Summary of NORTHWEST BIOTHERAPEUTICS INC

Item 7. 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 Item 8. "Financial Statements and Supplementary Data" included below in this Annual Report on Form 10-K. Operating results are not necessarily indicative of results that may occur in future periods.

This discussion and analysis contains forward-looking statements that involve a number of risks, uncertainties and assumptions. Actual events or results may differ materially from our expectations. Important factors that could cause actual results to differ materially from those stated or implied by our forward-looking statements include, but are not limited to, those set forth in Item 1A. "Risk Factors" in this Annual Report. All forward-looking statements included in this Annual Report are based on information available to us on the date of this Annual Report and, except as required by law, we undertake no obligation to update publicly or revise any forward-looking statements.

Overview

We are a development stage biotechnology company focused on discovering, developing and commercializing immunotherapy products that generate and enhance immune system responses to treat cancer. Data from our clinical trials suggest that our cancer therapies significantly extend both time to recurrence and survival, while providing a superior quality of life with no debilitating side effects when compared with current therapies. For additional information regarding our business, product candidates and the status of our clinical trials, see Item 1. "Business" in this Annual Report on Form 10-K.

Our financing activities are described below under "- Liquidity and Capital Resources". We will need to raise additional capital to fund our operations, including our Phase II DCVax®-Brain clinical trial. Depending on the trial results, we plan to seek product approval for DCVax®-Brain, our leading product candidate, in both the U.S. and E.U.

We have experienced recurring losses from operations and have a deficit accumulated during the development stage of $164.6 million at December 31, 2008. In addition, our independent registered public accounting firm has indicated in its report on our financial statements included in this Annual Report on Form 10-K that there is substantial doubt about our ability to continue as a going concern.

Going Concern

Our financial statements for the year ended December 31, 2008 have been 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 and have a deficit accumulated during the development stage of $164.6 million that raises substantial doubt about our ability to continue as a going concern and our auditors have issued an opinion, for the year ended December 31, 2008, which states that there is substantial doubt about our ability to continue as a going concern.

If we are unable to continue as a going concern, we would consider all opportunities for creating value in the Company, including investigating ways to advance our dendritic cell-based product and monoclonal antibody candidates, including pursuing potential corporate partnerships for our monoclonal antibody candidates, and other alternatives, including the possible sale of some or all of our assets.

Expenses

From our inception through December 31, 2008, we incurred costs of approximately $57.3 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 their professional services.

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.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") 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. Our accounting policies are described in more detail in Note 3 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. We have identified the following as the most critical accounting policies and estimates used in this preparation of our consolidated financial statements.

Restructuring Liabilities.

When circumstances warrant, we may elect to discontinue certain business activities or change the manner in which we conduct ongoing operations. When such a change is made, management will estimate the costs to exit a business or restructure ongoing operations. The components of the estimates may include estimates and assumptions regarding the timing and costs of future events and activities that represent management's best expectations based on known facts and circumstances at the time of estimation. Management periodically reviews its restructuring estimates and assumptions relative to new information, if any, of which it becomes aware. Should circumstances warrant, management will adjust its previous estimates to reflect what it then believes to be a more accurate representation of expected future costs. Because management's estimates and assumptions regarding restructuring costs include probabilities of future events, such estimates are inherently vulnerable to changes due to unforeseen circumstances, changes in market conditions, regulatory changes, changes in existing business practices and other circumstances that could materially and adversely affect the results of operations.

Impairment of Long-Lived Assets

As of December 31, 2008, we had approximately $394,000 of property and equipment, net of accumulated depreciation. In accounting for these long-lived assets, we make estimates about the expected useful lives of the assets, the expected residual values of the assets, and the potential for impairment based on events or circumstances. The events or circumstances could include a significant decrease in market value, a significant change in asset condition or a significant adverse change in regulatory climate. Application of the test for impairment requires judgment.

