Most favored nation

The Letter further indicated that when the stock issuances made throughout 2014 and 2015 were aggregated and measured against the stock outstanding in January 2014, the issuances exceeded the 20% limit. Although the shares issued to Cognate were unregistered, non-tradable shares, were subject to multi-year vesting and multi-year lock-up restrictions and, as determined by an independent economic analysis, had an actual value substantially below the value of publicly tradable shares, Nasdaq concluded that the applicable “market price” of these shares for purposes of determining compliance with the Nasdaq rules is the market price of tradable shares. Measured on this basis, some of the Company’s issuances to Cognate to conform to terms provided to unrelated investors were considered to be below the market prices. In addition, under Nasdaq’s rules, the existence of most favored nation adjustments also resulted in the issuances being deemed to have been made at below market prices. Based on these factors, the Nasdaq Staff determined that the aggregated issuances by the Company to Cognate were not in compliance with Rule 5635(d).

In November 2014, the Company approved the issuance of adjustment shares under the most favored nation anti-dilution provision, as a result of transactions done with unrelated investors on terms more favorable to those investors than the terms that had been provided to Cognate. The approval and the plan to issue the adjustment shares was reported in the Company’s SEC filings at that time and subsequently, but the shares were not actually issued until October 2015, when completion of that issuance was required as a pre-condition of a $30 million financing the Company entered into.

Since the Contracts precluded Cognate for years from monetizing any of the shares it received in lieu of cash payment of its invoices, the Contracts also included most favored nation anti-dilution provisions such that if the Company entered into transactions with unrelated investors or creditors involving a lower price per share while Cognate was locked up, then the terms of Cognate’s shares would be conformed to the terms of the unrelated investors or creditors.

The Company’s remediation plan proposed that Cognate would surrender certain shares and warrants it had received in connection with the Contracts, Cognate would accept an increase in the exercise price of certain warrants received in connection with the Contracts, and the most favored nation anti-dilution provisions would be deleted from the Contracts. The Company’s proposed remediation plan was set forth in an exchange agreement (the “Exchange Agreement”) subject to Nasdaq’s review and acceptance.

Upon execution of this Agreement, NW Bio will make an aggregate upfront payment (the “Milestone and Initiation Payment”) to Cognate covering extensive preparatory work and an initiation payment relating to the initiation of substantial Manufacturing Expansion Services on an urgent basis under this Agreement. NW Bio acknowledges and agrees that Cognate’s performance of Manufacturing Expansion Services to date, including on an accelerated timetable, before even having an agreement in place, have been of great value to NW Bio. NW Bio now needs a further expanded scope and amount of Manufacturing Expansion Services. NW Bio will make Milestone and Initiation payments in connection with the launch of greatly expanded Manufacturing Expansion Services pursuant to this Agreement, and in connection with milestones reached hereunder. The initial Milestone and Initiation Payment will be made in the form of 1,071,287 shares of NW Bio Common Stock and Warrants exercisable for 511,142 shares of NW Bio Common Stock, with an exercise price of four dollars ($4.00) per share, an exercise period of five (5) years from issuance, cashless exercise provisions and most favored nation provisions. NW Bio will also make milestone payments to Cognate upon the achievement of mutually agreed operational milestones. Such milestones will be included in the ongoing sub-agreements or work orders attached hereto as Exhibits, and/or may be otherwise agreed by the parties. The securities issued to Cognate hereunder will be subject to a lock-up for up to thirty (30) months from issuance, or such longer period as the parties may mutually agree. NW Bio will compensate Cognate for such-lock up on market based terms, and such terms will be subject to most favored nation provisions with respect to any securities issuances, agreements or exercises involving any other investor or creditor. Under the lock-up, Cognate will be prohibited from selling or trading the covered securities in the market.

The disinterested members of the Board of Directors of NW Bio agree that the magnitude of the undertakings now being asked of Cognate, particularly in view of the extraordinary performance by Cognate to date, and the scale and scope of services needed, which far exceeds the parties’ expectations when the Prior Agreement was entered into, requires a substantial initiation payment in connection with the major expansion of the DCVax-L program needed by NW Bio (the “Initiation Payment”). The disinterested Members of the Board agree that the excess services and accelerated timelines are of great value to NW Bio. Previously, NW Bio has left approximately half of Cognate’s invoices unpaid for more than a year. NW Bio desires to recognize and compensate Cognate for its superior performance, and to rectify the payment situation at Cognate going forward. NW Bio will make an Initiation Payment in connection with the substantial expansion of the DCVax program pursuant to this Agreement: 1,020,273 shares of NW Bio common stock, and a warrant exercisable for 486,802 shares of NW Bio common stock at $4.00 per share, with an exercise period of five (5) years from issuance, cashless exercise provisions and most favored nation provisions for anti-dilution protection. NW Bio will also make milestone payments to Cognate upon the achievement of mutually agreed operational milestones, such as most favored nation treatment will include not only the price and terms of securities issued but also the addition of, and terms relating to, additional securities, and additional rights and/or benefits to the investor or creditor (including warrants, rights of first refusal, registration rights, pre-emptive rights, and/or other securities, rights or benefits). Such most favored nation adjustments may be implemented at any time or times after being triggered by terms provided to other investors or creditors, and may be triggered on multiple occasions with respect to a particular security issued hereunder.

On a going forward basis, commencing with August, 2013, and continuing throughout the lock-up period (18 months), the Company and Cognate agreed to establish a regular ongoing arrangement for payment of at least half of all invoices in common stock of the Company, and the remainder in cash, at $4.00 per share subject to a most favored nation treatment with respect to terms provided to other investors or creditors (including with respect to any warrants). The arrangement will continue for 18 months or until terminated by mutual agreement. The contracts implementing these agreements are in process.

On July 31, 2013, Cognate agreed to convert an aggregate of $11.6 million in accounts payable into shares of our common stock at a conversion price of $4.00 per share, which resulted in the issuance in August 2013 of an aggregate of 2.9 million shares of common stock subject to most favored nation treatment with respect to terms provided to other investors or creditors (including with respect to any warrants). The conversion shares are subject to a lock-up period of 18 months from the date of their issuance, on market based terms. Under the lock-up, the shares cannot be sold or traded. The conversions and the lock-up terms are subject to most favored nation treatment with respect to terms provided to other investors or creditors (including with respect to any warrants). The contracts implementing these agreements are in process. Prior to this conversion transaction, Cognate had been entitled to receive 4.2 million shares of our common stock and 2.1 million warrants in exchange for the $11.6 million in payables owed to Cognate, and entitled to most favored nation treatment on its conversions with respect to terms provided to other investors or creditors (including with respect to any warrants); however, Cognate agreed to defer the warrants and the most favored nation treatment until the parties negotiated new or revised agreements to cover the expanded scope of manufacturing and related services needed for our expanded DCVax-L clinical program, DCVax Direct clinical program and other programs. These new or revised agreements are in process.