Most favored nation

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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.

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.

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 a broad range of Ancillary Services under this Agreement. NW Bio acknowledges and agrees that Cognate’s performance of Ancillary 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 greatly expanded scope and amount of such Ancillary Services. NW Bio will make a Milestone and Initiation payment in connection with the launch of greatly expanded Ancillary Services pursuant to this Agreement. The Milestone and Initiation Payment will be made in the form of 1,326,355 shares of NW Bio Common Stock and Warrants exercisable for 632,843 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 may be included in the ongoing sub-agreements or work orders attached hereto as Exhibits, 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.

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 [*]. 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.

Notwithstanding anything to the contrary herein, or in any other document or source, any amounts owed that are paid by NW Bio in shares, warrants and/or other securities of any kind (including RSUs, convertible debt securities or other) issued or issuable in connection with this Agreement (including any subsequent amendments hereof), will be subject to adjustment on a most favored nation basis relative to the terms provided to any other investor or creditor of NW Bio during the Term of this Agreement or the Lock-Up Agreement, at Cognate’s election, so that the terms of all shares, warrants and/or other securities issued or issuable under this Agreement will have terms no less favorable to Cognate than the terms of any shares, warrants and/or other securities issued or issuable to any other investor or creditor during the Term of this Agreement. For the avoidance of doubt, the application of 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.

Due to the large expansion of the Company’s Phase III trial with DCVax-L for brain cancer, and initiation of the trial in Europe, as well as initiation of the Company’s DCVax-Direct program, and certain advanced product development work, additional services that are required for logistics, distribution and tracking, and other pending programs, the Company and Cognate are in the process of substantially expanding their agreements. The agreements in process will cover manufacturing and related services for the DCVax-L program, the DCVax-Direct program, ancillary services and substantial manufacturing capacity expansion. The agreements will involve substantial upfront payments and will be subject to the parties’ July 31, 2013 agreement 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 for an initial period in parallel with the lock-up period under the Conversion Transaction subject to a most favored nation treatment with respect to terms provided to other investors or creditors (including with respect to any warrants). The agreements may cover commercial as well as clinical activities, and will only be terminable early by either party for uncured material breach by the other party.

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 a 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.

On a going forward basis, commencing with August 2013, and continuing throughout the lock-up period (18 months), we and Cognate agreed to establish an arrangement for regular ongoing payment of at least half of all invoices in common stock of our 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 BioServices (“Cognate”) agreed to convert an aggregate of $11.6 million in accounts payable into shares of 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 on the market. The conversions and the lock-up terms are subject to most favored nation treatment with respect to terms provided to other investors. The contracts implementing these agreements are in process. The fair value of the common stock on the date of this transaction was $10.3 million. Prior to this Conversion Transaction, Cognate had been entitled to receive 4.2 million shares of NW Bio 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 the Company’s expanded DCVax-L clinical program, DCVax-Direct clinical program and other programs. These new or revised agreements are in process. Because the 2.1 million warrants and 1.3 million common shares were not contingently issuable as of September 30, 2013, the Company recorded a shares payable to related party liability of $4.7 million and a $3.6 million warrant liability in accordance with the guidance contained in ASC 815-40-15-7D, "Contracts in Entity's Own Equity" whereby under that provision they do not meet the criteria for equity treatment and must be recorded as a liability. Accordingly, the Company classifies the warrant instrument as a liability at its fair value and adjusts the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company's statements of operations. As a result of this Conversion Transaction, the Company recorded a $7.0 million non-cash charge to inducement expense and a $0.07 million derivative valuation gain from the date of the Conversion Transaction through September 30, 2013.

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.

We supplementally advise the Staff that the updated disclosure above excludes disclosure related to our most favored nation clause with Alcatel-Lucent as Alcatel-Lucent was not a top channel partner during the periods disclosed in the Form 10-Q. If Alcatel-Lucent is a top channel partner in future periods, we will include disclosure of the term and termination provisions as well as the most favored nation clause with Alcatel-Lucent in the relevant periodic reports.

The redemption of the Convertible CRA Shares held by the current holders thereof may trigger rights we granted to certain former holders (the “Former Preferred Holders”) of certain of our preferred shares, including the Convertible CRA Shares (the “Preferred Shares”), that were redeemed in 2010 to be treated no less favorably with respect to the redemption of their Preferred Shares (“Most Favored Nation Rights”) than any holder of Convertible CRA Shares that is subsequently redeemed. Certain of the Former Preferred Holders also have anti-dilution rights (the “Anti-Dilution Rights”), which, for a specified period of time, prohibit us from issuing securities if such issuance would reduce such Former Preferred Holders’ ownership of our Common Shares below specified percentages. The Fifth Amendment to the Waiver requires us to negotiate in good faith to redeem the outstanding Convertible CRA Shares and eliminate the Most Favored Nation Rights and the Anti-Dilution Rights and allows us to effect such redemptions and elimination of rights at any time prior to midnight on August 15, 2012; provided, however¸ that the costs of such redemptions and elimination of rights do not exceed specified amounts, which amounts are significantly less than the amount required to redeem the Convertible CRA Shares pursuant to their terms. We can provide no assurance that we will be able to successfully negotiate the redemption of the outstanding Convertible CRA Shares or the elimination of the Most Favored Nation Rights or the Anti-Dilution Rights. Certain affiliates of Bank of America, N.A. have Most Favored Nation Rights and Anti-Dilution Rights.

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