Stock-Based Compensation

The Company accounts for stock based compensation under Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004), Share-Based Payment. SFAS 123(R) requires the measurement and recognition of compensation for all stock-based awards including stock options and employee stock purchases under a stock purchase plan, to be accounted for under the fair value method and requires the use of an option pricing model for estimating fair value. Accordingly, share-based compensation is measured at the grant date, based on the fair value of the award.

Determining the appropriate fair-value model and calculating the fair value of share-based awards at the date of grant requires judgment. We use the Black-Scholes option pricing model to estimate the fair value of employee stock options and rights to purchase shares under stock plans, consistent with the provisions of SFAS 123(R). Option pricing models, including the Black-Scholes model, also require the use of input assumptions, including expected volatility, expected life, expected dividend rate, and expected risk-free rate of return. We estimate the volatility of our common stock based on the historical volatility over the most recent period corresponding with the estimated expected life of the award. We estimate expected life of the award based on historical experience with similar awards, giving consideration to the contractual terms, vesting schedules and pre-vesting and post-vesting forfeitures. Higher volatility and expected lives result in a proportional increase to share-based compensation determined at the date of grant. The expected dividend rate and expected risk-free rate of return are not as significant to the calculation of fair value. Although the fair value of our share-based awards is determined in accordance with SFAS 123(R) and SEC Staff Accounting Bulletin, or SAB, 107, Share-Based Payment, the Black-Scholes option pricing model requires the input of highly subjective assumptions, and other reasonable assumptions could provide differing results.

In addition, SFAS 123(R) requires us to develop a forfeiture rate which is an estimate of the number of share-based awards that will be forfeited prior to vesting. Quarterly changes in the estimated forfeiture rate can potentially have a significant effect on reported share-based compensation, as the effect of adjusting the forfeiture rate for all expense amortization is recognized in the period the forfeiture estimate is changed.

Revenue Recognition

We earn revenues through research grants and previously earned revenues through sale of research materials and providing research services to third parties. Revenues from sale of research materials are to multiple customers with whom there is no other contractual relationship and are recognized when shipped to the customer and title has passed.

Research contracts and grants require us to perform research activities as specified in each respective contract or grant on a best efforts basis, and we are paid based on the fees stipulated in the respective contracts and grants which approximate the costs incurred by us in performing such activities. We recognize revenue under the research contracts and grants based on completion of performance under the respective contracts and grants where no ongoing obligation on our part exists. Direct costs related to these contracts and grants are reported as research and development expenses.

Results of Operations

Operating costs:

Operating costs and expenses consist primarily of research and development expenses, including clinical trial expenses which rise 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 depreciation, amortization of stock options and warrants.

Year Ended December 31, 2007 Compared to the Year Ended December 31, 2008

We recognized a loss from operations of $22.3 million for the year ended December 31, 2008 compared to a loss from operations of $16.0 million for the year ended December 31, 2007. The increase in net loss was primarily attributable to unexpected legal costs, increased staffing and costs associated with establishing the business in Switzerland.

Research and Development Expense. Research and development expense increased from $8.8 million for the year ended December 31, 2007 to $12.7 million for the year ended December 31, 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.

General and Administrative Expense. General and administrative expense increased from $7.2 million for the year ended December 31, 2007 to $8.9 million for the year ended December 31, 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 in, locations such as Switzerland, Spain and Israel;

• legal costs associated with ongoing litigation;

· higher staffing costs associated with expansion of our business activities in the United States and internationally; and

• additional rent expense related to our new headquarters located in Bethesda, Maryland.

Depreciation and Amortization. Depreciation and amortization increased from $19,000 during the year ended December 31, 2007 to $22,000 for the year ended December 31, 2008 due to more assets being placed into service in 2008 compared to 2007.

Interest Expense, Net. Interest expense net decreased from $5.6 million for the year ended December 31, 2007 to approximately $821,000 for the year ended December 31, 2008. Interest expense for the year ended December 31, 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 year ended December 31, 2008. Interest expense in 2008 was related to notes payable from both related and non related parties and included both interest and debt discount expense.

