The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
(amounts in thousands, except share and per share amounts)
1. Nature of the Business and Basis of Presentation
Tokai Pharmaceuticals, Inc. (the “Company”) was incorporated on March 26, 2004 under the laws of the State of Delaware. The
Company is a biopharmaceutical company focused on developing and commercializing innovative therapies for the treatment of prostate cancer and other hormonally-driven diseases. The Company’s lead drug candidate, galeterone, is an oral small
molecule that utilizes the mechanistic pathways of current second-generation androgen signaling inhibitors, while also introducing a distinct third mechanism—androgen receptor degradation. The Company is developing galeterone for the treatment
of patients with metastatic castration resistant prostate cancer (“mCRPC”). Since its inception, the Company has devoted substantially all of its efforts to research and development, in-licensing technology and raising capital.
The Company is subject to risks common to companies in the biotechnology industry including, but not limited to, new technological
innovations, protection of proprietary technology, dependence on key personnel, compliance with government regulations and the need to obtain additional financing. Galeterone, which is currently under development, and any product candidates that the
Company may seek to develop in the future, will require significant additional research and development efforts, including extensive preclinical and clinical testing, and regulatory approval prior to commercialization. These efforts require
significant amounts of additional capital, adequate personnel infrastructure, and extensive compliance capabilities.
There can be no
assurance that the Company’s research and development will be successfully completed, that adequate protection for the Company’s intellectual property will be obtained, that any products developed will obtain necessary regulatory approval
or that any approved products will be commercially viable. Even if the Company’s drug development efforts are successful, it is uncertain when, if ever, the Company will generate significant revenue from product sales. The Company operates in
an environment of rapid change in technology and substantial competition from pharmaceutical and biotechnology companies. In addition, the Company is dependent upon the services of its employees, consultants and contracted service providers.
On September 22, 2014, the Company completed an initial public offering (“IPO”) of its common stock through the issuance and
sale of 6,480,000 shares of common stock at a price to the public of $15.00 per share, resulting in net proceeds of $87,062 after deducting underwriting discounts and commissions and offering expenses. Upon the closing of the IPO, all outstanding
shares of the Company’s redeemable convertible preferred stock automatically converted into 14,860,173 shares of the Company’s common stock. On October 9, 2014, the Company issued and sold an additional 540,000 shares of its common
stock at the public offering price of $15.00 per share as a result of the partial exercise by the underwriters of their option to purchase additional shares of common stock, resulting in additional net proceeds to the Company of $7,533 after
deducting underwriting discounts and commissions.
The Company’s consolidated financial statements have been prepared on the basis of
continuity of operations, realization of assets and satisfaction of liabilities in the ordinary course of business. The Company has incurred losses and negative cash flows from operations since inception. As of December 31, 2015, the Company
had an accumulated deficit of $131,438 and had cash and investments of $63,957. The Company believes its cash and investments balance as of December 31, 2015 will only be sufficient to enable it to fund planned operating expenses and capital
expenditure requirements into the first half of 2017. The Company will need to obtain substantial additional funding in order to complete the development of, and to commercialize, galeterone for patients with AR-V7 positive mCRPC and in other
indications and patient populations, submit an NDA to the FDA for galeterone, conduct other clinical trials of galeterone, and develop or commercialize any future product candidates. If the Company is unable to raise capital when needed or on
acceptable terms, it may
F-7
Tokai Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share and per share amounts)
be forced to delay, reduce, terminate or eliminate its product development programs and commercialization efforts. The Company’s ability to generate product revenue and operating cash flow
will depend heavily on the successful development and eventual commercialization of galeterone and other product candidates that it may develop in the future.
The accompanying consolidated financial statements and footnotes include Diotima Pharmaceuticals, Inc. (“Diotima”), a variable
interest entity in which the Company had a variable financial interest and was the primary beneficiary but had no ownership interest. In 2010, the Company formed and incorporated Diotima. Diotima operated as a stand-alone company with limited
activity through April 2014. In early 2014, the license agreements relating to the Diotima compounds were terminated. Additionally, in April 2014, the board of directors and stockholders of Diotima approved the dissolution of Diotima, and Diotima
was dissolved. All significant intercompany balances and transactions between the Company and Diotima have been eliminated in consolidation. Expenses incurred by Diotima for the years ended December 31, 2014 and 2013 were $8 and $60,
respectively.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation
of financial statements in conformity with U.S. Generally Accepted Accounting Principles requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the consolidated financial statements, and the reported amounts of expenses during the reporting periods. Significant estimates, assumptions and judgments reflected in these consolidated financial statements include,
but are not limited to, the accrual of research and development expenses and the valuation of stock-based awards. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Actual results could differ from the
Company’s estimates.
Cash Equivalents
The Company considers all short-term, highly liquid investments with original maturities of ninety days or less at date of purchase to be cash
equivalents. Cash equivalents, which consist of money market accounts, are stated at fair value.
Marketable Securities
The Company’s marketable securities are classified as available-for-sale and are carried at fair value with the unrealized gains and
losses reported as a component of accumulated other comprehensive loss in stockholders’ equity (deficit). Realized gains and losses and declines in value judged to be other than temporary are included as a component of interest and other income
(expense), net based on the specific identification method. The Company has classified its marketable securities with maturities beyond one year as short-term, based on their highly liquid nature and because such marketable securities are available
for current operations.
Concentration of Risk
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents and
marketable securities. The Company has all cash and cash equivalents and marketable securities’ balances at two accredited financial institutions, in amounts that exceed federally
F-8
Tokai Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share and per share amounts)
insured limits. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
The Company is dependent on third-party manufacturers to supply products for research and development activities in its programs. In
particular, the Company relies and expects to continue to rely on a small number of manufacturers to supply it with its requirements for the active pharmaceutical ingredients and formulated drugs related to these programs. These programs could be
adversely affected by a significant interruption in the supply of active pharmaceutical ingredients and formulated drugs.
The Company is
dependent on Qiagen Manchester Limited (“Qiagen”) to develop and commercialize a companion diagnostic test for use with galeterone to identify mCRPC patients with the AR-V7 splice variant. If Qiagen is unable to successfully develop and
commercialize the companion diagnostic test, the development, approval and commercialization of galeterone could be adversely affected.
Fair Value
Measurements
Certain assets and liabilities are carried at fair value. Fair value is defined 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. Valuation techniques used to
measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair
value hierarchy, of which the first two are considered observable and the last is considered unobservable:
|
|
•
|
|
Level 1—Quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
|
Level 2—Observable inputs (other than Level 1 quoted prices) such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets
or liabilities, or other inputs that are observable or can be corroborated by observable market data.
|
|
|
•
|
|
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow
methodologies and similar techniques.
|
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation expense is recognized using the straight-line method
based upon estimated useful life as follows:
|
|
|
|
|
Lab equipment
|
|
3 years
|
|
Computer equipment
|
|
3 years
|
|
Furniture and fixtures
|
|
5 years
|
|
Leasehold improvements
|
|
Shorter of life of lease or
estimated useful life
|
Upon retirement or sale of property and equipment, the cost and related accumulated depreciation of such
property and equipment disposed of are removed from the accounts and any resulting gain or loss is included in loss from operations.
F-9
Tokai Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share and per share amounts)
Impairment of Long-Lived Assets
Long-lived assets consist of property and equipment. Long-lived assets to be held and used are tested for recoverability whenever events or
changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the business
in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset for recoverability, the Company
compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset to its carrying value. An impairment loss would be recognized when estimated undiscounted future cash flows expected to
result from the use of an asset are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset over its fair value, determined based on discounted cash flows. To date, the Company has
not recorded any impairment losses on long-lived assets.
Research and Development Costs
Research and development costs are expensed as incurred. Included in research and development expenses are salaries, stock-based compensation
and benefits of employees, third-party license fees and other operational costs related to the Company’s research and development activities, including manufacturing expenses and external costs of outside vendors engaged to conduct both
preclinical studies and clinical trials. The Company expenses raw materials used to manufacture its drug substance when received.
As part
of the process of preparing consolidated financial statements, the Company is required to estimate its accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with company
personnel and outside vendors to identify services that have been performed on the Company’s behalf and estimating the level of service performed and the associated costs incurred for the services when the Company has not yet been invoiced or
otherwise notified of the actual costs. The majority of the Company’s service providers invoice in arrears for services performed, on a pre-determined schedule or when contractual milestones are met; however, some require advanced payments. The
Company makes estimates of its accrued expenses as of each balance sheet date in its consolidated financial statements based on facts and circumstances known to the Company at that time. Examples of estimated accrued research and development
expenses include fees paid to:
|
|
•
|
|
clinical research organizations in connection with clinical trials;
|
|
|
•
|
|
investigative sites or other providers in connection with clinical trials;
|
|
|
•
|
|
Qiagen in connection with the development of the AR-V7 clinical trial assay and companion diagnostic test;
|
|
|
•
|
|
vendors in connection with preclinical development activities; and
|
|
|
•
|
|
vendors related to product manufacturing, development and distribution of clinical supplies.
|
The Company bases its expenses related to clinical trials on its estimates of the services received and efforts expended pursuant to contracts
with multiple clinical research organizations and investigative sites that manage and conduct clinical trials on the Company’s behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may
result in uneven payment flows. There may be instances in which payments made to vendors will exceed the level of services provided and result in a prepayment of the clinical expense. Payments under some of these contracts depend on factors such as
the successful enrollment of
F-10
Tokai Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share and per share amounts)
patients and the completion of clinical trial milestones. In accruing service fees, the Company estimates the time period over which services will be performed, enrollment of patients, number of
sites activated and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from its estimate, the Company adjusts the accrual or amount of prepaid expense accordingly.
Although the Company does not expect its estimates to be materially different from amounts actually incurred, its understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary
and may result in the Company reporting amounts that are too high or too low in any particular period. For the years ended December 31, 2015, 2014 and 2013, the Company has not made any material adjustments to its prior estimates of accrued
research and development expenses.
Patent Costs
All patent-related costs incurred in connection with filing and prosecuting patent applications are recorded as general and administrative
expenses as incurred, as recoverability of such expenditures is uncertain.
Accounting for Stock-Based Compensation
The Company measures all stock options and other stock-based awards granted to employees and directors at the fair value on the date of the
grant using the Black-Scholes option-pricing model. The fair value of the awards is recognized as expense, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award. The
straight-line method of expense recognition is applied to all awards with service-only conditions, while the graded vesting method is applied to all grants with both service and performance conditions. For stock-based awards granted to
non-employees, compensation expense is recognized over the period during which services are rendered by such non-employees until completed. At the end of each financial reporting period prior to completion of the service, the fair value of the
unvested portion of the awards is re-measured using the then-current fair value of the Company’s common stock and updated assumption inputs in the Black-Scholes option-pricing model.
The Company classifies stock-based compensation expense in its consolidated statement of operations and comprehensive loss in the same manner
in which the award recipient’s payroll costs are classified or in which the award recipient’s service payments are classified.
The Company recognizes compensation expense for only the portion of awards that are expected to vest. In developing a forfeiture rate
estimate, the Company has considered its historical experience to estimate pre-vesting forfeitures for service-based awards. The impact of a forfeiture rate adjustment will be recognized in full in the period of adjustment, and if the actual
forfeiture rate is materially different from the Company’s estimate, the Company may be required to record adjustments to stock-based compensation expense in future periods.
Income Taxes
The Company
accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the consolidated financial
statements or in the Company’s tax returns. Deferred taxes are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences
are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent
it believes, based upon the weight of available evidence, that it is more likely than not that all or a portion of deferred tax assets will not be
F-11
Tokai Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share and per share amounts)
realized, a valuation allowance is established through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected
and considering prudent and feasible tax planning strategies.
The Company accounts for uncertainty in income taxes recognized in its
consolidated financial statements by applying a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by
the taxing authorities. If the tax position is deemed more-likely-than- not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the consolidated financial statements. The amount of the benefit that
may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are
considered appropriate as well as the related net interest and penalties.
As of December 31, 2015, the Company has early adopted
Accounting Standards Update 2015-17,
Balance Sheet Classification of Deferred Taxes
, issued by the Financial Accounting Standards Board (the “FASB”) in November 2015, which simplifies the presentation of deferred income taxes by
eliminating the need for entities to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. The Company adopted this guidance retrospectively to all periods presented.
As the Company had no current deferred tax assets or current tax liabilities on its consolidated balance sheet, the adoption of this guidance had no impact on the Company’s financial statements.
Segment Data
The Company manages
its operations as a single segment for the purposes of assessing performance and making operating decisions. The Company’s singular focus is on developing novel proprietary therapies for the treatment of prostate cancer and other
hormonally-driven diseases. No revenue has been generated since inception. The Company holds tangible assets with a net book value of $175 in laboratories located outside of the United States.
Comprehensive Loss
Comprehensive
loss includes net loss as well as other changes in stockholders’ equity (deficit) that result from transactions and economic events other than those with stockholders. For the year ended December 31, 2015, the Company’s only element
of other comprehensive loss was unrealized loss on marketable securities. For the years ended December 31, 2014 and 2013, there was no difference between net loss and comprehensive loss.
Net Income (Loss) Per Share
In
September 2014, upon the closing of the IPO, all of the outstanding shares of the Company’s redeemable convertible preferred stock automatically converted into 14,860,173 shares of the Company’s common stock. Prior to this conversion, the
Company followed the two-class method when computing net income (loss) per share as the Company had issued shares that met the definition of participating securities. The two-class method determines net income (loss) per share for each class of
common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common stockholders for the period to be allocated between
common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. The Company’s redeemable convertible preferred stock contractually entitled the holders of
F-12
Tokai Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share and per share amounts)
such shares to participate in dividends, but did not contractually require the holders of such shares to participate in losses of the Company. Accordingly, the two-class method did not apply for
periods in which the Company reported a net loss or a net loss attributable to common stockholders resulting from dividends or accretion related to its redeemable convertible preferred stock.
Basic net income (loss) per share attributable to common stockholders is computed by dividing the net income (loss) attributable to common
stockholders by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share attributable to common stockholders is computed by dividing the diluted net income (loss) attributable to common
stockholders by the weighted average number of common shares, including potential dilutive common shares assuming the dilutive effect of outstanding stock options and unvested restricted common shares, as determined using the treasury stock method.
For periods in which the Company has reported net losses, diluted net loss per common share attributable to common stockholders is the same as basic net loss per common share attributable to common stockholders, since dilutive common shares are not
assumed to have been issued if their effect is anti-dilutive.
The following common stock equivalents outstanding as of December 31,
2015, 2014 and 2013 were excluded from the computation of diluted net loss per share for the years ended December 31, 2015, 2014 and 2013, because they had an anti-dilutive impact:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
Stock options to purchase common stock
|
|
|
2,861,011
|
|
|
|
2,146,927
|
|
|
|
1,124,116
|
|
|
Restricted common stock units
|
|
|
40,953
|
|
|
|
54,604
|
|
|
|
—
|
|
|
Redeemable convertible preferred stock (as converted to common stock)
|
|
|
—
|
|
|
|
—
|
|
|
|
14,860,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,901,964
|
|
|
|
2,201,531
|
|
|
|
15,984,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recently Issued Accounting Pronouncements
In August 2014, the FASB issued Accounting Standards Update 2014-15,
Presentation of Financial Statements—Going Concern
(
Subtopic 205-40).
The new guidance addresses management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures.
Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. The standard will be effective for the first interim period within annual
reporting periods beginning after December 15, 2016. Early adoption is permitted. This guidance relates to footnote disclosure only and the adoption will not impact the Company’s financial position, results of operations or liquidity.
F-13
Tokai Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share and per share amounts)
3. Marketable Securities and Fair Value Measurements
As of December 31, 2015, marketable securities by security type consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
|
Certificates of Deposit (due within one year)
|
|
$
|
13,709
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13,709
|
|
|
Certificates of Deposit (due after one year through two years)
|
|
|
1,178
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,178
|
|
|
United States Treasury Notes (due within one year)
|
|
|
22,596
|
|
|
|
—
|
|
|
|
(47
|
)
|
|
|
22,549
|
|
|
United States Treasury Notes (due after one year through two years)
|
|
|
2,506
|
|
|
|
—
|
|
|
|
(8
|
)
|
|
|
2,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
39,989
|
|
|
$
|
—
|
|
|
$
|
(55
|
)
|
|
$
|
39,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company did not have marketable securities as of December 31, 2014.
The following tables present the Company’s fair value hierarchy for its cash equivalents and marketable securities, which are measured at
fair value on a recurring basis as of December 31, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2015
Using
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Instruments
|
|
$
|
—
|
|
|
$
|
18,361
|
|
|
$
|
—
|
|
|
$
|
18,361
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
|
—
|
|
|
|
14,887
|
|
|
|
—
|
|
|
|
14,887
|
|
|
United States Treasury Notes
|
|
|
—
|
|
|
|
25,047
|
|
|
|
—
|
|
|
|
25,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
58,295
|
|
|
$
|
—
|
|
|
$
|
58,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2014
Using
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Instruments
|
|
$
|
—
|
|
|
$
|
91,316
|
|
|
$
|
—
|
|
|
$
|
91,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
91,316
|
|
|
$
|
—
|
|
|
$
|
91,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The carrying values of accounts payable and accrued expenses approximate their fair value due to the
short-term nature of these liabilities.
F-14
Tokai Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share and per share amounts)
4. Property and Equipment, net
Property and equipment, net consisted of the following as of December 31, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
Lab equipment
|
|
$
|
322
|
|
|
$
|
—
|
|
|
Computer equipment
|
|
|
243
|
|
|
|
91
|
|
|
Leasehold improvements
|
|
|
66
|
|
|
|
—
|
|
|
Furniture and fixtures
|
|
|
23
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
654
|
|
|
|
91
|
|
|
Less: Accumulated depreciation
|
|
|
(165
|
)
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
489
|
|
|
$
|
33
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $109, $21 and $10 for the years ended December 31, 2015, 2014 and 2013,
respectively.
5. Accrued Expenses
Accrued expenses consisted of the following as of December 31, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
Accrued research and development expenses
|
|
$
|
3,188
|
|
|
$
|
1,853
|
|
|
Accrued payroll and related expenses
|
|
|
900
|
|
|
|
963
|
|
|
Accrued professional fees
|
|
|
699
|
|
|
|
497
|
|
|
Accrued other
|
|
|
167
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,954
|
|
|
$
|
3,478
|
|
|
|
|
|
|
|
|
|
|
|
6. Redeemable Convertible Preferred Stock
Prior to the completion of its IPO in September 2014 (Note 7), the Company had outstanding Series A, Series B-1, Series B-2, Series C, Series
D-1, Series D-2, Series D-3 and Series E redeemable convertible preferred stock (collectively, the “Redeemable Preferred Stock”). The Company classified the Redeemable Preferred Stock outside of stockholders’ equity (deficit) because
the shares contained redemption features that were not solely within the Company’s control. In connection with the closing of the Company’s IPO, all of the Company’s outstanding Redeemable Preferred Stock automatically converted into
common stock on a 10.47-for-1 basis. No Redeemable Preferred Stock was outstanding as of December 31, 2014 or 2015.
In May and
October 2013, the Company issued an aggregate of 56,892,391 shares of Series E redeemable convertible preferred stock to existing and new investors at $0.62398475 per share for gross proceeds of $35,500. The Company incurred issuance costs of $94 in
connection with the sale and issuance of these shares of Series E redeemable convertible preferred stock which were immediately accreted to the carrying value of the Series E redeemable convertible preferred stock.
F-15
Tokai Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share and per share amounts)
7. Common Stock
On August 29, 2014, the Company effected a 1-for-10.47 reverse stock split of its issued and outstanding shares of common stock.
Accordingly, all share and per share amounts for all periods presented in these consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this reverse stock split.
On September 22, 2014, the Company completed an IPO of its common stock through the issuance and sale of 6,480,000 shares of common stock
at a price to the public of $15.00 per share, resulting in net proceeds of $87,062 after deducting underwriting discounts and commissions and offering expenses. Upon the closing of the IPO, all outstanding shares of the Company’s redeemable
convertible preferred stock automatically converted into 14,860,173 shares of the Company’s common stock. On October 9, 2014, the Company issued and sold an additional 540,000 shares of its common stock at the public offering price of
$15.00 per share as a result of the partial exercise by the underwriters of their option to purchase additional shares of common stock, resulting in additional net proceeds to the Company of $7,533 after deducting underwriting discounts and
commissions.
Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s
stockholders. Common stockholders are not entitled to receive dividends, unless declared by the board of directors.
8. Stock-Based Awards
The Company’s 2014 Stock Incentive Plan (the “2014 Plan”) permits the Company to make grants of incentive stock options,
non-statutory stock options, restricted stock, restricted stock units, stock appreciation rights and other stock-based awards to the Company’s employees, officers, directors, consultants and advisors; however, incentive stock options may only
be granted to the Company’s employees. The number of shares initially reserved for issuance under the 2014 Plan was 1,745,413 shares of common stock and may be increased by the number of shares under the 2007 Stock Incentive Plan (the
“2007 Plan”) that expire, terminate or are otherwise surrendered, cancelled, forfeited or repurchased by the Company. The number of shares of common stock that may be issued under the plan is also subject to an annual increase on the first
day of each fiscal year equal to the lesser of (i) 1,800,000 shares of the Company’s common stock, (ii) 4% of the number of shares of the Company’s common stock outstanding on the first day of the applicable fiscal year or
(iii) an amount determined by the Company’s board of directors. As of December 31, 2015, 1,156,154 shares remained available for issuance under the 2014 Plan. The number of authorized shares reserved for issuance under the 2014 Plan
was increased by 903,885 shares effective as of January 1, 2016.
As required by the 2007 Plan and 2014 Plan, the exercise price for
stock options granted is not to be less than the fair value of common stock as of the date of grant. The Company bases fair value of common stock on the quoted market price. Prior to the IPO, the value of common stock was determined by the
Company’s board of directors by taking into consideration its most recently available valuation of common stock performed by management and the board of directors as well as additional factors which might have changed since the date of the most
recent contemporaneous valuation through the date of grant.
During the years ended December 31, 2015, 2014 and 2013, the Company
granted options to purchase 996,845, 1,039,155 and 786,537 shares of common stock, respectively, to certain employees, consultants and directors. The vesting of most of these awards is time-based and the restrictions typically lapse over three to
four years.
F-16
Tokai Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share and per share amounts)
2014 Employee Stock Purchase Plan
Under the 2014 Employee Stock Purchase Plan (the “ESPP”), an aggregate of 225,000 shares of the Company’s common stock are
reserved for issuance. The number of shares of the Company’s common stock reserved for issuance under the ESPP will automatically increase on the first day of each fiscal year equal to the lesser of (1) 450,000 shares of the Company’s
common stock, (2) 1% of the total number of shares of the Company’s common stock outstanding on the first day of the applicable fiscal year and (3) an amount determined by the Company’s board of directors. No offering periods
have commenced under the ESPP and the number of shares reserved for issuance under the ESPP have not increased.
Stock Option Valuation
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. Prior to its IPO,
the Company was a private company and lacked company-specific historical and implied volatility information. Therefore, the Company estimated its expected stock volatility based on the historical volatility of a publicly traded group of peer
companies. The Company expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own traded stock price. The expected term of the Company’s stock options has been determined utilizing the
“simplified” method for awards that qualify as “plain-vanilla” options. The expected term of stock options granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined
by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash
dividends and does not expect to pay any cash dividends in the foreseeable future.
The following table sets forth the assumptions that
the Company used to determine the fair value of the stock options granted, presented on a weighted average basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
Risk-free interest rate
|
|
|
1.79
|
%
|
|
|
1.83
|
%
|
|
|
1.72
|
%
|
|
Expected term (in years)
|
|
|
6.01
|
|
|
|
5.95
|
|
|
|
5.98
|
|
|
Expected volatility
|
|
|
74.2
|
%
|
|
|
79.4
|
%
|
|
|
79.7
|
%
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
F-17
Tokai Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share and per share amounts)
The following table summarizes the Company’s stock option activity from January 1,
2015 through December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issuable
Under Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
(In years)
|
|
|
|
|
|
Outstanding as of December 31, 2014
|
|
|
2,146,927
|
|
|
$
|
5.54
|
|
|
|
8.6
|
|
|
$
|
19,802
|
|
|
Granted
|
|
|
996,845
|
|
|
|
10.60
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(201,153
|
)
|
|
|
2.31
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(81,608
|
)
|
|
|
4.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2015
|
|
|
2,861,011
|
|
|
$
|
7.57
|
|
|
|
8.3
|
|
|
$
|
7,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest as of December 31, 2015
|
|
|
2,822,786
|
|
|
$
|
7.52
|
|
|
|
8.2
|
|
|
$
|
7,896
|
|
|
Options exercisable as of December 31, 2015
|
|
|
1,199,676
|
|
|
$
|
4.10
|
|
|
|
7.0
|
|
|
$
|
6,455
|
|
The aggregate intrinsic value was calculated based on the positive differences between the market value of the
Company’s common stock on December 31, 2015 and 2014, of $8.72 and $14.74 per share, respectively, and the exercise prices of the options.
The weighted average grant date fair value of stock options granted was $6.94, $6.70 and $1.17 per share for the years ended December 31,
2015, 2014 and 2013, respectively.
The total intrinsic value of stock options exercised was $2,236, $35 and $33 for the years ended
December 31, 2015, 2014 and 2013, respectively.
Restricted Common Stock Units
The 2014 Plan provides for the award of restricted common stock units. The Company has granted restricted common stock units with time-based
vesting conditions. Unvested shares of restricted common stock may not be sold or transferred by the holder. These restrictions lapse according to the time-based vesting conditions of each award.
The table below summarizes the Company’s restricted stock unit activity from January 1, 2015 through December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
|
Unvested restricted common stock units as of December 31, 2014
|
|
|
54,604
|
|
|
$
|
15.00
|
|
|
Issued
|
|
|
—
|
|
|
|
—
|
|
|
Vested
|
|
|
(13,651
|
)
|
|
|
15.00
|
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted common stock units as of December 31, 2015
|
|
|
40,953
|
|
|
$
|
15.00
|
|
|
|
|
|
|
|
|
|
|
|
F-18
Tokai Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share and per share amounts)
During 2014, the Company granted 54,604 restricted stock units with a fair value of $15.00
per share that are subject to time-based vesting conditions that lapse over four years. Upon vesting, the restricted stock units entitle the holder to one share of common stock for each restricted stock unit. All restricted stock units currently
granted have been classified as equity instruments as their terms require settlement in shares. Restricted stock units with time-based vesting conditions are valued on the grant date using the grant date market price of the underlying shares. As of
December 31, 2015, the Company estimates that all shares of restricted stock units with an intrinsic value of $357 and a weighted average remaining contractual term of 2.67 years will ultimately vest. The Company did not grant restricted stock
units in 2015 or 2013.
Stock-based Compensation
The Company recorded stock-based compensation expense related to stock options and restricted common stock units in the following expense
categories of its statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
Research and development
|
|
$
|
634
|
|
|
$
|
552
|
|
|
$
|
91
|
|
|
General and administrative
|
|
|
2,267
|
|
|
|
1,556
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,901
|
|
|
$
|
2,108
|
|
|
$
|
238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense for the year ended December 31, 2014 includes $880 of stock-based
compensation expense related to a performance-based option grant which vested during 2014.
As of December 31, 2015, the Company had
an aggregate of $10,738 of unrecognized stock-based compensation expense, which it expects to recognize over a weighted average period of 3.06 years.
9. Commitments and Contingencies
Leases
In February 2015, the Company entered into a sublease with a Massachusetts limited liability company (the
“sublandlord”) for 15,981 square feet of office space in Boston, Massachusetts. The sublease is subject and subordinate to a prime lease, dated October 5, 2010, between the sublandlord and the prime landlord. The term of the sublease
commenced on April 1, 2015 and expires on December 31, 2016. If the term of the prime lease is terminated for any reason prior to the expiration or earlier termination of the sublease, the sublease will terminate immediately and the
Company will have no recourse against the sublandlord for such termination. In June 2015, the Company entered into a lease for the existing space with the prime landlord (the “landlord”) which effectively extends the term of the lease of
the existing space until July 31, 2018. Payment escalations specified in the lease agreements are accrued such that rent expense per square foot is recognized on a straight-line basis over the terms of occupancy.
Prior to April 2015, the Company leased office space in Cambridge, Massachusetts, and obtained certain office-related services on a
month-to-month basis under a 30-day cancelable operating service agreement. The Company recorded exit costs of $133 included in rent expense during the year ended December 31, 2015 in connection with the termination of the Cambridge lease.
During the years ended December 31, 2015, 2014 and 2013, the Company recognized $835, $520 and $366, respectively, of rental expense
related to office space.
F-19
Tokai Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share and per share amounts)
As of December 31, 2015, future minimum lease payments under noncancelable office leases
are as follows:
|
|
|
|
|
|
|
2016
|
|
$
|
555
|
|
|
2017
|
|
|
839
|
|
|
2018
|
|
|
489
|
|
|
|
|
|
|
|
|
|
|
$
|
1,883
|
|
|
|
|
|
|
|
Restricted Cash and Letters of Credit
As of December 31, 2015 and 2014, the Company held a money market account to collateralize a credit card account with its bank of $200,
which was classified as restricted cash on the consolidated balance sheet as of December 31, 2015 and 2014. In connection with the new office lease entered into in 2015, the Company was required to maintain a letter of credit totaling $70 for
the benefit of the landlord of the new lease. The landlord can draw against the letter of credit in the event of default by the Company. The Company holds $70 in a money market account to collateralize the letter of credit, which amount is also
included in restricted cash on the balance sheet as of December 31, 2015.
Intellectual Property Licenses
The Company has a master license agreement with the University of Maryland, Baltimore (“UMB”). Pursuant to the license agreement,
UMB granted an exclusive, worldwide license, with the right to sublicense, under certain patents and patent applications to make, have made, use, sell, offer to sell and import certain anti-androgen steroids, including galeterone, for the
prevention, diagnosis, treatment or control of any human or animal disease. In addition, UMB granted the Company a first option to receive an exclusive license to UMB’s rights in certain improvements to the licensed products. The Company has
exercised its option and acquired exclusive rights to licensed improvements under three amendments to the license agreement. The Company is obligated to pay UMB an annual maintenance fee of $10 each year until the first commercial sale of a product
developed using the licensed technology. The Company is also obligated to make an additional $50 milestone payment to UMB for each additional investigational new drug application filed for a licensed product and a $100 milestone payment upon the
approval by the U.S. Food and Drug Administration of each new drug application (“NDA”) for a licensed product. Because none of these milestones have been achieved as of December 31, 2015, no liabilities for such milestone payments
have been recorded in the Company’s consolidated financial statements.
The Company must also pay UMB a low-single digit percentage
royalty on aggregate worldwide net sales of licensed products, including sales by sublicensees, on a licensed product-by-licensed product and country-by-country basis until the later of the expiration of the last-to-expire applicable licensed patent
or ten years after first commercial sale of the applicable licensed product, in each case in the applicable country. The royalty obligations are subject to specified reductions in the event that additional licenses need to be obtained from third
parties or in the event of specified competition from third-party products licensed by UMB. Minimum annual royalty payments to UMB are $50 beginning in the year following the year in which the first commercial sale occurs. The Company must also pay
UMB 10% of all non-royalty sublicense income received from sublicensees. Finally, the Company is responsible for all patent expenses related to the prosecution and maintenance of the licensed patents. As of December 31, 2015, the Company has
not yet developed a commercial product using the licensed technologies, nor has it entered into any sublicense agreements for the technologies.
F-20
Tokai Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share and per share amounts)
In January 2015, the Company entered into an exclusive license agreement with The Johns
Hopkins University (“Johns Hopkins”) pursuant to which Johns Hopkins granted the Company an exclusive, worldwide license under certain patents and patent applications, and a non-exclusive license under certain know-how, in each case with
the right to sublicense, to make, have made, use, sell, offer to sell and import certain assays to identify androgen receptor variants for use as a companion diagnostic with galeterone. In addition, Johns Hopkins granted the Company an option to
negotiate an exclusive license to Johns Hopkins’s rights in certain improvements to the licensed intellectual property.
Under the
terms of the license agreement, the Company is obligated to diligently develop, manufacture and sell licensed products. The Company is also obligated to use commercially reasonable efforts to achieve specified milestone events by specified dates.
Unless the license agreement with Johns Hopkins is terminated earlier as provided below, the license from Johns Hopkins expires on a country-by-country basis as of the later of the expiration date of the last to expire of the claims of the patent
rights licensed under the agreement in such country or ten years after the first commercial sale of a licensed product in such country. Johns Hopkins may terminate the agreement if the Company fails to achieve such milestone events and does not cure
such failure within a specified termination notice period. Johns Hopkins may also terminate the agreement upon a material breach by the Company under the agreement if the Company does not cure such breach within a specified notice period or upon the
Company’s bankruptcy or insolvency. The Company may terminate the agreement at any time upon 90 days’ notice.
In consideration
for the rights granted to the Company under the license agreement, the Company made an upfront payment to Johns Hopkins of $75 following the execution of the license agreement, which was recognized as research and development expense during the year
ended December 31, 2015. The Company is obligated to pay Johns Hopkins an annual minimum royalty of up to $30 and to make milestone payments to Johns Hopkins upon the achievement of specified technical and commercial milestones. If all such
milestones were achieved, the total milestone payments owed to Johns Hopkins would equal $700 in the aggregate. During the year ended December 31, 2015, the Company expensed $50 related to the achievement of two of these milestones. The Company
has not achieved any other milestones and therefore no additional liabilities for such milestone payments have been recorded in the Company’s consolidated financial statements.
The Company must also pay Johns Hopkins single digit percentage royalties on aggregate worldwide net sales of licensed products (but not
galeterone), including sales by sublicensees, on a licensed product-by-licensed product and country-by-country basis until the later of the expiration of the last-to-expire applicable licensed patent or ten years after first commercial sale of the
applicable licensed product, in each case in the applicable country. These royalty obligations are subject to specified reductions in the event that additional licenses from third parties are required. The Company must also pay Johns Hopkins 20% of
all non-royalty sublicense income received from sublicensees and reimburse Johns Hopkins for patent costs. As of December 31, 2015, the Company has not yet developed a commercial product using the licensed technologies.
Companion Diagnostic Development Agreement
In March 2015, the Company entered into a project work plan with Qiagen under a Master Collaboration Agreement, dated January 12, 2015,
between the Company and Qiagen (together with the project work plan, the “CDx Agreement”). Pursuant to the CDx Agreement, Qiagen has agreed to develop and commercialize a companion diagnostic test for use with galeterone to identify mCRPC
patients with the AR-V7 splice variant. Qiagen has also developed under the CDx Agreement a clinical trial assay for use in our pivotal Phase 3 clinical trial of galeterone in order to identify mCRPC patients whose tumor cells express AR-V7.
F-21
Tokai Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share and per share amounts)
Under the CDx Agreement, Qiagen is responsible for developing, and obtaining and maintaining
regulatory approvals for the companion diagnostic test in the United States, the European Union, Canada, Australia and such other countries as the parties may agree. In addition, Qiagen has agreed to use commercially reasonable and diligent efforts
to manufacture the companion diagnostic test and to make the companion diagnostic test commercially available in those countries in which the Company has obtained regulatory approval for, and has valid patent claims covering, galeterone. Qiagen will
be responsible for commercializing the companion diagnostic in each such country. If Qiagen elects not to commercialize the companion diagnostic test itself in any such country, for so long as there are valid patent claims covering galeterone in
such country, Qiagen has agreed to procure alternative distribution channels or otherwise supply the companion diagnostic test to the Company in order for the Company to market galeterone in combination with the companion diagnostic test. Upon the
request of the Company, the parties have also agreed to negotiate in good faith to expand the scope of the projects under the Agreement to, among other things, provide for the development and commercialization of the companion diagnostic test for
use with galeterone in Japan.
Subject to the terms of the CDx Agreement, the Company paid Qiagen a fee for the exclusive right to have
the circulating tumor cell enrichment technology used in the development of the companion diagnostic test, which was recognized as research and development expense during the year ended December 31, 2015. The Company will also pay Qiagen fees
for the development of the AR-V7 clinical trial assay and a contingent milestone payment of $1,000 upon Qiagen obtaining pre-market approval of the companion diagnostic test. Furthermore, the Company will reimburse Qiagen for certain direct
out-of-pocket costs incurred by Qiagen, including for sample material. These amounts are subject to adjustment if the parties determine that changes in the scope of the development program are required. Following commercialization, the Company will
have no further payment obligations to Qiagen under the Agreement. The Company will not, however, receive any revenues from future sales, if any, of the companion diagnostic test.
The CDx Agreement expires on the later to occur of (i) the fifth anniversary of regulatory approval of the companion diagnostic test and
(ii) the expiration of Qiagen’s commercialization obligations under the CDx Agreement. The Company is permitted to terminate the CDx Agreement for convenience upon 180 days’ written notice to Qiagen. Either party may terminate the CDx
Agreement upon 60 days’ written notice to the other party based on uncured material breaches by the other party and may terminate the CDx Agreement immediately based on the bankruptcy or insolvency of the other party.
Advisor Agreement
The Company
paid a financial advisor $1,053 upon the closing of its IPO in connection with strategic and financial advisory services unrelated to the offering. The Company recorded this amount as general and administrative expense in its consolidated statement
of operations and comprehensive loss for the year ended December 31, 2014.
Indemnification Agreements
In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners,
and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into
indemnification agreements with each of its directors and executive officers, which provide, among other things, that the Company will indemnify such directors and executive officers to the fullest extent permitted by law for claims arising in his
or her capacity as a director or officer. The maximum potential amount of future payments the Company could be required to make under these
F-22
Tokai Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share and per share amounts)
indemnification agreements is, in many cases, unlimited. To date, the Company has not incurred any material costs as a result of the indemnification agreements described above. In addition, the
Company maintains directors and officers insurance coverage. The Company does not believe that the outcome of any claims under indemnification arrangements will have a material effect on its financial position, results of operations or cash flows,
and it has not accrued any liabilities related to such obligations in its consolidated financial statements as of December 31, 2015.
10. Income
Taxes
During the years ended December 31, 2015, 2014 and 2013, the Company recorded no income tax benefits for the net operating
losses incurred in each year, due to its uncertainty of realizing a benefit from those items.
A reconciliation of the U.S. federal
statutory income tax rate to the Company’s effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
Federal statutory income tax rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
|
Federal research and development tax credit
|
|
|
(0.5
|
)
|
|
|
(0.9
|
)
|
|
|
(0.7
|
)
|
|
State taxes, net of federal benefit
|
|
|
(5.3
|
)
|
|
|
(4.5
|
)
|
|
|
(5.6
|
)
|
|
Stock-based compensation expense
|
|
|
0.4
|
|
|
|
1.1
|
|
|
|
0.4
|
|
|
Other
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
0.1
|
|
|
Increase in deferred tax asset valuation allowance
|
|
|
39.3
|
|
|
|
38.1
|
|
|
|
39.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets as of December 31, 2015 and 2014 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Capitalized research and development expenses
|
|
$
|
37,765
|
|
|
$
|
24,945
|
|
|
Net operating loss carryforwards
|
|
|
10,224
|
|
|
|
6,292
|
|
|
Stock-based compensation
|
|
|
1,371
|
|
|
|
612
|
|
|
Research and development tax credit carryforwards
|
|
|
1,273
|
|
|
|
1,008
|
|
|
Accrued expenses
|
|
|
339
|
|
|
|
414
|
|
|
Other
|
|
|
56
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
51,028
|
|
|
|
33,272
|
|
|
Valuation allowance
|
|
|
(51,028
|
)
|
|
|
(33,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
F-23
Tokai Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share and per share amounts)
Changes in the valuation allowance for deferred tax assets during the years ended
December 31, 2015, 2014 and 2013 related primarily to the increase in net operating loss carryforwards, capitalized research and development expenses and research and development tax credit carryforwards and were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
Valuation allowance as of beginning of year
|
|
$
|
33,272
|
|
|
$
|
24,402
|
|
|
$
|
18,138
|
|
|
Decreases recorded as benefit to income tax provision
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Increases recorded to income tax provision
|
|
|
17,756
|
|
|
|
8,870
|
|
|
|
6,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance as of end of year
|
|
$
|
51,028
|
|
|
$
|
33,272
|
|
|
$
|
24,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015, the Company had net operating loss carryforwards for federal and state income
tax purposes of $27,900 and $24,200, respectively, which begin to expire in 2024 and 2030, respectively. As of December 31, 2015, the federal and state net operating loss carryforwards include $1,400 of deductions for stock option compensation
for which the associated tax benefit will be credited to additional paid-in capital when realized. This amount is accounted for separately and is not included in the Company’s deferred tax assets. As of December 31, 2015, the Company also
had available research and development tax credit carryforwards for federal and state income tax purposes of $1,040 and $353, respectively, which begin to expire in 2025 and 2023, respectively. Utilization of the net operating loss carryforwards and
research and development tax credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”) due to ownership changes that have occurred previously
or that could occur in the future. These ownership changes may limit the amount of carryforwards that can be utilized annually to offset future taxable income. The Company has not conducted a formal study to assess whether a change of control has
occurred or whether there have been multiple changes of control since inception due to the significant complexity and cost associated with such a study. If the Company has experienced a change of control, as defined by Section 382 of the Code,
at any time since inception, utilization of the net operating loss carryforwards or research and development tax credit carryforwards may be subject to an annual limitation under Section 382 of the Code, which is determined by first multiplying
the value of the Company’s stock at the time of the ownership change by the applicable long-term tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the net
operating loss carryforwards or research and development tax credit carryforwards before utilization.
The Company has evaluated the
positive and negative evidence bearing upon its ability to realize the deferred tax assets. Management has considered the Company’s history of cumulative net losses incurred since inception and its lack of commercialization of any products
since inception and has concluded that it is more likely than not that the Company will not realize the benefits of the deferred tax assets. Accordingly, a full valuation allowance has been established against the deferred tax assets as of
December 31, 2015 and 2014. Management reevaluates the positive and negative evidence at each reporting period.
The Company has not
recorded any amounts for unrecognized tax benefits as of December 31, 2015 or 2014.
The Company files tax returns as prescribed by
the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. There are currently no pending income tax examinations. The
Company’s tax years are still open under statute from 2012 to the present. Earlier years may be examined to the extent that tax credit or net
F-24
Tokai Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share and per share amounts)
operating loss carryforwards are used in future periods. The Company’s policy is to record interest and penalties related to income taxes as part of its income tax provision.
11. 401(k) Plan
The Company has a
401(k) plan available for participating employees who meet certain eligibility requirements. Eligible employees may defer a portion of their salary as defined by the plan. Company contributions to the plan may be made at the discretion of the Board
of Directors. To date, the Company has not made any contributions to the plan. Effective January 1, 2016, the Company has elected to make matching contributions for the plan year ending December 31, 2016 at a rate of 100% of each
employee’s contribution up to a maximum matching contribution of 3% of the employee’s compensation and at a rate of 50% of each employee’s contribution in excess of 3% up to a maximum of 5% of the employee’s compensation.
12. Related Party Transactions
The
Company had an outstanding loan to a former advisor comprised of unpaid principal and interest in the amount of $220 that was deemed uncollectable and as a result, was fully reserved for in 2007. In 2014, the Company started to receive repayment of
this note. This loan was fully repaid in April 2015. The Company recorded $49 and $158 for the years ended December 31, 2015 and 2014, respectively, in interest and other income (expense), net, representing cash collected during those periods.
13. Selected Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
Dec. 31,
2015
|
|
|
Sept. 30,
2015
|
|
|
June 30,
2015
|
|
|
March 31,
2015
|
|
|
Dec. 31,
2014
|
|
|
Sept. 30,
2014
|
|
|
June 30,
2014
|
|
|
March 31,
2014
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Loss from operations
|
|
|
(11,072
|
)
|
|
|
(11,907
|
)
|
|
|
(8,982
|
)
|
|
|
(13,300
|
)
|
|
|
(6,261
|
)
|
|
|
(6,424
|
)
|
|
|
(5,885
|
)
|
|
|
(4,892
|
)
|
|
Net loss
|
|
|
(11,017
|
)
|
|
|
(11,853
|
)
|
|
|
(8,957
|
)
|
|
|
(13,260
|
)
|
|
|
(6,208
|
)
|
|
|
(6,390
|
)
|
|
|
(5,851
|
)
|
|
|
(4,847
|
)
|
|
Basic and diluted net loss per share
|
|
$
|
(0.49
|
)
|
|
$
|
(0.53
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
(0.59
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(2.71
|
)
|
|
$
|
(11.68
|
)
|
|
$
|
(9.79
|
)
|
F-25
Tokai Pharmaceuticals, Inc.
Balance Sheets
(In thousands, except share and per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
18,630
|
|
|
$
|
24,023
|
|
|
Marketable securities
|
|
|
16,088
|
|
|
|
39,934
|
|
|
Prepaid expenses and other current assets
|
|
|
1,616
|
|
|
|
3,213
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
36,334
|
|
|
|
67,170
|
|
|
Property and equipment, net
|
|
|
117
|
|
|
|
489
|
|
|
Restricted cash
|
|
|
270
|
|
|
|
270
|
|
|
Other assets
|
|
|
—
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
36,721
|
|
|
$
|
67,974
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
886
|
|
|
$
|
1,208
|
|
|
Accrued expenses
|
|
|
5,458
|
|
|
|
4,954
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
6,344
|
|
|
|
6,162
|
|
|
Long-term liabilities
|
|
|
120
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
6,464
|
|
|
|
6,250
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 6)
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued or
outstanding
|
|
|
—
|
|
|
|
—
|
|
|
Common stock, $0.001 par value; 200,000,000 shares authorized; 22,641,651 and
22,597,144 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively
|
|
|
23
|
|
|
|
23
|
|
|
Additional paid-in capital
|
|
|
195,891
|
|
|
|
193,194
|
|
|
Accumulated other comprehensive income (loss)
|
|
|
3
|
|
|
|
(55
|
)
|
|
Accumulated deficit
|
|
|
(165,660
|
)
|
|
|
(131,438
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
30,257
|
|
|
|
61,724
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
36,721
|
|
|
$
|
67,974
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-26
Tokai Pharmaceuticals, Inc.
