 month term, (ii) accrue interest at 10% per annum on a 365 day basis compounded annually from their respective original issuance dates, and are (iii) secured by a first priority senior security interest in all of the Company’s assets. The initial bridge funding period expires May 26, 2004, unless earlier terminated or extended by Toucan.

     During the bridge period, Toucan and the Company have agreed to cooperate and use their best efforts to restart the Company’s development programs and to take the necessary actions to enable the Company to ultimately complete an equity financing. At its election, Toucan will lead all bridge period activities after consultation with the Company. The bridge period activities will include without limitation: (i) negotiation and execution of contract manufacturing arrangements for good manufacturing practice sourcing and handling of dendritic cells, (ii) analysis of the intellectual property of the Company, (iii) identification and pursuit of additional antigens to establish a product pipeline for the Company, through negotiation and execution of binding letters of intent or agreements for one or more licensing and/or merger and acquistion transactions, (iv) clarification and analysis of licensing terms and costs for license of IL-4, (v) preparation of an updated business plan, budgets, regulatory plan, manufacturing plans, and intellectual property analyses, (vi) preparation of an investor package and due diligence binders to facilitate review and due diligence by prospective equity investors, (vii) evaluation of potential structures for the anticipated equity financing, (viii) analysis and determination, satisfactory to Toucan, of what re