Year Ended December 31, 2006 Compared to the Year Ended December 31, 2007

For the year ended December 31, 2007, our loss from operations was approximately $16.0 million, compared to $6.0 million for the year ended December 31, 2006. Approximately 55% of our expended resources in 2007 were apportioned to the re-activation of our two DCVax® protocols and other research and development ventures. From our inception through December 31, 2007, we incurred costs of approximately $44.6 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.

Total Revenues. Revenues decreased 88% from $80,000 for the year ended December 31, 2006 to $10,000 for the year ended December 31, 2007. The overall decrease is primarily due to the fact we completed a sale of certain license rights during 2006 which was not duplicated in 2007.

Research and Development Expense. Research and development expense increased 132% from $3.8 million for the year ended December 31, 2006 to $8.8 million for the year ended December 31, 2007. This increase was primarily due to an increase in monthly contract manufacturing costs, as well as an increase in support costs related to the development of a clinical trial program and potential compassionate use/named patient programs in Switzerland and elsewhere. In January 2007, we began to prepare for the enrollment of our first patients in our Phase II DCVax®-Brain clinical trial, which increased our pre-manufacturing costs. These costs have continued to increase as we initiate additional sites and prepare to and enroll new patients in this clinical trial.

General and Administrative Expense. General and administrative expense increased 215% from approximately $2.3 million for the year ended December 31, 2006 to $7.2 million for the year ended December 31, 2007. In addition to unexpected lawyer fees and costs associated with our AIM listing in the United Kingdom, specifically board of directors and insurance costs, general and administrative costs increased due to a number of potentially non-recurring costs including, start-up costs, mainly consulting and travel costs, due to expansion of our business activities in the United States and internationally, specifically in Switzerland, Spain and Israel; staffing costs; legal costs associated with ongoing litigation; and FAS 123(R) expense associated with stock option grants to executives.

Depreciation and Amortization. Depreciation and amortization decreased 49% from $37,000 for the year ended December 31, 2006 to $19,000 for the year ended December 31, 2007. This decrease was primarily due to the fact that our remaining assets are either fully depreciated or were previously impaired. We acquired a minimal amount of new assets during the year ended December 31, 2007.

Interest Expense, Net and Other Income. Interest expense increased from approximately $2.6 million for the year ended December 31, 2006 to $5.6 million for the year ended December 31, 2007. Interest expense is primarily related to the debt discount and interest accretion associated with our outstanding convertible promissory notes and warrants. Interest expense increased significantly during the year ended December 31, 2007 compared to the prior year due to the immediate amortization of the debt discount associated with the June 1, 2007 amendment to certain convertible notes payable to Toucan Partners. In addition, we recorded a warrant valuation gain of $7.1 million during the year ended December 31, 2006 with respect to the revaluation of the potential shares that could be issued in excess of the available authorized shares. See "Warrant Valuation" below for further discussion. We did not have a similar gain or loss during the year ended December 31, 2007.

Liquidity and Capital Resources

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 December 31, 2008, the carrying value of the Loan was $1,044,000, net of unamortized discount of $16,000. The Company amortizes the discount using the effective interest method over the term of the loan. During the year ended December 31, 2008, the Company recorded interest expense related to the amortization of the discount of $44,000. 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.

On December 22, 2008, the Company entered into a Loan Agreement and Promissory Note with Toucan Partners. Under the Note, Toucan has loaned the Company $500,000 (the "Toucan December Loan"). 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 June 22, 2009. The Note may be prepaid without the consent of Toucan. 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 Toucan Partners a warrant to purchase 132,500 shares of the Company's common stock at an exercise price equal to $0.40 per share, which was the closing price of the Company's Common Stock on the NASD Over-The-Counter Bulletin Board on December 22, 2008. The warrant expires 5 years from the date of issuance.

Upon issuing the Note to Toucan Partners, the Company recognized the note and warrants based on their relative fair values of $453,000 and $47,000, 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 197%, no dividends, and a risk-free interest rate of 1.53%.

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 is 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 were 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") ("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 . . .