Statements of Operations and Comprehensive Loss
(In thousands, except share and per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
Revenue
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
6,162
|
|
|
|
8,491
|
|
|
|
23,988
|
|
|
|
24,905
|
|
|
General and administrative
|
|
|
3,146
|
|
|
|
3,416
|
|
|
|
10,375
|
|
|
|
9,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
9,308
|
|
|
|
11,907
|
|
|
|
34,363
|
|
|
|
34,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(9,308
|
)
|
|
|
(11,907
|
)
|
|
|
(34,363
|
)
|
|
|
(34,189
|
)
|
|
Interest income and other income, net
|
|
|
38
|
|
|
|
54
|
|
|
|
141
|
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,270
|
)
|
|
$
|
(11,853
|
)
|
|
$
|
(34,222
|
)
|
|
$
|
(34,070
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
|
$
|
(0.41
|
)
|
|
$
|
(0.53
|
)
|
|
$
|
(1.51
|
)
|
|
$
|
(1.52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, basic and diluted
|
|
|
22,636,977
|
|
|
|
22,540,876
|
|
|
|
22,632,287
|
|
|
|
22,449,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,270
|
)
|
|
$
|
(11,853
|
)
|
|
$
|
(34,222
|
)
|
|
$
|
(34,070
|
)
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on marketable securities
|
|
|
(3
|
)
|
|
|
10
|
|
|
|
58
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss)
|
|
|
(3
|
)
|
|
|
10
|
|
|
|
58
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
$
|
(9,273
|
)
|
|
$
|
(11,843
|
)
|
|
$
|
(34,164
|
)
|
|
$
|
(34,062
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-27
Tokai Pharmaceuticals, Inc.
Statements of Cash Flows
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(34,222
|
)
|
|
$
|
(34,070
|
)
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
2,660
|
|
|
|
2,044
|
|
|
Depreciation expense
|
|
|
154
|
|
|
|
53
|
|
|
Impairment of property and equipment
|
|
|
235
|
|
|
|
—
|
|
|
Release of reserve for loan to former advisor
|
|
|
—
|
|
|
|
(49
|
)
|
|
Premium on purchase of marketable securities
|
|
|
(2
|
)
|
|
|
(186
|
)
|
|
Amortization of premium on marketable securities
|
|
|
109
|
|
|
|
34
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
1,642
|
|
|
|
(1,507
|
)
|
|
Accounts payable
|
|
|
(322
|
)
|
|
|
887
|
|
|
Accrued expenses
|
|
|
504
|
|
|
|
429
|
|
|
Other assets
|
|
|
—
|
|
|
|
(45
|
)
|
|
Other long-term liabilities
|
|
|
32
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(29,210
|
)
|
|
|
(32,359
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from maturities of marketable securities
|
|
|
24,297
|
|
|
|
—
|
|
|
Purchases of marketable securities
|
|
|
(500
|
)
|
|
|
(39,775
|
)
|
|
Purchases of property and equipment
|
|
|
(17
|
)
|
|
|
(349
|
)
|
|
Change in restricted cash
|
|
|
—
|
|
|
|
(70
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
23,780
|
|
|
|
(40,194
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Repayment of notes receivable
|
|
|
—
|
|
|
|
49
|
|
|
Proceeds from exercise of common stock options
|
|
|
37
|
|
|
|
416
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
37
|
|
|
|
465
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(5,393
|
)
|
|
|
(72,088
|
)
|
|
Cash and cash equivalents at beginning of period
|
|
|
24,023
|
|
|
|
105,256
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
18,630
|
|
|
$
|
33,168
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing activities:
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment included in accounts payable and accrued
expenses
|
|
$
|
—
|
|
|
$
|
98
|
|
The accompanying notes are an integral part of these financial statements.
F-28
Tokai Pharmaceuticals, Inc.
Notes to Financial Statements
(Amounts in thousands, except share and per share data)
(Unaudited)
1. Nature of the Business
and Basis of Presentation
Tokai Pharmaceuticals, Inc. (the “Company”) was incorporated on March 26, 2004 under the
laws of the State of Delaware. The Company is a biopharmaceutical company focused on developing and commercializing innovative therapies for the treatment of prostate cancer and other hormonally-driven diseases. The Company’s lead drug
candidate, galeterone, is an oral small molecule that utilizes the mechanistic pathways of current second-generation androgen signaling inhibitors, while also introducing a distinct third mechanism—androgen receptor degradation. Since its
inception, the Company has devoted substantially all of its efforts to research and development, in-licensing technology and raising capital.
In July 2016, the Company announced its plan to discontinue the ARMOR3-SV Phase 3 clinical trial of galeterone following the
recommendation made by the trial’s independent data monitoring committee (“DMC”). The Company anticipates that all patients enrolled in the ARMOR3-SV clinical trial will discontinue treatment by the end of this year. The Company is
analyzing the unblinded data from the ARMOR3-SV clinical trial to evaluate potential paths forward for galeterone and its drug discovery program, known as the Androgen Receptor Degradation Agents (“ARDA”) program. Based on preliminary data
reviewed to date, however, there is a substantial likelihood that the Company will not pursue the development of galeterone in AR-V7 positive metastatic castration resistant prostate cancer (“mCRPC”) in the future. Following the
announcement regarding the discontinuation of the ARMOR3-SV trial, the Company reduced its workforce in the third quarter of 2016 by approximately 60% and incurred a charge of $1,200 during the three months ended September 30, 2016 related to
the workforce reduction including severance, benefits and related costs of which $500 and $700 were recorded in research and development expenses and general and administrative expenses, respectively. The Company paid $300 of these costs during the
three months ended September 30, 2016 and expects to pay $600 in the fourth quarter of 2016 and $300 in the first quarter of 2017. As of September 30, 2016, the Company had a balance of $900 in accrued expenses related to these severance,
benefits and related costs.
In addition, in August 2016, the Company determined to discontinue enrollment in its ongoing Phase 2 ARMOR2
expansion clinical trial of galeterone in mCRPC patients with acquired resistance to Xtandi
®
(enzalutamide) and not to proceed with the planned study of galeterone in mCRPC patients who
rapidly progress on either enzalutamide or Zytiga
®
(abiraterone acetate). While no new patients are being enrolled in the ARMOR 2 trial, the Company is continuing to follow the patients who
remain in the ARMOR2 trial.
In September 2016, the Company announced that the board of directors had initiated a review of strategic
alternatives that could result in changes to its business strategy and future operations. The objective of this review, which is being conducted in parallel with the review of development options for galeterone and the ARDA program, is to maximize
shareholder value.
The Company is subject to risks common to companies in the biotechnology industry including, but not limited to, new
technological innovations, protection of proprietary technology, dependence on key personnel, compliance with government regulations and the need to obtain additional financing. Galeterone, which is currently under development, and any product
candidates that the Company may seek to develop in the future under the ARDA program or otherwise, will require significant additional research and development efforts, including extensive preclinical and clinical testing, formulation development
and manufacturing, and regulatory approval prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel infrastructure, and extensive compliance capabilities.
F-29
Tokai Pharmaceuticals, Inc.
Notes to Financial Statements
(Amounts in thousands, except share and per share data)
(Unaudited)
There can be no assurance that the Company’s research and development activities will be
successfully completed, that adequate protection for the Company’s intellectual property will be obtained or maintained, that any products developed will obtain necessary regulatory approval or that any approved products will be commercially
viable. Even if the Company’s drug development efforts are successful, it is uncertain when, if ever, the Company will generate significant revenue from product sales. The Company operates in an environment of rapid change in technology and
substantial competition from pharmaceutical and biotechnology companies. In addition, the Company is dependent upon the services of its employees, consultants and contracted service providers.
The Company’s financial statements have been prepared on the basis of continuity of operations, realization of assets and satisfaction of
liabilities in the ordinary course of business. The Company has incurred losses and negative cash flows from operations since inception. As of September 30, 2016, the Company had an accumulated deficit of $165,660 and had cash and investments
of $34,718. In light of the discontinuation of the ARMOR3-SV trial and the reduction in workforce that occurred in the third quarter of 2016 and assuming no new clinical efforts for galeterone or any other product candidate, the Company expects its
cash and investments as of September 30, 2016 to be sufficient to fund operations for at least the next twelve months. The Company is currently evaluating potential paths forward for galeterone and its ARDA program and is reviewing strategic
alternatives. If the Company determines to pursue an alternate strategy or engage in a strategic transaction, its future business, prospects, financial position and operating results could be significantly different than those in historical periods
or projected by management. If the Company determines to further develop galeterone, proceed with its ARDA program, or both, substantial additional funding will be needed. Because of the significant uncertainty regarding its future plans, the
Company is not able to accurately predict the impact of a potential change of the business strategy on future funding requirements. If the Company’s cash and investments are not sufficient to fund a revised strategy and the Company is unable to
raise capital when needed or on acceptable terms, the Company may be forced to delay, reduce, terminate or eliminate its product development programs and its commercialization efforts.
The balance sheet at December 31, 2015 was derived from audited financial statements, but does not include all disclosures required by
U.S. generally accepted accounting principles (“GAAP”). The accompanying unaudited financial statements as of September 30, 2016 and for the three and nine months ended September 30, 2016 and 2015 have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance
with GAAP have been condensed or omitted pursuant to such rules and regulations. The Company believes, however, that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in
conjunction with the Company’s audited financial statements and the notes thereto for the year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K that was filed with the SEC on March 10, 2016. In the
opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the Company’s financial position as of September 30, 2016 and results of operations for the three and nine months
ended September 30, 2016 and 2015 and cash flows for the nine months ended September 30, 2016 and 2015 have been made. The results of operations for the three and nine months ended September 30, 2016 and 2015 are not necessarily
indicative of the results of operations that may be expected for the year ending December 31, 2016.
F-30
Tokai Pharmaceuticals, Inc.
Notes to Financial Statements
(Amounts in thousands, except share and per share data)
(Unaudited)
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation
of financial statements in conformity with GAAP requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of expenses during the reporting periods. Significant estimates, assumptions and judgments reflected in these financial statements include, but are not limited to, the accrual of research and
development expenses and the valuation of stock-based awards. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Actual results could differ from the Company’s estimates.
Marketable Securities
The
Company’s marketable securities are classified as available-for-sale and are carried at fair value with the unrealized gains and losses reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity.
Realized gains and losses and declines in value judged to be other than temporary are included as a component of interest income and other income, net based on the specific identification method. The Company classifies its marketable securities with
maturities beyond one year as short-term, based on their highly liquid nature and because such marketable securities are available for current operations.
At September 30, 2016, marketable securities by security type consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
|
Certificates of Deposit (due within one year)
|
|
$
|
5,579
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,579
|
|
|
United States Treasury Notes (due within one year)
|
|
|
10,506
|
|
|
|
3
|
|
|
|
—
|
|
|
|
10,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,085
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
16,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2015 marketable securities by security type consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
|
Certificates of Deposit (due within one year)
|
|
$
|
13,709
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13,709
|
|
|
Certificates of Deposit (due after one year through two years)
|
|
|
1,178
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,178
|
|
|
United States Treasury Notes (due within one year)
|
|
|
22,596
|
|
|
|
—
|
|
|
|
(47
|
)
|
|
|
22,549
|
|
|
United States Treasury Notes (due after one year through two years)
|
|
|
2,506
|
|
|
|
—
|
|
|
|
(8
|
)
|
|
|
2,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
39,989
|
|
|
$
|
—
|
|
|
$
|
(55
|
)
|
|
$
|
39,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined 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
F-31
Tokai Pharmaceuticals, Inc.
Notes to Financial Statements
(Amounts in thousands, except share and per share data)
(Unaudited)
advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use
of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are
considered observable and the last is considered unobservable:
|
|
•
|
|
Level 1—Quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
|
Level 2—Observable inputs (other than Level 1 quoted prices) such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets
or liabilities, or other inputs that are observable or can be corroborated by observable market data.
|
|
|
•
|
|
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow
methodologies and similar techniques.
|
The following tables present the Company’s fair value hierarchy for its cash
equivalents and marketable securities, which are measured at fair value on a recurring basis at September 30, 2016 and December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at September 30, 2016 Using
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Instruments
|
|
$
|
—
|
|
|
$
|
13,113
|
|
|
$
|
—
|
|
|
$
|
13,113
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
|
—
|
|
|
|
5,579
|
|
|
|
—
|
|
|
|
5,579
|
|
|
United States Treasury Notes
|
|
|
—
|
|
|
|
10,509
|
|
|
|
—
|
|
|
|
10,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
29,201
|
|
|
$
|
—
|
|
|
$
|
29,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2015 Using
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Instruments
|
|
$
|
—
|
|
|
$
|
18,361
|
|
|
$
|
—
|
|
|
$
|
18,361
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
|
—
|
|
|
|
14,887
|
|
|
|
—
|
|
|
|
14,887
|
|
|
United States Treasury Notes
|
|
|
—
|
|
|
|
25,047
|
|
|
|
—
|
|
|
|
25,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
58,295
|
|
|
$
|
—
|
|
|
$
|
58,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The carrying values of accounts payable and accrued expenses approximate their fair value due to the
short-term nature of these liabilities.
Net Loss Per Share
Basic net loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding for the period.
Because the inclusion of common share equivalents in the calculation would be anti-dilutive for all periods presented, diluted net loss per share is the same as basic net loss per share.
F-32
Tokai Pharmaceuticals, Inc.
Notes to Financial Statements
(Amounts in thousands, except share and per share data)
(Unaudited)
The following common share equivalents outstanding as of September 30, 2016 and 2015
were excluded from the computation of diluted net loss per share for the three and nine months ended September 30, 2016 and 2015 because they had an anti-dilutive impact:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
Stock options to purchase common stock
|
|
|
2,117,531
|
|
|
|
2,861,011
|
|
|
Unvested restricted common stock units
|
|
|
—
|
|
|
|
40,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,117,531
|
|
|
|
2,901,964
|
|
|
|
|
|
|
|
|
|
|
|
Recently Issued Accounting Pronouncements
In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-15,
Presentation of
Financial Statements—Going Concern
(
Subtopic 205-40).
The new guidance addresses management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to
provide related footnote disclosures. Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. This standard will be effective for
fiscal years ending after December 15, 2016. Early adoption is permitted. This guidance relates to footnote disclosure only and its adoption will not impact the Company’s financial position, results of operations or liquidity.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
(“ASU 2016-02”), which applies to all leases and will require
lessees to put most leases on the balance sheet, but recognize expense in a manner similar to the current standard. ASU 2016-02 will be effective for fiscal years beginning after December 15, 2018. Early adoption is permitted.
Entities are required to use a modified retrospective approach of adoption for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Full retrospective application is
prohibited. The Company is evaluating this guidance.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation—Stock
Compensation
(“ASU 2016-09”). ASU 2016-09 identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either
equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. ASU 2016-09 will be effective for the first interim
period within fiscal years beginning after December 15, 2016. Early adoption is permitted. The Company is evaluating the impact of the adoption of this guidance on the Company’s financial position, results of operations and liquidity.
3. Accrued Expenses
Accrued expenses
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
Accrued research and development expenses
|
|
$
|
3,565
|
|
|
$
|
3,188
|
|
|
Accrued payroll and related expenses
|
|
|
1,045
|
|
|
|
900
|
|
|
Accrued professional fees
|
|
|
734
|
|
|
|
699
|
|
|
Accrued other
|
|
|
114
|
|
|
|
167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,458
|
|
|
$
|
4,954
|
|
|
|
|
|
|
|
|
|
|
|
F-33
Tokai Pharmaceuticals, Inc.
Notes to Financial Statements
(Amounts in thousands, except share and per share data)
(Unaudited)
4. Income Taxes
The Company did not provide for any income taxes in the nine months ended September 30, 2016 or 2015. The Company had gross deferred tax
assets of $51,028 at December 31, 2015, which increased by approximately $13,000 at September 30, 2016. The Company has provided a valuation allowance for the full amount of its net deferred tax assets because, at each of
September 30, 2016 and December 31, 2015, it was more likely than not that any future benefit from deductible temporary differences and net operating loss and tax credit carryforwards would not be realized.
The Company has not recorded any amounts for unrecognized tax benefits as of September 30, 2016 or December 31, 2015. As of
September 30, 2016 and December 31, 2015, the Company had no accrued interest or tax penalties recorded. The Company’s income tax return reporting periods since December 31, 2012 are open to income tax audit examination by the
federal and state tax authorities. In addition, because the Company has net operating loss carryforwards, the Internal Revenue Service is permitted to audit earlier years and propose adjustments up to the amount of net operating losses generated in
those years.
5. Stock-Based Compensation
The Company grants stock-based awards under its 2014 Stock Incentive Plan and is authorized to issue, but has not issued as of
September 30, 2016, common stock under its 2014 Employee Stock Purchase Plan. The Company also has outstanding stock options under its 2007 Stock Incentive Plan, but is no longer granting awards under this plan. As of September 30, 2016,
2,799,965 shares of common stock were available for issuance under the 2014 Stock Incentive Plan. As of September 30, 2016, 225,000 shares of common stock were available for issuance to participating employees under the 2014 Employee Stock
Purchase Plan. The Company recorded stock-based compensation expense related to stock options and restricted common stock units in the following expense categories of its statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
Research and development
|
|
$
|
93
|
|
|
$
|
156
|
|
|
$
|
498
|
|
|
$
|
464
|
|
|
General and administrative
|
|
|
553
|
|
|
|
648
|
|
|
|
2,162
|
|
|
|
1,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
646
|
|
|
$
|
804
|
|
|
$
|
2,660
|
|
|
$
|
2,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. Commitments and Contingencies
Leases
In February 2015, the
Company entered into a sublease with a Massachusetts limited liability company (the “Sublandlord”) for 15,981 square feet of office space in Boston, Massachusetts. The sublease is subject and subordinate to a prime lease between the
Sublandlord and the prime landlord. The term of the sublease commenced on April 1, 2015 and expires on December 31, 2016. If the term of the prime lease is terminated for any reason prior to the expiration or earlier termination of the
sublease, the sublease will terminate immediately and the Company will have no recourse against the Sublandlord for such termination. In June 2015, the Company entered into a lease (the “New Lease”) for the existing space with the prime
landlord (the “Landlord”), which effectively extends the term until July 31, 2018. Payment escalations specified in the lease agreements are accrued such that rent expense per square foot is recognized on a straight-line basis over
the terms of occupancy.
F-34
Tokai Pharmaceuticals, Inc.
Notes to Financial Statements
(Amounts in thousands, except share and per share data)
(Unaudited)
Prior to April 2015, the Company leased office space in Cambridge, Massachusetts, and
obtained certain office-related services on a month-to-month basis under a 30-day cancelable operating service agreement. The Company recorded exit costs of $133 in connection with the termination of the Cambridge lease, which are included in rent
expense during the nine months ended September 30, 2015.
During each of the three months ended September 30, 2016 and 2015, the
Company recognized $174 of rental expense related to office space. During the nine months ended September 30, 2016 and 2015, the Company recognized $521 and $661, respectively, of rental expense related to office space.
As of September 30, 2016, future minimum lease payments under noncancelable office leases were as follows:
|
|
|
|
|
|
|
Remainder of 2016
|
|
$
|
140
|
|
|
2017
|
|
|
839
|
|
|
2018
|
|
|
489
|
|
|
|
|
|
|
|
|
|
|
$
|
1,468
|
|
|
|
|
|
|
|
Restricted Cash and Letters of Credit
The Company held a money market account of $200 to collateralize a credit card account with its bank, which was classified as restricted cash
on the balance sheet as of September 30, 2016 and December 31, 2015. The Company is required to maintain a letter of credit totaling $70 for the benefit of the Landlord of the New Lease. The Landlord can draw against the letter of credit
in the event of default by the Company. The Company held $70 in a money market account to collateralize the letter of credit, which amount was also included in restricted cash on the balance sheet as of September 30, 2016 and December 31,
2015.
Intellectual Property Licenses
The Company has a master license agreement with the University of Maryland, Baltimore (“UMB”). Pursuant to the license agreement,
UMB granted an exclusive, worldwide license, with the right to sublicense, under certain patents and patent applications to make, have made, use, sell, offer to sell and import certain anti-androgen steroids, including galeterone, for the
prevention, diagnosis, treatment or control of any human or animal disease. In addition, UMB granted the Company a first option to receive an exclusive license to UMB’s rights in certain improvements to the licensed products. The Company has
exercised its option and acquired exclusive rights to licensed improvements under four amendments to the license agreement. The Company is obligated to pay UMB an annual maintenance fee of $10 each year until the first commercial sale of a product
developed using the licensed technology. The Company is also obligated to make milestone payments of an additional $50 for the filing of each additional investigational new drug application filed for a licensed product, aggregate milestone payments
of up to $150 associated with the development of a licensed product for a particular non-prostate disease indication, and a $100 milestone payment upon the approval by the U.S. Food and Drug Administration (“FDA”) of each new drug
application (“NDA”) for a licensed product. There were no milestones achieved during the nine months ended September 30, 2016 or 2015.
The Company must also pay UMB a low-single digit percentage royalty on aggregate worldwide net sales of licensed products, including sales by
sublicensees, on a licensed product-by-licensed product and country-by-country basis until the later of the expiration of the last-to-expire applicable licensed patent or ten
F-35
Tokai Pharmaceuticals, Inc.
Notes to Financial Statements
(Amounts in thousands, except share and per share data)
(Unaudited)
years after first commercial sale of the applicable licensed product, in each case in the applicable country. The royalty obligations are subject to specified reductions in the event that
additional licenses need to be obtained from third parties or in the event of specified competition from third-party products licensed by UMB. Minimum annual royalty payments to UMB are $50 beginning in the year following the year in which the first
commercial sale occurs. The Company must also pay UMB 10% of all non-royalty sublicense income received from sublicensees. Finally, the Company is responsible for all patent expenses related to the prosecution and maintenance of the licensed
patents. As of September 30, 2016 the Company has not yet developed a commercial product using the licensed technologies, nor has it entered into any sublicense agreements for the technologies.
In January 2015, the Company entered into an exclusive license agreement with The Johns Hopkins University (“Johns Hopkins”)
pursuant to which Johns Hopkins granted the Company an exclusive, worldwide license under certain patents and patent applications, and a non-exclusive license under certain know-how, in each case with the right to sublicense, to make, have made,
use, sell, offer to sell and import certain assays to identify androgen receptor variants for use as a companion diagnostic with galeterone. In addition, Johns Hopkins granted the Company an option to negotiate an exclusive license to Johns
Hopkins’s rights in certain improvements to the licensed intellectual property.
In consideration for the rights granted to the
Company under the license agreement, the Company made an upfront payment to Johns Hopkins of $75 following the execution of the license agreement, which was recognized as research and development expense during the nine months ended
September 30, 2015. The Company is obligated to pay Johns Hopkins an annual minimum royalty of up to $30 and to make milestone payments to Johns Hopkins upon the achievement of specified technical and commercial milestones. If all such
milestones were achieved, the total milestone payments owed to Johns Hopkins would equal $700 in the aggregate. During the year ended December 31, 2015, the Company expensed $50 upon the achievement of two of these milestones. The Company has
not achieved any other milestones and, therefore, no additional liabilities for such milestone payments have been recorded in the Company’s financial statements.
The Company must also pay Johns Hopkins single digit percentage royalties on aggregate worldwide net sales of licensed products (but not
galeterone), including sales by sublicensees, on a licensed product-by-licensed product and country-by-country basis until the later of the expiration of the last-to-expire applicable licensed patent or ten years after first commercial sale of the
applicable licensed product, in each case in the applicable country. These royalty obligations are subject to specified reductions in the event that additional licenses from third parties are required. The Company must also pay Johns Hopkins 20% of
all non-royalty sublicense income received from sublicensees and reimburse Johns Hopkins for patent costs. As of September 30, 2016, the Company has not yet developed a commercial product using the licensed technologies.
Companion Diagnostic Development Agreement
In March 2015, the Company entered into a project work plan with Qiagen Manchester Limited (“Qiagen”) under a Master Collaboration
Agreement, dated January 12, 2015, between the Company and Qiagen (together with the project work plan, the “CDx Agreement”). Pursuant to the CDx Agreement, Qiagen has agreed to develop and commercialize a companion diagnostic test
for use with galeterone to identify mCRPC patients with the AR-V7 splice variant. Qiagen has also developed under the CDx Agreement a clinical trial assay that was used in the Company’s pivotal Phase 3 clinical trial of galeterone in order
to identify mCRPC patients whose tumor cells express AR-V7, and that may be used in future clinical trials of galeterone.
F-36
Tokai Pharmaceuticals, Inc.
Notes to Financial Statements
(Amounts in thousands, except share and per share data)
(Unaudited)
Subject to the terms of the CDx Agreement, the Company paid Qiagen a fee for the exclusive
right to have the circulating tumor cell enrichment technology used in the development of the companion diagnostic test, which was recognized as research and development expense during the nine months ended September 30, 2015. The Company also
paid Qiagen fees for the development of the AR-V7 clinical trial assay. On October 28, 2016, the Company and Qiagen entered into an agreement terminating the project work plan effective September 27, 2016. The Company is responsible for
making a final payment of $1,099 to Qiagen at which time there will be no future financial obligations by the Company or Qiagen under the project work plan. The Company recorded research and development expense of $1,099 in the three and nine months
ended September 30, 2016 related to this final payment to Qiagen, which amount is included in accrued expenses at September 30, 2016.
Indemnification Agreements
In
the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners, and other parties with respect to certain matters including, but not limited to, losses arising out of breach
of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with each of its directors and executive officers, which provide, among other things,
that the Company will indemnify such directors and executive officers to the fullest extent permitted by law for claims arising in his or her capacity as a director or officer. The maximum potential amount of future payments the Company could be
required to make under these indemnification agreements is, in many cases, unlimited. To date, the Company has not incurred material costs as a result of the indemnification agreements described above. In addition, the Company maintains directors
and officers insurance coverage. The Company is unable to predict if any claims under indemnification arrangements will have a material effect on its financial position, results of operations or cash flows and has not accrued any material
liabilities related to such possible obligations in its financial statements as of September 30, 2016.
Legal Proceedings
On August 1, 2016, a purported stockholder of the Company filed a putative class action lawsuit in the U.S. District Court for the
Southern District of New York against the Company, Jodie P. Morrison, and Lee H. Kalowski, entitled
Doshi v. Tokai Pharmaceuticals, Inc., et al.
, No. 1:16-cv-06106 (“
Doshi
Action”). The plaintiff seeks to represent
a class of purchasers of Company securities between June 24, 2015, and July 25, 2016, and alleges that, in violation of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated thereunder, defendants made
false and misleading statements and omissions about the Company’s clinical trials for its drug candidate, galeterone. The lawsuit seeks, among other things, unspecified compensatory damages, interest, costs, and attorneys’ fees. On
October 3, 2016, the case was transferred to the U.S. District Court for the District of Massachusetts.
On August 19, 2016, a
purported stockholder of the Company filed a putative class action lawsuit in the Superior Court of the State of California, County of San Francisco, against the Company, Jodie P. Morrison, Lee H. Kalowski, Seth L. Harrison, Timothy J. Barberich,
David A. Kessler, Joseph A. Yanchik, III, and the underwriters of the Company’s initial public offering (“IPO”), entitled
Jackie888, Inc. v. Tokai Pharmaceuticals, Inc., et al.
, No. CGC-16-553796. The lawsuit alleges that, in
violation of the Securities Act of 1933 (“Securities Act”), the Company’s registration statement for its IPO made false and misleading statements and omissions about the Company’s clinical trials for galeterone. The
plaintiff seeks to represent a class of purchasers of Company common stock in and/or traceable to the Company’s IPO. The lawsuit seeks, among other things,
F-37
Tokai Pharmaceuticals, Inc.
Notes to Financial Statements
(Amounts in thousands, except share and per share data)
(Unaudited)
unspecified compensatory damages, interest, costs, and attorneys’ fees. On October 19, 2016, the defendants moved to dismiss or stay the action on grounds of
forum non
conveniens
, and certain individual defendants moved to quash the plaintiff’s summons for lack of personal jurisdiction.
On
September 29, 2016, two purported stockholders of the Company filed a putative class action lawsuit in the U.S. District Court for the District of Massachusetts against the Company, Jodie Pope Morrison, Lee H. Kalowski, Seth L. Harrison,
Timothy J. Barberich, David A. Kessler, Joseph A. Yanchik, III, and the underwriters of the Company’s IPO, entitled
Garbowski, et al. v. Tokai Pharmaceuticals, Inc., et al.
, No. 1:16-cv-11963 (“
Garbowski
Action”).
The lawsuit alleges that the defendants and the Company’s registration statement for its IPO made false and misleading statements and omissions about the Company’s clinical trials for galeterone, in violation of the Securities Act, the
Exchange Act, and Rule 10b-5. The plaintiffs seek to represent a class of purchasers of Company common stock in or traceable to the Company’s IPO as well as a class of purchasers of Company common stock between September 17, 2014, and
July 25, 2016. The lawsuit seeks, among other things, unspecified compensatory damages, interest, costs, and attorneys’ fees. The plaintiff in the
Doshi
Action has filed a motion to consolidate the
Doshi
and
Garbowski
Actions for all purposes.
The Company believes it has valid defenses, and intends to engage in a vigorous defense of the
litigation. However, the Company is unable to predict the ultimate outcome of these actions, and, therefore cannot estimate possible losses or ranges of losses, if any, or the materiality thereof. An unexpected unfavorable resolution of these
matters in any reporting period may have a material adverse effect on the Company’s results of operations and cash flows for that period.
7.
401(k) Plan
The Company has a 401(k) plan available for participating employees who meet certain eligibility requirements. Eligible
employees may defer a portion of their salary as defined by the plan. Company contributions to the plan may be made at the discretion of the Board of Directors. Since January 1, 2016, the Company has made matching contributions for the plan
year ending December 31, 2016 at a rate of 100% of each employee’s contribution up to a maximum matching contribution of 3% of the employee’s eligible plan compensation and at a rate of 50% of each employee’s contribution in
excess of 3% up to a maximum of 5% of the employee’s eligible plan compensation.
For the nine months ended September 30, 2016,
the Company made matching contributions of $119 for the plan year ending December 31, 2016.
8. Related Party Transaction
In September 21, 2016, the Company entered into a consulting agreement with Apple Tree Life Sciences, Inc. (“Apple Tree”) under
which Apple Tree agreed to provide consulting, advisory and related services to and for the Company from time to time. There is no fee for these services except for reimbursement of out of pocket expenses. Affiliates of Apple Tree beneficially own
approximately 35% of the Company, and Dr. Seth Harrison, a member of the Company’s board of directors, is a principal of Apple Tree.
F-38
INDEX TO OTIC CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Consolidated Financial Statements for the Nine Months Ended September 30, 2016 and 2015
F-39
OTIC PHARMA LTD.
CONSOLIDATED
BALANCE SHEETS
U.S. Dollars in thousands except share data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
|
Note
|
|
|
2015
|
|
|
2014
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
$
|
3,095
|
|
|
$
|
1,565
|
|
|
Restricted cash
|
|
|
|
|
|
|
14
|
|
|
|
14
|
|
|
Other current receivables
|
|
|
3
|
|
|
|
100
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
|
3,209
|
|
|
|
1,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
4
|
|
|
|
76
|
|
|
|
26
|
|
|
Other non-current assets
|
|
|
|
|
|
|
13
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
|
|
|
|
89
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,298
|
|
|
$
|
1,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
|
|
|
|
|
$
|
354
|
|
|
$
|
42
|
|
|
Other current liabilities
|
|
|
6
|
|
|
|
162
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
|
|
|
516
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
|
|
|
|
516
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares, NIS 0.01 par value;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized 8,600,118 shares as of December 31, 2015 and 6,000,010 shares as of
December 31, 2014;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued and outstanding: 700,705 shares as of December 31, 2015 and 554,681 shares as of
December 31, 2014.
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
Preferred shares, NIS 0.01 par value;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized 5,958,682 shares as of December 31, 2015 and 5,018,590 shares as of
December 31, 2014;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued and outstanding: 4,074,354 shares as of December 31, 2015 and 3,134,262 shares as of
December 31, 2014.
|
|
|
|
|
|
|
11
|
|
|
|
9
|
|
|
Additional paid-in-capital
|
|
|
|
|
|
|
11,214
|
|
|
|
5,723
|
|
|
Receipts on Account of Preferred A Shares
|
|
|
|
|
|
|
291
|
|
|
|
291
|
|
|
Accumulated deficit
|
|
|
|
|
|
|
(8,735
|
)
|
|
|
(4,521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
|
|
|
|
2,782
|
|
|
|
1,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,298
|
|
|
$
|
1,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 16, 2017
|
|
/s/ Christine G. Ocampo
|
|
/s/ Gregory J. Flesher
|
|
Date of approval of the
financial statements
|
|
Christine G. Ocampo, CFO
|
|
Gregory J. Flesher, CEO
|
F-42
OTIC PHARMA LTD.
CONSOLIDATED STATEMENTS OF OPER
ATIONS
U.S. Dollars in thousands except share and per share data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
December 31,
|
|
|
|
|
Note
|
|
|
2015
|
|
|
2014
|
|
|
Research and development expenses, net
|
|
|
9
|
|
|
$
|
2,774
|
|
|
$
|
946
|
|
|
General and administrative expenses
|
|
|
10
|
|
|
|
1,415
|
|
|
|
208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
|
|
|
|
(4,189
|
)
|
|
|
(1,154
|
)
|
|
Other income (expense), net
|
|
|
|
|
|
|
25
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss for the year
|
|
|
|
|
|
$
|
(4,214
|
)
|
|
$
|
(1,160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss used in the calculation of basic and diluted net loss per share
|
|
|
12
|
|
|
$
|
(687
|
)
|
|
$
|
(270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
|
12
|
|
|
$
|
(1.13
|
)
|
|
$
|
(0.49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding, basic and diluted
|
|
|
|
|
|
|
605,520
|
|
|
|
554,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-43
OTIC PHARMA LTD.
STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
U.S. Dollars in thousands except share data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares
|
|
|
|
|
|
|
|
|
Additional
Paid in
Capital
|
|
|
Receipts on
account of
shares
|
|
|
Accumulated
Deficit
|
|
|
Total
|
|
|
|
|
|
Preferred Shares
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amounts
|
|
|
Shares
|
|
|
Amounts
|
|
|
|
|
|
|
Balance as of December 31, 2013
|
|
|
554,681
|
|
|
$
|
1
|
|
|
|
2,368,826
|
|
|
$
|
7
|
|
|
$
|
4,144
|
|
|
$
|
291
|
|
|
$
|
(3,361
|
)
|
|
$
|
1,082
|
|
|
Issuance of shares and warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
765,436
|
|
|
|
2
|
|
|
|
1,498
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,500
|
|
|
Share-based payment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
81
|
|
|
|
—
|
|
|
|
—
|
|
|
|
81
|
|
|
Loss for the year
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,160
|
)
|
|
|
(1,160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2014
|
|
|
554,681
|
|
|
|
1
|
|
|
|
3,134,262
|
|
|
|
9
|
|
|
|
5,723
|
|
|
|
291
|
|
|
|
(4,521
|
)
|
|
|
1,503
|
|
|
Issuance of shares and warrants
|
|
|
146,024
|
(**)
|
|
|
—
|
|
|
|
940,092
|
|
|
|
2
|
(*)
|
|
|
5,381
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,383
|
|
|
Share-based payment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
110
|
|
|
|
—
|
|
|
|
—
|
|
|
|
110
|
|
|
Loss for the year
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,214
|
)
|
|
|
(4,214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2015
|
|
|
700,705
|
|
|
$
|
1
|
|
|
|
4,074,354
|
|
|
$
|
11
|
|
|
$
|
11,214
|
|
|
$
|
291
|
|
|
|
(8,735
|
)
|
|
$
|
2,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
Net of $51 of issuance expenses.
|
F-44
OTIC PHARMA LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. Dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
CASH FLOWS — OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Loss for the year
|
|
$
|
(4,214
|
)
|
|
$
|
(1,160
|
)
|
|
Adjustments to reconcile loss from operations to net cash used for operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
12
|
|
|
|
9
|
|
|
Share-based compensation to employees
|
|
|
110
|
|
|
|
81
|
|
|
License fees paid in shares
|
|
|
93
|
|
|
|
—
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in other receivables
|
|
|
(81
|
)
|
|
|
149
|
|
|
Increase in trade accounts payable
|
|
|
312
|
|
|
|
19
|
|
|
Decrease (increase) in other current liabilities
|
|
|
70
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for operating activities
|
|
|
(3,698
|
)
|
|
|
(912
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS—INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(62
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
(62
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS—FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Issuance of shares and warrants
|
|
|
5,290
|
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
5,290
|
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
1,530
|
|
|
|
588
|
|
|
Cash and cash equivalents—beginning of year
|
|
|
1,565
|
|
|
|
977
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents—end of year
|
|
$
|
3,095
|
|
|
$
|
1,565
|
|
|
|
|
|
|
|
|
|
|
|
F-45
OTIC PHARMA LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. Dollars in thousands except share and per share data
NOTE 1—GENERAL
Otic Pharma,
Ltd. (the “Company” or “Otic”) is a clinical-stage, specialty pharmaceutical company focused on the acquisition and development of products for disorders of the ear, nose, and throat (ENT). Otic was founded in Israel in 2008. In
2015, Otic established U.S. operations, Otic Pharma, Inc., (the “Subsidiary”) and moved its corporate headquarters to Southern California. Otic has two novel technologies that are initially being developed for conditions of the ear.
OP-01 is a foam-based technology. It was developed by Otic with the intent to be used as a delivery vehicle for drugs which are to be placed
into the ears, as well as the nasal and sinus cavities. OP-01 is currently being developed as an improved treatment option for acute otitis externa (AOE or “swimmers ear”), a common medical condition of the outer ear canal that globally
affects tens of millions of adults and children every year. Otic has completed four clinical trials, including a successful phase 2b study with a steroid-free, antibiotic-only formulation of OP-01 that performed similarly to standard of care. Otic
is now planning to further modify the foam formulation to create a clinically differentiated, best-in-class product for AOE that is an improvement to the standard of care.
OP-02 is a surfactant-based technology. It was originally developed by Otodyne, Inc. and subsequently licensed to Otic in November 2015. OP-02
is currently being developed as a potential first-in-class treatment option for patients with otitis media (OM) and Eustachian tube dysfunction (ETD). OM and ETD are common medical conditions of the middle ear that globally affects more than
700 million adults and children every year. OM is a common disorder seen in pediatric practice and it is the most frequent reason children are prescribed antibiotics and undergo surgery. OP-02 is a daily nasal spray, designed to improve and
maintain the Eustachian tube’s ability to drain and ventilate the middle ear. In 2017, Otic is planning to initiate phase 1 clinical studies to explore the safety and tolerability of OP-02, as well as explore how OP-02 affects the Eustachian
tube (pharmacodynamics). Studies will evaluate single and repeated intranasal doses of OP-02. Upon completion of these studies, Otic will begin phase 2 with a focus on prevention of acute, recurrent, and chronic OM in children.
GOING CONCERN:
To date
the Company has not generated revenues from its activities and has incurred substantial operating losses. Management expects the Company to continue to generate substantial operating losses and to continue to fund its operations primarily through
utilization of its current financial resources and through additional raises of capital.
Such conditions raise substantial doubts about
the Company’s ability to continue as a going concern. Management’s plan includes raising funds from outside potential investors. However, there is no assurance such funding will be available to the Company or that it will be obtained on
terms favorable to the Company or will provide the Company with sufficient funds to meet its objectives. These financial statements do not include any adjustments relating to the recoverability and classification of assets, carrying amounts or the
amount and classification of liabilities that may be required should the Company be unable to continue as a going concern.
NOTE 2—SIGNIFICANT
ACCOUNTING POLICIES
|
|
A.
|
Basis of Presentation:
|
The financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America (“U.S. GAAP”).
F-46
OTIC PHARMA LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. Dollars in thousands except share and per share data
NOTE 2—SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
B.
|
Use of estimates in the preparation of financial statements:
|
The preparation of
financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company’s management believes that the estimates,
judgment and assumptions used are reasonable based upon information available at the time they are made. These estimates, judgment and assumptions can affect reported amounts and disclosures made. Actual results could differ from those estimates.
|
|
C.
|
Financial Statements in U.S. Dollars:
|
The functional currency of the Company is the
U.S dollar (“USD”) since the U.S. dollar is the currency of the primary economic environment in which the Company has operated and expects to continue to operate in the foreseeable future.
Transactions and balances denominated in USD are presented at their original amounts. Transactions and balances denominated in foreign
currencies have been re-measured to USD in accordance with the provisions of ASC 830-10, “Foreign Currency Translation”.
All
transaction gains and losses from re-measurement of monetary balance sheet items denominated in non-dollar currencies are reflected in the statement of operations as financial income or expenses, as appropriate.
|
|
D.
|
Cash and cash equivalents:
|
Cash equivalents are short-term highly liquid investments
that are readily convertible to cash with maturities of three months or less as of the date acquired.
Restricted cash is primarily invested in highly liquid deposits with
original maturities of less than three months, which are used as securities for rental payments.
|
|
F.
|
Property and equipment:
|
Property and equipment are presented at cost less accumulated
depreciation and amortization. Depreciation and amortization are calculated based on the straight-line method over the estimated useful lives of the related assets or terms of the related leases, as follows:
|
|
|
|
|
|
|
%
|
|
Computers
|
|
33
|
|
Furniture and office equipment
|
|
7-20
|
|
Lab equipment
|
|
15
|
|
Leasehold improvement
|
|
over the related period
|
F-47
OTIC PHARMA LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. Dollars in thousands except share and per share data
NOTE 2—SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
G.
|
Share-based compensation:
|
The Company applies ASC 718-10, “Share-Based
Payment,” which requires the measurement and recognition of compensation expenses for all share-based payment awards, including employee stock options under the Company’s stock plans, based on estimated fair values. The value of the
portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company’s statement of operations.
The Company estimates the fair value of stock options granted as equity awards using the Black-Scholes options pricing model. The
option-pricing model requires a number of assumptions, of which the most significant are share price, expected volatility and the expected option term (the time from the grant date until the options are exercised or expire). Expected volatility
is estimated based on volatility of similar companies in the pharmaceutical sector. The Company has historically not paid dividends and has no foreseeable plans to issue dividends. The risk-free interest rate is based on the yield from governmental
zero-coupon bonds with an equivalent term. The expected option term is calculated using the “simplified” method.
|
|
H.
|
Basic and diluted net loss per share:
|
Basic loss per share is computed by dividing the
net loss, as adjusted to include preferred shares dividend participation rights as well as interest accumulated on preferred shares, by the weighted average number of ordinary shares outstanding during the year. Shares and preferred shares
contingently issuable for little or no cash are included in basic loss per share on an as issued basis.
Diluted loss per share is
computed by dividing the net loss, as adjusted to include preferred shares dividend participation rights as well as interest accumulated on preferred shares, of preferred shares outstanding during the year as well as of preferred shares that would
have been outstanding if all potentially dilutive preferred shares had been issued, by the weighted average number of ordinary shares outstanding during the year, plus the number of ordinary shares that would have been outstanding if all potentially
dilutive ordinary shares had been issued, using the treasury stock method, in accordance with ASC 260-10 “Earnings per Share”.
Potentially dilutive shares were excluded from the calculation of diluted loss per share for all periods presented due to their anti-dilutive
effect. The number of such anti-dilutive shares excluded from the calculation is 2,195,101 and 1,316,418 for the year ended December 31, 2015 and 2014, respectively.
|
|
I.
|
Research and development expenses, net:
|
Research and development expenses, are charged
to the statement of operations as incurred. Grants for funding of approved research and development projects are recognized at the time the Company is entitled to such grants, on the basis of the costs incurred and applied as a deduction from the
research and development expenses.
|
|
J.
|
Fair value of financial instruments:
|
The financial instruments of the company consist
mainly of cash and cash equivalents, other receivables, restricted cash, trade accounts payable and other current liabilities. In view of their nature,
F-48
OTIC PHARMA LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. Dollars in thousands except share and per share data
NOTE 2—SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
J.
|
Fair value of financial instruments (Cont.):
|
the fair value of the financial instruments included in working capital of the Company is
usually identical or substantially similar to their carrying amounts.
|
|
(1)
|
The Company uses the liability method to determine its income tax expense as required under the Statement of ASC 740-10. ASC 740-10 requires the establishment of a deferred tax asset or liability for the
recognition of future deductible or taxable temporary differences and operating loss carry forwards. Valuation allowances are established when necessary; to reduce deferred tax assets, if it is more likely than not that all or a portion of it will
not be realized.
|
|
|
(2)
|
The Company does not create deferred tax assets for accumulated tax losses and timing differences, since there is no certainty for taxable income in the foreseeable future.
|
|
|
L.
|
Recent Accounting Standards
|
In May 2014, the Financial Accounting Standards Board (the
“FASB”) issued a new standard to achieve a consistent application of revenue recognition within the U.S., resulting in a single revenue model to be applied by reporting companies under U.S. generally accepted accounting principles. Under
the new model, recognition of revenue occurs when a customer obtains control of the promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In
addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard is effective beginning in the first quarter of 2018;
early adoption is prohibited. The new standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application.
As the Company has not incurred revenues to date, it is unable to determine the expected impact the new standard will have on its consolidated financial statements.
In January 2016, the FASB issued an amended standard requiring changes to recognition and measurement of certain financial assets and
liabilities. The standard primarily affects equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. This standard is effective beginning in the first quarter
of 2018. Certain provisions allow for early adoption. The Company does not expect that the adoption of this standard will have a significant impact on the financial position or results of operations.
In February 2016, the FASB issued a new lease accounting standard requiring the recognition of lease assets and liabilities on the balance
sheet. This standard is effective beginning in the first quarter of 2019; early adoption is permitted. The Company has not yet determined the impact of the new standard on its consolidated financial statements.
In March 2016, the FASB issued an accounting standard update aimed at simplifying the accounting for share-based payment transactions.
Included in the update are modifications to the accounting for income taxes upon vesting or settlements of awards, employer tax withholding on share-based
F-49
OTIC PHARMA LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. Dollars in thousands except share and per share data
NOTE 2—SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
L.
|
Recent Accounting Standards (Cont.)
|
compensation, forfeitures, and financial statement presentation of excess tax benefits. This standard is effective beginning in the first quarter of 2017; early adoption is permitted. The Company
does not expect that the adoption of this standard will have a significant impact on the financial position or results of operations.
In
June 2016, the FASB issued a new standard requiring measurement and recognition of expected credit losses on certain types of financial instruments. The new standard also modifies the impairment model for available-for-sale debt securities and
provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. This standard is effective beginning in the first quarter of 2020; early adoption is permitted starting from the first
quarter of 2019. The Company does not expect that the adoption of this standard will have a significant impact on the financial position or results of operations.
NOTE 3—OTHER CURRENT RECEIVABLES
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
Prepaid expenses
|
|
$
|
70
|
|
|
$
|
12
|
|
|
Government institutions
|
|
|
25
|
|
|
|
10
|
|
|
Income receivable- Office of Chief Scientist (“OCS”)
|
|
|
5
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
100
|
|
|
$
|
32
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 4—PROPERTY AND EQUIPMENT, NET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computer
and
software
|
|
|
Furniture
and office
equipment
|
|
|
Lab
equipment
|
|
|
Leasehold
improvement
|
|
|
Total
|
|
|
Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 1, 2015
|
|
$
|
15
|
|
|
$
|
7
|
|
|
$
|
35
|
|
|
$
|
—
|
|
|
$
|
57
|
|
|
Additions
|
|
|
6
|
|
|
|
54
|
|
|
|
—
|
|
|
|
2
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
|
21
|
|
|
|
61
|
|
|
|
35
|
|
|
|
2
|
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 1, 2015
|
|
|
12
|
|
|
|
2
|
|
|
|
17
|
|
|
|
—
|
|
|
|
31
|
|
|
Additions
|
|
|
3
|
|
|
|
4
|
|
|
|
5
|
|
|
|
—
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
|
15
|
|
|
|
6
|
|
|
|
22
|
|
|
|
—
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
$
|
6
|
|
|
$
|
55
|
|
|
$
|
13
|
|
|
$
|
2
|
|
|
$
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2014
|
|
$
|
3
|
|
|
$
|
5
|
|
|
$
|
18
|
|
|
$
|
—
|
|
|
$
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 5—EMPLOYEE RIGHTS UPON RETIREMENT
Israeli labor law generally requires payment of severance pay upon dismissal of an employee or upon termination of employment in certain other
circumstances.
F-50
OTIC PHARMA LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. Dollars in thousands except share and per share data
NOTE 5—EMPLOYEE RIGHTS UPON RETIREMENT (Cont.)
Pursuant to section 14 of the Severance Compensation Act, 1963, the Company’s employees
covered under this section are entitled to monthly deposits, at a rate of 8.33% of their monthly salary, made in their name with insurance companies. Payments in accordance with section 14 relieve the Company from any future severance payments in
respect of those employees.
The Company is not statutorily required by U.S. law to pay severance upon termination of employment in
respect of its U.S. employees.
NOTE 6—OTHER CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
Employees and related institutions
|
|
$
|
149
|
|
|
$
|
66
|
|
|
Accrued expenses and others
|
|
|
13
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
162
|
|
|
$
|
92
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 7—COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
Grant
|
|
U.S.
Dollars in
thousands
|
|
|
Conditions
|
|
OCS
|
|
$
|
537
|
|
|
As of December 31, 2015, the Company received loans in the amount of approximately $537 thousands from the OCS designated for the Company’s investments in research and development. The said loans are linked to
the Dollar and bear annual interest of LIBOR. The loans are to be repaid out of royalties from sales of the products developed by the Company from the investments in research and development.
|
|
OCS grants receivable
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In September 2015, the Subsidiary entered into a Lease Agreement (the
“Lease Agreement”) for approximately 5,113 square feet of office space located in Irvine, California. The lease has a 36-month term beginning September 1, 2015. Monthly rent begins at $13 per month, with scheduled annual rent
increases of 4% thereafter.
In November 2015, the Subsidiary entered into an Exclusive License
Agreement (the “License Agreement”) with Scientific Development and Research Inc. and Otodyne Inc. (the “Licensors”). According to which the Licensors shall provide the License Technology, as defined in the License
F-51
OTIC PHARMA LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. Dollars in thousands except share and per share data
NOTE 7—COMMITMENTS AND CONTINGENCIES (Cont.)
Agreement, to the Subsidiary. In return to the License Agreement, the Subsidiary will pay to the Licensors a license fee in a total amount of $600, and the Company will issue to the Licensors
88,024 Ordinary Shares NIS 0.01 par value each (see note 8 D). In addition, the Subsidiary will pay additional amount of $100 as a Technology Transfer Fee as defined in the License Agreement, and future milestones and royalty payments, as defined
and detailed in the License Agreement.
As of Dec 31 2015, the Company paid to the Licensors $650 in cash as well as $93 in ordinary
shares. The related expense was included in the statement of operations as research and development expense. The share-based expense was valued based on an estimated ordinary share price of $1.06.
NOTE 8—SHARE CAPITAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
|
Authorized
|
|
|
Issued
|
|
|
Authorized
|
|
|
Issued
|
|
|
|
|
Number of shares
|
|
|
Number of shares
|
|
|
Ordinary Shares of NIS 0.01 nominal value
|
|
|
8,600,118
|
|
|
|
700,705
|
|
|
|
6,000,010
|
|
|
|
554,681
|
|
|
Preferred A Shares NIS 0.01 nominal value
|
|
|
691,000
|
|
|
|
493,551
|
|
|
|
691,000
|
|
|
|
493,551
|
|
|
Preferred B Shares NIS 0.01 nominal value
|
|
|
4,327,590
|
|
|
|
2,640,711
|
|
|
|
4,327,590
|
|
|
|
2,640,711
|
|
|
Preferred C Shares NIS 0.01 nominal value
|
|
|
940,092
|
|
|
|
940,092
|
|
|
|
—
|
|
|
|
—
|
|
|
Receipts on account of Preferred A Shares
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,558,800
|
|
|
|
4,775,059
|
|
|
|
11,018,600
|
|
|
|
3,688,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares:
Ordinary Shares confer upon the holders thereof the right to receive notice of, participate in, and vote at general meetings of the Company.
Holders also have the right to receive cash and stock dividends, if declared or upon dissolution, subject to the preferential rights of the holders of the series of Preferred Shares.
Preferred Shares:
Preferred Shares are convertible into ordinary shares at the option of their holders, and confer upon their holders all rights accruing to
holders of Ordinary Shares in the Company on an as converted basis. In addition, holders of Preferred Shares are entitled to preference upon a liquidation event and upon distribution of dividends, plus 8% annual interest calculated on the preferred
share original issue price, as further detailed in the Company’s Articles of Association.
Interest accumulated on preferred shares
as of December 31 2015 and 2014 was $1,800 and $1,150, respectively.
F-52
OTIC PHARMA LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. Dollars in thousands except share and per share data
NOTE 8—SHARE CAPITAL (Cont.)
Receipts on account of Preferred A Shares:
On June 20, 2010, Incentive II Management Ltd. (“Incentive”) provided Otic Pharma with a loan (the “Incentive Loan”)
under a Convertible Loan Agreement (the “Loan Agreement”) between Otic Pharma and Incentive. As part of the closing of the Series B Preferred Shares Purchase Agreement in February 2012, Incentive, Otic Pharma and the Series B
Investors agreed that the Incentive Loan provided by Incentive shall be convertible by Incentive into 196,714 Preferred A Shares (the “Incentive A Shares”), which conversion shall occur upon request by Incentive (the “Formal
Conversion”). Until the Formal Conversion, the Incentive A Shares that are issuable to Incentive are deemed issued and outstanding and held by Incentive for all intents and purposes and the loan provided shall be deemed, for all intents
and purposes, as repaid in full pursuant to its terms. As the underlying shares have not been issued as of December 31, 2015, the funds received in their regard are presented as receipts on account of shares on the Company’s
shareholders equity statement.
|
|
B.
|
During 2012-2013, the Company entered into the Share Purchase Agreement and into several amendments thereto (the “Series B SPA”) with OrbiMed and other investors (collectively, “the Series B
Investors”). In accordance with the Series B SPA, the Series B Investors invested during 2012-2014 a total amount of $4,730 for 2,413,676 Series B Preferred Shares and 1,577,818 warrants.
|
In addition, pursuant the Series B SPA, the convertible loans provided to the Company by the lenders in the aggregate amount of $330 were
converted into 227,035 Series B Preferred Shares and 109,056 warrants to purchase Series B Preferred Shares.
|
|
C.
|
In May, October and November 2015, the Company entered into a Share Purchase Agreement and into several amendments thereto (the “Series C SPA”) with existing and new investors (collectively, the
“Series C Investors”). In accordance to the Series C SPA, the Investors invested $5,340 for 940,092 Series C Preferred Shares. In addition, the Series C Investors received 286,435 Warrants to purchase 286,435 Ordinary Shares of the Company
at an exercise price equal to the underlying shares par value.
|
|
|
D.
|
In November 2015, the Company issued 88,024 Ordinary Shares, as part of the License Agreement. See Note 7 (C).
|
|
|
(1)
|
In May 2015, the Company entered into a Restricted Share Award Agreement with a Director (the “Director”), according to which the Company shall issue to the Director 58,000 restricted Ordinary Shares
(the “Restricted Share”) for a total consideration of $61 thousands. The Company has the right and option to purchase from the Director some or all of the Restricted Shares issued, as defined and detailed in the Restricted Share Award
Agreement (the “Purchase Option”). The shares will be released from the Company’s Purchase Option during a period of 4 years.
|
|
|
(2)
|
During 2014, the Company’s Board of Directors approved a placement of 14,500 options to Company’s employee. The Options were granted in accordance with the “capital gains route” provided under
Sections 102 of the Income Tax Ordinance.
|
F-53
OTIC PHARMA LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. Dollars in thousands except share and per share data
NOTE 8—SHARE CAPITAL (Cont.)
The options shall vest as follows: 25% of the options shall vest on the first anniversary of
the vesting Commencement date. The remaining options shall vest in equal monthly installments for a period of 36 Months.
During 2015,
the employee’s employment ended and accordingly, all the 14,500 options expired.
|
|
(3)
|
During 2015, the Company’s Board of Directors approved an additional placement of 1,021,864 options to the Company’s employees, director and the Subsidiary employees. The Options were granted in
accordance with the “capital gains route” provided under Sections 102 of the Income Tax Ordinance, and section 409A according to the IRS Code.
|
180,825 options granted shall vest in accordance with several milestones and/or achievements, and another 899,039 options granted shall vest
as follows: 25% of the options shall be vested on the first anniversary of the vesting commencement date, and 75% of the Options shall be vested on a quarterly basis during the next 3 years.
|
|
(4)
|
The parameters used for purposes of the model were as follows:
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
|
2015
|
|
2014
|
|
Exercise price (USD)
|
|
$1.06
|
|
$0.58
|
|
Fair value per share (USD)
|
|
$1.06
|
|
$1.06
|
|
Anticipated volatility (*) (Percentage)
|
|
93
|
|
93
|
|
Term of the option (in years)
|
|
5.5-7
|
|
5.5-7
|
|
Risk-free interest rate (Percentage) (**)
|
|
0.95
|
|
0.98
|
|
|
(*)
|
Expected volatility was determined based on historical volatility of stock prices of similar publicly-traded companies, who operate in the same field and have a similar business risk level.
|
|
|
(**)
|
Risk-free interest rate was derived from the interest curve of U.S. Government Treasury Bonds for a period corresponding to the term of the options when granted.
|
F-54
OTIC PHARMA LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. Dollars in thousands except share and per share data
NOTE 8—SHARE CAPITAL (Cont.)
|
|
(5)
|
A summary of activity of options granted to purchase the Company’s Shares under the Company’s share option plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
Number
of
options
|
|
|
Weighted
average
exercise
price
|
|
|
Number
of
options
|
|
|
Weighted
average
exercise
price
|
|
|
Outstanding at beginning of year
|
|
|
179,025
|
|
|
$
|
0.39
|
|
|
|
164,525
|
|
|
$
|
0.37
|
|
|
Granted
|
|
|
1,021,864
|
|
|
$
|
1.06
|
|
|
|
14,500
|
|
|
$
|
0.58
|
|
|
Expired
|
|
|
(14,500
|
)
|
|
$
|
0.58
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
1,186,389
|
|
|
$
|
0.97
|
|
|
|
179,025
|
|
|
$
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total stock-based compensation expense for the year ended December 31, 2015 resulting from options
granted to employees in a total amount of $98, is included in the Company’s statement of operations as general and administrative expenses.
|
|
(6)
|
Options issued to non-employees:
|
The Company’s outstanding options to
non-employees as of December 31, 2015, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to
Common
stock
|
|
|
Weighted
average
exercise price
|
|
|
Options
exercisable
|
|
|
July 2012
|
|
|
47,724
|
|
|
$
|
0.36
|
|
|
|
46,151
|
|
|
December 2015
|
|
|
125,000
|
|
|
$
|
1.06
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172,724
|
|
|
$
|
0.70
|
|
|
|
56,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total stock-based compensation expense for the year ended December 31, 2015 resulting from
options granted to non—employees in a total amount of $4, included in the Company’s statement of operations in the general and administrative expenses.
F-55
OTIC PHARMA LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. Dollars in thousands except share and per share data
NOTE 9—RESEARCH AND DEVELOPMENT EXPENSES, NET
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
|
|
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
Subcontractors and consultants
|
|
$
|
1,138
|
|
|
$
|
386
|
|
|
License fee (*)
|
|
|
743
|
|
|
|
—
|
|
|
Salaries and related expenses
|
|
|
739
|
|
|
|
468
|
|
|
Vehicle maintenance
|
|
|
62
|
|
|
|
58
|
|
|
Patents
|
|
|
59
|
|
|
|
63
|
|
|
Travel abroad
|
|
|
57
|
|
|
|
14
|
|
|
Share-based payments
|
|
|
34
|
|
|
|
81
|
|
|
Depreciation
|
|
|
9
|
|
|
|
9
|
|
|
Materials
|
|
|
1
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,842
|
|
|
|
1,088
|
|
|
Less—Grants from OCS
|
|
|
(68
|
)
|
|
|
(142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,774
|
|
|
$
|
946
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 10—GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
|
|
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
Professional services
|
|
$
|
699
|
|
|
$
|
139
|
|
|
Salaries and related expenses
|
|
|
377
|
|
|
|
11
|
|
|
Rent and office maintenance
|
|
|
171
|
|
|
|
58
|
|
|
Travel abroad
|
|
|
77
|
|
|
|
—
|
|
|
Share-based payments
|
|
|
76
|
|
|
|
—
|
|
|
Investor relations
|
|
|
12
|
|
|
|
—
|
|
|
Depreciation
|
|
|
3
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,415
|
|
|
$
|
208
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 11—TAXES ON INCOME
The Company is subject to income taxes under the Israeli and U.S. tax laws:
|
|
|
The Company is subject to Israeli corporate tax rate of 26.5% in the years 2015 and 2014, 25% in the year 2016, 24% in 2017 and 23% from 2018.
|
|
|
|
The Company is subject to a blended U.S. tax rate (Federal as well as state corporate tax) of 35%.
|
F-56
OTIC PHARMA LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. Dollars in thousands except share and per share data
NOTE 11—TAXES ON INCOME (Cont.)
|
|
2.
|
As of December 31, 2015, the Company generated net operating losses in Israel of approximately $5,125, which may be carried forward and offset against taxable income in the future for an indefinite period.
|
|
|
|
As of December 31, 2015, the Company generated net operating losses in the U.S. of approximately $919. Net operating losses in the United States are available through 2035. Utilization of U.S. net operating losses
may be subject to substantial annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses
before utilization.
|
|
|
3.
|
The Company is still in its development stage and has not yet generated revenues, therefore, it is more likely than not that sufficient taxable income will not be available for the tax losses to be utilized in
the future. Therefore, a valuation allowance was recorded to reduce the deferred tax assets to its recoverable amounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31
|
|
|
|
|
2015
|
|
|
2014
|
|
|
Net loss carry-forward
|
|
$
|
1,680
|
|
|
$
|
929
|
|
|
Other reserves
|
|
|
418
|
|
|
|
223
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
2,098
|
|
|
|
1,152
|
|
|
Valuation allowance
|
|
|
(2,098
|
)
|
|
|
(1,152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 12—BASIC LOSS PER SHARE
The loss and weighted average number of ordinary shares used in the calculation of basic loss per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net loss available to shareholders of the company
|
|
$
|
(4,214
|
)
|
|
$
|
(1,160
|
)
|
|
Interest accumulated on preferred shares and on preferred shares contingently issuable
for little or no cash
|
|
|
(651
|
)
|
|
|
(374
|
)
|
|
Net loss attributable to shareholders of preferred shares and to shareholders of
preferred shares contingently issuable for little or no cash
|
|
|
4,178
|
|
|
|
1,264
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss used in the calculation of basic loss per share
|
|
|
(687
|
)
|
|
|
(270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted average number of ordinary shares
|
|
|
605,520
|
|
|
|
554,681
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
$
|
(1.13
|
)
|
|
$
|
(0.49
|
)
|
|
|
|
|
|
|
|
|
|
|
F-57
OTIC PHARMA LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. Dollars in thousands except share and per share data
NOTE 13—TRANSACTIONS WITH RELATED PARTIES
Transactions with related parties:
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For the year ended
December 31,
|
|
|
|
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2015
|
|
|
2014
|
|
|
Consulting fees to related
parties
(1)
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|
$
|
44
|
|
|
$
|
50
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|
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|
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|
|
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In the fiscal years ended December 31, 2015 and 2014, consulting fees were paid to a member of the
Board.
NOTE 14—SUBSEQUENT EVENTS
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(1)
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In July 2016, the Company entered into a Convertible Loan Agreement (the “CLA”) with current Investors (the “Investors”). In accordance with the CLA, the Company will receive from the
Investors, a Bridge Financing in an aggregate amount of $2,930 (the “Bridge Financing Amount”) as defined in the CLA. As of the date of the approval of the financial statements, the Company received a total amount of $2,930.
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(2)
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In September 2016, the Company consolidated the oversight and management of all research and development activities to the Subsidiary. The Group expects operations in the Israel office to conclude by
November 30, 2016. Intellectual property will remain under the ownership of the Company.
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(3)
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On December 21, 2016, the Company entered into a Share Purchase Agreement to merge with Tokai in an all-stock transaction. On a pro forma basis, based upon the number of shares of Tokai common stock to be
issued in accordance with the Share Purchase Agreement, Tokai equity holders will own approximately 40% of the combined company and Otic equity holders will own approximately 60% of the combined company. The transaction has been approved by the
board of directors of both companies and by the shareholders of Otic. The transaction is expected to close in the first half of 2017, subject to the approval of the stockholders of Tokai and other customary closing conditions, as detailed in the
Share Purchase Agreement.
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In connection with the transaction, Otic will be deemed to be the accounting acquirer and
therefore the transaction will be treated as a reverse acquisition because (i) Otic security holders are expected to own approximately 60% of the voting interests of the combined company immediately following the closing of the transaction;
(ii) directors appointed by Otic will hold a majority of the board seats in the combined company; and (iii) Otic management will hold all key positions in the management of the combined company.
F-58
Otic Pharma, Ltd.
Consolidated Balance Sheets
(in thousands, except share and per share data)
(unaudited)
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September 30,
2016
|
|
|
December 31,
2015
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|
Assets
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|
|
|
|
|
|
|
|
|
Current assets:
|
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|
|
|
|
|
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Cash and cash equivalents
|
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$
|
2,372
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|
|
$
|
3,095
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|
|
Restricted cash
|
|
|
14
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|
|
|
14
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|
Other current assets
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|
|
71
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|
|
100
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|
|
|
|
|
|
|
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Total current assets
|
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|
2,457
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|
|
|
3,209
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Property and equipment, net
|
|
|
72
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|
|
|
76
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Other non-current assets
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|
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—
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
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|
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Total assets
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$
|
2,529
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|
|
$
|
3,298
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Liabilities and Shareholders’ Deficit
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Current liabilities:
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Accounts payable
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$
|
68
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$
|
354
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|
Accrued expenses
|
|
|
230
|
|
|
|
162
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|
Convertible debt
|
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|
3,447
|
|
|
|
—
|
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|
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|
|
|
|
|
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Total current liabilities
|
|
|
3,745
|
|
|
|
516
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|
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|
|
|
|
|
|
|
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Total liabilities
|
|
|
3,745
|
|
|
|
516
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|
|
|
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|
|
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Commitments and contingencies (Note 5)
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Shareholders’ deficit:
|
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|
|
|
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Ordinary Shares, NIS 0.01 par value, 740,215 and 700,705 shares issued and outstanding
at September 30, 2016 and December 31, 2015, respectively
|
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1
|
|
|
|
1
|
|
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Preferred Shares, NIS 0.01 par value, 4,074,354 shares issued and outstanding at
September 30, 2016 and December 31, 2015
|
|
|
11
|
|
|
|
11
|
|
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Additional paid-in capital
|
|
|
11,356
|
|
|
|
11,214
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|
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Receipts on account of Preferred A Shares
|
|
|
291
|
|
|
|
291
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|
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Accumulated deficit
|
|
|
(12,875
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)
|
|
|
(8,735
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)
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|
|
|
|
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|
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Total shareholders’ deficit
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|
|
(1,216
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)
|
|
|
2,782
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|
|
|
|
|
|
|
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|
|
|
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Total liabilities and shareholders’ deficit
|
|
$
|
2,529
|
|
|
$
|
3,298
|
|
|
|
|
|
|
|
|
|
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See notes to consolidated financial statements.
F-59
Otic Pharma, Ltd.
Consolidated Statements of Operations
(in thousands, except share and per share data)
(unaudited)
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Nine months ended
September 30,
|
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|
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2016
|
|
|
2015
|
|
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Revenue
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Operating expenses:
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|
|
|
|
|
|
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Research and development expenses, net
|
|
|
2,335
|
|
|
|
1,521
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|
|
General and administrative expenses
|
|
|
1,326
|
|
|
|
566
|
|
|
|
|
|
|
|
|
|
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|
|
Total operating expenses
|
|
|
3,661
|
|
|
|
2,087
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(3,661
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)
|
|
|
(2,087
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)
|
|
Other income (expense), net
|
|
|
(479
|
)
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,140
|
)
|
|
$
|
(2,070
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net loss used in the calculation of basic and diluted net loss per
share
|
|
$
|
(718
|
)
|
|
$
|
(582
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
|
$
|
(1.01
|
)
|
|
$
|
(0.65
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding, basic and diluted
|
|
|
711,231
|
|
|
|
898,436
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-60
Otic Pharma, Ltd.
Consolidated Statements of Cash Flows
(in thousands, except share and per share data)
(unaudited)
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|
|
Nine months ended
September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,140
|
)
|
|
$
|
(2,070
|
)
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
16
|
|
|
|
7
|
|
|
Share-based compensation expense
|
|
|
142
|
|
|
|
31
|
|
|
Fair value of debt in excess of proceeds
|
|
|
517
|
|
|
|
—
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
|
Other current and non-current assets
|
|
|
42
|
|
|
|
(46
|
)
|
|
Restricted cash
|
|
|
—
|
|
|
|
14
|
|
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(286
|
)
|
|
|
301
|
|
|
Accrued expenses
|
|
|
68
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(3,641
|
)
|
|
|
(1,724
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(12
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(12
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from convertible loan
|
|
|
2,930
|
|
|
|
—
|
|
|
Proceeds from issuance of Series C Preferred stock
|
|
|
—
|
|
|
|
1,903
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
2,930
|
|
|
|
1,903
|
|
|
|
|
|
|
|
|
|
|
|
|
N
et increase (decrease) in cash and cash equivalents
|
|
|
(723
|
)
|
|
|
172
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
3,095
|
|
|
|
1,565
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
2,372
|
|
|
$
|
1,737
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-61
Notes to the Consolidated Financial Statements (unaudited)
Note 1. Description of Business
Otic Pharma, Ltd. (the “Company” or “Otic”) is a clinical-stage, specialty pharmaceutical company focused on the
acquisition and development of products for disorders of the ear, nose, and throat (ENT). Otic was founded in Israel in 2008. In 2015, Otic established U.S. operations, Otic Pharma, Inc., (the “Subsidiary”) and moved its corporate
headquarters to Southern California. Otic has two novel technologies that are initially being developed for conditions of the ear.
OP-01
is a foam-based technology. It was developed by Otic with the intent to be used as a delivery vehicle for drugs which are to be placed into the ears, as well as the nasal and sinus cavities. OP-01 is currently being developed as an improved
treatment option for acute otitis externa (AOE or “swimmers ear”), a common medical condition of the outer ear canal that globally affects tens of millions of adults and children every year. Otic has completed four clinical trials,
including a successful phase 2b study with a steroid-free, antibiotic-only formulation of OP-01 that performed similarly to standard of care. Otic is now planning to further modify the foam formulation to create a clinically differentiated,
best-in-class product for AOE that is an improvement to the standard of care.
OP-02 is a surfactant-based technology. It was originally
developed by Otodyne, Inc. and subsequently licensed to Otic in November 2015. OP-02 is currently being developed as a potential first-in-class treatment option for patients with otitis media (OM) and Eustachian tube dysfunction (ETD). OM and ETD
are common medical conditions of the middle ear that globally affects more than 700 million adults and children every year. OM is a common disorder seen in pediatric practice and it is the most frequent reason children are prescribed
antibiotics and undergo surgery. OP-02 is a daily nasal spray, designed to improve and maintain the Eustachian tube’s ability to drain and ventilate the middle ear. In 2017, Otic is planning to initiate phase 1 clinical studies to explore the
safety and tolerability of OP-02, as well as explore how OP-02 affects the Eustachian tube (pharmacodynamics). Studies will evaluate single and repeated intranasal doses of OP-02. Upon completion of these studies, Otic will begin phase 2 with a
focus on prevention of acute, recurrent, and chronic OM in children.
Otic has no products approved for commercial sale. Otic has not
generated any revenue and has incurred significant operating losses in each year since its inception in 2008. Substantially all of Otic’s operating losses resulted from expenses incurred in connection with its research and development programs
and from general and administrative costs associated with its operations. Otic will need to expend substantial resources and expects to continue to generate operating losses for the foreseeable future as it continues to pursue its research and
development programs for the treatment of AOE and OM. Otic is subject to a number of risks and uncertainties similar to those of other life science companies developing new products, including, among others, the risks related to the necessity to
obtain adequate additional financing, to successfully develop product candidates, to obtain regulatory approval of product candidates, to comply with government regulations, to successfully commercialize its potential products, to the protection of
proprietary technology and to the dependence on key individuals. Furthermore, due to the uncertainty of pharmaceutical product development, Otic may never achieve future revenue through product sales, licensing or partnership agreements. Such
conditions raise substantial doubts about the Company’s ability to continue as a going concern.
From inception through
September 30, 2016, the Company has raised net cash proceeds of approximately $14.4 million from private investors through both equity and convertible debt financing to fund operating activities. As of September 30, 2016, the Company had
an accumulated deficit of $12.9 million and $2.4 million of cash and cash equivalents Based upon current operating plans, Otic expects the proceeds from the Equity Financing along with net cash held by each of Tokai and Otic upon consummation of the
Otic Transaction, will be sufficient to fund operations into the second half of 2018. There can be no assurance that the Otic Transaction or the Equity Financing will close. If the Otic Transaction and Equity Financing are not consummated, Otic will
be required to obtain additional financing to continue operations. There can be no
F-62
assurance that any such financing can be obtained by the Company, or if obtained, what the terms thereof may be, or that any amount that the Company is able to raise will be adequate to support
the Company’s working capital requirements until it achieves profitable operations.
Cash requirements may vary materially from those
now planned because of changes in the Company’s focus and direction of its research and development programs, competitive and technical advances, patent developments, regulatory changes or other developments. Additional financing will be
required to continue operations after the Company exhausts its current cash resources and anticipated cash proceeds from the Otic Transaction and Equity Financing and to continue its long-term plans for clinical trials and new product development.
There can be no assurance that any such financing can be obtained by the Company, or if obtained, what the terms thereof may be, or that any amount that the Company is able to raise will be adequate to support the Company’s working capital
requirements until it achieves profitable operations.
The balance sheet at December 31, 2015 was derived from audited financial
statements, but does not include all disclosures required by U.S. generally accepted accounting principles (“GAAP”). The accompanying unaudited financial statements as of September 30, 2016 and for the nine months ended
September 30, 2016 and 2015 have been prepared by Otic pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Otic believes, however, that the disclosures are adequate to make the information presented not misleading.
These financial statements should be read in conjunction with Otic’s audited financial statements and the notes thereto for the year ended December 31, 2015 included in this proxy statement. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments necessary for a fair statement of the Company’s financial position as of September 30, 2016 and results of operations for the nine months ended September 30, 2016 and 2015 and cash flows
for the nine months ended September 30, 2016 and 2015 have been made. The results of operations for the nine months ended September 30, 2016 and 2015 are not necessarily indicative of the results of operations that may be expected for the
year ending December 31, 2016.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The
accompanying interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and in accordance with
the rules and regulations of the Securities and Exchange Commission (‘SEC”) for interim financial statements. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for
complete financial statements. The consolidated financial statements reflect all adjustments which are of a normal recurring nature and, in the opinion of management, necessary to a fair statement of the results for the periods presented herein. The
unaudited consolidated interim financial statements have been prepared on the same basis as the annual financial statements. These interim financial results are not necessarily indicative of the results to be expected for the year ending
December 31, 2016, or for any other future annual or interim period. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited financial statements and the related notes thereto included herein.
The consolidated financial statements include the accounts of the Company and its Subsidiary. Intercompany transactions and balances have
been eliminated upon consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, and disclosure of contingent
F-63
assets and liabilities, at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Significant estimates in the financial statements include accrued expenses and share based compensation.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and its Subsidiary. Intercompany transactions and balances have been
eliminated upon consolidation.
Cash and cash equivalents
Cash equivalents consist of demand deposits in banks and other short-term, highly liquid investments with original maturities of less than
three months.
Restricted cash
Restricted cash is primarily used as security for rental payments and is invested in highly liquid deposits with original maturities of less
than three months.
Fair value of financial instruments
The Company measures the fair value of certain of its financial instruments on a recurring basis. A fair value hierarchy is used to rank the
quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
|
|
•
|
|
Level 1—Quoted prices (unadjusted) in active markets for identical assets and liabilities.
|
|
|
•
|
|
Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as unadjusted quoted prices for similar assets and liabilities, unadjusted quoted prices in the markets that are not
active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
|
•
|
|
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
At September 30, 2016 and December 31, 2015, the Company’s financial instruments included cash and cash equivalents and
restricted cash. As of September 30, 2016, the Company’s financial instruments also included short-term convertible debt. The carrying amount of cash and cash equivalents, restricted cash and short-term convertible debt approximates fair
value due to the short-term maturities of these instruments.
Property and equipment
Property and equipment are presented at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated
based on the straight-line method over the estimated useful lives of the related assets or terms of the related leases.
In accordance
with ASC 360-10 (formerly “SFAS No. 144”, “Accounting for Impairment or Disposal of Long-Lived Assets” of the FASB), Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable based on estimated future undiscounted cash flows. If so indicated an impairment loss would be recognized for the difference between the carrying amount of the asset and its fair value
.
As of September 30, 2016, no impairment expenses have been recorded.
F-64
Convertible Notes
Convertible notes with characteristics of both liabilities and equity are classified as either debt or equity based on the characteristics of
their monetary value, with convertible notes classified as debt being measured at fair value, in accordance with ASC 480-10, “Accounting for Certain Financial instruments with Characteristics of both Liabilities and Equity”.
Net Loss Per Share
Basic loss
per share is computed by dividing the net loss, as adjusted to include preferred shares dividend participation rights as well as interest accumulated on preferred shares, by the weighted average number of ordinary shares outstanding during the year.
Shares and preferred shares contingently issuable for little or no cash are included in basic loss per share on an as issued basis.
Diluted loss per share is computed by dividing the net loss, as adjusted to include preferred shares dividend participation rights as well as
interest accumulated on preferred shares, of preferred shares outstanding during the year as well as of preferred shares that would have been outstanding if all potentially dilutive preferred shares had been issued, by the weighted average number of
ordinary shares outstanding during the year, plus the number of ordinary shares that would have been outstanding if all potentially dilutive ordinary shares had been issued, using the treasury stock method, in accordance with ASC 260-10
“Earnings per Share”.
Potentially dilutive shares were excluded from the calculation of diluted loss per share for all periods
presented due to their anti-dilutive effect.
The following common share equivalents outstanding as of September 30, 2016 and 2015
were excluded from the computation of diluted net loss per share for the nine months ended September 30, 2016 and 2015 because they had an anti-dilutive impact:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Stock options
|
|
|
1,096,079
|
|
|
|
179,025
|
|
|
Stock warrants
|
|
|
1,942,908
|
|
|
|
1,656,473
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,038,987
|
|
|
|
1,835,498
|
|
|
|
|
|
|
|
|
|
|
|
Recognition of expenses in outsourced contracts
Pursuant to management’s assessment of the services that have been performed on OP-01 and OP-02 clinical trials and other contracts, the
Company recognizes expense as the services are provided. Such management assessments include, but are not limited to: (1) an evaluation by the project manager of the work that has been completed during the period; (2) measurement of
progress prepared internally and/or provided by the third-party service provider; (3) analyses of data that justify the progress; and (4) management’s judgment. Several of the Company’s contracts extend across multiple reporting
periods.
Research and development expenses
Research and development expenses consist of expenses incurred in performing research and development activities including salaries and
benefits and other overhead expenses, clinical trials, contract services and other outsourced contracts. Research and development expenses are charged to operations as they are incurred. Up-front payments to collaborators made in exchange for the
avoidance of potential future milestone and royalty payments on licensed technology are also charged to research and development expense
F-65
when the drug is still in the development stage, has not been approved by the FDA for commercialization and has no alternative uses.
The Company assesses its obligations to make milestone payments that may become due under licensed or acquired technology to determine whether
the payments should be expensed or capitalized. The Company charges milestone payments to research and development expense when:
|
|
•
|
|
The technology is in the early stage of development and has no alternative uses;
|
|
|
•
|
|
There is substantial uncertainty regarding the future success of the technology or product;
|
|
|
•
|
|
There will be difficulty in completing the remaining development; and
|
|
|
•
|
|
There is substantial cost to complete the work.
|
Acquired contractual rights.
Payments
to acquire contractual rights to a licensed technology or drug candidate are expensed as incurred when there is uncertainty in receiving future economic benefits from the acquired contractual rights. The Company considers the future economic
benefits from the acquired contractual rights to a drug candidate to be uncertain until such drug candidate is approved by the FDA or when other significant risk factors are abated.
Share-based compensation
The
Company grants options and restricted stock awards to purchase the Company’s common stock to employees, directors and consultants under stock option plans. The benefits provided under these plans are share-based payments that the Company
accounts for using the fair value method.
The fair value of each option award is estimated on the date of grant using a
Black-Scholes-Merton option pricing model (“Black-Scholes model”) that uses assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, expected stock price volatility, actual and
projected employee stock option exercise behaviors, risk-free interest rate and expected dividends. Expected volatilities are based on the historical volatility of the Company’s common stock valuation and other factors. The expected terms of
options granted are based on analyses of historical employee termination rates and option exercises. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of the grant. Since the Company does not expect to pay
dividends on common stock in the foreseeable future, it estimated the dividend yield to be 0%.
Share-based compensation expense
recognized during a period is based on the value of the portion of share-based payment awards that is ultimately expected to vest and is amortized under the straight-line attribution method. As share-based compensation expense recognized in the
accompanying consolidated statements of operations for the nine months ended September 30, 2016 and 2015 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. The fair value method requires forfeitures
to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company estimates forfeitures based on historical experience. Changes to the estimated forfeiture rate are
accounted for as a cumulative effect of change in the period the change occurred.
F-66
Total compensation expense related to all of the Company’s share-based awards for the nine
months ended September 30, 2016 and 2015 was comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Share-based compensation classified as:
|
|
|
|
|
|
|
|
|
|
Research and development expense
|
|
$
|
52
|
|
|
$
|
7
|
|
|
General and administrative expense
|
|
|
90
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
142
|
|
|
$
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2016
|
|
|
2016
|
|
|
Share-based compensation expense from:
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
141
|
|
|
$
|
24
|
|
|
Restricted stock awards
|
|
|
1
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
142
|
|
|
$
|
31
|
|
|
|
|
|
|
|
|
|
|
|
Since the Company has a net operating loss carry-forward as of September 30, 2016 and 2015, no excess tax
benefits for tax deductions related to share-based awards were recognized in the accompanying consolidated statements of operations.
Recent
Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards
update (“ASU”) 2014-09, “Revenue from Contracts with Customers,” requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. In May 2014,
the Financial Accounting Standards Board (“FASB”) issued Accounting Standards update (“ASU”)
2014-09,
Revenue from Contracts with Customers (Topic 606), which supersedes the revenue
recognition requirements in ASC 605, Revenue Recognition. This guidance is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. This guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant
judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This guidance can be adopted either retrospectively to each prior reporting period presented, or retrospectively with a cumulative-effect
adjustment recognized as of the date of adoption. The original effective date of this guidance for public entities was for annual reporting period beginning after December 15, 2016.
In August 2014, the FASB issued ASU NO. 2014-15,
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going
Concern
, or ASU 2014-15. ASU 2014-15 requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued and provides guidance
on determining when and how to disclose going concern uncertainties in the financial statements. Certain disclosures will be required if conditions give rise to substantial doubt about an entity’s ability to continue as a going concern. ASU
2014-15 applies to all entities and is effective for annual and interim reporting periods ending after December 15, 2016, with early adoption permitted. The Company does not anticipate an early adoption, and is currently evaluating the impact
on its financial statements upon the adoption of this guidance.
F-67
In January 2016, the FASB issued an amended standard requiring changes to recognition and
measurement of certain financial assets and liabilities. The standard primarily affects equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. This standard
is effective beginning in the first quarter of 2018. Certain provisions allow for early adoption. The Company does not expect that the adoption of this standard will have a significant impact on the financial position or results of operations.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under this guidance, an entity is required to recognize right-of-use assets
and lease liabilities on its balance sheet and disclose key information about leasing arrangements. This guidance offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to
disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for annual reporting
period beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company is currently evaluating the impact on its financial
statements upon the adoption of this guidance.
In March 2016, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) No. 2016-09, Compensation – Stock Compensation (Topic 718). This guidance identifies areas for simplification involving several aspects of accounting for share-based payment transactions,
including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the
statement of cash flows. This guidance is effective for annual reporting period beginning after December 15, 2016, including interim periods within that reporting period, with early adoption permitted. The Company is currently evaluating the
impact on its financial statements upon the adoption of this guidance.
In June 2016, the FASB issued a new standard requiring measurement
and recognition of expected credit losses on certain types of financial instruments. The new standard also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial
assets with credit deterioration since their origination. This standard is effective beginning in the first quarter of 2020; early adoption is permitted starting from the first quarter of 2019. The Company does not expect that the adoption of this
standard will have a significant impact on the financial position or results of operations.
Note 3. Convertible Loan
On July 11, 2016, OrbiMed Israel Partners Limited Partnership and Peregrine Management II Ltd. provided Otic with a convertible bridge
financing in the aggregate amount of $2,930,000 (the “Bridge Financing Amount”), pursuant to a Bridge Financing Agreement, dated July 11, 2016 (the “Bridge Financing Agreement”). Under the terms of the Bridge Financing
Agreement, other than upon occurrence of an Event of Default (as defined in the Bridge Financing Agreement), Otic is not required to repay the Bridge Financing Amount or any portion in cash. The Bridge Financing Agreement further provides that
upon a Deemed Liquidation (as defined in Otic’s Articles of Association), the Bridge Financing Amount is convertible into 606,845 Preferred C Shares of Otic at a price per share representing 85% of the Preferred C Shares’ original issue
price. As such, conversion will occur upon closing of the Otic Transaction pursuant to the terms of the Bridge Financing Agreement.
The
Company concluded the value of the note is predominantly based on a fixed monetary amount known at the date of issuance as represented by the 15% discount on the Company’s shares to be sold upon a Deemed Liquidation event (as defined in
Otic’s Articles of Association). Accordingly, the note was classified as debt and is measured at its fair value, pursuant to the provisions of ASC 480-10, “Accounting for Certain Financial instruments with Characteristics of both
Liabilities and Equity.”
F-68
The fair value of the note is measured based on observable inputs as the fixed monetary value of
the variable amount of shares to be issued upon conversion (Level 2 measurement).
Note 4. Computation of Net Loss per Share
Basic loss per share is computed by dividing the net loss, as adjusted to include preferred shares dividend participation rights as well as
interest accumulated on preferred shares, by the weighted average number of ordinary shares outstanding during the year. Shares and preferred shares contingently issuable for little or no cash are included in basic loss per share on an as issued
basis.
Diluted loss per share is computed by dividing the net loss, as adjusted to include preferred shares dividend participation rights
as well as interest accumulated on preferred shares, of preferred shares outstanding during the year as well as of preferred shares that would have been outstanding if all potentially dilutive preferred shares had been issued, by the weighted
average number of ordinary shares outstanding during the year, plus the number of ordinary shares that would have been outstanding if all potentially dilutive ordinary shares had been issued, using the treasury stock method, in accordance with ASC
260-10 “Earnings per Share”.
Potentially dilutive shares were excluded from the calculation of diluted loss per share for all
periods presented due to their anti-dilutive effect.
The loss and weighted average number of ordinary shares used in the calculation of
basic loss per share are as follows (in thousands, except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
Ended
September 30,
2016
|
|
|
Nine Months
Ended
September 30,
2015
|
|
|
Net loss available to shareholders of the company
|
|
$
|
(4,140
|
)
|
|
$
|
(2,070
|
)
|
|
Interest accumulated on preferred shares and on preferred shares contingently issuable
for little or no cash
|
|
|
(917
|
)
|
|
|
(671
|
)
|
|
Net loss attributable to shareholders of preferred shares and to shareholders of
preferred shares contingently issuable for little or no cash
|
|
|
4,339
|
|
|
|
2,159
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss used in the calculation of basic loss per share
|
|
$
|
(718
|
)
|
|
$
|
(582
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
$
|
(1.01
|
)
|
|
$
|
(0.65
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of ordinary shares
|
|
|
711,231
|
|
|
|
898,436
|
|
|
|
|
|
|
|
|
|
|
|
Because the inclusion of common share equivalents in the calculation would be anti-dilutive for all periods
presented, diluted net loss per share is the same as basic net loss per share.
Note 5. Commitments and Contingencies
The following table summarizes Otic’s contractual obligations as of September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period
|
|
|
|
|
Total
|
|
|
Less than
1 year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
More Than
5 Years
|
|
|
|
|
(in thousands)
|
|
|
Operating lease commitments
(1)
|
|
|
$324
|
|
|
$
|
171
|
|
|
$
|
153
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
(2)(3)(4)
|
|
$
|
324
|
|
|
$
|
171
|
|
|
$
|
153
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-69
Contractual Obligations:
|
(1)
|
Operating lease commitments are comprised of the following:
|
|
|
a.
|
An office lease for Otic Pharma, Ltd. which is located in Rehovot, Israel. The office space is leased under an operating lease through November 2016.
|
|
|
b.
|
An office lease for Otic Pharma, Inc. which is located in Irvine, California in a 5,113 square-foot office space. The Irvine office is leased under an operating lease through September 2018.
|
|
|
c.
|
A vehicle lease for employees located in the Rehovot, Israel office. The vehicle lease was canceled effective December 2016.
|
|
(2)
|
As of December 31, 2015, Otic received loans in the amount of approximately $537,000 from the OCS designated for Otic’s investments in research and development. The loans are linked to the U.S. dollar and bear
annual interest of LIBOR. The loans are to be repaid out of royalties from sales of the products developed by Otic from their investments in research and development.
|
|
(3)
|
In November 2015, the Otic Pharma, Inc. entered into an Exclusive License Agreement with Scientific Development and Research Inc. and Otodyne Inc. (the “Licensors”). According to which the Licensors shall
provide the License Technology, as defined in the Exclusive License Agreement, to the Subsidiary. In return to the Exclusive License Agreement, Otic Pharma, Inc. will pay to the Licensors a license fee in a total amount of $600,000, and Otic issued
to the Licensors 88,024 Ordinary Shares NIS 0.01 par value each. In addition, Otic Pharma, Inc. paid an additional amount of $100,000 as a Technology Transfer Fee as defined in the Exclusive License Agreement, and future milestones and royalty
payments, as defined and detailed in the Exclusive License Agreement.
|
|
(4)
|
On July 11, 2016, OrbiMed Israel Partners Limited Partnership and Peregrine Management II Ltd. provided Otic with a convertible bridge financing in the aggregate amount of $2,930,000 (the “Bridge Financing
Amount”), pursuant to a Bridge Financing Agreement, dated July 11, 2016 (the “Bridge Financing Agreement”). Under the terms of the Bridge Financing Agreement, other than upon occurrence of an Event of Default (as defined in the
Bridge Financing Agreement), Otic is not required to repay the Bridge Financing Amount or any portion in cash. The Bridge Financing Agreement further provides that upon a Deemed Liquidation (as defined in Otic’s Articles of Association),
the Bridge Financing Amount is convertible into 606,845 Preferred C Shares of Otic at a price per share representing 85% of the Preferred C Shares’ original issue price. As such, conversion will occur upon closing of the Otic Transaction
pursuant to the terms of the Bridge Financing Agreement.
|
Indemnification:
In the normal course of business, the
Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnification. The Company’s exposure under these agreements is unknown because it involves future claims that may
be made against the Company but have not yet been made. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations. However, the Company may record charges in the future as a result
of these indemnification obligations. No amounts associated with such indemnifications have been recorded to date.
Contingencies:
From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of business activities. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such
expenditures can be reasonably estimated. There have been no contingent liabilities requiring accrual at September 30, 2016.
F-70
Note 6. Shareholder’s Equity
Composition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
|
|
Authorized
|
|
|
Issued
|
|
|
Authorized
|
|
|
Issued
|
|
|
|
|
Number of shares
|
|
|
Number of shares
|
|
|
Ordinary Shares of NIS 0.01 nominal value
|
|
|
8,600,118
|
|
|
|
740,215
|
|
|
|
7,000,016
|
|
|
|
612,681
|
|
|
Preferred A Shares NIS 0.01 nominal value
|
|
|
691,000
|
|
|
|
493,551
|
|
|
|
691,000
|
|
|
|
493,551
|
|
|
Preferred B Shares NIS 0.01 nominal value
|
|
|
4,327,590
|
|
|
|
2,640,711
|
|
|
|
4,327,590
|
|
|
|
2,640,711
|
|
|
Preferred C Shares NIS 0.01 nominal value
|
|
|
940,092
|
|
|
|
940,092
|
|
|
|
352,094
|
|
|
|
352,094
|
|
|
Receipts on account of Preferred A Shares
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,558,800
|
|
|
|
4,814,569
|
|
|
|
12,370,700
|
|
|
|
4,099,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares:
Ordinary shares confer upon the holders thereof the right to receive notice of, participate in, and vote at general meetings of the Company.
Holders also have the right to receive cash and stock dividends, if declared or upon dissolution, subject to the preferential rights of the holders of the series of preferred shares.
Preferred Shares:
Preferred shares are
convertible into ordinary shares at the option of their holders, and confer upon their holders all rights accruing to holders of ordinary shares in the Company on an as converted basis. In addition, holders of Preferred Shares are entitled to
preference upon a liquidation event and upon distribution of dividends, plus 8% annual interest calculated on the preferred share original issue price, as further detailed in the Company’s Articles of Association. The Otic Transaction meets the
criteria for a liquidation event as detailed in the Company’s Articles of Association.
Interest accumulated on preferred shares for
the nine months ended September 30, 2016 and 2015 was $917 and $671, respectively.
Receipts on account of Preferred A Shares:
On June 20, 2010, Incentive II Management Ltd. (“Incentive”) provided Otic Pharma with a loan (the “Incentive Loan”)
under a Convertible Loan Agreement (the “Loan Agreement”) between Otic Pharma and Incentive. As part of the closing of the Series B Preferred Shares Purchase Agreement in February 2012, Incentive, Otic Pharma and the Series B
Investors agreed that the Incentive Loan provided by Incentive shall be convertible by Incentive into 196,714 Preferred A Shares (the “Incentive A Shares”), which conversion shall occur upon request by Incentive (the “Formal
Conversion”). Until the Formal Conversion, the Incentive A Shares that are issuable to Incentive are deemed issued and outstanding and held by Incentive for all intents and purposes and the loan provided shall be deemed, for all intents
and purposes, as repaid in full pursuant to its terms. As the underlying shares have not been issued as of December 31, 2015, the funds received in their regard are presented as receipts on account of shares on the Company’s
shareholders equity statement.
Warrants:
During the nine months ended September 30, 2016 and 2015, no warrants were issued and warrants issued and outstanding were 1,942,908 and
1,656,473, respectively.
F-71
The Company expects all outstanding warrants to be exercised upon or prior to close of the Otic
Transaction.
Note 6. Related Party Transactions
On July 27, 2012 and May 17, 2015, the Company entered into loan agreements with a director of the Company (together, the “Loan
Agreements”). In accordance with the Loan Agreements, the Company provided to the director loans in the amount of $42,555 and $61,480, respectively, to purchase restricted ordinary shares of the Company totaling 83,441 shares and 58,000 shares,
respectively. The loans are non-recourse loans and do not bear interest. The loans will be repaid prior to closing of the Otic Transaction.
Note 7. Subsequent Event
On
December 21, 2016, the Company entered into a Share Purchase Agreement to merge with Tokai in an all-stock transaction. On a pro forma basis, based upon the number of shares of Tokai common stock to be issued in accordance with the Share
Purchase Agreement, Tokai equity holders will own approximately 40% of the combined company and Otic equity holders will own approximately 60% of the combined company. The transaction has been approved by the board of directors of both companies and
by the shareholders of Otic. The transaction is expected to close in the first half of 2017, subject to the approval of the stockholders of Tokai and other customary closing conditions, as detailed in the Share Purchase Agreement.
In connection with the transaction, Otic will be deemed to be the accounting acquirer and therefore the transaction will be treated as a
reverse acquisition because (i) Otic security holders are expected to own approximately 60% of the voting interests of the combined company immediately following the closing of the transaction; (ii) directors appointed by Otic will hold a
majority of the board seats in the combined company; and (iii) Otic management will hold all key positions in the management of the combined company.
F-72
ANNEX A: SHARE PURCHASE AGREEMENT
SHARE PURCHASE AGREEMENT
by and among
TOKAI
PHARMACEUTICALS, INC.,
OTIC PHARMA, LTD.
and
SHAREHOLDERS OF
OTIC PHARMA, LTD.
Dated as of December 21, 2016
A - 1
TABLE OF CONTENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
|
ARTICLE I THE SHARE PURCHASE
|
|
|
A-9
|
|
|
|
|
|
|
1.1
|
|
Share Purchase
|
|
|
A-9
|
|
|
|
|
|
|
1.2
|
|
Closing
|
|
|
A-9
|
|
|
|
|
|
|
1.3
|
|
Closing Date Deliverables; Certain Definitions
|
|
|
A-10
|
|
|
|
|
|
|
1.4
|
|
[Intentionally omitted]
|
|
|
A-12
|
|
|
|
|
|
|
1.5
|
|
Treatment of Otic Pharma Share Options and Otic Pharma Warrants
|
|
|
A-12
|
|
|
|
|
|
|
1.6
|
|
Allocation Schedules
|
|
|
A-13
|
|
|
|
|
|
|
1.7
|
|
Withholding Rights
|
|
|
A-13
|
|
|
|
|
|
|
1.8
|
|
Additional Withholding Matters
|
|
|
A-13
|
|
|
|
|
|
ARTICLE II REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS
|
|
|
A-14
|
|
|
|
|
|
|
2.1
|
|
Organization, Standing
|
|
|
A-14
|
|
|
|
|
|
|
2.2
|
|
Authority, Power; No Conflict; Required Filings and Consents
|
|
|
A-14
|
|
|
|
|
|
|
2.3
|
|
Ownership of Otic Pharma Share Capital
|
|
|
A-15
|
|
|
|
|
|
|
2.4
|
|
Litigation
|
|
|
A-16
|
|
|
|
|
|
|
2.5
|
|
Brokers
|
|
|
A-16
|
|
|
|
|
|
|
2.6
|
|
Purchase for Own Account; Sophistication
|
|
|
A-16
|
|
|
|
|
|
|
2.7
|
|
Access to Information
|
|
|
A-16
|
|
|
|
|
|
|
2.8
|
|
Restricted Securities; Legends
|
|
|
A-16
|
|
|
|
|
|
|
2.9
|
|
Accredited Investor; Regulation S
|
|
|
A-17
|
|
|
|
|
|
|
2.10
|
|
No Other Representations or Warranties
|
|
|
A-17
|
|
|
|
|
|
ARTICLE III REPRESENTATIONS AND WARRANTIES OF OTIC PHARMA
|
|
|
A-17
|
|
|
|
|
|
|
3.1
|
|
Organization, Standing and Power
|
|
|
A-17
|
|
|
|
|
|
|
3.2
|
|
Capitalization
|
|
|
A-18
|
|
|
|
|
|
|
3.3
|
|
Subsidiaries
|
|
|
A-20
|
|
|
|
|
|
|
3.4
|
|
Authority; No Conflict; Required Filings and Consents
|
|
|
A-21
|
|
|
|
|
|
|
3.5
|
|
Financial Statements; Information Provided
|
|
|
A-21
|
|
|
|
|
|
|
3.6
|
|
No Undisclosed Liabilities
|
|
|
A-22
|
|
|
|
|
|
|
3.7
|
|
Absence of Certain Changes or Events
|
|
|
A-22
|
|
|
|
|
|
|
3.8
|
|
Taxes
|
|
|
A-22
|
|
|
|
|
|
|
3.9
|
|
Owned and Leased Real Properties
|
|
|
A-26
|
|
|
|
|
|
|
3.10
|
|
Intellectual Property
|
|
|
A-26
|
|
|
|
|
|
|
3.11
|
|
Contracts
|
|
|
A-27
|
|
|
|
|
|
|
3.12
|
|
Litigation
|
|
|
A-29
|
|
A - 2
|
|
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
|
3.13
|
|
Environmental Matters
|
|
|
A-29
|
|
|
|
|
|
|
3.14
|
|
Employee Benefit Plans
|
|
|
A-30
|
|
|
|
|
|
|
3.15
|
|
Compliance With Laws
|
|
|
A-32
|
|
|
|
|
|
|
3.16
|
|
Permits and Regulatory Matters
|
|
|
A-32
|
|
|
|
|
|
|
3.17
|
|
Employees
|
|
|
A-33
|
|
|
|
|
|
|
3.18
|
|
Insurance
|
|
|
A-36
|
|
|
|
|
|
|
3.19
|
|
No Fairness Opinion
|
|
|
A-36
|
|
|
|
|
|
|
3.20
|
|
Brokers; Fees and Expenses
|
|
|
A-36
|
|
|
|
|
|
|
3.21
|
|
Certain Business Relationships With Affiliates
|
|
|
A-36
|
|
|
|
|
|
|
3.22
|
|
Controls and Procedures, Certifications and Other Matters
|
|
|
A-36
|
|
|
|
|
|
|
3.23
|
|
Books and Records
|
|
|
A-37
|
|
|
|
|
|
|
3.24
|
|
Ownership of Public Company Common Stock
|
|
|
A-37
|
|
|
|
|
|
|
3.25
|
|
Privacy and Data Security
|
|
|
A-37
|
|
|
|
|
|
|
3.26
|
|
Government Funding
|
|
|
A-38
|
|
|
|
|
|
|
3.27
|
|
Export Control Laws
|
|
|
A-38
|
|
|
|
|
|
|
3.28
|
|
No Other Representations or Warranties
|
|
|
A-39
|
|
|
|
|
|
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PUBLIC COMPANY
|
|
|
A-39
|
|
|
|
|
|
|
4.1
|
|
Organization, Standing and Power
|
|
|
A-39
|
|
|
|
|
|
|
4.2
|
|
Capitalization
|
|
|
A-40
|
|
|
|
|
|
|
4.3
|
|
Subsidiaries
|
|
|
A-41
|
|
|
|
|
|
|
4.4
|
|
Authority; No Conflict; Required Filings and Consents
|
|
|
A-42
|
|
|
|
|
|
|
4.5
|
|
SEC Filings; Financial Statements; Information Provided
|
|
|
A-43
|
|
|
|
|
|
|
4.6
|
|
No Undisclosed Liabilities
|
|
|
A-44
|
|
|
|
|
|
|
4.7
|
|
Absence of Certain Changes or Events
|
|
|
A-44
|
|
|
|
|
|
|
4.8
|
|
Taxes
|
|
|
A-44
|
|
|
|
|
|
|
4.9
|
|
Owned and Leased Real Properties
|
|
|
A-46
|
|
|
|
|
|
|
4.10
|
|
Intellectual Property
|
|
|
A-47
|
|
|
|
|
|
|
4.11
|
|
Contracts
|
|
|
A-47
|
|
|
|
|
|
|
4.12
|
|
Litigation
|
|
|
A-49
|
|
|
|
|
|
|
4.13
|
|
Environmental Matters
|
|
|
A-49
|
|
|
|
|
|
|
4.14
|
|
Employee Benefit Plans
|
|
|
A-49
|
|
|
|
|
|
|
4.15
|
|
Compliance With Laws
|
|
|
A-52
|
|
|
|
|
|
|
4.16
|
|
Permits and Regulatory Matters
|
|
|
A-52
|
|
|
|
|
|
|
4.17
|
|
Employees
|
|
|
A-52
|
|
A - 3
|
|
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
|
4.18
|
|
Insurance
|
|
|
A-53
|
|
|
|
|
|
|
4.19
|
|
Opinion of Financial Advisor
|
|
|
A-53
|
|
|
|
|
|
|
4.20
|
|
Section 203 of the DGCL
|
|
|
A-53
|
|
|
|
|
|
|
4.21
|
|
Brokers; Fees and Expenses
|
|
|
A-53
|
|
|
|
|
|
|
4.22
|
|
Controls and Procedures, Certifications and Other Matters
|
|
|
A-54
|
|
|
|
|
|
|
4.23
|
|
Books and Records
|
|
|
A-54
|
|
|
|
|
|
|
4.24
|
|
No Other Representations or Warranties
|
|
|
A-54
|
|
|
|
|
|
ARTICLE V CONDUCT OF BUSINESS
|
|
|
A-54
|
|
|
|
|
|
|
5.1
|
|
Covenants of Otic Pharma
|
|
|
A-54
|
|
|
|
|
|
|
5.2
|
|
Covenants of Public Company
|
|
|
A-57
|
|
|
|
|
|
|
5.3
|
|
Confidentiality
|
|
|
A-59
|
|
|
|
|
|
ARTICLE VI ADDITIONAL AGREEMENTS
|
|
|
A-59
|
|
|
|
|
|
|
6.1
|
|
No Solicitation
|
|
|
A-59
|
|
|
|
|
|
|
6.2
|
|
Proxy Statement
|
|
|
A-62
|
|
|
|
|
|
|
6.3
|
|
NASDAQ Listing
|
|
|
A-63
|
|
|
|
|
|
|
6.4
|
|
Access to Information
|
|
|
A-63
|
|
|
|
|
|
|
6.5
|
|
Stockholder Approval
|
|
|
A-64
|
|
|
|
|
|
|
6.6
|
|
Legal Conditions to Transaction
|
|
|
A-64
|
|
|
|
|
|
|
6.7
|
|
Public Disclosure
|
|
|
A-64
|
|
|
|
|
|
|
6.8
|
|
Affiliate Legends
|
|
|
A-65
|
|
|
|
|
|
|
6.9
|
|
Indemnification
|
|
|
A-65
|
|
|
|
|
|
|
6.10
|
|
Notification of Certain Matters
|
|
|
A-66
|
|
|
|
|
|
|
6.11
|
|
Corporate Identity
|
|
|
A-66
|
|
|
|
|
|
|
6.12
|
|
Succession
|
|
|
A-66
|
|
|
|
|
|
|
6.13
|
|
Board of Directors of Public Company
|
|
|
A-66
|
|
|
|
|
|
|
6.14
|
|
Employee Communications
|
|
|
A-67
|
|
|
|
|
|
|
6.15
|
|
State Takeover Laws
|
|
|
A-67
|
|
|
|
|
|
|
6.16
|
|
Security Holder Litigation
|
|
|
A-67
|
|
|
|
|
|
|
6.17
|
|
Lock-Up;
Regulation S
|
|
|
A-67
|
|
|
|
|
|
ARTICLE VII CONDITIONS TO TRANSACTION
|
|
|
A-68
|
|
|
|
|
|
|
7.1
|
|
Conditions to Each Party’s Obligation To Effect the Transaction
|
|
|
A-68
|
|
|
|
|
|
|
7.2
|
|
Additional Conditions to the Obligations of Public Company
|
|
|
A-68
|
|
|
|
|
|
|
7.3
|
|
Additional Conditions to the Obligations of Otic Pharma
|
|
|
A-69
|
|
A - 4
|
|
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
|
ARTICLE VIII TERMINATION AND AMENDMENT
|
|
|
A-70
|
|
|
|
|
|
|
8.1
|
|
Termination
|
|
|
A-70
|
|
|
|
|
|
|
8.2
|
|
Effect of Termination
|
|
|
A-71
|
|
|
|
|
|
|
8.3
|
|
Fees and Expenses
|
|
|
A-72
|
|
|
|
|
|
|
8.4
|
|
Amendment
|
|
|
A-73
|
|
|
|
|
|
|
8.5
|
|
Extension; Waiver
|
|
|
A-73
|
|
|
|
|
|
|
8.6
|
|
Procedure for Termination, Amendment, Extension or Waiver
|
|
|
A-73
|
|
|
|
|
|
ARTICLE IX MISCELLANEOUS
|
|
|
A-73
|
|
|
|
|
|
|
9.1
|
|
Non-survival
of Representations, Warranties and
Agreements
|
|
|
A-73
|
|
|
|
|
|
|
9.2
|
|
Notices
|
|
|
A-73
|
|
|
|
|
|
|
9.3
|
|
Entire Agreement
|
|
|
A-74
|
|
|
|
|
|
|
9.4
|
|
No Third Party Beneficiaries
|
|
|
A-75
|
|
|
|
|
|
|
9.5
|
|
Assignment
|
|
|
A-75
|
|
|
|
|
|
|
9.6
|
|
Severability
|
|
|
A-75
|
|
|
|
|
|
|
9.7
|
|
Counterparts and Signature
|
|
|
A-75
|
|
|
|
|
|
|
9.8
|
|
Interpretation
|
|
|
A-75
|
|
|
|
|
|
|
9.9
|
|
Governing Law
|
|
|
A-75
|
|
|
|
|
|
|
9.10
|
|
Remedies
|
|
|
A-76
|
|
|
|
|
|
|
9.11
|
|
Submission to Jurisdiction
|
|
|
A-76
|
|
|
|
|
|
|
9.12
|
|
WAIVER OF JURY TRIAL
|
|
|
A-76
|
|
|
|
|
|
|
9.13
|
|
Disclosure Schedule
|
|
|
A-76
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit A
|
|
Form of Public Company Support Agreement
|
|
|
|
|
|
|
|
Exhibit B
|
|
Preliminary Closing Date Allocation Schedule
|
|
|
|
|
|
|
|
Exhibit C
|
|
OCS Undertaking
|
|
|
A - 5
TABLE OF DEFINED TERMS
|
|
|
|
|
Terms
|
|
Cross Reference
in Agreement
|
|
102 Plan
|
|
Section 3.8(k)
|
|
102 Trustee
|
|
Section 1.3(c)
|
|
104H Ruling
|
|
Section 1.8(c)(ii)
|
|
104H Trustee
|
|
Section 1.3(c)
|
|
Acquisition Proposal
|
|
Section 6.1(f)
|
|
Adjusted Warrant
|
|
Section 1.5
|
|
Affiliate
|
|
Section 3.2(e)
|
|
Aggregate Closing Consideration
|
|
Section 1.3(c)
|
|
Agreement
|
|
Preamble
|
|
Alternative Acquisition Agreement
|
|
Section 6.1(b)(ii)
|
|
Bankruptcy and Equity Exception
|
|
Section 2.2(a)
|
|
Business Day
|
|
Section 1.2
|
|
Certificate
|
|
Section 1.3(c)
|
|
Closing
|
|
Section 1.2(a)
|
|
Closing Date
|
|
Section 1.2(a)
|
|
Closing Date Allocation Schedule
|
|
Section 1.3(c)
|
|
Code
|
|
Section 1.3(c)
|
|
Confidentiality Agreement
|
|
Section 5.3
|
|
Contract
|
|
Section 3.11(f)
|
|
DGCL
|
|
Section 3.5(c)
|
|
Employee Benefit Plan
|
|
Section 3.14(n)(i)
|
|
Environmental Law
|
|
Section 3.13(d)
|
|
ERISA
|
|
Section 1.3(c)
|
|
ERISA Affiliate
|
|
Section 1.3(c)
|
|
Exchange Act
|
|
Section 3.5(b)
|
|
Exchange Ratio
|
|
Section 1.6
|
|
Export Approvals
|
|
Section 3.27(a)
|
|
FDA
|
|
Section 3.16(a)
|
|
Financial Statements
|
|
Section 3.5(a)
|
|
GAAP
|
|
Section 3.5(a)
|
|
Governmental Entity
|
|
Section 1.3(c)
|
|
Government Grants
|
|
Section 3.26
|
|
Hazardous Substance
|
|
Section 3.13(e)
|
|
Indemnified Persons
|
|
Section 6.9(a)
|
|
Innovation Law
|
|
Section 3.26
|
|
Intellectual Property
|
|
Section 3.10(e)(i)
|
|
Interim Options Tax Ruling
|
|
Section 1.8(c)(i)
|
|
IRS
|
|
Section 3.14(f)
|
|
Israeli Income Tax Ordinance
|
|
Section 1.3(c)
|
|
Israeli Options Tax Ruling
|
|
Section 1.8(c)(i)
|
|
Israeli Severance Pay Law
|
|
Section 3.17(e)
|
|
Israeli Tax Rulings
|
|
Section 1.8(c)(ii)
|
|
ITA
|
|
Section 1.3(c)
|
|
Liens
|
|
Section 3.4(b)
|
|
Most Recent Balance Sheet Date
|
|
Section 3.5(a)
|
|
NASDAQ
|
|
Section 3.5(c)
|
|
NASDAQ Listing Application
|
|
Section 4.4(c)
|
|
NASDAQ Proposal
|
|
Section 6.3
|
A - 6
|
|
|
|
|
Terms
|
|
Cross Reference
in Agreement
|
|
OCS
|
|
Section 3.26
|
|
Ordinary Course of Business
|
|
Section 3.3(d)
|
|
Otic Pharma
|
|
Preamble
|
|
Otic Pharma Authorizations
|
|
Section 3.16(b)
|
|
Otic Pharma Balance Sheet
|
|
Section 3.5(a)
|
|
Otic Pharma Board
|
|
Section 1.3(c)
|
|
Otic Pharma Share Capital
|
|
Section 1.3(c)
|
|
Otic Pharma Ordinary Shares
|
|
Section 2.1(b)(ii)
|
|
Otic Pharma Disclosure Schedule
|
|
Article III
|
|
Otic Pharma Employee Plans
|
|
Section 3.14(a)
|
|
Otic Pharma Insurance Policies
|
|
Section 3.18
|
|
Otic Pharma Intellectual Property
|
|
Section 3.10(b)
|
|
Otic Pharma Leases
|
|
Section 3.9(b)
|
|
Otic Pharma Material Adverse Effect
|
|
Section 3.1
|
|
Otic Pharma Organizational Documents
|
|
Section 1.3(c)
|
|
Otic Pharma Preferred Shares
|
|
Section 1.3(c)
|
|
Otic Pharma Sites
|
|
Section 3.25(a)
|
|
Otic Pharma Share Options
|
|
Section 2.3(a)
|
|
Otic Pharma Share Plan
|
|
Section 2.3(a)
|
|
Otic Pharma Third Party Intellectual Property
|
|
Section 3.10(b)
|
|
Otic Pharma Termination Fee
|
|
Section 8.3(b)
|
|
Otic Pharma Voting Proposal
|
|
Section 3.4(a)
|
|
Otic Pharma Warrants
|
|
Section 3.2(d)
|
|
Outside Date
|
|
Section 8.1(b)
|
|
Patent Rights
|
|
Section 3.10(e)(ii)
|
|
Payee
|
|
Section 1.8(a)
|
|
Paying Agent
|
|
Section 1.3(c)
|
|
Payor
|
|
Section 1.7
|
|
Permits
|
|
Section 3.16(a)
|
|
Personal Information
|
|
Section 3.25(b)
|
|
Piper
|
|
Section 3.20
|
|
Preliminary Closing Date Allocation Schedule
|
|
Section 1.3(c)
|
|
Privacy Laws
|
|
Section 3.25(b)
|
|
Proxy Statement
|
|
Section 3.5(c)
|
|
Public Company
|
|
Preamble
|
|
Public Company Authorizations
|
|
Section 4.16(a)
|
|
Public Company Balance Sheet
|
|
Section 4.5(b)
|
|
Public Company Board
|
|
Section 1.3(c)
|
|
Public Company Board Recommendation Change
|
|
Section 6.1(b)(i)
|
|
Public Company Common Stock
|
|
Section 2.1(c)
|
|
Public Company ESPP
|
|
Section 4.2(b)
|
|
Public Company Disclosure Schedule
|
|
Article IV
|
|
Public Company Employee Plans
|
|
Section 4.14(a)
|
|
Public Company Financial Advisor
|
|
Section 4.19
|
|
Public Company Insurance Policies
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Section 4.18
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Public Company Intellectual Property
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Section 4.10(b)
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Public Company Leases
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Section 4.9(b)
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Public Company Material Adverse Effect
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Section 4.1
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Public Company Meeting
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Section 3.5(c)
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Public Company Preferred Stock
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Section 4.2(a)
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Terms
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Cross Reference
in Agreement
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Public Company SEC Reports
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Section 4.5(a)
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Public Company Support Agreement
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Preamble
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Public Company Stockholder Approval
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Section 3.5(c)
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Public Company Stock Options
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Section 4.2(b)
|
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Public Company Stock Plans
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Section 4.2(b)
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Public Company Termination Fee
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Section 8.3(c)
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Public Company Third Party Intellectual Property
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Section 4.10(b)
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Public Company Voting Proposal
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Section 3.5(c)
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Public Company Warrants
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Section 4.2(c)
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Qualified Person
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Section 6.1(f)
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Recommendation Change Notice
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Section 6.1(b)
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Regulating Authority
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Section 3.16(a)
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Regulation S Shareholder
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Section 2.9
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Representatives
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Section 6.1(a)
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Rule 145 Affiliates
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Section 6.8
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SEC
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Section 3.4(c)
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Section 102(b)(2)
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Section 1.8(c)(i)
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Section 14 Arrangement
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Section 3.17(e)
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Section 3(i)
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Section 1.8(c)(i)
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Securities Act
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Section 2.8(a)
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Shareholders
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Preamble
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Specified Time
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Section 6.1(f)
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Subsidiary
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Section 3.3(a)
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Superior Proposal
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Section 6.1(f)
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Taxes
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Section 3.8(a)
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Tax Returns
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Section 3.8(a)
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Trademarks
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Section 3.10(e)(iii)
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Transaction
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Preamble
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Valid Certificate
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Section 1.8(a)
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VAT
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Section 3.8(n)
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Withholding Drop Date
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Section 1.8(a)
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A - 8
SHARE PURCHASE AGREEMENT
THIS SHARE PURCHASE AGREEMENT (this “
Agreement
”), dated as of December 21, 2016, is entered into by and among Tokai
Pharmaceuticals, Inc., a Delaware corporation (“
Public Company
”), Otic Pharma, Ltd., a private limited company organized under the laws of the State of Israel (“
Otic Pharma
”), and the shareholders of Otic Pharma
identified on the signature page hereto (the “
Shareholders
”).
WHEREAS, the Shareholders own all of the issued and
outstanding shares of Otic Pharma Share Capital;
WHEREAS, the parties desire to enter into this Agreement pursuant to which each
Shareholder agrees to sell to Public Company and Public Company agrees to purchase from each Shareholder all of the shares of Otic Pharma Share Capital owned by such Shareholder (the “
Transaction
”), on the terms and subject to the
conditions contained herein; and
WHEREAS, concurrently with the execution and delivery of this Agreement and as a condition and
inducement to the Shareholders’ and Otic Pharma’s willingness to enter into this Agreement, the stockholders of Public Company listed on
Section A
of the Public Company Disclosure Schedule have entered into Support Agreements, dated
as of the date of this Agreement, in the form attached hereto as
Exhibit A
(the “
Public Company Support Agreements
”), pursuant to which such stockholders have, subject to the terms and conditions set forth therein, agreed to
vote all of their shares of capital stock of Public Company in favor of the Transaction and against any competing proposals.
NOW,
THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth below, Public Company, the Shareholders and Otic Pharma, intending to be legally bound, agree as follows:
ARTICLE I
THE SHARE
PURCHASE
1.1
Share Purchase
. Upon the terms and subject to the conditions set forth in this Agreement, on the Closing Date
Public Company shall purchase from each Shareholder, and each Shareholder shall, severally and not jointly, sell, convey, assign, transfer and deliver to Public Company, all of the Otic Pharma Share Capital owned by such Shareholder, as set forth
opposite such Shareholder’s name on the Closing Date Allocation Schedule, free and clear of all Liens. Each Shareholder hereby waives any rights of
pre-emption,
rights of first refusal or other
restrictions on transfer of the Otic Pharma Share Capital whether conferred by the Otic Pharma Organizational Documents or otherwise, in respect of the transfers contemplated by this Agreement.
1.2
Closing
.
(a)
Subject to the satisfaction or waiver (to the extent permitted by law) of the conditions set forth in Article VII, the closing of the Transaction (the “
Closing
”) will take place at 10:00 a.m., Eastern time, on a date to be specified
by Public Company and Otic Pharma (the “
Closing Date
”), which shall be no later than the second Business Day after satisfaction or waiver of the conditions set forth in Article VII (other than those conditions that by their nature
are to be satisfied at the Closing, but subject to the fulfillment or waiver of such conditions), at the offices of Wilmer Cutler Pickering Hale and Dorr LLP, 60 State Street, Boston, Massachusetts 02109, unless another date, place or time is agreed
to in writing by Public Company and Otic Pharma. For the purposes of this Agreement, the term “
Business Day
” shall mean any day other than a Friday, Saturday, Sunday or other day on which commercial banking institutions in New York,
New York or Tel Aviv, Israel are authorized or permitted by law to be closed.
A - 9
(b) At the Closing:
(i) Otic Pharma and the Shareholders shall deliver to Public Company the various certificates, instruments and documents referred to in
Section 7.2;
(ii) Public Company shall deliver to Otic Pharma the various certificates, instruments and documents referred to in
Section 7.3;
(iii) Public Company shall deliver the consideration contemplated by Section 1.3(b); and
(iv) each Shareholder shall deliver or procure to be delivered to Public Company:
(A) duly executed share transfer deeds in favor of Public Company in respect of all shares of Otic Pharma Share Capital owned by such
Shareholder, together with Certificates in respect of such shares, or if any Certificate shall have been lost, stolen, destroyed or never issued, an affidavit of that fact by the person claiming such Certificate to be lost, stolen, destroyed or
never issued;
(B) a copy of any power of attorney under which this Agreement or any of the transactions, transfers or documents
contemplated by this Agreement is effected and/or executed by the Shareholder, and evidence of the authority of any person signing on behalf of any Shareholder that is a corporate entity; and
(C) a power of attorney appointing Public Company as its attorney in its name and on its behalf to exercise any or all of the voting and
other rights, powers and privileges (including the right to nominate proxies on its behalf) attached to the shares of Otic Pharma Share Capital registered in its name and under which such Shareholder undertakes to ratify everything done by Public
Company, as its attorney, in pursuance of the power of attorney, and agrees that such power of attorney is executed to secure the interest of Public Company in the Otic Pharma Share Capital and shall accordingly be irrevocable.
1.3
Closing Date Deliverables; Certain Definitions
.
(a) No later than three Business Days prior to the Closing Date, Otic Pharma shall deliver to Public Company the Closing Date Allocation
Schedule.
(b) On the Closing Date, Public Company shall deliver to the Shareholders, in accordance with the Closing Date Allocation
Schedule, certificates representing a number of shares of common stock, $0.001 par value per share, of Public Company (“
Public Company Common Stock
”), equal to the Aggregate Closing Consideration;
provided
, that payment
hereunder in the form of shares of Public Company Common Stock shall be made only in whole shares, and any fractional shares shall be rounded down to the nearest whole share.
(c) For purposes of this Agreement, the following terms shall have the following meanings:
“
102 Trustee
” means Altshuler Shaham Benefits Ltd., appointed by Otic Pharma to serve as trustee pursuant to Section 102
of the Israeli Income Tax Ordinance and approved by the ITA.
“
104H Trustee
” means the trustee appointed by Otic Pharma
in accordance with the provisions of Section 104H of the Israeli Income Tax Ordinance, and to be approved by the ITA in the 104H Ruling.
“
Aggregate Closing Consideration
” means an aggregate number of newly issued shares of Public Company Common Stock equal to
the product of the total number of the shares of Otic Pharma Share Capital issued and outstanding and held by the Shareholders as of immediately prior to the Closing and the Exchange Ratio, which aggregate number shall in no event exceed 36,911,631.
“
Certificate
” means a certificate which as of immediately prior to the Closing represented outstanding shares of Otic
Pharma Share Capital.
A - 10
“
Closing Date Allocation Schedule
” means a schedule, prepared by Otic Pharma in
the format of the Preliminary Closing Date Allocation Schedule, dated as of the Closing Date and in form and substance reasonably acceptable to Public Company, setting forth, for each Shareholder: (a) such Shareholder’s name and address;
(b) the number of shares of each class of Otic Pharma Share Capital held as of the Closing Date by such Shareholder; (c) the portion of the Aggregate Closing Consideration payable to such Shareholder in accordance with the
Otic Pharma
Organizational Documents
; and (d) such information that is required under Treasury Regulation
Section 1.6045-1
for any share of Otic Pharma Share Capital that is a covered security as defined in
Treasury Regulation Section
1.6045-1(a)(15).
“
Code
” means the Internal Revenue
Code of 1986, as amended.
“
ERISA
” means the Employee Retirement Income Security Act of 1974, as amended.
“
ERISA Affiliate
” means any entity that is, or at any applicable time was, a member of (1) a controlled group of
corporations (as defined in Section 414(b) of the Code), (2) a group of trades or businesses under common control (as defined in Section 414(c) of the Code), or (3) an affiliated service group (as defined under Section 414(m) of the Code or the
regulations under Section 414(o) of the Code), any of which includes or included the entity in question or any of its Subsidiaries.
“
Governmental Entity
” means any supranational, national, state, municipal, local or foreign government, any court, tribunal,
arbitrator, administrative agency, commission or other governmental official, authority or instrumentality, in each case whether domestic or foreign, any stock exchange or similar self-regulatory organization or any quasi-governmental or private
body exercising any regulatory, Taxing or other governmental or quasi-governmental authority (including any governmental division, department, agency, commission, instrumentality, official, organization, unit, body or entity and any court or other
tribunal).
“
Israeli Income Tax Ordinance
” means the Israeli Income Tax Ordinance (New Version) 1961 and the regulations
and rules promulgated thereunder.
“
ITA
” means the Israeli Tax Authority.
“
Otic Pharma Board
” means the Board of Directors of Otic Pharma.
“
Otic Pharma Ordinary Shares
” means Ordinary Shares, NIS 0.01 nominal value per share, of Otic Pharma.
“
Otic Pharma Organizational Documents
” means the Articles of Association of Otic Pharma.
“
Otic Pharma Preferred Shares
” means, collectively, the Series A Preferred Shares, Series B Preferred Shares and Series C
Preferred Shares.
“
Otic Pharma Share Capital
” means Otic Pharma Ordinary Shares and Otic Pharma Preferred Shares,
collectively.
“
Paying Agent
” means the Public Company, or such other entity or Person as may be mutually agreed by the
Public Company and Otic Pharma.
“
Preliminary Closing Date Allocation Schedule
” means the schedule attached hereto as
Exhibit B
and dated as of the date hereof, setting forth, for each Shareholder: (a) such Shareholder’s name and address; (b) the number of shares of each class of Otic Pharma Share Capital expected to be held as of the Closing
Date by such Shareholder; (c) the portion of the Aggregate Closing Consideration payable to such Shareholder in accordance with the Otic Pharma Organizational Documents; (d) such information that is required under Treasury Regulation
Section 1.6045-1
for any share of Otic Pharma Share Capital that is a covered security as defined in Treasury Regulation Section
1.6045-1(a)(15).
A - 11
“
Public Company Board
” means the Board of Directors of Public Company.
“
Representatives
” means, with respect to any entity, the directors, officers, employees, financial advisors, attorneys,
accountants, consultants, agents and other authorized representatives of such entity, acting in such capacity.
“
Series A
Preferred Shares
” means the Series A Preferred Shaers, NIS 0.01 nominal value per share, of Otic Pharma.
“
Series B
Preferred Shares
” means the Series B Preferred Shaers, NIS 0.01 nominal value per share, of Otic Pharma.
“
Series C
Preferred Shares
” means the Series C Preferred Shaers, NIS 0.01 nominal value per share, of Otic Pharma.
1.4 [Intentionally
omitted]
1.5
Treatment of Otic Pharma Share Options and Otic Pharma Warrants
.
(a) At the Closing, each outstanding option to purchase Otic Pharma Ordinary Shares (each, a “
Otic Pharma Share Option
” and
collectively, the “
Otic Pharma Share Options
”), whether vested or unvested, and the Otic Pharma Ltd. Global Share Incentive Plan (2012) (the “
Otic Pharma Share Plan
”) itself, insofar as it relates to outstanding
Otic Pharma Share Options, shall be assumed by Public Company and shall become an option to acquire, on the same terms and conditions as were applicable under such Otic Pharma Share Option immediately prior to the Closing, such number of shares of
Public Company Common Stock as is equal to the number of shares of Otic Pharma Ordinary Shares subject to the unexercised portion of such Otic Pharma Share Option immediately prior to the Closing multiplied by the Exchange Ratio (rounded down to the
nearest whole share number), at an exercise price per share equal to the exercise price per share of such Otic Pharma Share Option immediately prior to the Closing divided by the Exchange Ratio (rounded up to the nearest whole cent);
provided
that the assumption of each Otic Pharma Share Option pursuant to this Section 2.3(a) shall comply with all requirements of Sections 424 and 409A of the Code and the Treasury regulations issued thereunder, as applicable, and of the Israeli Options
Tax Ruling. Such Otic Pharma Share Options shall continue in effect on the same terms and conditions to which they are currently subject (subject to the adjustments required by this Section 1.5 after giving effect to the Transaction). Otic
Pharma shall, prior to the Closing, take all actions necessary or desirable in connection with the treatment of Otic Pharma Share Options contemplated by this Section 1.5(a), including obtaining the consent from each holder of any Otic Pharma Share
Options (unless such consent is not required under the terms of the applicable agreement, instrument or plan).
(b) As soon as
practicable after the Closing, Public Company shall deliver to the participants in the Otic Pharma Share Plan appropriate notice setting forth such participants’ rights pursuant to Otic Pharma Share Options, as provided in this
Section 1.5.
(c) Public Company shall take all corporate action necessary to reserve for issuance a sufficient number of shares of
Public Company Common Stock for delivery upon exercise of Otic Pharma Share Options assumed in accordance with this Section 1.5. As promptly as practicable after the Closing, Public Company shall file a registration statement on Form
S-8
(or any successor form) or another appropriate form with respect to the shares of Public Company Common Stock subject to such options and shall use commercially reasonable efforts to maintain the effectiveness
of such registration statement or registration statements (and maintain the current status of the prospectus or prospectuses contained therein) for so long as such options remain outstanding.
(d) Otic Pharma shall terminate any employee share purchase plans in accordance with their terms as of or prior to the Closing.
A - 12
(e) At the Closing, by virtue of the Transaction, each Otic Pharma Warrant outstanding
immediately prior to the Closing shall be automatically assumed by Public Company and shall become a warrant to acquire, on the same terms and conditions as were applicable under such Otic Pharma Warrant, such number of shares of Public Company
Common Stock as is equal to the number of Otic Pharma Ordinary Shares, Series B Preferred Shares or Series C Preferred Shares, as applicable, subject to the unexercised portion of such Otic Pharma Warrant immediately prior to the Closing multiplied
by the Exchange Ratio (rounded down to the nearest whole share number), at an exercise price per share equal to the exercise price per share of such Otic Pharma Warrant immediately prior to the Closing divided by the Exchange Ratio (rounded up to
the nearest whole cent) (each, as so adjusted, an “
Adjusted Warrant
”). Otic Pharma shall, prior to the Closing, take all actions necessary or desirable in connection with the treatment of Otic Pharma Warrants contemplated by this
Section 2.3(e). Public Company shall take all corporate actions necessary to reserve for issuance of shares of Public Company Common Stock that will be subject to the Adjusted Warrants.
(f) For purposes of this Section 1.5, “
Exchange Ratio
” means 4.255.
1.6
Allocation Schedules
.
(a) The Preliminary Closing Date Allocation Schedule sets forth a good faith estimate as of the date of this Agreement of the amounts payable
to the Shareholders pursuant to this Agreement. Otic Pharma shall deliver to Public Company, at least three Business Days prior to the Closing, the Closing Date Allocation Schedule. Public Company shall be entitled to rely conclusively on the
Closing Date Allocation Schedule, and, as between the Shareholders, on the one hand, and Public Company, on the other hand, any amounts delivered by the Public Company to any Shareholder in accordance with the Closing Date Allocation Schedule shall
be deemed for all purposes to have been delivered to the applicable Shareholder in full satisfaction of the obligations of the Public Company under this
Article I
.
(b) Public Company shall pay the portion of the Aggregate Closing Consideration payable in respect of the Otic Pharma Share Capital to the
applicable Shareholders in accordance with the Closing Date Allocation Schedule.
1.7
Withholding Rights
. Subject to the provisions
of Section 1.8, each of Otic Pharma, Public Company, the Paying Agent and the 102 Trustee (each, a “
Payor
”) will be entitled to deduct and withhold from the amounts otherwise payable by it pursuant to this Agreement to any
person such amounts as it reasonably determines that it is required to deduct and withhold with respect to the making of such payment under the Israeli Income Tax Ordinance, the Code, or any other applicable law, including the Israeli Income Tax
Ordinance and to collect any necessary Tax forms, including Forms
W-8
or
W-9,
as applicable, or any similar information, from Shareholders and any other recipients of
payments hereunder. In the event that any amount is so deducted and withheld, and properly remitted to the applicable Tax authority, such amount will be treated for all purposes of this Agreement as having been paid to the person to whom the payment
from which such amount was withheld was made. The Public Company undertakes to promptly provide each of the Shareholders from whom Tax was so withheld with sufficient evidence regarding the amounts that were paid and withheld with respect to such
Shareholders.
1.8
Additional Withholding Matters
.
(a) Notwithstanding Section 1.7 above, with respect to Israeli Tax, no amount payable to a Shareholder or to a holder of Otic Pharma
Share Options (each a “
Payee
”) under this Agreement at the Closing shall be subject to withhold of Israeli Tax if the 104H Ruling has been received.
(b) To the extent not previously filed, Otic Pharma shall cause its Israeli counsel in full coordination with Public Company and its Israeli
counsel, to prepare and file with the ITA an application for the following rulings:
(i) A ruling in relation to the Otic Pharma Share
Capital subject to the provisions of Section 102(b)(2) of the Israeli Income Tax Ordinance (“
Section 102(b)(2)
”) and Otic Pharma Share Options subject to
A - 13
the provisions of Section 102(b)(2) or Section 3(i) of the Israeli Income Tax Ordinance (“
Section 3(i)
”), as applicable, confirming, among others, that: (i) the assumption
of the Otic Share Option Plan, and of the Otic Pharma Share Capital and Otic Pharma Share Options, which remain subject to the statutory minimum trust period under such Section 102 of the Israeli Income Tax Ordinance, will not constitute a
violation of the requirements of Section 102 of the Israeli Income Tax Ordinance; and (ii) Public Company and anyone acting on its behalf, including the Paying Agent, shall be exempt from withholding Tax in relation to any payments or
consideration transferred to the 102 Trustee in relation to Otic Pharma Share Capital subject to Section 102(b)(2) or Otic Pharma Share Options subject to Section 102(b)(2) or Section 3(i), as applicable; which ruling may be subject to customary
conditions regularly associated with such a ruling (the “
Israeli Options Tax Ruling
”). If the Israeli Options Tax Ruling is not granted prior to the Closing, Otic Pharma shall seek to receive prior to the Closing an interim tax
ruling confirming among others that Public Company and anyone acting on its behalf (including the Paying Agent) shall be exempt from Israeli withholding Tax in relation to any payments made to the 102 Trustee with respect to Otic Pharma Share
Capital subject to Section 102(b)(2) or Otic Pharma Share Options subject to Section 102(b)(2) or Section 3(i) (which interim tax ruling may be subject to customary conditions regularly associated with such an interim tax ruling) (the
“
Interim Options Tax Ruling
”); and
(ii) A ruling confirming that the provisions of Section 104H apply to the
Transaction and that the applicable Israeli Tax with respect to the Transaction shall be deferred in accordance with the provisions of Section 104H (the “
104H Ruling
” and together with the Interim Options Tax Ruling and the Israeli
Options Tax Rulings, the “
Israeli Tax Rulings
”).
(c) The parties will cause their respective Israeli counsel, advisors
and accountants to coordinate and cooperate and provide all information required with respect to Otic Pharma’s preparation and filing of such application and in the preparation of any written or oral submissions that may be necessary, proper or
advisable to obtain the Israeli Tax Rulings. Subject to the terms and conditions hereof, Otic Pharma shall use commercially reasonable efforts to promptly take, or cause to be taken, all reasonable action and to do, or cause to be done, all
reasonable things necessary, proper or advisable to obtain the Israeli Tax Rulings as promptly as practicable; provided, however, that if none of such Israeli Tax Rulings is obtained for any reason whatsoever by the Closing Date, the Closing shall
be delayed or postponed. For the avoidance of doubt, it is clarified that the language of the Israeli Tax Rulings (as applicable) shall be subject to the prior written approval of Public Company and its Israeli counsel, which shall not be
unreasonably withheld or delayed. Otic Pharma will inform Public Company and its Israeli counsel in advance of any meeting or other discussion with the ITA with respect to any of the Israeli Tax Rulings and allow Public Company’s counsel to
attend such meeting and participate in such discussions. Should Public Company’s counsel not attend any such meeting or discussion with the ITA, the counsel of Otic Pharma shall provide such counsel with an update of such meeting or discussion
within one (1) Business Day of such meeting or discussion.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS
Each Shareholder, severally and not jointly, represents and warrants to Public Company that the statements contained in this
Article II
are true and correct.
2.1
Organization, Standing
. To the extent such Shareholder is an entity, (a) the Shareholder is a
corporation or other entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation and (b) the Shareholder is not in default under or in violation of any provision of its organizational
documents. The Shareholder has all requisite power and authority to carry on the businesses in which it is engaged and to own and use the properties owned and used by it.
2.2
Authority, Power; No Conflict; Required Filings and Consents
.
(a) Except as set forth in
Section 2.2(a)
of the Otic Pharma Disclosure Schedule, the Shareholder has all requisite power and
authority and capacity (in the case of individuals) to execute and deliver this Agreement
A - 14
and the other agreements contemplated hereby to which the Shareholder is a party and to perform the Shareholder’s obligations hereunder and thereunder. The execution and delivery by the
Shareholder of this Agreement and the other agreements contemplated hereby to which the Shareholder is a party and the performance by the Shareholder of this Agreement and the consummation by the Shareholder of the transactions contemplated hereby
and thereby have been duly and validly authorized by all necessary corporate and other action on the part of the Shareholder. This Agreement and all other agreements contemplated hereby to which the Shareholder is a party have been or will be as of
the Closing Date duly and validly executed and delivered by the Shareholder and, assuming the due authorization, execution and delivery by Public Company, Otic Pharma, the other Shareholders, and any other party thereto, constitutes or will
constitute a valid and binding obligation of the Shareholder, enforceable against the Shareholder in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors’ rights and to general equity principles (the “
Bankruptcy and Equity Exception
”).
(b) The execution and delivery of this Agreement by the Shareholder does not, and the consummation by the Shareholder of the Transaction
shall not, (i) conflict with, or result in any violation or breach of, any provision of the certificate of incorporation or bylaws (or similar organizational documents) of Shareholder (to the extent Shareholder is an entity), (ii) conflict
with, or result in any violation or breach of, or constitute (with or without notice or lapse of time, or both) a default (or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any benefit) under, or
require a consent or waiver under, constitute a change in control under, require the payment of a penalty under or result in the imposition of any mortgage, security interest, pledge, lien, charge or encumbrance of any nature
(“
Liens
”) on assets under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, license, contract or other agreement, instrument or obligation to which the Shareholder is a party or by which any
of its properties or assets may be bound, or (iii) conflict with or violate any permit, concession, franchise, license, judgment, injunction, order, decree, statute, law, ordinance, rule or regulation applicable to the Shareholder or any of its
properties or assets, except in the case of clauses (ii) and (iii) of this
Section 2.2(b)
, for any such conflicts, violations, breaches, defaults, terminations, cancellations, accelerations or losses that, individually or in the
aggregate, are not reasonably likely to prohibit or materially delay the ability of the Shareholder to consummate the transactions contemplated by this Agreement or to perform its obligations hereunder.
Section 2.2(b)
of the Otic Pharma
Disclosure Schedule lists all consents, waivers and approvals (if any) under any of the Shareholder’s agreements, licenses or leases required to be obtained in connection with the consummation of the transactions contemplated by this Agreement,
which, if individually or in the aggregate were not obtained, would reasonably be expected to prohibit or materially delay the ability of the Shareholder to consummate the transactions contemplated by this Agreement or to perform its obligations
hereunder.
(c) No consent, approval, license, permit, order or authorization of, or registration, declaration, notice or filing with,
any Governmental Entity is required by or with respect to the Shareholder in connection with the execution and delivery of this Agreement by the Shareholder or the consummation by the Shareholder of the transactions contemplated by this Agreement,
except for such consents, authorizations, orders, filings, approvals and registrations that, individually or in the aggregate, if not obtained or made, would reasonably be expected to prohibit or materially delay the ability of the Shareholder to
consummate the transactions contemplated by this Agreement or to perform its obligations hereunder.
2.3
Ownership of Otic Pharma Share
Capital
. The Shareholder holds legally, beneficially and of record all of the Shareholder’s Otic Pharma Share Capital set forth on
Section
3.2(b)
of the Otic Pharma Disclosure Schedule, free and clear of any
Liens (other than restrictions on transfer arising under applicable securities laws). Except as set forth in
Section
2.3
and
Section 3.2(e)
of the Otic Pharma Disclosure Schedule, the Shareholder is not a party to
any voting trust, proxy, or other agreement or understanding with respect to the voting or transfer of any Shares. Upon consummation of the purchase contemplated hereby, Public Company will acquire from the Shareholder good and marketable title to
all Shares owned by the Shareholder, free and clear of all Liens (other than restrictions on transfer arising under applicable securities laws).
A - 15
2.4
Litigation
. There is no action, suit, proceeding, claim, arbitration or investigation
before any Governmental Entity or before any arbitrator that is pending or has been threatened in writing against the Shareholder that questions the validity of this Agreement or any action taken or to be taken by the Shareholder in connection
herewith or that would reasonably be expected to prohibit or materially delay the Shareholder’s ability to consummate the transactions contemplated by this Agreement. The Shareholder does not have any claim of any kind against Otic Pharma.
2.5
Brokers
. The Shareholder has no liability or obligation to pay any fees or commissions to any broker, finder or agent with respect
to the transactions contemplated by this Agreement.
2.6
Purchase for Own Account; Sophistication
. The Shareholder acknowledges and
agrees that shares of Public Company Common Stock to be acquired by the Shareholder pursuant to this Agreement will be acquired for investment for the Shareholder’s own account, not as a nominee or agent, and not with a view to the resale or
distribution of any part thereof, and that the Shareholder has no present intention of selling, granting any participation in, or otherwise distributing the same. The Shareholder acknowledges and agrees that the Shareholder does not presently have
any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third party, with respect to any of the shares of Public Company Common Stock to be received by it pursuant to
this Agreement. The Shareholder represents and warrants that it has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of owning the shares of Public Company Common Stock to be
received by it pursuant to this Agreement. The Shareholder has the ability to bear the economic risk of the investment in shares of Public Company Common Stock, including complete loss of such investment.
2.7
Access to Information
. The Shareholder acknowledges that (a) it has been afforded (i) access to information about each of
Otic Pharma and Public Company, respectively, and their respective financial conditions, results of operations, businesses, properties and prospects sufficient to enable the Shareholder to evaluate its investment in Public Company Common Stock; and
(ii) the opportunity to obtain such additional information that the other party possesses or can acquire without unreasonable effort or expense that is necessary to make an informed investment decision with respect to the investment in Public
Company Common Stock and any such additional information has been provided to the Shareholder’s reasonable satisfaction, and (b) it has sought such professional advice as it has considered necessary to make an informed decision with
respect to its acquisition of the Public Company Common Stock. Except to the extent expressly provided for in this Agreement, the Shareholder hereby agrees that neither Public Company nor any of its Affiliates will have or be subject to any
liability or indemnification obligation to the Shareholder or to any other person resulting from the issuance of shares of Public Company Common Stock to the Shareholders.
2.8
Restricted Securities; Legends
.
(a) The Shareholder understands that the shares of Public Company Common Stock to be received by it in connection with the Transaction have
not been, and will not be, 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 depends upon, among other
things, the bona fide nature of the investment intent and the accuracy of the Shareholder’s representations and warranties as expressed herein. The Shareholder understands that such shares of Public Company Common Stock will be “restricted
securities” under applicable securities laws and that, pursuant to these laws, the Shareholder must hold such shares indefinitely unless they are registered with the Securities and Exchange Commission (the “
SEC
”) and qualified
by state authorities, or an exemption from such registration and qualification requirements is available.
(b) The Shareholder
understands that the shares of Public Company Common Stock to be received by it in connection with the Transaction may be notated with one or more of the following legends:
(i) “THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND
NOT WITH A
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VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH TRANSFER MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.”
(ii) Any legend required by
applicable securities laws to the extent such laws are applicable to the Shares represented by the certificate, instrument, or book entry so legended.
2.9
Accredited Investor; Regulation S
. Except as set forth on Schedule 2.9 to this Agreement, the Shareholder either is (a) an
“accredited investor” (as defined in Regulation D promulgated under the Securities Act) or (b) not a “U.S. person” within the meaning of Rule 902 of Regulation S of the Securities Act and is not acquiring Public
Company Common Stock pursuant to this Agreement for the account or benefit of any U.S. person within the meaning of Rule 902 of Regulation S of the Securities Act (each such Shareholder, a “
Regulation S Shareholder
”).
2.10
No Other Representations or Warranties
. The Shareholder hereby acknowledges and agrees that, except for the representations and
warranties contained in this Agreement, none of Public Company nor any other person on behalf of Public Company makes any express or implied representation or warranty with respect to Public Company or with respect to any other information provided
to Otic Pharma, any Shareholder or any of their Affiliates in connection with the transactions contemplated hereby, and (subject to the express representations and warranties of Public Company set forth in
Article IV
(in each case as
qualified and limited by the Public Company Disclosure Schedule)) no Shareholder nor any of their respective Affiliates, stockholders, directors, officers, employees, agents, representatives or advisors, or any other person, has relied on any such
information (including the accuracy or completeness thereof).
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF OTIC PHARMA
Otic Pharma represents and warrants to Public Company that the statements contained in this Article III are true and correct, except as
expressly set forth herein or in the disclosure schedule delivered by Otic Pharma to Public Company on the date of this Agreement (the “
Otic Pharma Disclosure Schedule
”). For purposes hereof, the phrase “to the knowledge of
Otic Pharma” and similar expressions mean the actual knowledge of the persons identified on Section K of the Otic Pharma Disclosure Schedule for this purpose, and such knowledge as such persons would reasonably be expected to have obtained in
the course of their performance of their positions at Otic Pharma (but without any special investigation).
3.1
Organization, Standing
and Power
. Otic Pharma is a private limited company duly organized and validly existing under the laws of the State of Israel and is not a “breaching company” in the records of the Israeli Registrar of Companies. Otic Pharma has all
requisite corporate power and authority to own, lease and operate its properties and assets and to carry on its business as currently conducted, and is duly qualified to do business and is in good standing as a foreign corporation in each
jurisdiction listed on Section 3.1 of the Otic Pharma Disclosure Schedule, which jurisdictions constitute the only jurisdictions in which the character of the properties it owns, operates or leases or the nature of its activities makes such
qualification necessary, except for such failures to be so qualified or in good standing, individually or in the aggregate, that have not had, and are not reasonably likely to have, a Otic Pharma Material Adverse Effect. For purposes of this
Agreement, the term “
Otic Pharma Material Adverse Effect
” means any material adverse change, effect, event, circumstance or development with respect to, or material adverse effect on, the business, assets, liabilities,
capitalization, condition (financial or other), or results of operations of Otic Pharma and its Subsidiaries, taken as a whole;
provided
,
however
, that none of the following, to the extent arising after the date of this Agreement,
shall be deemed to be a Otic Pharma Material Adverse Effect: any change or event caused by or resulting from (A) changes in prevailing economic or market conditions in the United States or any other jurisdiction in which
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such entity has substantial business operations (except to the extent those changes have a disproportionate effect on Otic Pharma and its Subsidiaries relative to the other participants in the
industry or industries in which Otic Pharma and its Subsidiaries operate in the relevant jurisdiction), (B) changes or events affecting the industry or industries in which Otic Pharma and its Subsidiaries operate generally (except to the extent
those changes or events have a disproportionate effect on Otic Pharma and its Subsidiaries relative to the other participants in the industry or industries in which Otic Pharma and its Subsidiaries operate), (C) changes in generally accepted
accounting principles or requirements applicable to Otic Pharma and its Subsidiaries (except to the extent those changes or events have a disproportionate effect on Otic Pharma and its Subsidiaries relative to the other participants in the industry
or industries in which Otic Pharma and its Subsidiaries operate), (D) changes in laws, rules or regulations of general applicability or interpretations thereof by any Governmental Entity (except to the extent those changes or events have a
disproportionate effect on Otic Pharma and its Subsidiaries relative to the other participants in the industry or industries in which Otic Pharma and its Subsidiaries operate), (E) any natural disaster or any outbreak of major hostilities in which
the United States or Israel is involved or any act of terrorism within the United States or Israel or directed against their facilities or citizens wherever located (except to the extent those changes or events have a disproportionate effect on Otic
Pharma and its Subsidiaries relative to the other participants in the industry or industries in which Otic Pharma and its Subsidiaries operate), or (F) any failure by Otic Pharma to meet any internal guidance, budgets, plans or forecasts of its
revenues, earnings or other financial performance or results of operations (but not, in the case of this clause (F), the underlying cause of such changes or failures, unless such changes or failures would otherwise be excepted from this definition).
For the avoidance of doubt, the parties agree that the terms “material,” “materially” and “materiality” as used in this Agreement with an initial lower case “m” shall have their respective customary and
ordinary meanings, without regard to the meanings ascribed to Otic Pharma Material Adverse Effect or Public Company Material Adverse Effect, in each case as defined in this Agreement. Otic Pharma has made available to Public Company complete and
accurate copies of the Otic Pharma Organizational Documents and is not in material default under or in material violation of any provision of such documents.
3.2
Capitalization
.
(a) The authorized share capital of Otic Pharma consists of 9,207,060 Ordinary Shares, of which 740,215 were issued and outstanding, and
5,958,682 Preferred Shares, of which: (i) 691,000 shares are designated as Series A Preferred Shares, of which 493,551 were issued and outstanding, (ii) 4,327,590 shares are designated as Series B Preferred Shares, of which 2,640,711 were issued and
outstanding, and (iii) 1,546,950 shares are designated as Series C Preferred Shares, of which 940,092 were issued and outstanding. The rights and privileges of each class and series of Otic Pharma’s share capital are as set forth in Otic
Pharma’s articles of association. As of the date of this Agreement, no shares were held in the treasury of Otic Pharma or by Subsidiaries of Otic Pharma.
(b) Section 3.2(b) of the Otic Pharma Disclosure Schedule sets forth a complete and accurate list, as of the date of this Agreement, of the
holders of Otic Pharma Share Capital, showing the number of shares, and the class or series of such shares, held by each shareholder and (for shares other than Otic Pharma Ordinary Shares) the number of shares of Otic Pharma Ordinary Shares (if any)
into which such shares are convertible. Section 3.2(b) of the Otic Pharma Disclosure Schedule also sets forth a complete and accurate list of all issued and outstanding shares of Otic Pharma Ordinary Shares that constitute restricted stock or that
are otherwise subject to a repurchase or redemption right or right of first refusal in favor of Otic Pharma, indicating the name of the applicable shareholder, the vesting schedule for any such shares, including the extent to which any such
repurchase or redemption right or right of first refusal has lapsed as of the date of this Agreement, whether (and to what extent) the vesting will be accelerated in any way by the transactions contemplated by this Agreement or by termination of
employment or change in position following consummation of the transactions contemplated by this Agreement, and whether to the knowledge of Otic Pharma such holder has the sole power to vote and dispose of such shares.
(c) The Otic Pharma Ltd. Global Share Initiative Plan (2012) is the sole Otic Pharma Share Plan that Otic has ever had. Section 3.2(c)
of the Otic Pharma Disclosure Schedule sets forth a complete and accurate list,
A - 18
as of the date of this Agreement, of: (i) the number of shares of Otic Pharma Ordinary Shares issued to date under such plan, the number of shares of Otic Pharma Ordinary Shares subject to
outstanding options under such Plan and the number of shares of Otic Pharma Ordinary Shares reserved for future issuance under such Plan; and (ii) all outstanding Otic Pharma Share Options, indicating with respect to each such Otic Pharma Share
Option the name of the holder thereof, the number of shares of Otic Pharma Ordinary Shares subject to such Otic Pharma Share Option, the exercise price, the date of grant and the vesting schedule, including whether (and to what extent) the vesting
will be accelerated in any way by the transactions contemplated by this Agreement or by termination of employment or change in position following consummation of the Transaction, whether such Otic Pharma Share Option is intended to be an incentive
stock option, whether each such Otic Pharma Share Option was granted and is subject to Tax pursuant to Section 3(i) of the Israeli Income Tax Ordinance or Section 102 of the Israeli Income Tax Ordinance and the applicable
sub-section
of Section 102 of the Israeli Income Tax Ordinance, and for Otic Pharma Share Options subject to Section 102(b)(2) of the Israeli Income Tax Ordinance the date of deposit of such Otic Pharma Share
Option with the 102 Trustee, including also full details of the grant and the date of deposit of the respective option agreement with the 102 Trustee. Otic Pharma has made available to Public Company complete and accurate copies of the Otic Pharma
Share Plan and the form of share option agreements evidencing Otic Pharma Share Options.
(d) Section 3.2(d) of the Otic Pharma
Disclosure Schedule sets forth the number of shares of Otic Pharma Ordinary Shares and Otic Pharma Preferred Shares reserved for future issuance pursuant to warrants or other outstanding rights (other than Otic Pharma Share Options) to purchase
shares of Otic Pharma Ordinary Shares and Otic Pharma Preferred Shares outstanding as of the date of this Agreement (such outstanding warrants or other rights, the “
Otic Pharma Warrants
”) and the agreement or other document under
which such Otic Pharma Warrants were granted and sets forth a complete and accurate list of all holders of Otic Pharma Warrants indicating the number and type of shares of Otic Pharma Share Capital subject to each Otic Pharma Warrant, and the
exercise price, the date of grant and the expiration date thereof.
Otic Pharma has made available to Public Company complete and accurate copies of the forms of agreements evidencing all Otic
Pharma Warrants.
(e) Except (i) as set forth in this Section 3.2 and (ii) as reserved for future grants under Otic Pharma
Share Plan, (A) there are no equity securities of any class of Otic Pharma, or any security exchangeable into or exercisable for such equity securities, issued, reserved for issuance or outstanding and (B) there are no options, warrants,
equity securities, calls, rights, commitments or agreements of any character to which Otic Pharma is a party or by which Otic Pharma or any of its Subsidiaries is bound obligating Otic Pharma or any of its Subsidiaries to issue, exchange, transfer,
deliver or sell, or cause to be issued, exchanged, transferred, delivered or sold, additional shares of capital stock or other equity interests of Otic Pharma or any security or rights convertible into or exchangeable or exercisable for any such
shares or other equity interests, or obligating Otic Pharma or any of its Subsidiaries to grant, extend, accelerate the vesting of, otherwise modify or amend or enter into any such option, warrant, equity security, call, right, commitment or
agreement. Otic Pharma does not have any outstanding stock appreciation rights, phantom stock, performance based rights or similar rights or obligations. Other than Otic Pharma’s articles of association, neither Otic Pharma nor any of its
Affiliates is a party to or is bound by any, and to the knowledge of Otic Pharma, there are no, agreements or understandings with respect to the voting (including voting trusts and proxies) or sale or transfer (including agreements imposing transfer
restrictions) of any shares or other equity interests of Otic Pharma. For purposes of this Agreement, the term “
Affiliate
” when used with respect to any party shall mean any person who is an “affiliate” of that party
within the meaning of Rule 405 promulgated under the Securities Act. Except as contemplated by this Agreement or described in this Section 3.2(e), there are no registration rights to which Otic Pharma or any of its Subsidiaries is a party or by
which it or they are bound with respect to any equity security of any class of Otic Pharma.
(f) All outstanding Otic Pharma Share
Capital is, and all shares of Otic Pharma Ordinary Shares subject to issuance as specified in Sections 3.2(c), 3.2(d), and 3.2(e) upon issuance on the terms and conditions specified in the instruments pursuant to which they are issuable, will be,
duly authorized, validly issued, fully paid and nonassessable and not subject to or issued in violation of any purchase option, call option, right of first refusal, preemptive right, subscription right or any similar right under any provision of
applicable law, the Otic
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Pharma Organizational Documents or any agreement to which Otic Pharma is a party or is otherwise bound. There are no obligations, contingent or otherwise, of Otic Pharma or any of its
Subsidiaries to repurchase, redeem or otherwise acquire any shares of Otic Pharma Share Capital. All outstanding shares of Otic Pharma Share Capital have been offered, issued and sold by Otic Pharma in compliance with all applicable securities laws.
(g) No consent of the holders of Otic Pharma Share Options or Otic Pharma Warrants, apart from consents previously obtained, is required
in connection with the actions contemplated by Section 1.5.
3.3
Subsidiaries
.
(a) Section 3.3(a) of the Otic Pharma Disclosure Schedule sets forth, for each Subsidiary of Otic Pharma: (i) its name; (ii) the
number and type of outstanding equity securities and a list of the holders thereof; and (iii) the jurisdiction of organization. For purposes of this Agreement, the term “
Subsidiary
” means, with respect to any party, any
corporation, partnership, trust, limited liability company or other
non-corporate
business enterprise in which such party (or another Subsidiary of such party) owns or controls, directly or indirectly,
securities or other ownership interests representing (A) more that 50% of the voting power of all outstanding stock or ownership interests of such entity or (B) the right to receive more than 50% of the net assets of such entity available
for distribution to the holders of outstanding stock or ownership interests upon a liquidation or dissolution of such entity.
(b) Each
Subsidiary of Otic Pharma is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation (to the extent such concepts are applicable in such jurisdiction), has all requisite corporate
(or similar, in the case of a
non-corporate
entity) power and authority to own, lease and operate its properties and assets and to carry on its business as currently conducted and as currently proposed to be
conducted, and is duly qualified to do business and is in good standing as a foreign corporation (to the extent such concepts are applicable) in each jurisdiction where the character of its properties owned, operated or leased or the nature of its
activities makes such qualification necessary, except for such failures to be so organized, qualified or in good standing, individually or in the aggregate, that have not had, and are not reasonably likely to have, a Otic Pharma Material Adverse
Effect. All of the outstanding shares of capital stock and other equity securities or interests of each Subsidiary of Otic Pharma are duly authorized, validly issued, fully paid, nonassessable and free of preemptive rights and all such shares (other
than directors’ qualifying shares in the case of
non-U.S.
Subsidiaries, all of which Otic Pharma has the power to cause to be transferred for no or nominal consideration to Otic Pharma or Otic
Pharma’s designee) are owned, of record and beneficially, by Otic Pharma or another of its Subsidiaries free and clear of all Liens, claims, agreements or limitations in Otic Pharma’s voting rights. There are no outstanding or authorized
options, warrants, rights, agreements or commitments to which Otic Pharma or any of its Subsidiaries is a party or which are binding on any of them providing for the issuance, disposition or acquisition of any capital stock of any Subsidiary of Otic
Pharma. There are no outstanding stock appreciation, phantom stock or similar rights with respect to any Subsidiary of Otic Pharma. There are no voting trusts, proxies or other agreements or understandings with respect to the voting of any capital
stock of any Subsidiary of Otic Pharma.
(c) Otic Pharma has made available to Public Company complete and accurate copies of the
charter, bylaws or other organizational documents of each Subsidiary of Otic Pharma.
(d) Otic Pharma does not control directly or
indirectly or have any direct or indirect equity participation or similar interest in any corporation, partnership, limited liability company, joint venture, trust or other business association or entity which is not a Subsidiary of Otic Pharma.
There are no obligations, contingent or otherwise, of Otic Pharma or any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital stock of any Subsidiary of Otic Pharma or to provide funds to or make any investment (in
the form of a loan, capital contribution or otherwise) in any Subsidiary of Otic Pharma or any other entity, other than guarantees of bank obligations of Subsidiaries of Otic Pharma entered into in the ordinary course of business consistent in all
material respects with past practice (as applicable to a party, the “
Ordinary Course of Business
”).
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3.4
Authority; No Conflict; Required Filings and Consents
.
(a) Otic Pharma has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated
by this Agreement. The execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement by Otic Pharma have been duly authorized by all necessary corporate action on the part of Otic Pharma. This
Agreement has been duly executed and delivered by Otic Pharma and constitutes the valid and binding obligation of Otic Pharma, enforceable against Otic Pharma in accordance with its terms, subject to the Bankruptcy and Equity Exception.
(b) The execution and delivery of this Agreement by Otic Pharma does not, and the consummation by Otic Pharma of the Transaction shall not,
(i) conflict with, or result in any violation or breach of, any provision of the certificate of incorporation or bylaws of Otic Pharma or of the charter, bylaws or other organizational document of any Subsidiary of Otic Pharma,
(ii) conflict with, or result in any violation or breach of, or constitute (with or without notice or lapse of time, or both) a default (or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any
material benefit) under, or require a consent or waiver under, constitute a change in control under, require the payment of a penalty under or result in the imposition of any Liens on Otic Pharma’s or any of its Subsidiaries’ assets under
any of the terms, conditions or provisions of any Contract required to be disclosed in Section 3.11(d) of the Otic Pharma Disclosure Schedules, or (iii) conflict with or violate any permit, concession, franchise, license, judgment, injunction,
order, decree, statute, law, ordinance, rule or regulation applicable to Otic Pharma or any of its Subsidiaries or any of its or their properties or assets, except in the case of clauses (ii) and (iii) of this Section 3.4(b) for any such
conflicts, violations, breaches, defaults, terminations, cancellations, accelerations or losses that, individually or in the aggregate, have not had, and are not reasonably likely to result in, the loss of a material benefit to, or in the creation
of any material liability for, Otic Pharma. Section 3.4(b) of the Otic Pharma Disclosure Schedule lists all consents, waivers and approvals under any of Otic Pharma’s or any of its Subsidiaries’ agreements, licenses or leases required to
be obtained in connection with the consummation of the transactions contemplated by this Agreement, which, if individually or in the aggregate were not obtained, would result in a loss of a material benefit to, or the creation of any material
liability for, Otic Pharma or Public Company as a result of the Transaction.
(c) Except as set forth in Section 3.14(c) of the Otic
Pharma Disclosure Schedule, no consent, approval, license, permit, order or authorization of, or registration, declaration, notice or filing with, any Governmental Entity is required by or with respect to Otic Pharma or any of its Subsidiaries in
connection with the execution and delivery of this Agreement by Otic Pharma or the consummation by Otic Pharma of the Transaction, except for such consents, authorizations, orders, filings, approvals and registrations that, individually or in the
aggregate, if not obtained or made, would not result in a loss of a material benefit to, or the creation of any material liability for, Otic Pharma or Public Company as a result of the Transaction. No publication of a prospectus in Israel is
required by or with respect to Otic Pharma or any of its Subsidiaries in connection with the execution and delivery of this Agreement by Otic Pharma or the consummation by Otic Pharma of the Transaction.
3.5
Financial Statements; Information Provided
.
(a) Otic Pharma has made available to Public Company correct and complete copies of the Financial Statements. The Financial Statements
(i) comply as to form in all material respects with all applicable accounting requirements, (ii) were prepared in accordance with United States generally accepted accounting principles (“
GAAP
”) applied on a consistent
basis throughout the periods covered thereby (except as may be indicated in the notes to such financial statements) and (iii) fairly present in all material respects the consolidated financial position of Otic Pharma and its Subsidiaries as of
the dates thereof and the consolidated assets, liabilities, business, financial condition, results of its operations and cash flows for the periods indicated, consistent with the books and records of Otic Pharma and its Subsidiaries, except that the
unaudited interim financial statements are subject to normal and recurring
year-end
adjustments, which will not be material in amount or effect and which
A - 21
do not contain footnotes otherwise required by GAAP. For purposes of this Agreement,
“
Financial Statements
” means (i) the audited consolidated balance sheets
and statements of income, changes in shareholders’ equity and cash flows of Otic Pharma as of the end of and for each of the last three fiscal years, and (ii) the unaudited consolidated balance sheet of Otic Pharma (the “
Otic
Pharma Balance Sheet
”) as of September 30, 2016 (the “
Most Recent Balance Sheet Date
”) and the unaudited consolidated statements of income, changes in shareholders’ equity and cash flows for the nine months ended
as of the Most Recent Balance Sheet Date.
(b) Deloitte, Brightman Almagor Zohar & Co., Otic Pharma’s current auditor, is
and to the knowledge of Otic Pharma has been at all times since its engagement by Otic Pharma been, (x) “independent” with respect to Otic Pharma and its Subsidiaries within the meaning of Regulation
S-X
and (y) in compliance with subsections (g) through (l) of Section 10A of the Securities Exchange Act of 1934, as amended (the “
Exchange Act
”) (to the extent applicable), and the
related rules of the SEC and Public Company Accounting Oversight Board.
(c) The information to be supplied by or on behalf of Otic
Pharma for inclusion in a definitive proxy statement on Schedule 14A seeking stockholder approval of the Public Company Voting Proposal (the “
Proxy Statement
”) to be sent to the stockholders of Public Company in connection with the
meeting of Public Company’s stockholders (the “
Public Company Meeting
”) to consider the issuance of shares of Public Company Common Stock in the Transaction (the “
Public Company Voting Proposal
”) under the
rules of The NASDAQ Stock Market, Inc. (“
NASDAQ
”) and the General Corporation Law of the State of Delaware (the “
DGCL
”) (the “
Public Company Stockholder Approval
”), which information shall be deemed
to include all information about or relating to Otic Pharma and its Subsidiaries shall not, on the date the Proxy Statement is first mailed to stockholders of Public Company, or at the time of the Public Company Meeting, contain any statement that,
at such time and in light of the circumstances under which it shall be made, is false or misleading with respect to any material fact, or omit to state any material fact necessary in order to make the statements made in the Proxy Statement not false
or misleading; or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the Public Company Meeting that has become false or misleading.
3.6
No Undisclosed Liabilities
. Otic Pharma does not have any liability that is required to be set forth on a balance sheet of Otic
Pharma in accordance with GAAP, except for (a) liabilities shown on the Most Recent Balance Sheet, (b) liabilities that have arisen since the Most Recent Balance Sheet Date in the Ordinary Course of Business, (c) liabilities for
transaction expenses incurred in connection with the transactions contemplated by this Agreement and (d) contractual and other liabilities incurred in the Ordinary Course of Business that are not required by GAAP to be reflected on a balance
sheet.
3.7
Absence of Certain Changes or Events
. During the period beginning on the Most Recent Balance Sheet Date and ending on
the date hereof, Otic Pharma and its Subsidiaries have conducted their respective businesses only in the Ordinary Course of Business and, since such date, there has not been (i) any change, event, circumstance, development or effect that,
individually or in the aggregate, has had, or is reasonably likely to have, a Otic Pharma Material Adverse Effect; or (ii) any other action that would have required consent of Public Company pursuant to Section 5.1 (other than clause
(A) of paragraph (j) or paragraphs (k) or (l) thereof) had such action or event occurred after the date of this Agreement.
3.8
Taxes
.
(a) Each of
Otic Pharma and its Subsidiaries has properly filed on a timely basis all income and other material Tax Returns that it was required to file, and all such Tax Returns were true, correct and complete in all material respects. Each of Otic Pharma and
its Subsidiaries has paid on a timely basis all Taxes that were due and payable. The unpaid Taxes of Otic Pharma and each of its Subsidiaries for Tax periods through the date of the Otic Pharma Balance Sheet do not exceed the accruals and reserves
for Taxes (excluding accruals and reserves for deferred Taxes established to reflect timing differences between book and Tax income) set forth on the Otic Pharma Balance Sheet and all unpaid Taxes of Otic Pharma and each of its Subsidiaries for all
Tax periods
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commencing after the date of the Otic Pharma Balance Sheet arose in the Ordinary Course of Business. Neither Otic Pharma nor any of its Subsidiaries is or has ever been a member of an affiliated
group with which it has filed (or been required to file) consolidated, combined, unitary or similar Tax Returns, other than a group of which the common parent is Otic Pharma. With the exception of customary commercial leases or contracts that are
not primarily related to Taxes entered into in the Ordinary Course of Business and liabilities thereunder, neither Otic Pharma nor any of its Subsidiaries (i) has any actual or potential liability under Treasury Regulations
Section 1.1502-6
(or any comparable or similar provision of federal, state, local or foreign law), as a transferee or successor, pursuant to any contractual obligation, or otherwise for any Taxes of any person
other than Otic Pharma or any of its Subsidiaries, or (ii) is a party to or bound by any Tax indemnity, Tax sharing, Tax allocation or similar agreement. All material Taxes that Otic Pharma or any of its Subsidiaries was required by law to
withhold or collect have been duly withheld or collected and, to the extent required, have been properly paid to the appropriate Governmental Entity, and each of Otic Pharma and its Subsidiaries has complied with all material information reporting
and backup withholding requirements, including the maintenance of required records with respect thereto, in connection with amounts paid to any employee, independent contractor, creditor, or other third party. For purposes of this Agreement, (i)
“
Taxes
” shall mean any and all taxes, charges, fees, duties, contributions, levies or other similar assessments or liabilities in the nature of a tax, including, without limitation, income, gross receipts, corporation, ad valorem,
premium, value-added, net worth, capital stock, capital gains, documentary, recapture, alternative or
add-on
minimum, disability, estimated, registration, recording, excise, real property, personal property,
sales, use, license, lease, service, service use, transfer, withholding, employment, unemployment, insurance, social security, national insurance, health tax, business license, business organization, environmental, workers compensation, payroll,
profits, severance, stamp, occupation, windfall profits, customs duties, franchise and other taxes of any kind whatsoever imposed by the United States of America or any state, local or foreign government, or any agency or political subdivision
thereof, and any interest, fines, penalties, assessments or additions to tax imposed with respect to such items, and (ii) “
Tax Returns
” shall mean any and all reports, returns (including information returns), declarations, or
statements relating to Taxes, including any schedule or attachment thereto and any amendment thereof, filed with or submitted to a Governmental Entity in connection with the determination, assessment, collection or payment of Taxes or in connection
with the administration, implementation or enforcement of or compliance with any legal requirement relating to any Tax.
(b) Otic Pharma
has delivered or made available to Public Company (i) complete and correct copies of all Tax Returns of Otic Pharma and any of its Subsidiaries relating to Taxes for all taxable periods for which the applicable statute of limitations has not
yet expired, (ii) complete and correct copies of all private letter rulings, revenue agent reports, information document requests, notices of proposed deficiencies, deficiency notices, protests, petitions, closing agreements, settlement
agreements, pending ruling requests and any similar documents submitted by, received by, or agreed to by or on behalf of Otic Pharma or any of its Subsidiaries relating to Taxes for all taxable periods for which the statute of limitations has not
yet expired, and (iii) complete and correct copies of all material agreements, rulings, settlements or other Tax documents with or from any Governmental Entity relating to Tax incentives of Otic Pharma or any of its Subsidiaries. No examination
or audit of any Tax Return of Otic Pharma or any of its Subsidiaries by any Governmental Entity is currently in progress or, to the knowledge of Otic Pharma, threatened or contemplated. Neither Otic Pharma nor any of its Subsidiaries has been
informed in writing by any jurisdiction in which Otic Pharma or any Subsidiary does not file a Tax Return that the jurisdiction believes that Otic Pharma or any of its Subsidiaries was required to file any Tax Return that was not filed or is subject
to Tax in such jurisdiction. Neither Otic Pharma nor any of its Subsidiaries has (i) waived any statute of limitations with respect to Taxes or agreed to extend the period for assessment or collection of any Taxes, which waiver or extension is
still in effect, (ii) requested any extension of time within which to file any Tax Return, other than routine extensions available as a matter of right which Tax Return has not yet been filed, or (iii) executed or filed any power of
attorney with any taxing authority, which is still in effect.
(c) Neither Otic Pharma nor any of its Subsidiaries has made any payment,
is obligated to make any payment, or is a party to any agreement that could obligate it to make any payment that may be treated as an “excess parachute payment” under Section 280G of the Code (without regard to Sections 280G(b)(4) and
280G(b)(5) of the Code).
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(d) Neither Otic Pharma nor any of its Subsidiaries has been a United States real property
holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(l)(A)(ii) of the Code.
(e) Neither Otic Pharma nor any of its Subsidiaries has distributed to its shareholders or security holders stock or securities of a
controlled corporation, nor has stock or securities of Otic Pharma or any of its Subsidiaries been distributed, in a transaction to which Section 355 of the Code applies (i) in the two years prior to the date of this Agreement or
(ii) in a distribution that could otherwise constitute part of a “plan” or “series of related transactions” (within the meaning of Section 355(e) of the Code) that includes the transactions contemplated by this Agreement.
(f) There are no Liens with respect to Taxes upon any of the assets or properties of Otic Pharma or any of its Subsidiaries, other than
with respect to Taxes not yet due and payable.
(g) Neither Otic Pharma nor any of its Subsidiaries will be required to include any item
of income in, or exclude any item of deduction from, taxable income for any period (or any portion thereof) ending after the Closing Date as a result of any (i) adjustments under Section 481 of the Code (or any similar adjustments under
any provision of the Code or the corresponding foreign, state or local Tax laws), (ii) deferred intercompany gain or any excess loss account described in Treasury Regulations under Section 1502 of the Code (or any corresponding provision of
state, local or foreign Tax law), (iii) closing agreement as described in Section 7121 of the Code (or any corresponding or similar provision of state, local or foreign Tax law) executed on or prior to the Closing Date, (iv) installment
sale or other open transaction disposition made on or prior to the Closing Date, (v) prepaid amount received on or prior to the Closing Date, or (vi) any election made pursuant to Section 108(i) of the Code on or prior to the Closing Date.
(h) Neither Otic Pharma nor any of its Subsidiaries has participated in any “reportable transaction” as defined in section
1.6011-4(b)
of the Treasury Regulations or any analogous provision of state or local law.
(i) Neither
Otic Pharma nor any Subsidiary (i) is a party to any joint venture, partnership, or other arrangement that is treated as a partnership for federal income Tax purposes, (ii) has made an entity classification
(“check-the-box”)
election under Section 7701 of the Code, (iii) is, or has been, a shareholder of a “controlled foreign corporation” as
defined in Section 957 of the Code (or any similar provision of state, local or foreign law), or (iv) is, or has been, a shareholder in a “passive foreign investment company” within the meaning of Section 1297 of the Code.
(j) Neither Otic Pharma nor any Subsidiary (A) has or has had a permanent establishment in any country (other than its country of
incorporation) as defined in any applicable Tax treaty or convention between such foreign country and Otic Pharma’s or its Subsidiary’s country of incorporation or (B) has or has had operations constituting doing business for Tax
purposes in any country (other than its country of incorporation).
(k) The Otic Pharma Share Plan is intended to qualify as a capital
gains track plan under Section 102 of the Israeli Income Tax Ordinance (a “
102 Plan
”), and has received a favorable determination or approval letter from, or is otherwise approved by, or deemed approved by passage of time
without objection by, the ITA. Otic Pharma Share Capital and Otic Pharma Share Options which are subject to Tax under Section 102 of the Israeli Income Tax Ordinance and which were issued under any 102 Plan have been granted and issued, as
applicable, in compliance with the applicable requirements of Section 102 of the Israeli Income Tax Ordinance (including the relevant
sub-sections
of Section 102) and the written requirements and
guidance of the ITA, including the filing of the necessary documents with the ITA, the appointment of an authorized trustee to hold the Otic Pharma Share Capital and Otic Pharma Share Options, and the due deposit of such Otic Pharma Share Capital
and Otic Pharma Share Options with such trustee pursuant to the terms of Section 102 of the Israeli Income Tax Ordinance and the guidance published by the ITA on July 24, 2012 and clarification dated November 6, 2012.
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(l) All related party transactions involving Otic Pharma or any of its Subsidiaries have been
conducted at arm’s length in compliance with Section 482 of the Code and the Treasury Regulations promulgated thereunder and any comparable provisions of any other Tax law. Each of Otic Pharma and its Subsidiaries has maintained
documentation (including any applicable transfer pricing studies) in connection with such related party transactions in accordance with Sections 482 and 6662 of the Code and the Treasury Regulations promulgated thereunder or the comparable
provisions of any other foreign Tax law, as applicable, including Section 85A of the Israeli Income Tax Ordinance and the regulations promulgated thereunder.
(m) Otic Pharma and its Subsidiaries have complied in all material respects with all applicable laws relating to the payment and withholding
of Taxes, including from payments made or deemed made to employees, suppliers, lenders and other third parties, from payments made or deemed made to any Person and have duly and timely withheld and paid over to the appropriate taxing authority all
amounts required to be so withheld and paid under all applicable laws. Otic Pharma and its Subsidiaries are materially in compliance with, and its records contain all information and documents necessary to comply with, all applicable information
reporting and withholding requirements under all applicable Tax laws.
(n) Otic Pharma is duly registered for the purposes of Israeli
value added tax and has complied in all material respects with the requirements concerning value added Taxes (“
VAT
”). Otic Pharma (i) has not made any exempt transactions (as defined in the Israel Value Added Tax Law of 1975)
and, to the knowledge of Otic Pharma, there are no circumstances by reason of which there might not be an entitlement to full credit of all VAT chargeable or paid on inputs, supplies, and other transactions and imports made by it, (ii) has
collected and timely remitted to the relevant taxing authority the output VAT which it is required to collect and remit under any applicable law; and (iii) has not received a refund for input VAT for which it is not entitled under applicable
law.
(o) Otic Pharma is not subject to any restrictions or limitations pursuant to Part E2 of the Israeli Income Tax Ordinance or
pursuant to any Tax ruling made with reference to the provisions of Part E2 of the Israeli Income Tax Ordinance.
(p) Otic Pharma does
not and has never participated or engaged in any transaction listed in Section 131(g) of the Israeli Income Tax Ordinance and the Israeli Income Tax Regulations (Reportable Tax Planning), 5767-2006 promulgated thereunder.
(q) Otic Pharma is not and has never been a real property corporation (
Igud Mekarke’in
) within the meaning of this term under
Section 1 of the Israeli Land Taxation Law (Appreciation and Acquisition), 5723-1963.
(r) Each of Otic Pharma and each Subsidiary
is a resident for Tax purposes solely in its country of incorporation, and, neither the Company nor its Subsidiary is subject to Tax in any jurisdiction other than its country of incorporation whether by virtue of having employees, or any other
place of business in such jurisdiction or by virtue of exercising management and control in such jurisdiction.
(s) Neither Otic Pharma
nor any of its Subsidiaries has made a valid election to be treated as a “Privileged Enterprise” (
Mifaal Muadaf
) under the Law for Encouragement of Capital Investments, 1959.
(t) Otic Pharma has provided to Public Company all material documentation relating to any applicable Tax holidays or incentives (other than
incentives generally available by operation of law without application to or action by any Governmental Entity). Otic Pharma and its Subsidiaries are in compliance with the requirements of all such Tax holidays and incentives and none of the Tax
holidays or incentives will be jeopardized by the consummation of the Transaction.
(u) Otic Pharma does not own any interest in any
controlled foreign corporation pursuant to Section 75B of the Israel Income Tax Ordinance, or other entity the income of which is required to be included in the income of Otic Pharma.
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3.9
Owned and Leased Real Properties
.
(a) Neither Otic Pharma nor any of its Subsidiaries owns or has ever owned any real property.
(b) Section 3.9(b) of the Otic Pharma Disclosure Schedule sets forth a complete and accurate list of all real property leased, subleased or
licensed by Otic Pharma or any of its Subsidiaries as of the date of this Agreement (collectively, the “
Otic Pharma Leases
”) and the location of the premises. Neither Otic Pharma nor any of its Subsidiaries nor, to the knowledge of
Otic Pharma, any other party is in breach or default and no event has occurred, is pending or, to the knowledge of Otic Pharma, is threatened, which, after the giving of notice, with lapse of time, or otherwise, would constitute any such breach or
default under any of Otic Pharma Leases, except where the existence of such breaches or defaults, individually or in the aggregate, has not had, and is not reasonably likely to result in, the loss of a material right or in a material liability of
Otic Pharma or any of its Subsidiaries. Neither Otic Pharma nor any of its Subsidiaries leases, subleases or licenses any real property to any person other than Otic Pharma and its Subsidiaries. Otic Pharma has made available to Public Company
complete and accurate copies of all Otic Pharma Leases.
3.10
Intellectual Property
.
(a) To the knowledge of Otic Pharma, Otic Pharma and its Subsidiaries own, license or otherwise possess legally enforceable rights, free and
clear of any Liens, to use all material Intellectual Property used or necessary to conduct the business of Otic Pharma and its Subsidiaries as currently conducted, or that would be used or necessary as such business is currently proposed to be
conducted (excluding generally commercially available software programs).
(b) The execution and delivery of this Agreement and
consummation of the Transaction will not result in the breach of, or create on behalf of any third party the right to terminate or modify, (i) any license, sublicense or other agreement relating to any Intellectual Property owned by Otic Pharma
or any of its Subsidiaries that is material to the business of Otic Pharma and its Subsidiaries, taken as a whole, including software that is used in the development or manufacture of or forms a part of any product or service sold by or expected to
be sold by Otic Pharma or any of its Subsidiaries, but excluding generally commercially available software programs (such Intellectual Property, the “
Otic Pharma Intellectual Property
”) or (ii) any license, sublicense and other
agreement as to which Otic Pharma or any of its Subsidiaries is a party and pursuant to which Otic Pharma or any of its Subsidiaries is authorized to use any third party Intellectual Property that is material to the business of Otic Pharma and its
Subsidiaries, taken as a whole, including software that is used in the development or manufacture of or forms a part of any product or service sold by or expected to be sold by Otic Pharma or any of its Subsidiaries, but excluding generally
commercially available software programs (such Intellectual Property, the “
Otic Pharma Third Party Intellectual Property
”). Section 3.10(b)(i) of the Otic Pharma Disclosure Schedule sets forth a complete and accurate list of all
Patent Rights and registrations and applications for Trademarks and copyrights included in Otic Pharma Intellectual Property and Section 3.10(b)(ii) sets forth a complete and accurate list of all agreements under which Otic Pharma or any of its
Subsidiaries has
in-licensed
any Otic Pharma Third Party Intellectual Property.
(c) To the
knowledge of Otic Pharma, all issued patents and registrations for Trademarks, service marks and copyrights which are owned by or licensed to Otic Pharma or any of its Subsidiaries and that are material to the business of Otic Pharma and its
Subsidiaries, taken as a whole, are valid and subsisting and all payments due and all registration and renewal formalities relating to Otic Pharma Intellectual Property are up to date, complete and correct. Otic Pharma and its Subsidiaries have
taken reasonable measures to protect the proprietary nature of the Otic Pharma Intellectual Property. To the knowledge of Otic Pharma, as of the date of this Agreement (i) no other person or entity is infringing, violating or misappropriating
any of the Otic Pharma Intellectual Property or Otic Pharma Third Party Intellectual Property and (ii) no claim or demand has been made in writing and no proceeding has been filed or is threatened in writing asserting that such Intellectual
Property is invalid or unenforceable.
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(d) To the knowledge of Otic Pharma, none of the (i) products previously or currently sold
by Otic Pharma or any of its Subsidiaries or (ii) business or activities previously or currently conducted by Otic Pharma or any of its Subsidiaries infringes, violates or constitutes a misappropriation of, any Intellectual Property of any
third party. As of the date of this Agreement, neither Otic Pharma nor any of its Subsidiaries has received any written complaint, claim or notice alleging any such infringement, violation or misappropriation.
(e) For purposes of this Agreement, the following terms shall have the following meanings:
(i) “
Intellectual Property
” means the following subsisting throughout the world:
(A) Patent Rights;
(B)
Trademarks and all goodwill in the Trademarks;
(C) copyrights, designs, data and database rights and registrations and applications for
registration thereof, including moral rights of authors;
(D) mask works and registrations and applications for registration thereof
under the laws of any jurisdiction;
(E) inventions, invention disclosures, statutory invention registrations, trade secrets and
confidential business information,
know-how,
manufacturing and product processes and techniques, research and development information, financial, marketing and business data, pricing and cost information,
business and marketing plans and customer and supplier lists and information, whether patentable or nonpatentable, whether copyrightable or
non-copyrightable
and whether or not reduced to practice; and
(F) other proprietary rights relating to any of the foregoing (including remedies against infringement thereof and rights of protection of
interest therein under the laws of all jurisdictions).
(ii) “
Patent Rights
” means all patents, patent applications,
utility models, and design registrations (including all related continuations,
continuations-in-part,
divisionals, reissues and reexaminations).
(iii) “
Trademarks
” means all registered trademarks and service marks, logos, Internet domain names, corporate names and
doing business designations and all registrations and applications for registration of the foregoing, common law trademarks and service marks and trade dress.
3.11
Contracts
.
(a) As
of the date of this Agreement, there are no Contracts that are material contracts (as defined in Item 601(b)(10) of Regulation
S-K)
with respect to Otic Pharma (assuming Otic Pharma was subject to the
requirements of the Exchange Act), other than those Contracts identified in
Section 3.11(a)
of the Otic Pharma Disclosure Schedule.
(b) Neither Otic Pharma nor any of its Subsidiaries has entered into any transaction that would be subject to proxy statement disclosure
pursuant to Item 404 of Regulation
S-K
(assuming Otic Pharma was subject to the requirements of the Exchange Act), other than as disclosed in
Section 3.11(b)
of the Otic Pharma Disclosure Schedule.
(c) Neither Otic Pharma nor any of its Subsidiaries is a party to any agreement under which a third party would be entitled to receive a
license or any other right to Otic Pharma Intellectual Property as a result of the transactions contemplated by this Agreement.
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(d)
Section
3.11(d)
of the Otic Pharma Disclosure Schedule lists the
following Contracts of Otic Pharma in effect as of the date of this Agreement:
(i) any Contract (or group of related Contracts) for the
purchase or sale of products or for the furnishing or receipt of services (A) which calls for performance over a period of more than 180 days from the date of this Agreement, (B) which involves an aggregate of more than $150,000 or
(C) in which Otic Pharma or any of its Subsidiaries has granted manufacturing rights, “most favored nation” pricing provisions or marketing or distribution rights relating to any products or territory or has agreed to purchase a
minimum quantity of goods or services or has agreed to purchase goods or services exclusively from a particular party;
(ii) any Contract
under which the consequences of a default or termination would reasonably be likely to have a Otic Pharma Material Adverse Effect;
(iii)
any Contract that could reasonably be expected to have the effect of prohibiting or impairing the conduct of the business of Otic Pharma or any of its Subsidiaries or Public Company or any of its Subsidiaries as currently conducted and as currently
proposed to be conducted;
(iv) any Contract under which Otic Pharma or any of its Subsidiaries is restricted from selling, licensing or
otherwise distributing any of its technology or products, or providing services to, customers or potential customers or any class of customers, in any geographic area, during any period of time or any segment of the market or line of business;
(v) any dealer, distribution, joint marketing, joint venture, joint development, partnership, strategic alliance, collaboration, development
agreement or outsourcing arrangement;
(vi) any Contract for the conduct of research studies,
pre-clinical
or clinical studies, manufacturing, distribution, supply, marketing or
co-promotion
of any products in development by or which has been or which is being
marketed, distributed, supported, sold or licensed out, in each case by or on behalf of Otic Pharma or any of its Subsidiaries; and
(vii) any Contract that would entitle any third party to receive a license or any other right to intellectual property of Public Company or
any of Public Company’s Affiliates following the Closing.
(e) Otic Pharma has made available to Public Company a complete and
accurate copy of each Contract listed in Sections 3.10(b)(i), 3.10(b)(ii), 3.11(a), 3.11(b) and 3.11(d) of the Otic Pharma Disclosure Schedule. With respect to each Contract so listed: (i) the Contract is legal, valid, binding and
enforceable and in full force and effect against Otic Pharma and/or its Subsidiaries party thereto, as applicable, and, to the knowledge of Otic Pharma, against each other party thereto, as applicable, subject to the Bankruptcy and Equity Exception;
(ii) the Contract will continue to be legal, valid, binding and enforceable and in full force and effect against Otic Pharma and/or its Subsidiaries party thereto, as applicable, and, to the knowledge of Otic Pharma, against each other party
thereto, immediately following the Closing in accordance with the terms thereof as in effect immediately prior to the Closing (other than any such Contracts that expire or terminate before such time in accordance with their terms and not as a result
of a breach or default by Otic Pharma or its Subsidiaries), in each such case subject to the Bankruptcy and Equity Exception; and (iii) none of Otic Pharma, its Subsidiaries nor, to the knowledge of Otic Pharma, any other party, is in breach or
violation of, or default under, any such Contract, and no event has occurred, is pending or, to the knowledge of Otic Pharma, is threatened, which, with or without notice or lapse of time, or both, would constitute a breach or default by Otic
Pharma, its Subsidiaries or, to the knowledge of Otic Pharma, any other party under such Contract, except for such breaches, violations or defaults that, individually or in the aggregate, have not had, and are not reasonably likely to have, a Otic
Pharma Material Adverse Effect.
(f) For purposes of this Agreement, the term “
Contract
” shall mean, with respect to any
person, any written, oral or other agreement, contract, subcontract, lease (whether for real or personal property), mortgage,
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understanding, arrangement, instrument, note, option, warranty, license, sublicense, insurance policy, benefit plan or commitment or undertaking of any nature to which such person is a party or
by which such person or any of its assets are bound under applicable law.
3.12
Litigation
. There is no action, suit, proceeding,
claim, arbitration or investigation before any Governmental Entity or before any arbitrator that is pending or threatened in writing against Otic Pharma or any of its Subsidiaries that (a) seeks either damages in excess of $100,000 or equitable
relief or (b) in any manner challenges or seeks to prevent, enjoin, alter or delay the transactions contemplated by this Agreement, except for such actions, suits, proceedings, claims, arbitrations or investigations first arising after the date
of this Agreement that, individually or in the aggregate, have not had, and are not reasonably likely to have, a Otic Pharma Material Adverse Effect. There are no material judgments, orders or decrees outstanding against Otic Pharma or any of its
Subsidiaries.
3.13
Environmental Matters
.
(a) Except for such matters that, individually or in the aggregate, have not had, and are not reasonably likely to have, a Otic Pharma
Material Adverse Effect:
(i) Otic Pharma and its Subsidiaries have complied with all applicable Environmental Laws;
(ii) the properties currently owned, leased or operated by Otic Pharma and its Subsidiaries (including soils, groundwater, surface water,
buildings or other structures) are not contaminated with any Hazardous Substances;
(iii) the properties formerly owned, leased or
operated by Otic Pharma or any of its Subsidiaries were not contaminated with Hazardous Substances during the period of ownership, use or operation by Otic Pharma or any of its Subsidiaries;
(iv) neither Otic Pharma nor any of its Subsidiaries are subject to liability for any Hazardous Substance disposal or contamination on the
property of any third party; and
(v) neither Otic Pharma nor any of its Subsidiaries have released any Hazardous Substance into the
environment.
(b) As of the date of this Agreement, neither Otic Pharma nor any of its Subsidiaries has received any written notice,
demand, letter, claim or request for information alleging that Otic Pharma or any of its Subsidiaries may be in violation of, liable under or have obligations under, any Environmental Law.
(c) Neither Otic Pharma nor any of its Subsidiaries is subject to any orders, decrees, injunctions or other arrangements with any
Governmental Entity or is subject to any indemnity or other agreement with any third party relating to liability under any Environmental Law or relating to Hazardous Substances.
(d) For purposes of this Agreement, the term “
Environmental Law
” means any law, regulation, order, decree, permit,
authorization, opinion, common law or agency requirement of any jurisdiction relating to: (i) the protection, investigation or restoration of the environment, human health and safety or natural resources, (ii) the handling, use, storage,
treatment, presence, disposal, release or threatened release of any Hazardous Substance or (iii) noise, odor, wetlands, pollution, contamination or any injury or threat of injury to persons or property.
(e) For purposes of this Agreement, the term “
Hazardous Substance
” means any substance that is: (i) listed, classified,
regulated or which falls within the definition of a “hazardous substance,” “hazardous waste” or “hazardous material” pursuant to any Environmental Law; (ii) any petroleum product or
by-product,
asbestos-
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containing material, lead-containing paint or plumbing, polychlorinated biphenyls, radioactive materials or radon; or (iii) any other substance that is the subject of regulatory action by
any Governmental Entity pursuant to any Environmental Law.
3.14
Employee Benefit Plans
.
(a) Section 3.14(a) of the Otic Pharma Disclosure Schedule sets forth a complete and accurate list of all Employee Benefit Plans maintained,
or contributed to, by Otic Pharma or any of its Subsidiaries or any of their respective ERISA Affiliates for the benefit of, or relating to, any current or former employee or other service provider of Otic Pharma or any of its Subsidiaries
(collectively, the “
Otic Pharma Employee Plans
”). Except as set forth in Section 3.14(a) of the Otic Pharma Disclosure Schedule, no Otic Pharma Employee Plan is subject to ERISA or covers any person providing services in the United
States.
(b) With respect to each Otic Pharma Employee Plan, Otic Pharma has made available to Public Company, a complete and accurate
copy of (i) such plan (or a written summary of any unwritten plan), (ii) each trust agreement, group annuity contract and summary plan description, if any, relating to such Otic Pharma Employee Plan, (iii) the three (3) most recent
financial statements for each Otic Pharma Employee Plan that is funded, (iv) all personnel, payroll and employment manuals and policies, (v) all employee handbooks, (vi) all regulatory or other filings or submissions to any
Governmental Entity with respect to each Otic Pharma Employee Plan, if any, (vii) all material correspondence to or from any Governmental Entity received in the last three years with respect to each Otic Pharma Employee Plan, if any.
(c) Each Otic Pharma Employee Plan has been administered in all respects in accordance with applicable laws and the regulations thereunder
and in accordance with its terms and each of Otic Pharma and its Subsidiaries and their respective ERISA Affiliates has in all respects met its obligations with respect to such Otic Pharma Employee Plan and has made all required contributions
thereto (or reserved such contributions on the Otic Pharma Balance Sheet). Otic Pharma and its Subsidiaries and each of their respective ERISA Affiliates and each Otic Pharma Employee Plan are in compliance in all respects with the currently
applicable law. All filings and reports as to each Otic Pharma Employee Plan required to have been submitted under applicable law have been timely submitted. There is no audit, investigation or other proceeding (including any voluntary correction
application) pending against or involving any Otic Pharma Employee Plan. There have been no events with respect to any Otic Pharma Employee Plan that could result in payment or assessment by or against Otic Pharma or any of its Subsidiaries of any
Taxes. With respect to Otic Pharma Employee Plans, no event has occurred, and to the knowledge of Otic Pharma, there exists no condition or set of circumstances in connection with which Otic Pharma or any of its Subsidiaries could be subject to any
liability that is reasonably likely, individually or in the aggregate, to have a Otic Pharma Material Adverse Effect under applicable law.
(d) There are no legal proceedings (except claims for benefits payable in the normal operation of the Otic Pharma Employee Plan) against or
involving any Otic Pharma Employee Plan or asserting any rights or claims to benefits under any Otic Pharma Employee Plan. Neither Otic Pharma nor any of its Subsidiaries has received any written notice of any audit or examination of any Otic Pharma
Employee Plan by any Governmental Entity.
(e) With respect to Otic Pharma Employee Plans, there are no benefit obligations for which
contributions have not been made or properly accrued and there are no benefit obligations that have not been accounted for by reserves, or otherwise properly footnoted in accordance with GAAP, on the financial statements of Otic Pharma, which
obligations are reasonably likely, individually or in the aggregate, to have a Otic Pharma Material Adverse Effect. The assets of each Otic Pharma Employee Plan that is funded are reported at their fair market value on the books and records of such
Otic Pharma Employee Plan.
(f) All Otic Pharma Employee Plans (if any) that are intended to be qualified under Section 401(a) of the
Code have received determination letters from the Internal Revenue Service (the “
IRS
”) to the effect that such Otic Pharma Employee Plans are qualified and the plans and trusts related thereto are exempt from federal
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income taxes under Sections 401(a) and 501(a), respectively, of the Code, no such determination letter has been revoked and revocation has not been threatened, and no such Otic Pharma Employee
Plan has been amended or operated since the date of its most recent determination letter or application therefor in any respect, and no act or omission has occurred, that would adversely affect its qualification or materially increase its cost. Each
Otic Pharma Employee Plan that is required to satisfy Section 401(k)(3) or Section 401(m)(2) of the Code has been tested for compliance with, and satisfies the requirements of, Section 401(k)(3) and Section 401(m)(2) of the Code, as the case may be,
for each plan year ending prior to the Closing Date.
(g) Neither Otic Pharma nor any of its Subsidiaries nor any of their respective
ERISA Affiliates has (i) ever maintained an Employee Benefit Plan that was ever subject to Section 412 of the Code or Title IV of ERISA or (ii) ever been obligated to contribute to a “multiemployer plan” (as defined in
Section 4001(a)(3) of ERISA). No Otic Pharma Employee Plan is funded by, associated with or related to a “voluntary employees’ beneficiary association” within the meaning of Section 501(c)(9) of the Code. No Otic Pharma Employee Plan
holds securities issued by Otic Pharma or any of its Subsidiaries or any of their respective ERISA Affiliates.
(h) Each Otic Pharma
Employee Plan is amendable and terminable unilaterally by Otic Pharma and any of Otic Pharma’s Subsidiaries and their respective ERISA Affiliates that are a party thereto or covered thereby at any time without liability to Otic Pharma or any of
its Subsidiaries or their respective ERISA Affiliates as a result thereof (other than for benefits accrued through the date of termination or amendment and reasonable administrative expenses related thereto), and no Otic Pharma Employee Plan, plan
documentation or agreement, summary plan description or other written communication distributed generally to employees by its terms prohibits Otic Pharma or any of its Subsidiaries or their respective ERISA Affiliates from amending or terminating
any such Otic Pharma Employee Plan. The investment vehicles used to fund Otic Pharma Employee Plans may be changed at any time without incurring a sales charge, surrender fee or other similar expense.
(i) Neither Otic Pharma nor any of its Subsidiaries nor any of their respective ERISA Affiliates is a party to any oral or written
(i) agreement with any shareholders, director, executive officer or other key employee of Otic Pharma or any of its Subsidiaries (A) the benefits of which are contingent, or the terms of which are altered, upon the occurrence of a
transaction involving Otic Pharma or any of its Subsidiaries of the nature of any of the transactions contemplated by this Agreement, (B) providing any term of employment or compensation guarantee or (C) providing severance benefits or
other benefits after the termination of employment of such director, executive officer or key employee; (ii) agreement, plan or arrangement under which any person may receive payments from Otic Pharma or any of its Subsidiaries or any of its
ERISA Affiliates that may be subject to the tax imposed by Section 4999 of the Code or included in the determination of such person’s “parachute payment” under Section 280G of the Code, without regard to Section 280G(b)(4) of the
Code; (iii) agreement providing any person providing for “tax gross up” or tax indemnifications related to Sections 280G or 409A of the Code or otherwise; or (iv) agreement or plan binding Otic Pharma or any of its Subsidiaries
or any of its ERISA Affiliates, including any stock option plan, stock appreciation right plan, restricted stock plan, stock purchase plan or severance benefit plan, any of the benefits of which shall be increased, or the vesting of the benefits of
which shall be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which shall be calculated on the basis of any of the transactions contemplated by this Agreement. There
are no loans or extensions of credit by Otic Pharma, any of its Subsidiaries or any of their respective ERISA Affiliate to any employee or any other service provider to Otic Pharma or any of its Subsidiaries.
(j) None of the Otic Pharma Employee Plans promises or provides post-termination medical or other post-termination welfare benefits to any
person, except as required by applicable law and at the sole expense of the participant
(k) Otic Pharma and its Subsidiaries are in
material compliance with all applicable provisions of the Affordable Care Act, including reporting requirements, and there has been no change in health plan terms or coverage that would reasonably be expected to attract an excise tax under Section
4980H of the Code for the current year.
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(l) Each Otic Pharma Employee Plan that is a “nonqualified deferred compensation plan”
(as defined in Section 409A(d)(1) of the Code) complies in form and operation with Section 409A of the Code and all IRS regulations and other guidance promulgated thereunder. No event has occurred that would be treated by Section 409A(b) of the Code
as a transfer of property for purposes of Section 83 of the Code. No stock option or equity unit option granted under any Otic Pharma Employee Plan has an exercise price that has been or may be less than the fair market value of the underlying
stock or equity units (as the case may be) as of the date such option was granted or has any feature for the deferral of compensation other than the deferral of recognition of income until the later of exercise or disposition of such option. No
nonqualified deferred compensation plan has been administered in a manner that would cause an excise tax to apply to payments to plan participants.
(m) Section 3.14(m) of the Otic Pharma Disclosure Schedule sets forth the policy of Otic Pharma and each of its Subsidiaries with respect to
accrued vacation, accrued sick time and earned time off and the amount of such liabilities as of September 30, 2016.
(n) For
purposes of this Agreement, the following terms shall have the following meanings:
(i) “
Employee Benefit Plan
” means any
“employee pension benefit plan” (including as defined in Section 3(2) of ERISA), any “employee welfare benefit plan” (as defined in Section 3(1) of ERISA) and any other written or oral plan, agreement or arrangement
involving direct or indirect compensation, including insurance coverage, severance benefits, disability benefits, fringe benefits, perquisites, change in control benefits, deferred compensation, bonuses, stock options, stock purchase, phantom stock,
stock appreciation or other forms of incentive compensation or post-retirement compensation and all unexpired severance agreements, written or otherwise.
3.15
Compliance With Laws
. Otic Pharma and each of its Subsidiaries has complied in all material respects with, is not in material
violation of, and, as of the date of this Agreement, has not received any notice alleging any material violation with respect to, any applicable provisions of any statute, law or regulation with respect to the conduct of its business, or the
ownership or operation of its properties or assets.
3.16
Permits and Regulatory Matters
.
(a) Otic Pharma and each of its Subsidiaries have all permits, licenses, registrations, authorizations, certificates, orders, approvals,
franchises, variances and other similar rights issued by or obtained from any Governmental Entities (collectively, “
Permits
”) that are material to the conduct of its business as currently conducted, including a business permit and
all such Permits required by the U.S. Food and Drug Administration (the “
FDA
”) and any other federal, state or foreign agencies or bodies (together with the FDA, the “
Regulating Authority
”) engaged in the regulation
of pharmaceuticals or biohazardous materials.
(b) All Permits that are necessary for the conduct of the business of Otic Pharma and each
of its Subsidiaries as currently conducted (“
Otic Pharma Authorizations
”) are in full force and effect, and to the knowledge of Otic Pharma, no violations or notices of failure to comply have been issued or recorded in respect of
any such Otic Pharma Authorization. No such Otic Pharma Authorization shall cease to be effective as a result of the consummation of the transactions contemplated by this Agreement. Otic Pharma and each of its Subsidiaries is in compliance in all
material respects under any of such Otic Pharma Authorizations. All applications, reports, notices and other documents required to be filed by Otic Pharma and its Subsidiaries with all Governmental Entities under the Otic Pharma Authorizations have
been timely filed and are complete and correct in all material respects as filed or as amended prior to the date of this Agreement. None of Otic Pharma, any Subsidiary of Otic Pharma, and to Otic Pharma’s knowledge, any officer, employee or
agent of Otic Pharma or any of its Subsidiaries has been convicted of any crime or engaged in any conduct that has previously caused or would reasonably be expected to result in (A) disqualification or debarment by the FDA under 21 U.S.C.
Sections 335(a) or (b), or any similar law, rule or regulation of any other Governmental Entity, or (B) exclusion under 42 U.S.C. Section
1320a-7
or any similar law, rule or regulation of any Governmental
Entity.
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(c) Otic Pharma and each of its Subsidiaries: (i) is and at all times has been in material
compliance, to the extent applicable, with all statutes, rules, regulations, and with all orders and guidance administered or issued by the FDA or any other Governmental Entity exercising comparable authority, applicable to the ownership, testing,
development, manufacture, packaging, processing, use, distribution, marketing, labeling, promotion, sale, offer for sale, storage, import, export or disposal of any product tested, developed, promoted, marketed, manufactured or distributed by Otic
Pharma and each of its Subsidiaries; (ii) has not received any notice or correspondence from any Governmental Entity alleging or asserting any noncompliance with any Otic Pharma Authorizations; and (iii) has not received notice that any
Governmental Entity has taken or is intending to take action to limit, suspend, modify or revoke any Otic Pharma Authorizations and, to the knowledge of Otic Pharma, there is no action or proceeding pending or threatened (including any prosecution,
injunction, seizure, civil fine, suspension or recall), in each case alleging that such Governmental Entity is considering such action. Neither Otic Pharma nor any of its Subsidiaries nor any of their respective officers, employees or agents have
made an untrue statement of a material fact or fraudulent statement to any Governmental Entity relating to the Otic Pharma Authorizations or failed to disclose a material fact required to be disclosed to any Governmental Entity relating to the Otic
Pharma Authorizations.
(d) There are no seizures, recalls, market withdrawals, field notifications or corrective actions, notifications
of misbranding or adulteration, destruction orders, safety alerts or similar actions relating to the safety or efficacy of any products marketed or sold by Otic Pharma or any of its Subsidiaries being conducted, requested in writing or, to the
knowledge of Otic Pharma, threatened by the FDA or any other Governmental Entity. Otic Pharma has not, either voluntarily or involuntarily, initiated, conducted or issued or caused to be initiated, conducted or issued any recall, market withdrawal,
safety alert or other similar notice or action relating to the alleged lack of safety or efficacy of any products marketed or sold by Otic Pharma or any of its Subsidiaries.
(e) The studies, tests and preclinical and clinical trials, if any, conducted by or on behalf of Otic Pharma or any of its Subsidiaries are
being conducted or have been conducted in all material respects in accordance with experimental protocols, procedures and controls pursuant to accepted professional and scientific standards for products or product candidates comparable to those
being developed by Otic Pharma or its Subsidiaries and all applicable laws and regulations. The descriptions of, protocols for, and data and other results of, any such studies, tests and/or trials that have been furnished or made available to Public
Company are accurate and complete in all material respects. Otic Pharma is not aware of any studies, test or trials the results of which reasonably call into question the results of the studies, tests and trials conducted by or on behalf of Otic
Pharma or any of its Subsidiaries, and neither Otic Pharma nor any of its Subsidiaries has received any notices or correspondence from the FDA or any other Governmental Entity exercising comparable authority or any institutional review board or
comparable authority requiring the termination, suspension or material modification of any studies, tests or preclinical or clinical trials conducted by or on behalf of Otic Pharma or any of its Subsidiaries.
3.17
Employees
.
(a)
All current and past employees, founders and current and former independent contractors of Otic Pharma or any of its Subsidiaries have entered into confidentiality and assignment of inventions agreements (which include a waiver of moral rights) with
Otic Pharma or such Subsidiary, a copy or form of which has previously been made available to Public Company. All former and current employees have executed a waiver of the right to claim royalties in Service Inventions as defined in
Section 132 of the Israel Patents Law, 1967 (the “
Patents Law
”). The Intellectual Property owned by Otic Pharma was developed and created solely by either (i) employees of Otic Pharma or its Subsidiaries acting within the
scope of their employment or (ii) by third parties who have validly and irrevocably assigned all of their rights therein to Otic Pharma or its Subsidiaries, and no third party owns or has any claim, right or interest in or to any of the
Intellectual Property owned by Otic Pharma.
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(b) To the knowledge of Otic Pharma, no Otic Pharma personnel who was involved in, or who
contributed to, the creation or development of any Intellectual Property owned by Otic Pharma, has performed services for any Governmental Entity, university, college or other educational institution or research center with respect to technology or
inventions that have been or may be incorporated into a product of Otic Pharma or related to Intellectual Property owned by Otic Pharma, during a period of time during which such Otic Pharma personnel was also performing services for Otic Pharma or
any of its Subsidiaries. Otic Pharma and its Subsidiaries are not subject to any order of any Governmental Entity that restricts or impairs the use, transfer or licensing of any portion of Intellectual Property owned by Otic Pharma.
(c) To the knowledge of Otic Pharma, as of the date of this Agreement, no employee of Otic Pharma or any Subsidiary of Otic Pharma is in
violation of any term of any patent disclosure agreement,
non-competition
agreement, or any restrictive covenant to a former employer relating to the right of any such employee to be employed by Otic Pharma or
any of its Subsidiaries because of the nature of the business currently conducted by Otic Pharma or any of its Subsidiaries or to the use of trade secrets or proprietary information of others. To the knowledge of Otic Pharma, as of the date of this
Agreement, no key employee or group of key employees has any plans to terminate employment with Otic Pharma or its Subsidiaries.
(d)
Neither Otic Pharma nor any of its Subsidiaries is a party to or otherwise bound by any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor organization. Neither Otic Pharma nor any of its
Subsidiaries is the subject of any proceeding asserting that Otic Pharma or any of its Subsidiaries has committed an unfair labor practice or is seeking to compel it to bargain with any labor union or labor organization, nor is there pending or, to
the knowledge of Otic Pharma, threatened, any labor strike, dispute, walkout, work stoppage, slow-down or lockout involving Otic Pharma or any of its Subsidiaries.
(e) Section 3.17(e) of the Otic Pharma Disclosure Schedule contains a list of all employees of Otic Pharma and its Subsidiaries along with
the position, the annual rate of salary of each such employee, whether such employee is full time or part time, is exempt or
non-exempt
from overtime compensation laws, is on leave and if so, the type of leave
and expected date of return, visa status (as applicable), date of hire, any incentive payment paid or payable in calendar year 2016 (and whether such incentive is cash or, if not, what other property is due), short-term or temporary basis, vacation
entitlement and accrued vacation or paid
time-off
balance, car entitlement, sick leave entitlement and accrual (if any), and recuperation pay entitlement and accrual, pension entitlements and provident funds
(including manager’s insurance, pension fund, education fund and health fund), their respective contribution rates for each component (e.g., severance component, pension savings and disability insurance) and the salary basis for such
contributions, severance entitlements (including whether such employee, to the extent employed in the State of Israel, is subject to a Section 14 arrangement under the Severance Pay Law, 5723 1963 (the “
Israeli Severance Pay
Law
” and “
Section
14 Arrangement
”)), and, to the extent such employee is subject to such a Section 14 Arrangement, an indication of whether such arrangement (or other applicable pension arrangement)
has been applied to such person from the commencement date of their employment and on the basis of their entire salary including other compensation (e.g., commission), main work location, notice period entitlement, and any other material
compensation payable to such employee. Neither Otic Pharma nor its Subsidiaries is delinquent in payments to any employees for wages, salaries, commissions or bonuses for services performed as of the date of this Agreement or amounts required by
applicable law to be reimbursed to such employees. The consummation of the Transaction will not give rise to any liability of Otic Pharma or any of its Subsidiaries for payments related to severance, termination, bonus, accrued vacation or personal
time, accrued days of sick pay or any similar payment.
(f) Otic Pharma and its Subsidiaries are, and at all times within applicable
statutes of limitations have been, in material compliance with all applicable laws respecting labor, employment, hiring and termination, fair employment practices, terms and conditions of employment, occupational health and safety and wage and hour
laws, including the Advance Notice for Dismissal and Resignation Law, 5761-2001, the Notification to an Employee (Terms of Employment) Law, 5762-2002, the Wage Protection Law 5718-1958, Prior Notice to the Employee Law, 5762-2002, the Prevention of
Sexual Harassment Law, 5758-1998, the Hours of Work and Rest
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Law, 5711-1951, the Annual Leave Law, 5711-1951, the Employment by Human Resource Contractors Law, 5756-1996 and the Increased Enforcement of Labor Laws-2012. During the past three
(3) years, each current and former employee of each of Otic Pharma and its Subsidiaries has been properly categorized as exempt or
non-exempt
from applicable laws pertaining to payment of minimum wage and
overtime compensation and has been paid overtime wages to the extent required by applicable law. Each individual who has rendered services to Otic Pharma or any of its Subsidiaries and has been classified as an independent contractor or other
non-employee
status for any purpose (including for purposes of Taxes and Tax reporting and under Otic Pharma Employee Plans) has been properly so classified. During the past three (3) years, there has not been
and there is no pending or, to the knowledge of Otic Pharma, threatened, any material claim, charge, grievance or Legal Proceeding against Otic Pharma or any of its Subsidiaries brought by or on behalf of any current or former applicant, employee,
independent contractor, subcontractor, leased employee, volunteer, or temporary employee of Otic Pharma or its Subsidiaries, alleging violation of any applicable employment law, agreement or any other claim arising out of such Person’s
employment, application for employment or termination of employment, consulting or other relationship with Otic Pharma or any of its Subsidiaries.
(g) Otic Pharma and its Subsidiaries have withheld, paid and reported all amounts required by the Israeli Tax Ordinance, the National
Insurance Law (Consolidated Version), 5755 1995, the National Health Insurance Law, 5754-1994 or any other law or by contract to be withheld, paid and reported with respect to compensation, wages, salaries, payments to the National Insurance
Institute, employees’ pension or managers insurance funds, disability insurance, continuing education fund or other similar funds and other payments to employees or consultants of Otic Pharma and its Subsidiaries. Neither Otic Pharma nor any of
its Subsidiaries is required to make payments for overtime hours above the global overtime compensation paid by it.
(h) At all times
since January 1, 2014, Otic Pharma and its Subsidiaries have never engaged any employees whose employment would require special licenses or permits by Otic Pharma or its Subsidiaries. Otic Pharma and its Subsidiaries have not engaged, and do
not currently engage, any contractors or contractors’ employees who, according to Israeli law, would reasonably be expected to be entitled to the rights of an employee
vis-à-vis
Otic Pharma or its Subsidiaries, including rights to severance pay, vacation, recuperation pay (
dmei havraa
) and other employee-related statutory
and contractual benefits.
(i) Otic Pharma’s and (if applicable) its Subsidiaries’ obligations to provide statutory severance
pay to its Israeli employees pursuant to the Israeli Severance Pay Law are fully funded in accordance with Section 14 under the Israeli Severance Pay Law and it is and was implemented properly, from the commencement date of the employee’s
employment and on the basis of the employee’s entire salary. Upon the termination of employment of Israeli employees, Otic Pharma will not have to make any payment under the Israeli Severance Pay Law, except for release of the funds accumulated
in accordance with Section 14.
(j) Otic Pharma and its Subsidiaries are not required (under any law, contract or otherwise) to
provide benefits or working conditions beyond the minimum benefits and working conditions required by law to be provided pursuant to rules and regulations of the Israeli Histadrut (General Federation of Labor), the Israeli Coordinating Bureau of
Economic Organization and the Israeli Industrialists’ Association. Otic Pharma and its Subsidiaries have not and are not subject to, and no employee or consultant of them benefits from, any extension order (
tzavei harchave
) or any
general contract or arrangement with respect to employment or termination of employment, except those extension orders that apply to all Israeli companies generally, and there are no unwritten Otic Pharma policies or customs which, by extension,
could entitle Israeli employees to any benefits in addition to what they are entitled by applicable law, agreement or any written policy.
(k) Section 3.17(k) of the Otic Pharma Disclosure Schedule contains a list of all employees of each of Otic Pharma and its Subsidiaries who
are a party to a
non-competition
agreement with Otic Pharma; copies of such agreements have previously been delivered, or made available, to Public Company. Section 3.17(k) of the Otic Pharma Disclosure
Schedule also contains a list of all employees of each of Otic Pharma and its Subsidiaries who are not citizens or lawful permanent residents of the jurisdiction in which they are working, and for each, the basis of his or her employment
authorization in such jurisdiction and the expiration of such authorization.
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3.18
Insurance
. Otic Pharma and its Subsidiaries maintain insurance policies (the
“
Otic Pharma Insurance Policies
”), including insurance covering directors and officers for securities law and other customary liabilities, with reputable insurance carriers against all risks of a character and in such amounts as are
usually insured against by similarly situated companies in the same or similar businesses. Each Otic Pharma Insurance Policy is in full force and effect. None of the Otic Pharma Insurance Policies shall terminate or lapse (or be affected in any
other adverse manner) by reason of any of the transactions contemplated by this Agreement. Otic Pharma and each of its Subsidiaries have complied in all material respects with the provisions of each Otic Pharma Insurance Policy under which it is the
insured party. No insurer under any Otic Pharma Insurance Policy has cancelled or generally disclaimed liability under any such policy or indicated any intent to do so or not to renew any such policy. All claims under the Otic Pharma Insurance
Policies have been filed in a timely fashion.
3.19
No Fairness Opinion
. Otic Pharma has not received, and, as of the date hereof,
does not intend to obtain, an opinion from any financial advisor, investment banker or other firm or person performing a similar function, with respect to the fairness of the Transaction, including the fairness of the consideration to be received by
holders of Otic Pharma Share Capital in connection with the Transaction.
3.20
Brokers; Fees and Expenses
. No agent, broker,
investment banker, financial advisor or other firm or person is or shall be entitled, as a result of any action, agreement or commitment of Otic Pharma or any of its Affiliates, to any broker’s, finder’s, financial advisor’s or other
similar fee or commission in connection with any of the transactions contemplated by this Agreement, except Piper Jaffray & Co (“
Piper
”) whose fees and expenses shall be paid by Otic Pharma immediately prior to the Closing.
Otic Pharma has made available to Public Company a complete and accurate copy of all agreements pursuant to which Piper is entitled to any fees and expenses in connection with any of the transactions contemplated by this Agreement. Otic Pharma is
not a party to any agreements with any agent, broker, investment banker, financial advisor or other similar firm or person that have not been made available to Public Company and which grant to such person rights after the Closing, other than
agreement that have been made available to the Public Company.
3.21
Certain Business Relationships With Affiliates
. Other than as
set forth in Section 3.21 of the Otic Pharma Disclosure Schedules, no Affiliate of Otic Pharma or of any of its Subsidiaries (a) owns any property or right, tangible or intangible, which is used in the business of Otic Pharma or any of its
Subsidiaries, (b) has any claim or cause of action against Otic Pharma or any of its Subsidiaries or (c) owes any money to, or is owed any money by, Otic Pharma or any of its Subsidiaries. Section 3.21 of the Otic Pharma Disclosure
Schedule describes any material Contracts between Otic Pharma and any Affiliate thereof which were entered into or have been in effect at any time since September 30, 2014, other than (i) any employment Contracts, invention assignment
agreements and other Contracts entered into in the Ordinary Course of Business relating to employment, or (ii) Contracts relating to stock purchases and awards, stock options and other equity arrangements, in each case relating to compensation.
3.22
Controls and Procedures, Certifications and Other Matters
.
(a) Otic Pharma and each of its Subsidiaries maintains accurate books and records reflecting its assets and liabilities and maintains proper
and adequate internal control over financial reporting that provide assurance that (i) transactions are executed with management’s authorization, (ii) transactions are recorded as necessary to permit preparation of the consolidated
financial statements of Otic Pharma and to maintain accountability for Otic Pharma’s consolidated assets, (iii) access to assets of Otic Pharma and its Subsidiaries is permitted only in accordance with management’s authorization,
(iv) the reporting of assets of Otic Pharma and its Subsidiaries is compared with existing assets at regular intervals and (v) accounts, notes and other receivables and inventory were recorded accurately, and proper and adequate procedures
are implemented to effect the collection thereof on a current and timely basis.
(b) Otic Pharma maintains disclosure controls and
procedures as would be required by
Rules 13a-15
or
15d-15
under the Exchange Act if Otic Pharma were registered under Section 12 of the Exchange Act, and
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such controls and procedures are effective to ensure that all material information concerning Otic Pharma and its Subsidiaries is made known on a timely basis to the individuals responsible for
the preparation of Otic Pharma’s filings with the SEC and other public disclosure documents. Section 3.22(b) of the Otic Pharma Disclosure Schedule lists, and Otic Pharma has made available to Public Company copies of, all written descriptions
of, and all policies, manuals and other documents promulgating, such disclosure controls and procedures.
(c) Neither Otic Pharma nor any
of its Subsidiaries has extended or maintained credit, arranged for the extension of credit, modified or renewed an extension of credit, in the form of a personal loan or otherwise, to or for any director or executive officer of Otic Pharma.
Section 3.22(c) of the Otic Pharma Disclosure Schedule identifies any loan or extension of credit maintained by Otic Pharma to which the second sentence of Section 13(k)(1) of the Exchange Act applies.
(d) Otic Pharma either (i) satisfies the conditions to qualification as a “smaller reporting company” set forth in 17 C.F.R.
229.10(f)(1), or (ii) if shares of Otic Pharma Ordinary Shares were traded on any regulated market or stock exchange, would qualify as a “smaller reporting company,” as defined by 17 C.F.R. 229.10(f)(1).
3.23
Books and Records
. The minute books and other similar records of Otic Pharma and each of its Subsidiaries contain complete and
accurate records of all material actions taken at any meetings of Otic Pharma’s or such Subsidiary’s shareholders, Board of Directors or any committee thereof and of all written consents executed in lieu of the holding of any such meeting.
The books and records of Otic Pharma and each of its Subsidiaries accurately reflect in all material respects the assets, liabilities, business, financial condition and results of operations of Otic Pharma or such Subsidiary and have been maintained
in accordance with good business and bookkeeping practices.
3.24
Ownership of Public Company Common Stock
. None of Otic Pharma nor
any of Otic Pharma’s “Affiliates” or “Associates” directly or indirectly “owns,” beneficially or otherwise, and at all times during the three-year period prior to the date of this Agreement, none of Otic
Pharma’s “Affiliates” or “Associates” directly or indirectly has “owned,” beneficially or otherwise, any of the outstanding Public Company Common Stock, as those terms are defined in Section 203 of the DGCL.
3.25
Privacy and Data Security
.
(a) Otic Pharma and each of its Subsidiaries, the products and all internet websites owned, maintained or operated by or on behalf of Otic
Pharma or any of its Subsidiaries (the “
Otic Pharma Sites
”), and all third parties, solely in connection with their performance of activities on Otic Pharma’s or any of Otic Pharma’s Subsidiaries’ behalf or in
connection with their use of Personal Information collected by or on behalf of Otic Pharma or any of its Subsidiaries, comply, and have at all times complied with all applicable data security, and Privacy Laws. Copies of all current internal and
public-facing privacy policies of Otic Pharma, if any, that apply to the Otic Pharma Sites and products have been made available to the Public Company, and none of the disclosures in such policies have been in violation of any Privacy Laws. Any
consents required under applicable laws for the collection, processing, transfer and other use of Personal Information by Otic Pharma or any of its Subsidiaries for the conduct of the business of Otic Pharma or any of its Subsidiaries have been
obtained. There is no complaint to, or any proceeding, or to the knowledge of Otic Pharma, an investigation (formal or informal) or claim or audit currently pending against, Otic Pharma or any of Otic Pharma’s Subsidiaries by any Person with
respect to Personal Information and, to the knowledge of Otic Pharma, there is no threatened complaint, proceeding, investigation (formal or informal) or claim against Otic Pharma or any of its Subsidiaries with respect thereto. With respect to all
Personal Information collected, stored, used, or maintained by or for Otic Pharma or any of its Subsidiaries, Otic Pharma and its Subsidiaries have at all times implemented reasonable security measures aiming to ensure that such Personal Information
is protected against loss and against unauthorized access, use, modification and disclosure. To the knowledge of Otic Pharma, there has been no loss, unauthorized access to or other misuse of such Personal Information. All databases owned,
controlled, held or used by Otic Pharma or any of its Subsidiaries and required to be registered under applicable
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laws have been properly registered, and the data therein has been used by Otic Pharma or any of its Subsidiaries solely as permitted pursuant to such registrations. The consummation of the
contemplated transactions shall not violate Otic Pharma’s internal and public-facing privacy policies as they currently exist or any applicable law.
(b) For the purposes of this Agreement:
“
Privacy Laws
” shall mean all applicable laws regarding the collection, use and protection of Personal
Information (including the Protection of Privacy Law 1981 and related regulations, directives and orders of any Governmental Entity of the State of Israel).
“
Personal Information
” shall mean individually identifiable information from or about an individual, including
an individual’s: (a) personally identifiable information (e.g., name, address, telephone number, email address, financial account number, government-issued identifier, details of a person’s personality, personal status, intimate
affairs, state of health, economic status, professional training, opinions or beliefs and any other data used or intended to be used to identify, contact or precisely locate a person), (b) Internet Protocol address or other persistent identifier;
and (c) “information” as defined by the Israeli Protection of Privacy Law, 1981 and applicable Israeli judicial precedents defining that term and the corresponding laws of other jurisdictions.
3.26
Government Funding
. Otic Pharma is subject to the provisions of the Encouragement of Research, Development and Technological
Innovation in the Industry Law 5744 1984, or the “
Innovation Law
” (formerly known as the Israeli Encouragement of Industrial Research and Development Law 5744-1984), as amended from time to time and/or such other law as will be
legislated in lieu thereof, including the regulations, directives, procedures and rules that have been or will be promulgated thereunder and/or by virtue thereof. Section 3.26 of the Otic Pharma Disclosure Schedule provides a true, complete and
correct list all pending and outstanding grants, incentives and subsidies from the Government of the State of Israel or any agency thereof, or from any Governmental Entity, granted to Otic Pharma and any of its Subsidiaries, including grants from
the OCS (collectively, “
Government Grants
”). Otic Pharma has made available to Public Company true, complete and correct copies of all documents evidencing Government Grants submitted by Otic Pharma and any its Subsidiaries (or
transferred or assigned or purchased by Otic Pharma and any of its Subsidiaries) and of all letters of approval, certificates of completion, and supplements and amendments thereto, granted to Otic Pharma and any of its Subsidiaries, and all material
correspondence related thereto. Section 3.26 of the Otic Pharma Disclosure Schedule sets forth: (a) the aggregate amount of each Government Grant; (b) the aggregate outstanding obligations, if any, of Otic Pharma and each of its
Subsidiaries under each Government Grant with respect to royalties or other payments; and (c) the outstanding amounts to be paid by the OCS to Otic Pharma and any of its Subsidiaries under the Government Grants, if any. Otic Pharma and each of
its Subsidiaries are in compliance with the terms and conditions of all Government Grants and the laws applicable thereto (including the provisions of the Innovation Law and relevant regulations promulgated pursuant thereto), which have been
approved, and have duly fulfilled all the undertakings required thereby to be fulfilled. To the knowledge of Otic Pharma, there is no event or other set of circumstances which would reasonably be expected to lead to the revocation or material
modification of any of the Government Grants that have been approved. Otic Pharma represents that no OCS funded Intellectual Property is incorporated into Otic Pharma’s “Surfactant Platform” products, which are based on intellectual
property licensed from Otodyne Inc., and that no OCS funded Intellectual Property is related to Otic Pharma’s current and/or anticipated business with respect to the Surfactant Platform. For the purposes of this Agreement “
OCS
”
shall mean the Israel Innovation Authority (formerly known as the Office of the Chief Scientist) of the Israeli Ministry of Economy and Industry.
3.27
Export Control Laws
.
(a) Otic Pharma and its Subsidiaries have at all times conducted their export and
re-export
transactions in accordance with all applicable import/export controls in countries in which Otic Pharma and its Subsidiaries conducts business. Without limiting the foregoing, Otic Pharma and its Subsidiaries have obtained all applicable export and
import licenses, approvals and filings with any Governmental Entity required for its
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export, import and
re-export
of products, services, software and technologies (“
Export Approvals
”). Otic Pharma and its Subsidiaries are
in compliance with the terms of all applicable Export Approvals. There are no pending legal proceedings or threatened claims against Otic Pharma and its Subsidiaries with respect to such Export Approvals or export or
re-export
transactions. There are no actions, conditions or circumstances pertaining to Otic Pharma’s export transactions that would reasonably be expected to give rise to any future claims; and
(b) Otic Pharma’s and its Subsidiaries’ business, as currently conducted, does not involve the use or development of, or engaging
in, encryption technology, or other technology whose development, commercialization or export is restricted under Israeli or other applicable foreign law, and Otic Pharma’s and its Subsidiaries’ business, as currently conducted, does not
require Otic Pharma or its Subsidiaries to obtain a license from the Israeli Ministry of Defense or an authorized body thereof pursuant to the Control of Products and Services Declaration (Engagement in Encryption), 1974, as amended, or other
applicable laws regulating the development, commercialization or export of technology.
3.28
No Other Representations or
Warranties
. Otic Pharma hereby acknowledges and agrees that, except for the representations and warranties contained in this Agreement, none of Public Company, nor any other person on behalf of Public Company makes any express or implied
representation or warranty with respect to Public Company, or with respect to any other information provided to Otic Pharma or any of its Affiliates in connection with the transactions contemplated hereby, and (subject to the express representations
and warranties of Public Company set forth in Article IV (in each case as qualified and limited by the Public Company Disclosure Schedule)) none of Otic Pharma or any of its Affiliates, shareholders, directors, officers, employees, agents,
representatives or advisors, or any other person, has relied on any such information (including the accuracy or completeness thereof).
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PUBLIC COMPANY
Public Company represents and warrants to Otic Pharma that the statements contained in this Article IV are true and correct, except:
(a) as disclosed in the Public Company SEC Reports filed or furnished prior to the date of this Agreement, or (b) as expressly set forth herein or in the disclosure schedule delivered by Public Company to Otic Pharma on the date of this
Agreement (the “
Public Company Disclosure Schedule
”). For purposes hereof, the phrase “to the knowledge of Public Company” and similar expressions mean the actual knowledge of the persons identified on Section K of the
Public Company Disclosure Schedule for this purpose, and such knowledge as such persons would reasonably be expected to have obtained in the course of their performance of their positions at the Public Company (but without any special
investigation).
4.1
Organization, Standing and Power
. Public Company is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, has all requisite corporate power and authority to own, lease and operate its properties and assets and to carry on its business as currently conducted, and is duly qualified to do
business and is in good standing as a foreign corporation in each jurisdiction listed on Section 4.1 of the Public Company Disclosure Schedule, which jurisdictions constitute the only jurisdictions in which the character of the properties it
owns, operates or leases or the nature of its activities makes such qualification necessary, except for such failures to be so qualified or in good standing, individually or in the aggregate, that have not had, and are not reasonably likely to have,
a Public Company Material Adverse Effect. For purposes of this Agreement, the term “
Public Company Material Adverse Effect
” means any material adverse change, effect, event, circumstance or development with respect to, or material
adverse effect on, the business, assets, liabilities, capitalization, condition (financial or other), or results of operations of Public Company and its Subsidiaries, taken as a whole;
provided
,
however
, that none of the following, to
the extent arising after the date of this Agreement, shall be deemed to be a Public Company Material Adverse Effect: any change or event caused by or resulting from (A) changes in prevailing economic or market conditions in the United States or
any other jurisdiction in which such entity has substantial business operations (except to the
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extent those changes have a disproportionate effect on Public Company and its Subsidiaries relative to the other participants in the industry or industries in which Public Company and its
Subsidiaries operate), (B) changes or events affecting the industry or industries in which Public Company and its Subsidiaries operate generally (except to the extent those changes or events have a disproportionate effect on Public Company and its
Subsidiaries relative to the other participants in the industry or industries in which Public Company and its Subsidiaries operate), (C) changes in generally accepted accounting principles or requirements applicable to Public Company and its
Subsidiaries (except to the extent those changes have a disproportionate effect on Public Company and its Subsidiaries relative to the other participants in the industry or industries in which Public Company and its Subsidiaries operate), (D)
changes in laws, rules or regulations of general applicability or interpretations thereof by any Governmental Entity (except to the extent those changes have a disproportionate effect on Public Company and its Subsidiaries relative to the other
participants in the industry or industries in which Public Company and its Subsidiaries operate), (E) any natural disaster or any outbreak of major hostilities in which the United States is involved or any act of terrorism within the United States
or directed against its facilities or citizens wherever located (except to the extent those changes or events have a disproportionate effect on Public Company and its Subsidiaries relative to the other participants in the industry or industries in
which Public Company and its Subsidiaries operate); (F) a change in the public trading price of Public Company Common Stock or the implications thereof, (G) a change in the trading volume of Public Company Common Stock, (H) any failure by
Public Company to meet any public estimates or expectations of Public Company’s revenue, earnings or other financial performance or results of operations for any period, or (I) any failure by Public Company to meet any guidance, budgets,
plans or forecasts of its revenues, earnings or other financial performance or results of operations (but not, in the case of (F) through (I), the underlying cause of such changes or failures, unless such changes or failures would otherwise be
excepted from this definition). For the avoidance of doubt, the parties agree that the terms “material,” “materially” and “materiality” as used in this Agreement with an initial lower case “m” shall have their
respective customary and ordinary meanings, without regard to the meanings ascribed to Public Company Material Adverse Effect or Otic Pharma Material Adverse Effect, in each case as defined in this Agreement. Public Company has made available to
Otic Pharma complete and accurate copies of its certificate of incorporation and bylaws and is not in material default under or in material violation of any provision of any such documents.
4.2
Capitalization
.
(a) The authorized capital stock of Public Company consists of 200,000,000 shares of Public Company Common Stock and 5,000,000 shares of
preferred stock, $0.001 par value per share (“
Public Company Preferred Stock
”). The rights and privileges of each class of Public Company’s capital stock are as set forth in Public Company’s certificate of incorporation.
As of the close of business on the Business Day prior to the date of this Agreement, (i) 22,641,651 shares of Public Company Common Stock were issued or outstanding, (ii) no shares of Public Company Common Stock were held in the treasury of
Public Company or by Subsidiaries of Public Company, and (iii) no shares of Public Company Preferred Stock were issued or outstanding.
(b) Section 4.2(b) of the Public Company Disclosure Schedule sets forth a complete and accurate list of the number of shares of Public
Company Common Stock reserved for future issuance pursuant to stock options granted and outstanding as of the close of business on the Business Day prior to the date of this Agreement, the plans under which such options were granted (collectively,
“
Public Company Stock Plans
”) and the total number of outstanding options to purchase shares of Public Company Common Stock (such outstanding options, “
Public Company Stock Options
”) under the Public Company Stock
Plans as of the close of business on the Business Day prior to the date of this Agreement, indicating, as of the date of this Agreement, with respect to each such Public Company Stock Option the name of the holder thereof, the Public Company Stock
Plan under which it was granted, the number of shares of Public Company Common Stock subject to such Public Company Stock Option, the exercise price, the date of grant and the vesting schedule, including whether (and to what extent) the vesting will
be accelerated in any way by the transactions contemplated by this Agreement or by termination of employment or change in position following consummation of the Transaction, and whether such Public Company Stock Option is intended to be an incentive
stock option. As of the close of business on the
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Business Day prior to the date of this Agreement, Public Company has reserved 250,000 shares of Public Company Common Stock for issuance to employees pursuant to Public Company’s 2014
Employee Stock Purchase Plan (the “
Public Company ESPP
”), of which 250,000 shares remain available for issuance thereunder as of the date hereof. Public Company has not granted, issued or authorized the grant or issuance of any
Public Company Stock Options on the Business Day prior to the date of this Agreement or on the date of this Agreement. Public Company has made available to Otic Pharma accurate and complete copies of all Public Company Stock Plans and the forms of
all stock option agreements evidencing Public Company Stock Options.
(c) Section 4.2(c) of the Public Company Disclosure Schedule lists
the number of shares of Public Company Common Stock reserved for future issuance pursuant to warrants or other outstanding rights (other than Public Company Stock Options) to purchase shares of Public Company Common Stock outstanding as of the close
of business on the Business Day prior to the date of this Agreement (such outstanding warrants or other rights, the “
Public Company Warrants
”) and the agreement or other document under which such Public Company Warrants were
granted, and the exercise price, the date of grant and the expiration date thereof. Public Company has made available to Otic Pharma accurate and complete copies of the forms of agreements evidencing all Public Company Warrants.
(d) Except (i) as set forth in this Section 4.2 or in Article II, (ii) as reserved for future grants under Public Company
Stock Plans, outstanding as of the close of business on the Business Day prior to the date of this Agreement and (iii) for the rights to acquire shares pursuant to the Public Company ESPP, (A) there are no equity securities of any class of
Public Company, or any security exchangeable into or exercisable for such equity securities, issued, reserved for issuance or outstanding and (B) there are no options, warrants, equity securities, calls, rights, commitments or agreements of any
character to which Public Company or any of its Subsidiaries is a party or by which Public Company or any of its Subsidiaries is bound obligating Public Company or any of its Subsidiaries to issue, exchange, transfer, deliver or sell, or cause to be
issued, exchanged, transferred, delivered or sold, additional shares of capital stock or other equity interests of Public Company or any security or rights convertible into or exchangeable or exercisable for any such shares or other equity
interests, or obligating Public Company or any of its Subsidiaries to grant, extend, accelerate the vesting of, otherwise modify or amend or enter into any such option, warrant, equity security, call, right, commitment or agreement. Public Company
does not have any outstanding stock appreciation rights, phantom stock, performance based rights or similar rights or obligations. Other than the Public Company Support Agreement, neither Public Company nor any of its Affiliates is a party to or is
bound by any, and to the knowledge of Public Company, there are no, agreements or understandings with respect to the voting (including voting trusts and proxies) or sale or transfer (including agreements imposing transfer restrictions) of any shares
of capital stock or other equity interests of Public Company. Except as contemplated by this Agreement or described in this Section 4.2(d), there are no registration rights to which Public Company or any of its Subsidiaries is a party or by which it
or they are bound with respect to any equity security of any class of Public Company. Stockholders of Public Company are not entitled to dissenters’ or appraisal rights under applicable state law in connection with the Transaction.
(e) All outstanding shares of Public Company Common Stock are, and all shares of Public Company Common Stock subject to issuance as specified
in Sections 4.2(b) and 4.2(c) or pursuant to Article II, upon issuance on the terms and conditions specified in the instruments pursuant to which they are issuable, will be, duly authorized, validly issued, fully paid and nonassessable and not
subject to or issued in violation of any purchase option, call option, right of first refusal, preemptive right, subscription right or any similar right under any provision of the DGCL, Public Company’s certificate of incorporation or bylaws or
any agreement to which Public Company is a party or is otherwise bound.
4.3
Subsidiaries
.
(a) Section 4.3(a) of the Public Company Disclosure Schedule sets forth, for each Subsidiary of Public Company: (i) its name;
(ii) the number and type of outstanding equity securities and a list of the holders thereof; and (iii) the jurisdiction of organization.
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(b) Each Subsidiary of Public Company is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation, has all requisite corporate power and authority to own, lease and operate its properties and assets and to carry on its business as currently conducted, and is duly qualified to
do business and is in good standing as a foreign corporation in each jurisdiction where the character of its properties owned, operated or leased or the nature of its activities makes such qualification necessary, except for such failures to be so
organized, qualified or in good standing, individually or in the aggregate, that have not had, and are not reasonably likely to have, a Public Company Material Adverse Effect. All of the outstanding shares of capital stock and other equity
securities or interests of each Subsidiary of Public Company are duly authorized, validly issued, fully paid, nonassessable and free of preemptive rights and all such shares (other than directors’ qualifying shares in the case of
non-U.S.
Subsidiaries, all of which Public Company has the power to cause to be transferred for no or nominal consideration to Public Company or Public Company’s designee) are owned, of record and beneficially,
by Public Company or another of its Subsidiaries free and clear of all Liens, claims, pledges, agreements or limitations in Public Company’s voting rights. There are no outstanding or authorized options, warrants, rights, agreements or
commitments to which Public Company or any of its Subsidiaries is a party or which are binding on any of them providing for the issuance, disposition or acquisition of any capital stock of any Subsidiary of Public Company. There are no outstanding
stock appreciation, phantom stock or similar rights with respect to any Subsidiary of Public Company. There are no voting trusts, proxies or other agreements or understandings with respect to the voting of any capital stock of any Subsidiary of
Public Company.
(c) Public Company has made available to Otic Pharma complete and accurate copies of the charter, bylaws or other
organizational documents of each Subsidiary of Public Company.
(d) Public Company does not control directly or indirectly or have any
direct or indirect equity participation or similar interest in any corporation, partnership, limited liability company, joint venture, trust or other business association or entity which is not a Subsidiary of Public Company. There are no
obligations, contingent or otherwise, of Public Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital stock of any Subsidiary of Public Company or to provide funds to or make any material investment (in
the form of a loan, capital contribution or otherwise) in any Subsidiary of Public Company or any other entity, other than guarantees of bank obligations of Subsidiaries of Public Company entered into in the Ordinary Course of Business.
4.4
Authority; No Conflict; Required Filings and Consents
.
(a) Public Company has all requisite corporate power and authority to enter into this Agreement and, subject only to the Public Company
Stockholder Approval, to consummate the transactions contemplated by this Agreement. The execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement by Public Company has been duly authorized by
all necessary corporate action on the part of Public Company, subject only to the Public Company Stockholder Approval. This Agreement has been duly executed and delivered by Public Company and constitutes the valid and binding obligation of Public
Company, enforceable against Public Company in accordance with its terms, subject to the Bankruptcy and Equity Exception.
(b) The
execution and delivery of this Agreement by Public Company does not, and the consummation by Public Company of the Transaction shall not, (i) conflict with, or result in any violation or breach of, any provision of the certificate of
incorporation or bylaws of Public Company or of the charter, bylaws or other organizational document of any other Subsidiary of Public Company, (ii) conflict with, or result in any violation or breach of, or constitute (with or without notice
or lapse of time, or both) a default (or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any material benefit) under, or require a consent or waiver under, constitute a change in control under, require
the payment of a penalty under or result in the imposition of any Lien on Public Company’s or any of its Subsidiaries’ assets under any of the terms, conditions or provisions of any Contract required to be disclosed in Section 4.11(d) of
the Public
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Company Disclosure Schedule, or (iii) subject to obtaining the Public Company Stockholder Approval and compliance with the requirements specified in clauses (i) through (vii) of Section
4.4(c), conflict with or violate any permit, concession, franchise, license, judgment, injunction, order, decree, statute, law, ordinance, rule or regulation applicable to Public Company or any of its Subsidiaries or any of its or their properties
or assets, except in the case of clauses (ii) and (iii) of this Section 4.4(b), for any such conflicts, violations, breaches, defaults, terminations, cancellations, accelerations or losses that, individually or in the aggregate have not had,
and are not reasonably likely to result in, the loss of a material benefit to, or in the creation of a material liability for, Public Company. Section 4.4(b) of the Public Company Disclosure Schedule lists all consents, waivers and approvals under
any of Public Company’s or any of its Subsidiaries’ agreements, licenses or leases required to be obtained in connection with the consummation of the transactions contemplated by this Agreement, which, if individually or in the aggregate
were not obtained, would result in a loss of a material benefit to, or the creation of any material liability for, Public Company or Otic Pharma as a result of the Transaction.
(c) No consent, approval, license, permit, order or authorization of, or registration, declaration, notice or filing with, any Governmental
Entity or any stock market or stock exchange on which shares of Public Company Common Stock are listed for trading is required by or with respect to Public Company or any of its Subsidiaries in connection with the execution and delivery of this
Agreement or the consummation by Public Company of the transactions contemplated by this Agreement, except for (i) the filing of the Proxy Statement with the SEC in accordance with the Exchange Act, (ii) the filing of such reports,
schedules or materials under Section 13 of or Rule
14a-12
under the Exchange Act as may be required in connection with this Agreement and the transactions contemplated hereby and thereby, (iii) such
consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable state securities laws and the laws of any foreign country, (iv) a NASDAQ Listing Application—For Companies Conducting
a Business Combination that Results in a Change of Control with respect to the shares of Public Company Common Stock to be issued pursuant to this Agreement (the “
NASDAQ Listing Application
”) and (v) such other consents,
authorizations, orders, filings, approvals and registrations that, individually or in the aggregate, if not obtained or made, would not result in a loss of a material benefit to, or the creation of any material liability for, Public Company or Otic
Pharma as a result of the Transaction.
(d) The affirmative vote in favor of the issuance of shares of Public Company Common Stock in the
Transaction by the holders of a majority of the shares of Public Company Common Stock present or represented by proxy and voting at the Public Company Meeting is the only vote of the holders of any class or series of Public Company’s capital
stock or other securities of Public Company necessary to approve the Public Company Voting Proposal. There are no bonds, debentures, notes or other indebtedness of Public Company having the right to vote (or convertible into, or exchangeable for,
securities having the right to vote) on any matters on which stockholders of Public Company may vote.
4.5
SEC Filings; Financial
Statements; Information Provided
.
(a) Public Company has filed all registration statements, forms, reports, certifications and other
documents required to be filed by Public Company with the SEC since September 18, 2014. All such registration statements, forms, reports and other documents (including those that Public Company may file after the date hereof until the Closing)
are referred to herein as the “
Public Company SEC Reports
.” All of the Public Company SEC Reports (A) were or will be filed on a timely basis, (B) at the time filed, complied, or will comply when filed, as to form in
all
material respects with the requirements of the Securities Act and the Exchange Act applicable to such Public Company SEC Reports and (C) did not or will not at the time they were or are filed contain any untrue statement of a
material fact or omit to state a material fact required to be stated in such Public Company SEC Reports or necessary in order to make the statements in such Public Company SEC Reports, in the light of the circumstances under which they were made,
not misleading, in any material respect.
(b) Each of the consolidated financial statements (including, in each case, any related notes
and schedules) contained or to be contained in the Public Company SEC Reports at the time filed (i) complied or will
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comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, (ii) were or will be prepared in
accordance with GAAP applied on a consistent basis throughout the periods involved and at the dates involved (except as may be indicated in the notes to such financial statements or, in the case of unaudited interim financial statements, as
permitted by the SEC on Form
10-Q
under the Exchange Act) and (iii) fairly presented or will fairly present in all material respects the consolidated financial position of Public Company and its
Subsidiaries as of the dates indicated and the consolidated results of its operations and cash flows for the periods indicated, except that the unaudited interim financial statements were or are subject to normal and recurring
year-end
adjustments. The consolidated balance sheet of Public Company as of September 30, 2016 is referred to herein as the “
Public Company Balance Sheet
.”
(c) PricewaterhouseCoopers LLP, Public Company’s current auditors, is and has been at all times since its engagement by Public Company
(i) “independent” with respect to Public Company within the meaning of Regulation
S-X
and (ii) in compliance with subsections (g) through (l) of Section 10A of the Exchange Act (to the
extent applicable) and the related rules of the SEC and the Public Company Accounting Oversight Board.
(d) The information to be
supplied by or on behalf of Public Company for inclusion, or filed by the Public Company and incorporated by reference, in the Proxy Statement to be sent to the stockholders of Public Company in connection with the Public Company Meeting, which
information shall be deemed to include all information about or relating to Public Company, the Public Company Voting Proposal or the Public Company Meeting, shall not, on the date the Proxy Statement is first mailed to stockholders of Public
Company, or at the time of the Public Company Meeting, contain any statement that, at such time and in light of the circumstances under which it shall be made, is false or misleading with respect to any material fact, or omit to state any material
fact necessary in order to make the statements made in the Proxy Statement not false or misleading; or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for
the Public Company Meeting that has become false or misleading.
(e) Public Company does not have and never has had any sales in or
revenues from the State of Israel.
4.6
No Undisclosed Liabilities
. Public Company does not have any liability that is required to
be set forth on a balance sheet of Public Company in accordance with GAAP, except for (a) liabilities shown on the Public Company Balance Sheet, (b) liabilities that have arisen since the date of the Public Company Balance Sheet in the
Ordinary Course of Business, (c) liabilities for transaction expenses incurred in connection with the transactions contemplated by this Agreement and alternatives to such transactions, and (d) contractual and other liabilities incurred in
the Ordinary Course of Business that are not required by GAAP to be reflected on a balance sheet.
4.7
Absence of Certain Changes or
Events
. During the period beginning on the date of the Public Company Balance Sheet and ending on the date hereof, Public Company and its Subsidiaries have conducted their respective businesses only in the Ordinary Course of Business and, since
such date, there has not been (i) any change, event, circumstance, development or effect that, individually or in the aggregate, has had, or is reasonably likely to have, a Public Company Material Adverse Effect or (ii) any other action or
event that would have required the consent of Otic Pharma pursuant to Section 5.2 (other than clause (A) of paragraph (j) or paragraphs (k) or (l) thereof) had such action or event occurred after the date of this Agreement.
4.8
Taxes
.
(a) Each of
Public Company and its Subsidiaries has properly filed on a timely basis all income and other material Tax Returns that it was required to file, and all such Tax Returns were true, correct and complete in all material respects. Each of Public
Company and its Subsidiaries has paid on a timely basis all Taxes that were due and payable. The unpaid Taxes of Public Company and each of its Subsidiaries for Tax periods through
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the date of the Public Company Balance Sheet do not exceed the accruals and reserves for Taxes (excluding accruals and reserves for deferred Taxes established to reflect timing differences
between book and Tax income) set forth on the Public Company Balance Sheet, and all unpaid Taxes of Public Company and each of its Subsidiaries for all Tax periods commencing after the date of the Public Company Balance Sheet arose in the Ordinary
Course of Business. Neither Public Company nor any of its Subsidiaries is or has ever been a member of an affiliated group with which it has filed (or been required to file) consolidated, combined, unitary or similar Tax Returns, other than a group
of which the common parent is Public Company. With the exception of customary commercial leases or contracts that are not primarily related to Taxes entered into in the Ordinary Course of Business and liabilities thereunder, neither Public Company
nor any of its Subsidiaries (i) has any actual or potential liability under Treasury Regulations
Section 1.1502-6
(or any comparable or similar provision of federal, state, local or foreign law), as
a transferee or successor, pursuant to any contractual obligation, or otherwise for any Taxes of any person other than Public Company or any of its Subsidiaries, or (ii) is a party to or bound by any Tax indemnity, Tax sharing, Tax allocation
or similar agreement. All material Taxes that Public Company or any of its Subsidiaries was required by law to withhold or collect have been duly withheld or collected and, to the extent required, have been properly paid to the appropriate
Governmental Entity, and each of Public Company and its Subsidiaries has complied with all material information reporting and backup withholding requirements, including the maintenance of required records with respect thereto, in connection with
amounts paid to any employee, independent contractor, creditor, or other third party.
(b) Public Company has delivered or made available
to Otic Pharma (i) complete and correct copies of all Tax Returns of Public Company and any of its Subsidiaries relating to Taxes for all taxable periods for which the applicable statute of limitations has not yet expired, (ii) complete
and correct copies of all private letter rulings, revenue agent reports, information document requests, notices of proposed deficiencies, deficiency notices, protests, petitions, closing agreements, settlement agreements, pending ruling requests and
any similar documents submitted by, received by, or agreed to by or on behalf of Public Company or any of its Subsidiaries relating to Taxes for all taxable periods for which the statute of limitations has not yet expired, and (iii) complete
and correct copies of all material agreements, rulings, settlements or other Tax documents with or from any Governmental Entity relating to Tax incentives of Otic Pharma or any of its Subsidiaries. No examination or audit of any Tax Return of Public
Company or any of its Subsidiaries by any Governmental Entity is currently in progress or, to the knowledge of Public Company, threatened or contemplated. Neither Public Company nor any of its Subsidiaries has been informed in writing by any
jurisdiction in which Public Company or any Subsidiary does not file a Tax Return that the jurisdiction believes that Public Company or any of its Subsidiaries was required to file any Tax Return that was not filed or is subject to Tax in such
jurisdiction. Neither Public Company nor any of its Subsidiaries has (i) waived any statute of limitations with respect to Taxes or agreed to extend the period for assessment or collection of any Taxes, which waiver or extension is still in
effect, (ii) requested any extension of time within which to file any Tax Return, other than routine extensions available as a matter of right which Tax Return has not yet been filed, or (iii) executed or filed any power of attorney with
any taxing authority, which is still in effect.
(c) Neither Public Company nor any of its Subsidiaries has made any payment, is
obligated to make any payment, or is a party to any agreement that could obligate it to make any payment that may be treated as an “excess parachute payment” under Section 280G of the Code (without regard to Sections 280G(b)(4) and
280G(b)(5) of the Code).
(d) Neither Public Company nor any of its Subsidiaries has been a United States real property holding
corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(l)(A)(ii) of the Code.
(e) Neither Public Company nor any of its Subsidiaries has distributed to its stockholders or security holders stock or securities of a
controlled corporation, nor has stock or securities of Public Company or any of its Subsidiaries been distributed, in a transaction to which Section 355 of the Code applies (i) in the two years prior to the date of this Agreement or
(ii) in a distribution that could otherwise constitute part of a “plan” or “series of
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related transactions” (within the meaning of Section 355(e) of the Code) that includes the transactions contemplated by this Agreement.
(f) There are no Liens with respect to Taxes upon any of the assets or properties of Public Company or any of its Subsidiaries, other than
with respect to Taxes not yet due and payable.
(g) Neither Public Company nor any of its Subsidiaries will be required to include any
item of income in, or exclude any item of deduction from, taxable income for any period (or any portion thereof) ending after the Closing Date as a result of any (i) adjustments under Section 481 of the Code (or any similar adjustments
under any provision of the Code or the corresponding foreign, state or local Tax laws), (ii) deferred intercompany gain or any excess loss account described in Treasury Regulations under Section 1502 of the Code (or any corresponding provision
of state, local or foreign Tax law), (iii) closing agreement as described in Section 7121 of the Code (or any corresponding or similar provision of state, local or foreign Tax law) executed on or prior to the Closing Date, (iv) installment
sale or other open transaction disposition made on or prior to the Closing Date, (v) prepaid amount received on or prior to the Closing Date, or (vi) any election made pursuant to Section 108(i) of the Code on or prior to the Closing Date.
(h) Neither Public Company nor any of its Subsidiaries has participated in any “reportable transaction” as defined in Section
1.6011-4(b)
of the Treasury Regulations or any analogous provision of state or local law.
(i) Neither
Public Company nor any Subsidiary (i) is a party to any joint venture, partnership, or other arrangement that is treated as a partnership for federal income Tax purposes, (ii) has made an entity classification
(“check-the-box”)
election under Section 7701 of the Code, (iii) is a stockholder of a “controlled foreign corporation” as defined in
Section 957 of the Code (or any similar provision of state, local or foreign law), or (iv) is a stockholder in a “passive foreign investment company” within the meaning of Section 1297 of the Code.
(j) Neither Public Company nor any Subsidiary (A) has or has had a permanent establishment in any country (other than its country of
incorporation) as defined in any applicable Tax treaty or convention between such country and Public Company or its Subsidiary’s country of incorporation or (B) has or has had operations constituting doing business for Tax purposes in any
country (other than its country of incorporation).
(k) All related party transactions involving Public Company or any of its
Subsidiaries have been conducted at arm’s length in compliance with Section 482 of the Code and the Treasury Regulations promulgated thereunder and any comparable provisions of any other Tax law. Each of Public Company and its Subsidiaries
has maintained documentation (including any applicable transfer pricing studies) in connection with such related party transactions in accordance with Sections 482 and 6662 of the Code and the Treasury Regulations promulgated thereunder and any
comparable provisions of any other Tax law.
4.9
Owned and Leased Real Properties
.
(a) Neither Public Company nor any of its Subsidiaries owns or has ever owned any real property.
(b) Section 4.9(b) of the Public Company Disclosure Schedule sets forth a complete and accurate list of all real property leased, subleased
or licensed by Public Company or any of its Subsidiaries as of the date of this Agreement (collectively, the “
Public Company Leases
”) and the location of the premises. Neither Public Company nor any of its Subsidiaries nor, to the
knowledge of Public Company, any other party is in breach or default and no event has occurred, is pending or, to the knowledge of Public Company, is threatened, which, after the giving of notice, with lapse of time, or otherwise, would constitute
any such breach or default under any of under any of the Public Company Leases, except where the existence of such defaults, individually or in the aggregate, has not had, and is not reasonably likely to result in, the loss of a material right or in
a material
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liability of Public Company or any of its Subsidiaries. Neither Public Company nor any of its Subsidiaries leases, subleases or licenses any real property to any person other than Public Company
and its Subsidiaries. Public Company has made available to Otic Pharma complete and accurate copies of all Public Company Leases.
4.10
Intellectual Property
.
(a) To the knowledge of Public Company, Public Company and its Subsidiaries own, license or otherwise
possess legally enforceable rights, free and clear of any Liens, to use all material Intellectual Property used or necessary to conduct the business of Public Company and its Subsidiaries as currently conducted, or that would be used or necessary as
such business is currently proposed to be conducted (excluding generally commercially available software programs).
(b) The execution
and delivery of this Agreement and consummation of the Transaction will not result in the breach of, or create on behalf of any third party the right to terminate or modify, (i) any license, sublicense or other agreement relating to any
Intellectual Property owned by Public Company or any of its Subsidiaries that is material to the business of Public Company and its Subsidiaries, taken as a whole, including software that is used in the development or manufacture of or forms a part
of any product or service sold by or expected to be sold by Public Company or any of its Subsidiaries, but excluding generally commercially available software programs (such Intellectual Property, the “
Public Company Intellectual
Property
”) or (ii) any license, sublicense and other agreement as to which Public Company or any of its Subsidiaries is a party and pursuant to which Public Company or any of its Subsidiaries is authorized to use any third party
Intellectual Property that is material to the business of Public Company and its Subsidiaries, taken as a whole, including software that is used in the development or manufacture of or forms a part of any product or service sold by or expected to be
sold by Public Company or any of its Subsidiaries, but excluding generally commercially available software programs (such Intellectual Property, the “
Public Company Third Party Intellectual Property
”). Section 4.10(b)(i) of the
Public Company Disclosure Schedule sets forth a complete and accurate list of all Patent Rights and registrations and applications for Trademarks and copyrights included in the Public Company Intellectual Property and Section 4.10(b)(ii) sets forth
a complete and accurate list of all agreements under which the Public Company or any of its Subsidiaries have
in-licensed
any Public Company Third Party Intellectual Property.
(c) To the knowledge of Public Company, all issued patents and registrations for Trademarks, service marks and copyrights which are owned by
or licensed to Public Company or any of its Subsidiaries and that are material to the business of Public Company and its Subsidiaries, taken as a whole, are valid and subsisting and all payments due and all registration and renewal formalities
relating to the Public Company Intellectual Property are up to date, complete and correct. Public Company and its Subsidiaries have taken reasonable measures to protect the proprietary nature of the Public Company Intellectual Property. To the
knowledge of Public Company, as of the date of this Agreement (i) no other person or entity is infringing, violating or misappropriating any of the Public Company Intellectual Property or Public Company Third Party Intellectual Property and
(ii) no claim or demand has been made in writing and no proceeding has been filed or is threatened in writing asserting that such Intellectual Property is invalid or unenforceable.
(d) To the knowledge of Public Company, none of the (i) products previously or currently sold by Public Company or any of its
Subsidiaries or (ii) business or activities previously or currently conducted by Public Company or any of its Subsidiaries infringes, violates or constitutes a misappropriation of, any Intellectual Property of any third party. As of the date of
this Agreement, neither Public Company nor any of its Subsidiaries has received any written complaint, claim or notice alleging any such infringement, violation or misappropriation.
4.11
Contracts
.
(a) As
of the date of this Agreement, there are no Contracts that are material contracts (as defined in Item 601(b)(10) of Regulation
S-K)
with respect to Public Company, other than those Contracts identified or
described in the Public Company SEC Reports filed prior to the date hereof.
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(b) Public Company has not entered into any transaction that would be subject to proxy statement
disclosure pursuant to Item 404 of Regulation
S-K
other than as disclosed in an SEC Report filed prior to the date hereof.
(c) Neither Public Company nor any of its Subsidiaries is a party to any agreement under which a third party would be entitled to receive a
license or any other right to Public Company Intellectual Property as a result of the transactions contemplated by this Agreement.
(d)
Section
4.11(d)
of the Public Company Disclosure Schedule lists the following Contracts of Public Company and its Subsidiaries in effect as of the date of this Agreement:
(i) any Contract (or group of related Contracts) for the purchase or sale of products or for the furnishing or receipt of services
(A) which calls for performance over a period of more than 180 days from the date of this Agreement, (B) which involves an aggregate of more than $150,000 or (C) in which Public Company or any of its Subsidiaries has granted
manufacturing rights, “most favored nation” pricing provisions or marketing or distribution rights relating to any products or territory or has agreed to purchase a minimum quantity of goods or services or has agreed to purchase goods or
services exclusively from a particular party;
(ii) any Contract under which the consequences of a default or termination would
reasonably be likely to have a Public Company Material Adverse Effect;
(iii) any Contract that could reasonably be expected to have the
effect of prohibiting or impairing the conduct of the business of Otic Pharma or any of its Subsidiaries or Public Company or any of its Subsidiaries as currently conducted and as currently proposed to be conducted;
(iv) any Contract under which Public Company or any of its Subsidiaries is restricted from selling, licensing or otherwise distributing any
of its technology or products, or providing services to, customers or potential customers or any class of customers, in any geographic area, during any period of time or any segment of the market or line of business;
(v) any dealer, distribution, joint marketing, joint venture, joint development, partnership, strategic alliance, collaboration, development
agreement or outsourcing arrangement;
(vi) any Contract for the conduct of research studies,
pre-clinical
or clinical studies, manufacturing, distribution, supply, marketing or
co-promotion
of any products in development by or which has been or which is being
marketed, distributed, supported, sold or licensed out, in each case by or on behalf of Public Company or any of its Subsidiaries; and
(vii) any Contract that would entitle any third party to receive a license or any other right to intellectual property of Otic Pharma or any
of Otic Pharma’s Affiliates following the Closing.
(e) Public Company has made available to Otic Pharma a complete and accurate
copy of each Contract listed in Sections 4.10(b)(i), 4.10(b)(ii) and 4.11(d) of the Public Company Disclosure Schedule. With respect to each Contract so listed and those Contracts identified or described in the Public Company SEC Reports filed
prior to the date hereof: (i) the Contract is legal, valid, binding and enforceable and in full force and effect against Public Company and/or its Subsidiaries, as applicable, and, to the knowledge of Public Company, against each other party
thereto, as applicable, subject to the Bankruptcy and Equity Exception; (ii) the Contract will continue to be legal, valid, binding and enforceable and in full force and effect against Public Company and/or its Subsidiaries, as applicable, and,
to the knowledge of Public Company, against each other party thereto, immediately following the Closing in accordance with the terms thereof as in effect immediately prior to the Closing (other than any such Contracts that expire or terminate before
such time in accordance with their terms and not as a result of a breach or default by Public Company or any of its Subsidiaries), in each case subject to
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the Bankruptcy and Equity Exception; and (iii) none of Public Company, its Subsidiaries nor, to the knowledge of Public Company, any other party, is in breach or violation of, or default
under, any such Contract, and no event has occurred, is pending or, to the knowledge of Public Company, is threatened, which, with or without notice or lapse of time, or both, would constitute a breach or default by Public Company, its Subsidiaries
or, to the knowledge of Public Company, any other party under such Contract, except for such breaches, violations or defaults that, individually or in the aggregate, have not had, and are not reasonably likely to have, a Public Company Material
Adverse Effect.
4.12
Litigation
. There is no action, suit, proceeding, claim, arbitration or investigation before any Governmental
Entity or before any arbitrator that is pending or has been threatened in writing against Public Company or any of its Subsidiaries that (a) seeks either damages in excess of $100,000 or equitable relief or (b) in any manner seeks material
injunctive or other non-monetary relief, including but not limited to a challenge or request to prevent, enjoin, alter or delay the transactions contemplated by this Agreement, except for such actions, suits, proceedings, claims, arbitrations or
investigations first arising after the date of this Agreement that, individually or in the aggregate, have not had, and are not reasonably likely to have, a Public Company Material Adverse Effect. There are no material judgments, orders or decrees
outstanding against Public Company or any of its Subsidiaries.
4.13
Environmental Matters
. Except for such matters that,
individually or in the aggregate, have not had, and are not reasonably likely to have, a Public Company Material Adverse Effect:
(i)
Public Company and its Subsidiaries have complied with all applicable Environmental Laws;
(ii) the properties currently owned, leased or
operated by Public Company and its Subsidiaries (including soils, groundwater, surface water, buildings or other structures) are not contaminated with any Hazardous Substances;
(iii) the properties formerly owned, leased or operated by Public Company or any of its Subsidiaries were not contaminated with Hazardous
Substances during the period of ownership, use or operation by Public Company or any of its Subsidiaries;
(iv) neither Public Company
nor any of its Subsidiaries are subject to liability for any Hazardous Substance disposal or contamination on the property of any third party; and
(v) neither Public Company nor any of its Subsidiaries have released any Hazardous Substance into the environment.
(b) As of the date of this Agreement, neither Public Company nor any of its Subsidiaries has received any written notice, demand, letter,
claim or request for information alleging that Public Company or any of its Subsidiaries may be in violation of, liable under or have obligations under, any Environmental Law.
(c) Neither Public Company nor any of its Subsidiaries is subject to any orders, decrees, injunctions or other arrangements with any
Governmental Entity or is subject to any indemnity or other agreement with any third party relating to liability under any Environmental Law or relating to Hazardous Substances.
4.14
Employee Benefit Plans
.
(a) Section 4.14(a) of the Public Company Disclosure Schedule sets forth a complete and accurate list of all Employee Benefit Plans
maintained, or contributed to, by Public Company or any of its Subsidiaries or any of their respective ERISA Affiliates for the benefit of, or relating to, any current or former employee or other service provider of the Public Company or any of its
Subsidiaries (together, the “
Public Company Employee Plans
”).
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(b) With respect to each Public Company Employee Plan, Public Company has made available to Otic
Pharma, a complete and accurate copy of (i) such plan (or a written summary of any unwritten plan), (ii) the three (3) most recent annual reports (Form 5500) filed with the IRS, (iii) each trust agreement, group annuity contract and
summary plan description, if any, relating to such Public Company Employee Plan, (iv) the three (3) most recent financial statements for each Public Company Employee Plan that is funded, (v) all personnel, payroll and employment
manuals and policies, (vi) all employee handbook, (vii) all reports regarding the satisfaction of the nondiscrimination requirements of Sections 410(b), 401(k) and 401(m) of the Code and (viii) any
non-routine
correspondence to or from the IRS, Department of Labor or other regulator concerning any Public Company Employee Plan, including any voluntary corrections submissions.
(c) Each Public Company Employee Plan has been administered in all material respects in accordance with ERISA, the Code and all other
applicable laws and the regulations thereunder and in accordance with its terms and each of Public Company and its Subsidiaries and their respective ERISA Affiliates has in all material respects met its obligations with respect to such Public
Company Employee Plan and has made all required contributions thereto (or reserved such contributions on the Public Company Balance Sheet). Public Company and its Subsidiaries and each of their respective ERISA Affiliates and each Public Company
Employee Plan are in compliance in all material respects with the currently applicable provisions of ERISA and the Code and the regulations thereunder (including Section 4980B of the Code, Subtitle K, Chapter 100 of the Code and Sections 601 through
608 and Section 701 et seq. of ERISA). All filings and reports as to each Public Company Employee Plan required to have been submitted to the IRS or to the United States Department of Labor have been timely submitted. There is no audit,
investigation or other proceeding (including any voluntary correction application) pending against or involving any Public Company Employee Plan. There have been no events with respect to any Public Company Employee Plan that could result in payment
or assessment by or against Public Company or any of its Subsidiaries of any Taxes, including (but without limitation) any excise Taxes under Sections 4972, 4975, 4976, 4977, 4979, 4980B, 4980D, 4980E, 4980H or 5000 of the Code. With respect to the
Public Company Employee Plans, no event has occurred, and to the knowledge of Public Company, there exists no condition or set of circumstances in connection with which Public Company or any of its Subsidiaries could be subject to any liability that
is reasonably likely, individually or in the aggregate, to have a Public Company Material Adverse Effect under ERISA, the Code or any other applicable law.
(d) With respect to the Public Company Employee Plans, there are no benefit obligations for which contributions have not been made or
properly accrued and there are no benefit obligations that have not been accounted for by reserves, or otherwise properly footnoted in accordance with GAAP, on the financial statements of Public Company, which obligations are reasonably likely,
individually or in the aggregate, to have a Public Company Material Adverse Effect. The assets of each Public Company Employee Plan that is funded are reported at their fair market value on the books and records of such Public Company Employee Plan.
(e) All Public Company Employee Plans that are intended to be qualified under Section 401(a) of the Code have received determination
letters from the IRS to the effect that such Public Company Employee Plans are qualified and the plans and trusts related thereto are exempt from federal income taxes under Sections 401(a) and 501(a) of the Code, respectively, of the Code, no such
determination letter has been revoked and revocation has not been threatened, and no such Public Company Benefit Plan has been amended or operated since the date of its most recent determination letter or application therefor in any respect, and no
act or omission has occurred, that would adversely affect its qualification or materially increase its cost. Each Public Company Employee Plan that is required to satisfy Section 401(k)(3) or Section 401(m)(2) of the Code had been tested for
compliance with, and satisfies the requirements of, Section 401(k)(3) and Section 401(m)(2) of the Code, as the case may be, for each plan year ending prior to the Closing Date.
(f) Neither Public Company nor any of its Subsidiaries nor any of their respective ERISA Affiliates has (i) ever maintained a Public
Company Employee Benefit Plan that was ever subject to Section 412 of the Code or Title IV of ERISA or (ii) ever been obligated to contribute to a “multiemployer plan” (as defined in Section 4001(a)(3) of ERISA). No Public
Company Employee Plan is funded by, associated with or related to a
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“voluntary employees’ beneficiary association” within the meaning of Section 501(c)(9) of the Code. No Public Company Employee Plan holds securities issued by Public Company or any
of its Subsidiaries or any of their respective ERISA Affiliates.
(g) Each Public Company Employee Plan is amendable and terminable
unilaterally by Public Company and any of Public Company’s Subsidiaries and their respective ERISA Affiliates that are a party thereto or covered thereby at any time without liability to Public Company or any of its Subsidiaries or their
respective ERISA Affiliates as a result thereof (other than for benefits accrued through the date of termination or amendment and reasonable administrative expenses related thereto), and no Public Company Employee Plan, plan documentation or
agreement, summary plan description or other written communication distributed generally to employees by its terms prohibits Public Company or any of its Subsidiaries or their respective ERISA Affiliates from amending or terminating any such Public
Company Employee Plan. The investment vehicles used to fund the Public Company Employee Plans may be changed at any time without incurring a material sales charge, surrender fee or other similar expense.
(h) Neither Public Company nor any of its Subsidiaries nor any of their respective ERISA Affiliates is a party to any oral or written
(i) agreement with any stockholders, director, executive officer or other key employee of Public Company or any of its Subsidiaries (A) the benefits of which are contingent, or the terms of which are materially altered, upon the occurrence
of a transaction involving Public Company or any of its Subsidiaries of the nature of any of the transactions contemplated by this Agreement, (B) providing any term of employment or compensation guarantee or (C) providing severance
benefits or other benefits after the termination of employment of such director, executive officer or key employee; (ii) agreement, plan or arrangement under which any person may receive payments from Public Company or any of its Subsidiaries
or their respective ERISA Affiliates that may be subject to the tax imposed by Section 4999 of the Code or included in the determination of such person’s “parachute payment” under Section 280G of the Code, without regard to
Section 280G(b)(4); (iii) agreement providing any person providing for “tax gross up” or tax indemnifications related to Sections 280G or 409A of the Code or otherwise; or (iv) agreement or plan binding Public Company or any of its
Subsidiaries or any of their respective ERISA Affiliates, including any stock option plan, stock appreciation right plan, restricted stock plan, stock purchase plan or severance benefit plan, any of the benefits of which shall be increased, or the
vesting of the benefits of which shall be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which shall be calculated on the basis of any of the transactions contemplated
by this Agreement. There are no loans or extensions of credit by Public Company, any of its Subsidiaries or any of their respective ERISA Affiliate to any employee or any other service provider to Public Company or any of its Subsidiaries.
(i) None of the Public Company Employee Plans promises or provides post-termination medical or other post-termination welfare benefits to any
person, except as required by applicable law and at the sole expense of the participant.
(j) Public Company and its Subsidiaries are in
material compliance with all applicable provisions of the Affordable Care Act, including reporting requirements, and there has been no change in health plan terms or coverage that would reasonably be expected to attract an excise tax under Section
4980H of the Code for the current year.
(k) Each Public Company Employee Plan that is a “nonqualified deferred compensation
plan” (as defined in Section 409A(d)(1) of the Code) materially complies in form and operation with Section 409A of the Code and all IRS regulations and other guidance thereunder. No event has occurred that would be treated by Section 409A(b)
of the Code as a transfer of property for purposes of Section 83 of the Code. Since January 1, 2005, no stock option or equity unit option granted under any Public Company Employee Plan has an exercise price that has been or may be less
than the fair market value of the underlying stock or equity units (as the case may be) as of the date such option was granted or has any feature for the deferral of compensation other than the deferral of recognition of income until the later of
exercise or disposition of such option. No nonqualified
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deferred compensation plan has been administered in a manner that would cause an excise tax to apply to payments to plan participants.
4.15
Compliance With Laws
. Public Company and each of its Subsidiaries has complied in all material respects with, is not in material
violation of, and, as of the date of this Agreement, has not received any notice alleging any material violation with respect to, any applicable provisions of any statute, law or regulation with respect to the conduct of its business, or the
ownership or operation of its properties or assets.
4.16
Permits and Regulatory Matters
.
(a) Public Company and each of its Subsidiaries have all material Permits required to conduct their businesses as currently conducted,
including all such Permits required by the FDA or any other Governmental Entity exercising comparable authority (the “
Public Company Authorizations
”).
(b) Public Company and its Subsidiaries are in compliance in all material respects with the terms of the Public Company Authorizations. No
Public Company Authorization shall cease to be effective as a result of the consummation of the transactions contemplated by this Agreement.
(c) All manufacturing, processing, distribution, labeling, storage, testing, specifications, sampling, sale or marketing of products
performed by or on behalf of Public Company or any of its Subsidiaries are in compliance in all material respects with all applicable laws, rules, regulations or orders administered or issued by the FDA or any other Governmental Entity exercising
comparable authority. As of the date of this Agreement, neither Public Company nor any of its Subsidiaries has received any written notices or correspondence from the FDA or any other Governmental Entity exercising comparable authority, and to the
knowledge of Public Company there is no action or proceeding pending or threatened (including any prosecution, injunction, seizure, civil fine, suspension or recall), in each case alleging that Public Company or any of its Subsidiaries is not
currently in compliance with any and all applicable laws, regulations or orders implemented by the FDA or any other Governmental Entity exercising comparable authority.
(d) There are no seizures, recalls, market withdrawals, field notifications or corrective actions, notifications of misbranding or
adulteration, destruction orders, safety alerts or similar actions relating to the safety or efficacy of any products marketed or sold by Public Company or any of its Subsidiaries being conducted, requested in writing or, to the knowledge of Public
Company, threatened by the FDA or any other Governmental Entity exercising comparable authority. Public Company has not, either voluntarily or involuntarily, initiated, conducted or issued or caused to be initiated, conducted or issued any recall,
market withdrawal, safety alert or other similar notice or action relating to the alleged lack of safety or efficacy of any products marketed or sold by Public Company or any of its Subsidiaries.
(e) The studies, tests and preclinical and clinical trials conducted by or on behalf of Public Company or any of its Subsidiaries were and,
if still pending, are being conducted in all material respects in accordance with experimental protocols, procedures and controls pursuant to, where applicable, accepted professional and scientific standards; and, as of the date of this Agreement,
neither Public Company nor any of its Subsidiaries has received any written notices or correspondence from the FDA or any other Governmental Entity exercising comparable authority requiring the termination, suspension or material modification of any
studies, tests or preclinical or clinical trials conducted by or on behalf of Public Company or any of its Subsidiaries.
4.17
Employees
.
(a) All current and past key employees of Public Company or any of its Subsidiaries have entered into confidentiality
and assignment of inventions agreements with Public Company, a copy or form of which has previously been made available to Otic Pharma. To the knowledge of Public Company, as of the date of this Agreement, no employee of Public Company or any
Subsidiary of Public Company is in violation of any term of
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any patent disclosure agreement,
non-competition
agreement, or any restrictive covenant to a former employer relating to the right of any such employee to
be employed by Public Company or any of its Subsidiaries because of the nature of the business currently conducted by Public Company or any of its Subsidiaries or to the use of trade secrets or proprietary information of others. To the knowledge of
Public Company, as of the date of this Agreement, no key employee or group of employees has any plans to terminate employment with Public Company or its Subsidiaries.
(b) Neither Public Company nor any of its Subsidiaries is a party to or otherwise bound by any collective bargaining agreement, contract or
other agreement or understanding with a labor union or labor organization. Neither Public Company nor any of its Subsidiaries is the subject of any proceeding asserting that Public Company or any of its Subsidiaries has committed an unfair labor
practice or is seeking to compel it to bargain with any labor union or labor organization, nor is there pending or, to the knowledge of Public Company, threatened, any labor strike, dispute, walkout, work stoppage, slow-down or lockout involving
Public Company or any of its Subsidiaries.
4.18
Insurance
. Public Company and its Subsidiaries maintain those insurance policies
listed on Section 4.18 of the Public Company Disclosure Schedule, setting forth the type of policy, the effective date, the expiration date, the policy limits and deductible or retention amounts for each such policy (the “
Public Company
Insurance Policies
”). Each Public Company Insurance Policy is in full force and effect. None of the Public Company Insurance Policies shall terminate or lapse (or be affected in any other adverse manner) by reason of any of the transactions
contemplated by this Agreement. Public Company and each of its Subsidiaries have complied in all material respects with the provisions of each Public Company Insurance Policy under which it is the insured party. No insurer under any Public Company
Insurance Policy has cancelled or generally disclaimed liability under any such policy or indicated any intent to do so or not to renew any such policy. All claims under the Public Company Insurance Policies have been filed in a timely fashion. All
material claims pending under the Public Company Insurance Policies as of the date of this Agreement are listed on Section 4.18 of the Public Company Disclosure Schedule (the “
Pending Claims
”), setting forth the general nature
of such claims (including claimant(s) and damages sought), the date on which the claim(s) arose and the expenses incurred to date under the retention or deductible.
4.19
Opinion of Financial Advisor
. The financial advisor of Public Company, Wedbush PacGrow (the “
Public Company Financial
Advisor
”), has delivered to Public Company an opinion dated the date of this Agreement to the effect, as of such date, that the consideration to be paid by Public Company in connection with the Transaction is fair, from a financial point of
view, to Public Company, a signed copy of which opinion will be delivered to Otic Pharma within one Business Day following the date of this Agreement.
4.20
Section 203 of the DGCL
. Assuming the accuracy of the representations and warranties of Otic Pharma in Section 3.24, Public
Company Board has taken all actions so that the restrictions contained in Section 203 of the DGCL applicable to a “business combination” (as defined in Section 203) shall not apply to the execution, delivery or performance of
this Agreement, the Public Company Support Agreement or the consummation of the Transaction or the other transactions contemplated by this Agreement or the Public Company Support Agreement.
4.21
Brokers; Fees and Expenses
. No agent, broker, investment banker, financial advisor or other firm or person is or shall be
entitled, as a result of any action, agreement or commitment of Public Company or any of its Subsidiaries, to any broker’s, finder’s, financial advisor’s or other similar fee or commission in connection with any of the transactions
contemplated by this Agreement, except the Public Company Financial Advisor. Public Company has made available to Otic Pharma a complete and accurate copy of all agreements pursuant to which the Public Company Financial Advisor is entitled to any
fees and expenses in connection with any of the transactions contemplated by this Agreement. Public Company is not a party to any agreements with the Public Company Financial Advisor providing the Public Company Financial Advisor with any rights
after the Closing that have not been made available to Otic Pharma.
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4.22
Controls and Procedures, Certifications and Other Matters
.
(a) Public Company and each of its Subsidiaries maintains accurate books and records reflecting its assets and liabilities and maintains
proper and adequate internal control over financial reporting designed to provide assurance that (i) transactions are executed with management’s authorization, (ii) transactions are recorded as necessary to permit preparation of the
consolidated financial statements of Public Company and to maintain accountability for Public Company’s consolidated assets, (iii) access to assets of Public Company and its Subsidiaries is permitted only in accordance with
management’s authorization, (iv) the reporting of assets of Public Company and its Subsidiaries is compared with existing assets at regular intervals and (v) accounts, notes and other receivables and inventory were recorded
accurately, and proper and adequate procedures are implemented to effect the collection thereof on a current and timely basis.
(b)
Public Company maintains disclosure controls and procedures required by
Rules 13a-15
or
15d-15
under the Exchange Act, and such controls and procedures are
effective to ensure that all material information concerning Public Company and its Subsidiaries is made known on a timely basis to the individuals responsible for the preparation of Public Company’s filings with the SEC and other public
disclosure documents.
(c) Neither Public Company nor any of its Subsidiaries has, since Public Company became subject to the reporting
requirements of Section 13 or Section 15(d) of the Exchange Act, extended or maintained credit, arranged for the extension of credit, modified or renewed an extension of credit, in the form of a personal loan or otherwise, to or for any
director or executive officer of Public Company. Section 4.22(c) of the Public Company Disclosure Schedule identifies any loan or extension of credit maintained by Public Company to which the second sentence of Section 13(k)(1) of the Exchange
Act applies.
4.23 Books and Records. The minute books and other similar records of Public Company contain complete and accurate records
of all material actions taken at any meetings of Public Company’s stockholders, Board of Directors or any committee thereof and of all written consents executed in lieu of the holding of any such meeting. The books and records of Public Company
accurately reflect in all material respects the assets, liabilities, business, financial condition and results of operations of Public Company and have been maintained in accordance with good business and bookkeeping practices.
4.24
No Other Representations or Warranties
. Public Company hereby acknowledges and agrees that, except for the representations and
warranties contained in this Agreement, none of Otic Pharma nor any other person on behalf of Otic Pharma makes any express or implied representation or warranty with respect to Otic Pharma or with respect to any other information provided to Public
Company or any of its Affiliates in connection with the transactions contemplated hereby, and (subject to the express representations and warranties of Otic Pharma set forth in Article III (in each case as qualified and limited by the Otic Pharma
Disclosure Schedule)) none of Public Company or any of its Affiliates, stockholders, directors, officers, employees, agents, representatives or advisors, or any other person, has relied on any such information (including the accuracy or completeness
thereof).
ARTICLE V
CONDUCT OF BUSINESS
5.1
Covenants of Otic Pharma
. Except as set forth in Section 5.1 of the Otic Pharma Disclosure Schedule or as expressly provided
herein or as consented to in writing by Public Company (which consent shall not be unreasonably withheld, conditioned or delayed), from and after the date of this Agreement until the earlier of the termination of this Agreement in accordance with
its terms and the Closing, Otic Pharma shall, and shall cause each of its Subsidiaries to, act and carry on its business in the Ordinary Course of Business, pay its debts and Taxes and perform its other obligations when due (subject to good faith
disputes over such debts, Taxes or obligations), comply with applicable laws, rules and regulations, and use commercially reasonable efforts,
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consistent in all material respects with past practices, to maintain and preserve its and each of its Subsidiaries’ business organization, assets and properties, keep available the services
of its present officers and key employees and preserve its advantageous business relationships with customers, strategic partners, suppliers, distributors and others having business dealings with it. Without limiting the generality of the foregoing,
except as set forth in Section 5.1 of the Otic Pharma Disclosure Schedule, from and after the date of this Agreement until the earlier of the termination of this Agreement in accordance with its terms and the Closing, Otic Pharma shall not, and
shall not permit any of its Subsidiaries to, directly or indirectly, do any of the following without the prior written consent of Public Company (which consent shall not, in the case of the actions set forth in clauses (k) and (l) of this
Section 5.1, be unreasonably withheld, conditioned or delayed):
(a) (i) declare, set aside or pay any dividends on, or make any
other distributions (whether in cash, securities or other property) in respect of, any of its capital stock (other than dividends and distributions by a direct or indirect wholly owned Subsidiary of Otic Pharma to its parent); (ii) split, combine or
reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock or any of its other securities; or (iii) purchase, redeem or otherwise
acquire any shares of its capital stock or any other of its securities or any rights, warrants or options to acquire any such shares or other securities, other than, in the case of this clause (iii), from former employees, directors and consultants
in accordance with agreements in effect on the date of this Agreement providing for the repurchase of shares at no or nominal consideration in connection with any termination of services to Otic Pharma or any of its Subsidiaries;
(b) except as permitted by Section 5.1(l), issue, deliver, sell, grant, pledge or otherwise dispose of or encumber any shares of its capital
stock, any other voting securities or any securities convertible into or exchangeable for, or any rights, warrants or options to acquire, any such shares, voting securities or convertible or exchangeable securities (other than the issuance of shares
of Otic Pharma Ordinary Shares upon the exercise of Otic Pharma Share Options or Otic Pharma Warrants outstanding on the date of this Agreement in accordance with their present terms (including cashless exercises) or Otic Pharma Share Options
granted as contemplated by Section 5.1(l));
(c) amend its certificate of incorporation, bylaws or other comparable charter or
organizational documents;
(d) except for purchases of inventory, raw materials and, to the extent the cost thereof is not in excess of
$100,000 in the aggregate, equipment, in each case in the Ordinary Course of Business, acquire (i) by merging or consolidating with, or by purchasing all or a substantial portion of the assets or any stock of, or by any other manner, any
business or any corporation, partnership, joint venture, limited liability company, association or other business organization or division thereof or (ii) any assets that are material, in the aggregate, to Otic Pharma and its Subsidiaries,
taken as a whole;
(e) except in the Ordinary Course of Business, sell, lease, license, pledge, or otherwise dispose of or encumber any
properties or assets of Otic Pharma or of any of its Subsidiaries;
(f) whether or not in the Ordinary Course of Business, sell, dispose
of or otherwise transfer any assets material to Otic Pharma and its Subsidiaries, taken as a whole (including any accounts, leases, contracts or intellectual property or any assets or the stock of any of its Subsidiaries, but excluding the sale or
license of products in the Ordinary Course of Business);
(g) (i) incur or suffer to exist any indebtedness for borrowed money other than
such indebtedness that existed as of the date of the Otic Pharma Balance Sheet to the extent reflected on the Otic Pharma Balance Sheet or guarantee any such indebtedness of another person, provided, however, that if the Closing does not occur on or
prior to March 1, 2017, Otic Pharma shall have the right, in its sole discretion, to incur up to an aggregate of $3,000,000 of additional indebtedness from the Shareholders on the terms set forth in Section 5.1(g)
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of the Otic Pharma Disclosure Schedule, (ii) issue, sell or amend any debt securities or warrants or other rights to acquire any debt securities of Otic Pharma or any of its Subsidiaries,
guarantee any debt securities of another person, enter into any “keep well” or other agreement to maintain any financial statement condition of another person or enter into any arrangement having the economic effect of any of the
foregoing, (iii) make any loans, advances (other than routine advances to employees of Otic Pharma in the Ordinary Course of Business) or capital contributions to, or investment in, any other person, other than Otic Pharma or any of its direct
or indirect wholly owned Subsidiaries or (iv) enter into any hedging agreement or other financial agreement or arrangement designed to protect Otic Pharma or its Subsidiaries against fluctuations in commodities prices or exchange rates;
(h) make any capital expenditures or other expenditures with respect to property, plant or equipment, other than as set forth in Otic
Pharma’s budget for capital expenditures previously made available to Public Company or the specific capital expenditures disclosed and set forth in Section 5.1(h) of the Otic Pharma Disclosure Schedule;
(i) make any changes in accounting methods, principles or practices, except insofar as may have been required by a change in GAAP or, except
as so required, change any assumption underlying, or method of calculating, any bad debt, contingency or other reserve;
(j) except
(i) in the Ordinary Course of Business or (ii) for terminations as a result of the expiration of any contract that expires in accordance with terms, (A) modify or amend in any material respect, or terminate, any material contract or
agreement to which Otic Pharma or any of its Subsidiaries is party, or (B) knowingly waive, release or assign any material rights or claims (including any
write-off
or other compromise of any accounts
receivable of Otic Pharma of any of its Subsidiaries);
(k) except in the Ordinary Course of Business, (i) enter into any material
contract or agreement relating to the rendering of services or the distribution, sale or marketing by third parties of the products, of, or products licensed by, Otic Pharma or any of its Subsidiaries or (ii) license any material intellectual
property rights to or from any third party;
(l) except as required to comply with applicable law or agreements, plans or arrangements
existing on the date hereof and either disclosed in the Otic Pharma Disclosure Schedules or not required by this Agreement to be so disclosed, (i) take any action with respect to, adopt, enter into, terminate or amend any employment, severance
or similar agreement or benefit plan for the benefit or welfare of any current or former director, officer, employee or consultant or any collective bargaining agreement, (ii) increase in any material respect the compensation or fringe benefits
of, or pay any material bonus to, any director, officer, employee or consultant (except for annual increases of the salaries of
non-officer
employees in the Ordinary Course of Business), (iii) amend or
accelerate the payment, right to payment or vesting of any compensation or benefits, including any outstanding options or restricted stock awards, (iv) pay any material benefit not provided for as of the date of this Agreement under any benefit
plan, (v) grant any awards under any bonus, incentive, performance or other compensation plan or arrangement or benefit plan (including the grant of stock options, stock appreciation rights, stock based or stock related awards, performance
units or restricted stock, or the removal of existing restrictions in any benefit plans or agreements or awards made thereunder), or (vi) take any action other than in the Ordinary Course of Business to fund or in any other way secure the
payment of compensation or benefits under any employee plan, agreement, contract or arrangement or benefit plan;
(m) make or change any
material Tax election, change an annual accounting period, enter into any closing agreement, waive or extend any statute of limitations with respect to Taxes, settle or compromise any material Tax liability, claim or assessment, surrender any right
to claim a refund of material Taxes, or amend any income or other material Tax return;
(n) commence any offering of shares of Otic
Pharma Ordinary Shares pursuant to any Employee Stock Purchase Plan;
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(o) initiate, compromise or settle any material litigation or arbitration proceeding;
(p) open or close any facility or office;
(q) fail to use commercially reasonable efforts to maintain insurance at levels substantially comparable to levels existing as of the date of
this Agreement;
(r) fail to pay accounts payable and other obligations in the Ordinary Course of Business;
(s) suspend any clinical trials sponsored by Otic Pharma or involving any products marketed or in development by Otic Pharma;
(t) permit the exercise of any Otic Pharma Share Options or Otic Pharma Warrants by any Person who is not a signatory to this Agreement,
unless such Person first executes a joinder agreement agreeing to be bound by the terms of this Agreement in form and substance reasonable acceptable to Public Company; or
(u) authorize any of, or commit or agree, in writing or otherwise, to take any of, the foregoing actions or any action that would make any
representation or warranty of Otic Pharma in this Agreement untrue or incorrect in any material respect, or would materially impair or prevent the satisfaction of any conditions in Article VII hereof.
5.2
Covenants of Public Company
. Except as set forth in Section 5.2 of the Public Company Disclosure Schedule or as expressly
provided herein or as consented to in writing by Otic Pharma (which consent shall not be unreasonably withheld, conditioned or delayed), from and after the date of this Agreement until the earlier of the termination of this Agreement in accordance
with its terms and the Closing, Public Company shall, and shall cause each of its Subsidiaries to, act and carry on its business in the Ordinary Course of Business, pay its debts and Taxes and perform its other obligations when due (subject to good
faith disputes over such debts, Taxes or obligations), comply with applicable laws, rules and regulations, and, use commercially reasonable efforts, consistent in all material respects with past practices, to maintain and preserve its and each of
its Subsidiaries’ business organization, assets and properties, keep available the services of its present officers and key employees and preserve its advantageous business relationships with customers, strategic partners, suppliers,
distributors and others having business dealings with it. Without limiting the generality of the foregoing, except as set forth on Section 5.2 of the Public Company Disclosure Schedule from and after the date of this Agreement until the earlier
of the termination of this Agreement in accordance with its terms and the Closing, Public Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, do any of the following without the prior written consent of Otic
Pharma (which consent shall not, in the case of the actions set forth in clauses (k) and (l) of this Section 5.2, be unreasonably withheld, conditioned or delayed):
(a) (i) split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in
lieu of or in substitution for shares of its capital stock or any of its other securities; or (ii) purchase, redeem or otherwise acquire any shares of its capital stock or any other of its securities or any rights, warrants or options to
acquire any such shares or other securities, other than, in the case of this clause (ii), from former employees, directors and consultants in accordance with agreements in effect on the date of this Agreement providing for the repurchase of shares
at no or nominal consideration in connection with any termination of services to Public Company or any of its Subsidiaries;
(b) issue,
deliver, sell, grant, pledge or otherwise dispose of or encumber any shares of its capital stock, any other voting securities or any securities convertible into or exchangeable for, or any rights, warrants or options to acquire, any such shares,
voting securities or convertible or exchangeable securities (in each case other than the issuance of shares of Public Company Common Stock upon the exercise of Public Company Stock Options or Public Company Warrants outstanding on the date of this
Agreement in accordance with their present terms (including cashless exercises));
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(c) amend its certificate of incorporation, bylaws or other comparable charter or organizational
documents;
(d) except for purchases of inventory and raw materials in the Ordinary Course of Business, acquire (i) by merging or
consolidating with, or by purchasing all or a substantial portion of the assets or any stock of, or by any other manner, any business or any corporation, partnership, joint venture, limited liability company, association or other business
organization or division thereof or (ii) any assets that are material, in the aggregate, to Public Company and its Subsidiaries, taken as a whole;
(e) except in the Ordinary Course of Business, sell, lease, license, pledge, or otherwise dispose of or encumber any properties or assets of
Public Company or of any of its Subsidiaries;
(f) whether or not in the Ordinary Course of Business, sell, dispose of or otherwise
transfer any assets material to Public Company and its Subsidiaries, taken as a whole (including any accounts, leases, contracts or intellectual property or any assets or the stock of any of its Subsidiaries, but excluding the sale or license of
products in the Ordinary Course of Business);
(g) (i) incur or suffer to exist any indebtedness for borrowed money or guarantee any such
indebtedness of another person, (ii) issue, sell or amend any debt securities or warrants or other rights to acquire any debt securities of Public Company or any of its Subsidiaries, guarantee any debt securities of another person, enter into
any “keep well” or other agreement to maintain any financial statement condition of another person or enter into any arrangement having the economic effect of any of the foregoing, (iii) make any loans, advances (other than routine
advances to employees of Public Company in the Ordinary Course of Business) or capital contributions to, or investment in, any other person, other than Public Company or any of its direct or indirect wholly owned Subsidiaries or (iv) enter into
any hedging agreement or other financial agreement or arrangement designed to protect Public Company or its Subsidiaries against fluctuations in commodities prices or exchange rates;
(h) make any capital expenditures or other expenditures, other than (i) those contemplated by the Public Company financial model
provided to Otic Pharma on the date hereof;
provided
that variances in any line item in the financial model shall be permitted to the extent the aggregate expenditures do not exceed the amount shown in the model (except as provided in clauses
(ii) and (iii), (ii) additional expenditures not exceeding 10% of the amount of aggregate expenditures shown in the model and (iii) expenditures incurred by the Public Company as a result of events or circumstances involving the Public
Company’s ongoing clinical trials that arise outside of the Public Company’s control;
(i) make any changes in accounting
methods, principles or practices, except insofar as may have been required by the SEC or a change in GAAP or, except as so required, change any assumption underlying, or method of calculating, any bad debt, contingency or other reserve;
(j) except (i) in the Ordinary Course of Business or (ii) for terminations as a result of the expiration of any contract that
expires in accordance with its terms, (A) modify or amend in any material respect, or terminate, any material contract or agreement to which Public Company or any of its Subsidiaries is party, or (B) knowingly waive, release or assign any
material rights or claims (including any
write-off
or other compromise of any accounts receivable of Public Company of any of its Subsidiaries);
(k) except in the Ordinary Course of Business, (i) enter into any material contract or agreement relating to the rendering of services
or the distribution, sale or marketing by third parties of the products, of, or products licensed by, Public Company or any of its Subsidiaries or (ii) license any material intellectual property rights to or from any third party;
(l) except as required to comply with applicable law or agreements, plans or arrangements existing on the date hereof and either disclosed in
the Public Company Disclosure Schedules, not required by this
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Agreement to be so disclosed or disclosed in the Public Company SEC Reports filed or furnished prior to the date of this Agreement, (i) take any action with respect to, adopt, enter into,
terminate or amend any employment, severance or similar agreement or benefit plan for the benefit or welfare of any current or former director, officer, employee or consultant or any collective bargaining agreement, (ii) increase in any
material respect the compensation or fringe benefits of, or pay any material bonus to, any director, officer, employee or consultant (except for annual increases of the salaries of
non-officer
employees in the
Ordinary Course of Business), (iii) amend or accelerate the payment, right to payment or vesting of any compensation or benefits, including any outstanding options or restricted stock awards, (iv) pay any material benefit not provided for as of
the date of this Agreement under any benefit plan, (v) grant any awards under any bonus, incentive, performance or other compensation plan or arrangement or benefit plan (including the grant of stock options, stock appreciation rights, stock
based or stock related awards, performance units or restricted stock, or the removal of existing restrictions in any benefit plans or agreements or awards made thereunder), (vi) hire any additional officers or other employees, or any consultants or
independent contractors, in each case, other than as set forth on Section 5.2(l) of the Public Company Disclosure Schedules and employees, consultants or independent contractors hired to fill open position created as a result of the separation of
service of an officer, employee, consultant or independent contractor, as applicable, after the date of this Agreement, or (vii) take any action other than in the Ordinary Course of Business to fund or in any other way secure the payment of
compensation or benefits under any employee plan, agreement, contract or arrangement or benefit plan;
(m) make or change any material
Tax election, change an annual accounting period, enter into any closing agreement, waive or extend any statute of limitations with respect to Taxes, settle or compromise any material Tax liability, claim or assessment, surrender any right to claim
a refund of material Taxes, or amend any income or other material Tax return;
(n) commence any offering of shares of Public Company
Common Stock pursuant to any Employee Stock Purchase Plan;
(o) initiate, compromise or settle any material litigation or arbitration
proceeding;
(p) open or close any facility or office;
(q) fail to use commercially reasonable efforts to maintain insurance at levels substantially comparable to levels existing as of the date of
this Agreement;
(r) fail to pay accounts payable and other obligations in the Ordinary Course of Business; or
(s) authorize any of, or commit or agree, in writing or otherwise, to take any of, the foregoing actions or any action that would make any
representation or warranty of Public Company in this Agreement untrue or incorrect in any material respect, or would materially impair or prevent the satisfaction of any conditions in Article VII hereof.
5.3
Confidentiality
. The parties acknowledge that Public Company and Otic Pharma have previously executed a mutual
non-disclosure
agreement, dated as of September 6, 2016 (the “
Confidentiality Agreement
”), which Confidentiality Agreement shall continue in full force and effect in accordance with its terms,
except as expressly modified by this Agreement.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1
No Solicitation
(a)
No Solicitation or Negotiation
. Except as set forth in this Section 6.1, until the Specified Time, each of Otic Pharma,
Public Company and their respective Subsidiaries shall not, and each of Otic Pharma and
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Public Company shall use commercially reasonable efforts to cause their respective Representatives not to, directly or indirectly:
(i) solicit, seek or initiate or knowingly take any action to facilitate or encourage any offers, inquiries or the making of any proposal or
offer that constitutes, or could reasonably be expected to lead to, any Acquisition Proposal;
(ii) enter into, continue or otherwise
participate or engage in any discussions or negotiations regarding any Acquisition Proposal, or furnish to any person any
non-public
information or afford any person other than Public Company or Otic Pharma,
as applicable, access to such party’s property, books or records (except pursuant to a request by a Governmental Entity) in connection with any Acquisition Proposal;
provided
,
however
, that nothing in this Section 6.1 shall
prevent a party or its Representatives from referring a person to this Section 6.1;
(iii) take any action to make the provisions of
any takeover statute inapplicable to any transactions contemplated by an Acquisition Proposal; or
(iv) publicly propose to do any of the
foregoing described in clauses (i) through (iii).
Notwithstanding the foregoing or anything to the contrary set forth in this
Agreement, subject to compliance with Section 6.1(c), Public Company may (A) furnish
non-public
information with respect to Public Company and its Subsidiaries to any Qualified Person (and the
Representatives of such Qualified Person), pursuant to a confidentiality agreement not materially less restrictive with respect to the confidentiality obligations of the Qualified Person than the Confidentiality Agreement, (B) engage in
discussions or negotiations (including solicitation of revised Acquisition Proposals) with any Qualified Person (and the Representatives of such Qualified Person) regarding any such Acquisition Proposal or (C) amend, or grant a waiver or
release under, any standstill or similar agreement with respect to any capital stock of such party with any Qualified Person. It is understood and agreed that any violation of the restrictions in this Section 6.1 (or action that, if taken by
Public Company would constitute such a violation) by any Representatives of Public Company shall be deemed to be a breach of this Section 6.1 by Public Company.
(b) No Change in Recommendation or Alternative Acquisition Agreement.
Prior to the Specified Time:
(i) Public Company Board shall not, except as set forth in this Section 6.1, withhold, withdraw or modify, or publicly propose to
withdraw or modify, its approval or recommendation with respect to the Public Company Voting Proposal (a “
Public Company Board Recommendation Change
”);
(ii) each of Public Company and Otic Pharma shall not enter into any letter of intent, memorandum of understanding, agreement in principle,
acquisition agreement, merger agreement or similar agreement (an “
Alternative Acquisition Agreement
”) providing for the consummation of a transaction contemplated by any Acquisition Proposal (other than a confidentiality
agreement referred to in Section 6.1(a) entered into in the circumstances referred to in Section 6.1(a)); and
(iii) each
of the Public Company Board and the Otic Pharma Board, and each committee thereof, shall not, except as set forth in this Section 6.1, adopt, approve or recommend, or publicly propose to adopt, approve or recommend, any Acquisition Proposal.
Notwithstanding the foregoing or anything to the contrary set forth in this Agreement (including the provisions of this
Section 6.1), at any time prior to the approval of the Public Company Voting Proposal, the Public Company Board may effect a Public Company Board Recommendation Change if: (i) the Public Company Board shall have determined in good faith
(after consultation with outside legal counsel) that the failure to effect a Public Company Board Recommendation Change could reasonably be expected to be inconsistent with its fiduciary obligations under applicable law; (ii) Public Company has
provided at least four
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Business Days prior written notice to Otic Pharma that it intends to effect a Public Company Board Recommendation Change, including a description in reasonable detail of the reasons for such
recommendation change, and written copies of any relevant proposed transactions agreements with any party making a potential Superior Proposal (a “
Recommendation Change Notice
”) (it being understood that the Recommendation Change
Notice shall not constitute a Public Company Board Recommendation Change for purposes of this Agreement); (iii) such party has complied in all material respects with the requirements of this Section 6.1 in connection with any potential Superior
Proposal; and (iv) if the other party shall have delivered to such party a written, binding and irrevocable offer to alter the terms or conditions of this Agreement during the four Business Day period referred to in clause (ii) above, the
Public Company Board of directors shall have determined in good faith (after consultation with outside legal counsel), after considering the terms of such offer by the other party, that the failure to effect a Public Company Board Recommendation
Change could still reasonably be expected to be inconsistent with its fiduciary obligations under applicable law. In the event of any material amendment to any Superior Proposal (including any revision in the amount, form or mix of consideration
Public Company’s stockholders would receive as a result of such potential Superior Proposal), Public Company shall be required to provide the other party with notice of such material amendment and there shall be a new two Business Day period
following such notification during which the parties shall comply again with the requirements of this Section 6.1(b) and the Public Company Board shall not make a Public Company Board Recommendation Change prior to the end of any such period as so
extended.
(c)
Notices of Proposals
. Each party will as promptly as reasonably practicable (and in any event within twenty-four
(24) hours after receipt) (i) notify the other party of its receipt of any Acquisition Proposal and (ii) provide to the other party a copy of such Acquisition Proposal (if written), or a summary of the material terms and conditions of
such Acquisition Proposal (if oral), including the identity of the Person making such Acquisition Proposal, and copies of all written communications with such Person with respect to such actual or potential Acquisition Proposal. Such party in
receipt of an Acquisition Proposal shall notify the other party, in writing, of any decision of its board of directors as to whether to consider any Acquisition Proposal or to enter into discussions or negotiations concerning any Acquisition
Proposal or to provide
non-public
information with respect to such to any person, which notice shall be given as promptly as practicable after such determination was reached (and in any event no later than one
Business Day after such determination was reached). Such party in receipt of an Acquisition Proposal will (A) provide the other party with written notice setting forth such information as is reasonably necessary to keep the other party informed
in all material respects of the status and material terms of any such Acquisition Proposal and of any material amendments or modifications thereto, (B) keep such other party informed as promptly as practicable with respect to any changes to the
material terms of an Acquisition Proposal submitted to such party (and in any event within twenty-four (24) hours following any such changes), including by providing a copy of all written proposals and a summary of all oral proposals or
material oral modifications to an earlier written proposal, in each case relating to any Acquisition Proposal, (C) prior to, or substantially concurrently with, the provision of any
non-public
information
of such party to any such person, provide such information to the other party (including by posting such information to an electronic data room), to the extent such information has not previously been made available to the other party, and
(D) promptly (and in any event within twenty-four (24) hours of such determination) notify the other party of any determination by such party’s board of directors that such Acquisition Proposal constitutes a Superior Proposal.
(d)
Certain Permitted Disclosure
. Notwithstanding anything to the contrary in this Agreement, nothing contained in this
Agreement shall prohibit the Public Company Board from (i) taking and disclosing to its stockholders a position with respect to a tender offer contemplated by
Rule 14d-9
or Rule
14e-2
promulgated under the Exchange Act, or from issuing a “stop, look and listen” statement pending disclosure of its position thereunder (none of which, in and of itself, shall be deemed to constitute a
Public Company Board Recommendation Change), or (ii) making any disclosure to its stockholders if, in the good faith judgment of its board of directors, after consultation with outside counsel, failure to so disclose could be inconsistent with
its obligations under applicable law;
provided
,
however
, that notwithstanding clauses (i) and (ii) of this Section 6.1(d), in no event shall Public Company, the Public Company Board, or any committee of the Public Company Board,
take, or agree or resolve to take, any action prohibited by Section 6.1(b), except as expressly permitted by Section 6.1(b).
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(e)
Cessation of Ongoing Discussions
. Each of Public Company and Otic Pharma shall, and
shall direct its Representatives to, cease immediately all discussions and negotiations that commenced prior to the date of this Agreement regarding any proposal that constitutes, or could reasonably be expected to lead to, an Acquisition Proposal;
provided
,
however
, that the foregoing shall not in any way limit or modify the rights of any party hereto under the other provisions of this Section 6.1. Public Company and Otic Pharma will immediately revoke or withdraw access of
any person (other than the Public Company, Otic Pharma and their respective Representatives) to any data room (virtual or actual) containing any
non-public
information with respect to Public Company and
request from each third party (other than the Public Company, Otic Pharma and their Representatives) the prompt return or destruction of all
non-public
information with respect to Public Company or Otic
Pharma, as applicable, previously provided to such person.
(f)
Definitions
. For purposes of this Agreement, the following terms
shall have the following meanings:
“
Acquisition Proposal
” means, with respect to Public Company or Otic Pharma,
(a) any inquiry, proposal or offer for a merger, consolidation, dissolution, sale of substantial assets, recapitalization, share exchange, tender offer or other business combination involving such party and its Subsidiaries (other than mergers,
consolidations, recapitalizations, share exchanges or other business combinations involving solely such party and/or one or more Subsidiaries of such party), (b) any proposal for the issuance by such party of 15% or more of its equity securities or
(c) any proposal or offer to acquire in any manner, directly or indirectly, 15% or more of the equity securities or consolidated total assets of such party and its Subsidiaries, in each case other than the transactions contemplated by this
Agreement.
“
Qualified Person
” means any person making an unsolicited Acquisition Proposal that the Public Company Board
determines in good faith (after consultation with outside counsel and its financial advisors) is, or could reasonably be expected to lead to, a Superior Proposal, and such Acquisition Proposal has not resulted from a material breach by Public
Company of its obligations under
Section 6.1(a)
.
“
Superior Proposal
” means, with respect to Public Company, any
bona fide
, unsolicited written proposal made by a third party to acquire 50% or more of the equity securities or consolidated total assets of such party and its Subsidiaries, pursuant to a tender or exchange offer, a merger, a consolidation,
business combination or recapitalization or a sale or exclusive license of its assets, (a) on terms which the board of directors of such party determines in its good faith judgment to be more favorable to the holders of such party’s
capital stock than the transactions contemplated by this Agreement (after consultation with its financial and legal advisors), taking into account all the terms and conditions of such proposal and this Agreement (including any termination or
break-up
fees and conditions to consummation, as well as any written, binding offer by the other party hereto to amend the terms of this Agreement, which offer is not revocable for at least three Business Days) that
the board of directors of such party determines to be relevant and (b) which board of directors of such party has determined to be reasonably capable of being completed on the terms proposed, taking into account all financial, regulatory, legal
and other aspects of such proposal that board of directors of such party determines to be relevant (including the likelihood and timing of consummation (as compared to the transactions contemplated hereby).
“
Specified Time
” means the earlier to occur of (a) the Closing, and (b) the time at which this Agreement is
terminated in accordance with the terms hereof.
6.2
Proxy Statement
.
(a) As promptly as practical after the execution of this Agreement, Public Company, with the cooperation of Otic Pharma, shall prepare and
file with the SEC the Proxy Statement. Otic Pharma shall provide to Public Company as promptly as reasonably practical all information regarding Otic Pharma required to be included in the Proxy Statement. Public Company shall respond to any comments
of the SEC on the preliminary
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filing(s) of the Proxy Statement and shall use commercially reasonable efforts to file the definitive version of the Proxy Statement as promptly as practicable, and Public Company shall cause the
Proxy Statement to be mailed to its stockholders at the earliest practicable time after the SEC has completed its review of the preliminary filing of the Proxy Statement (or once 10 days after the initial filing of the preliminary Proxy Statement,
if the SEC will not review the Proxy Statement). Public Company shall notify Otic Pharma promptly upon the receipt of any comments from the SEC or its staff and of any request by the SEC or its staff for amendments to the Proxy Statement or any
filing pursuant to Section 6.2(b) or for additional information and shall supply Otic Pharma with copies of all correspondence between Public Company or any of its representatives, on the one hand, and the SEC, or its staff, on the other hand, with
respect to the Proxy Statement or any filing pursuant to Section 6.2(b). Public Company shall use commercially reasonable efforts to cause all documents that it is responsible for filing with the SEC under this Section 6.2 to comply in all
material respects with all applicable requirements of law and the rules and regulations promulgated thereunder. Whenever either Public Company or Otic Pharma shall become aware of the occurrence of any event which is required to be set forth in an
amendment or supplement to the Proxy Statement or any filing pursuant to Section 6.2(b), Public Company or Otic Pharma, as the case may be, shall promptly inform the other of such occurrence and cooperate in filing with the SEC or its staff, and/or
mailing to stockholders of Public Company and Otic Pharma, such amendment or supplement.
(b) Public Company shall promptly make all
necessary filings required of Public Company with respect to the Transaction under the Securities Act, the Exchange Act, applicable state blue sky laws and the rules and regulations thereunder.
6.3
NASDAQ Listing
. Public Company agrees to use its commercially reasonable efforts to continue the listing of Public Company Common
Stock on NASDAQ during the term of this Agreement and to cause the shares of Public Company Common Stock being issued in connection with the Transaction to be approved for listing (subject to notice of issuance) on NASDAQ at or prior to the Closing,
including by filing the NASDAQ Listing Application. Otic Pharma will cooperate with Public Company to cause the NASDAQ Listing Application to be approved and shall promptly furnish to Public Company all information concerning Otic Pharma and its
equity holders that may be required or reasonably requested in connection with any action contemplated by this Section 6.3. To the extent necessary in order to maintain the listing of the Public Company Common Stock on NASDAQ (e.g., in order to
meet the NASDAQ minimum bid price requirement), the Public Company shall seek stockholder approval for a reverse stock split as part of the Proxy Statement (the “
NASDAQ Proposal
”), with the specific terms for such split to be
proposed by Public Company and approved by Otic Pharma (such approval not to be unreasonably withheld, conditioned or delayed).
6.4
Access to Information
. Subject to compliance with applicable confidentiality obligations owed to third parties in effect as of the date of this Agreement, each of Public Company and Otic Pharma shall (and shall cause each of its Subsidiaries
to) afford to the other party’s officers, employees, accountants, counsel and other representatives, reasonable access, during normal business hours during the period prior to the Closing, to all its properties, books, contracts, commitments,
personnel and records and, during such period, each of Public Company and Otic Pharma shall (and shall cause each of its Subsidiaries to) furnish promptly to the other party all information concerning its business, properties, assets and personnel
as the other party may reasonably request. Each of Public Company and Otic Pharma will hold any such information which is nonpublic in confidence in accordance with the Confidentiality Agreement. No information or knowledge obtained in any
investigation pursuant to this Section 6.4 or otherwise shall affect or be deemed to modify any representation or warranty contained in this Agreement or the conditions to the obligations of the parties to consummate the Transaction. Without
limiting the generality of the foregoing, from the date of this Agreement until the Closing, each of Public Company and Otic Pharma shall promptly provide the other party with copies of: (a) unaudited monthly financial statements or management
accounts, when available; (b) any written materials or communications sent by or on behalf of such party to its stockholders; (c) any notice, report or other document filed with or sent to, or received from, any Governmental Entity in
connection with the Transaction or any of the other transactions contemplated by this Agreement; and (d) any material notice, report or other document received from any Governmental Entity.
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6.5
Stockholder Approval
.
(a) Public Company, acting through the Public Company Board, shall take all actions in accordance with applicable law, its certificate of
incorporation and bylaws and NASDAQ rules to duly call, give notice of, convene and hold as promptly as practicable, after the declaration of effectiveness of the Registration Statement, the Public Company Stockholders Meeting for the purpose of
considering and voting upon the Public Company Voting Proposal as well as the NASDAQ Proposal, if any. Subject to Section 6.1(b), the Public Company Board shall include in the Proxy Statement the recommendation of the Public Company Board in favor
of approval of the Public Company Voting Proposal. Public Company shall take all action that is both reasonable and lawful to solicit from its stockholders proxies in favor of the Public Company Voting Proposal. Notwithstanding anything to the
contrary contained in this Agreement, Public Company, after consultation with Otic Pharma, may adjourn or postpone Public Company Stockholders Meeting to the extent necessary to ensure that any required supplement or amendment to the Proxy Statement
is provided to Public Company’s stockholders or, if as of the time for which the Public Company Stockholders Meeting is originally scheduled (as set forth in the Proxy Statement), there are insufficient shares of Public Company Common Stock
represented (either in person or by proxy) to constitute a quorum necessary to conduct the business of the Public Company Stockholders Meeting.
(b) Notwithstanding the foregoing, nothing herein shall limit a party’s right to terminate this Agreement pursuant to Section 8.1.
6.6
Legal Conditions to Transaction
.
(a) Subject to the terms hereof, including Section 6.6(b), Otic Pharma and Public Company shall each use commercially reasonable efforts to
(i) take, or cause to be taken, all actions, and do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective the transactions contemplated
hereby as promptly as practicable, (ii) as promptly as practicable, obtain from any Governmental Entity or any other third party any consents, licenses, permits, waivers, approvals, authorizations, or orders required to be obtained or made by
Otic Pharma or Public Company or any of their Subsidiaries in connection with the authorization, execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, (iii) as promptly as practicable, make all
necessary filings, and thereafter make any other required submissions, with respect to this Agreement and the Transaction required under (A) the Securities Act and the Exchange Act, and any other applicable securities laws, and (B) any
other applicable law and (iv) execute or deliver any additional instruments necessary to consummate the transactions contemplated by, and to fully carry out the purposes of, this Agreement. Otic Pharma and Public Company shall reasonably
cooperate with each other in connection with the making of all such filings. Otic Pharma and Public Company shall use their respective commercially reasonable efforts to furnish to each other all information required for any application or other
filing to be made pursuant to the rules and regulations of any applicable law (including all information required to be included in the Proxy Statement and the Registration Statement) in connection with the transactions contemplated by this
Agreement.
(b) Each of Otic Pharma and Public Company shall give (or shall cause their respective Subsidiaries to give) any notices to
third parties, and use, and cause their respective Subsidiaries to use, their commercially reasonable efforts to obtain any third party consents related to or required in connection with the Transaction that are (i) necessary to consummate the
transactions contemplated hereby, (ii) disclosed or required to be disclosed in the Otic Pharma Disclosure Schedule or the Public Company Disclosure Schedule, as the case may be, or (iii) required to prevent the occurrence of an event that
may have a Otic Pharma Material Adverse Effect or a Public Company Material Adverse Effect from occurring prior to or after the Closing.
6.7
Public Disclosure
. Except as may be required by applicable law or stock market regulations, (i) the press release announcing
the execution of this Agreement shall be issued only in such form as shall be mutually agreed upon by Public Company and Otic Pharma, (ii) Public Company shall use commercially reasonable efforts to consult with Otic Pharma before issuing any
press release or otherwise making any public statement
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with respect to the Transaction or this Agreement and shall not issue any such press release or make any such public statement prior to using such efforts (
provided
,
however
, that
these restrictions shall not apply to any communications by Public Company with respect to any Acquisition Proposal, Superior Proposal, Recommendation Change Notice or Public Company Board Recommendation Change) and (iii) Otic Pharma shall not
issue any press release or otherwise make any public statement with respect to the Transaction or this Agreement without the prior written consent of Public Company.
6.8
Affiliate Legends
. Section 6.8 of the Otic Pharma Disclosure Schedule sets forth a list of those persons who are, in Otic
Pharma’s reasonable judgment, “affiliates” of Otic Pharma within the meaning of Rule 145 promulgated under the Securities Act (“
Rule 145 Affiliates
”). Otic Pharma shall notify Public Company in writing regarding any
change in the identity of its Rule 145 Affiliates prior to the Closing Date. Public Company shall be entitled to place appropriate legends on the certificates evidencing any shares of Public Company Common Stock to be received by Rule 145 Affiliates
of Otic Pharma in the Transaction reflecting the restrictions set forth in Rule 145 promulgated under the Securities Act and to issue appropriate stop transfer instructions to the transfer agent for Public Company Common Stock.
6.9
Indemnification
.
(a) From the Closing through the sixth anniversary of the Closing Date, Public Company shall indemnify and hold harmless each person who is
now, or has been at any time prior to the date hereof, or who becomes prior to the Closing, a director or officer of Otic Pharma, Public Company or any of their respective Subsidiaries (the “
Indemnified Persons
”), against all
claims, losses, liabilities, damages, judgments, fines and reasonable fees, costs and expenses, including attorneys’ fees and disbursements, incurred in connection with any claim, action, suit, proceeding or investigation, whether civil,
criminal, administrative or investigative, arising out of or pertaining to the fact that the Indemnified Person is or was an officer, director, employee or agent of Otic Pharma, Public Company or any of their respective Subsidiaries, or, while a
director or officer of Otic Pharma, Public Company or any of their respective Subsidiaries, is or was serving at the request of Otic Pharma, Public Company or any of their respective Subsidiaries as a director, officer, employee or agent of another
person, whether asserted or claimed prior to, at or after the Closing, to the fullest extent permitted by applicable law. Each Indemnified Person will be entitled to advancement of expenses (including attorneys’ fees) incurred in the defense of
any such claim, action, suit, proceeding or investigation from Public Company following receipt by Public Company from the Indemnified Person of a request therefor;
provided
that any person to whom expenses are advanced provides an
undertaking, to the extent then required by the DGCL, to repay such advances if it is ultimately determined that such person is not entitled to indemnification. The certificate of incorporation and bylaws of the Public Company will contain
provisions at least as favorable as the provisions relating to the indemnification, advance of expenses and elimination of liability for monetary damages set forth in the certificate of incorporation and bylaws of the Public Company on the date
hereof.
(b) Public Company shall either (A) maintain in effect for six years after the Closing Date the Public Company’s
existing directors’ and officers’ insurance policies in place as of the date hereof, or (B) prior to the Closing, purchase a
six-year
“tail” policy under its own existing
directors’ and officers’ liability insurance policy, with an effective date as of the Closing (provided that Public Company may substitute therefor a policy of at least the same coverage containing terms and conditions that are not less
favorable in any material respect);
provided
, however, that in no event shall Public Company be required to expend pursuant to this Section 6.9(b) more than an amount equal to 200% of the current annual premiums paid by Public Company for
such insurance;
provided
,
further
, that during the term of the “tail” policy, Public Company shall not take any action following the Closing to cause such “tail” policy to be cancelled or any provision therein to be
amended or waived in any manner that would adversely affect in any material respect the rights of their former and current officers and directors.
(c) Public Company shall pay all expenses, including reasonable attorneys’ fees, that may be incurred by a person in successfully
enforcing such person’s rights provided in this Section 6.9.
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(d) Public Company and Otic Pharma agree that all rights to exculpation, indemnification and
advancement of expenses for acts or omissions occurring at or prior to the Closing, whether asserted or claimed prior to, at or after the Closing, now existing in favor of the current or former directors, officers or employees, as the case may be,
of Public Company, Otic Pharma or any of their respective Subsidiaries as provided in their respective certificates of incorporation or
by-laws
or other organization documents or in any agreement shall survive
the Transaction and shall continue in full force and effect. The provisions of this Section 6.9 are intended to be in addition to the rights otherwise available to the current officers and directors of Public Company, Otic Pharma or any of
their respective Subsidiaries by law, charter, statute,
by-law
or agreement, and shall operate for the benefit of, and shall be enforceable by, each of the Indemnified Persons, their heirs and their
representatives. The obligations set forth in this Section 6.9 shall not be terminated, amended or otherwise modified in any manner that adversely affects any Indemnified Person, or any person who is a beneficiary under the policies referred to
in this Section 6.9 and their heirs and representatives, without the prior written consent of such affected Indemnified person or other person.
(e) If Public Company, Otic Pharma or any of their respective successors or assigns shall (i) consolidate with or merge into any other
person and shall not be the continuing or surviving corporation or entity of such consolidation or merger, or (ii) transfer all or substantially all of its properties and assets to any person, then, and in each such case, proper provisions
shall be made so that the successors and assigns of such person shall assume all of the obligations of such person set forth in this Section 6.9.
(f) Nothing in this Agreement is intended to, shall be construed to or shall release, waive or impair any rights to directors’ and
officers’ insurance claims under any policy that is or has been in existence with respect to Otic Pharma, Public Company or any of their respective Subsidiaries for any of their respective directors, officers or other employees, it being
understood and agreed that the indemnification provided for in this Section 6.9 is not prior to or in substitution for any such claims under such policies.
6.10
Notification of Certain Matters
. Public Company shall give prompt notice to Otic Pharma, and Otic Pharma shall give prompt notice
to Public Company, upon becoming aware of the occurrence, or failure to occur, of any event, which occurrence or failure to occur would be reasonably likely to cause (a) (i) any representation or warranty of such party contained in this
Agreement that is qualified as to materiality to be untrue or inaccurate in any respect or (ii) any other representation or warranty of such party contained in this Agreement to be untrue or inaccurate in any material respect, in each case, at
any time from and after the date of this Agreement until the Closing, or (b) any material failure of Public Company or Otic Pharma, as the case may be, or of any officer, director, employee or agent thereof, to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it under this Agreement.
6.11
Corporate Identity
. Promptly
after the Closing, Public Company shall take all action necessary to cause its certificate of incorporation to be amended to reflect a change in Public Company’s name to OticPharma, Inc.
6.12
Succession
. Promptly after the Closing, Public Company shall take all action necessary to cause the persons identified on Schedule
6.12 of the Public Company Disclosure Schedule to be appointed as executive officers of Public Company.
6.13
Board of Directors of
Public Company
. Promptly after the Closing, Public Company shall take all action necessary (a) to cause the number of members of Public Company Board to be fixed at seven, (b) to cause three persons identified in writing by Otic Pharma
to the Public Company no later than 15 Business Days after the date of this Agreement and one person identified in writing by Otic Pharma promptly following the Closing, in each case under this clause (b) reasonably acceptable to the Public
Company, to be appointed to Public Company Board, and (c) to cause, effective at the time of such appointment, either (i) the resignations of three members of the Public Company Board or (ii) the resignations of four members of the
Public Company Board and the appointment to the Public Company Board of one person identified in writing by the Public Company to
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Otic Pharma no later than 15 Business Days after the date of this Agreement, in each case under this clause (c) reasonably acceptable to Otic Pharma.
6.14
Employee Communications
. Public Company and Otic Pharma will use reasonable efforts to consult with each other, and will consider
in good faith each other’s advice, prior to sending any notices or other communication materials to its employees regarding this Agreement, the Transaction or the effects thereof on the employment, compensation or benefits of its employees.
6.15
State Takeover Laws
. If any “fair price,” “business combination” or “control share acquisition”
statute or other similar statute or regulation is or may become applicable to any of the transactions contemplated by this Agreement, the parties hereto shall use their respective commercially reasonable efforts to (a) take such actions as are
reasonably necessary so that the transactions contemplated hereunder may be consummated as promptly as practicable on the terms contemplated hereby and (b) otherwise take all such actions as are reasonably necessary to eliminate or minimize the
effects of any such statute or regulation on such transactions.
6.16
Security Holder Litigation
. Notwithstanding anything to the
contrary herein, (a) Public Company shall have the right to control the defense and settlement of any litigation related to this Agreement, the Transaction or the other transactions contemplated by this Agreement brought by any stockholder or
any holder of other securities of Public Company against Public Company and/or its directors or officers, provided that Public Company shall give Otic Pharma the opportunity to participate in the defense of any such litigation and shall not settle
any such litigation (other than any settlement not requiring the payment of any amount to any third party in excess of the retentions or deductibles under any applicable insurance policies of Public Company) without the prior written consent of Otic
Pharma (which consent shall not be unreasonably withheld, conditioned or delayed), and (b) Otic Pharma shall have the right to control the defense and settlement of any litigation related to this Agreement, the Transaction or the other
transactions contemplated by this Agreement brought by any stockholder or any holder of other securities of Otic Pharma against Otic Pharma and/or its directors or officers, provided that Otic Pharma shall give Public Company the opportunity to
participate in the defense of any such litigation and shall consider Public Company’s advice with respect to such litigation.
6.17
Lock-Up;
Regulation S
.
(a) Until the date which is 180 days following the Closing Date,
each Shareholder, the 104H Trustee or the 102 Trustee, as applicable, will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any securities of Public Company, including shares of Public Company Common Stock
or securities convertible into or exchangeable or exercisable for any such securities, enter into a transaction which would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the
economic consequences of ownership of such securities, whether any such aforementioned transaction is to be settled by delivery of such securities or such other securities, in cash or otherwise, or publicly disclose the intention to make any such
offer, sale, pledge or disposition, or otherwise to enter into any such transaction, swap, hedge or other arrangement.
(b) Each
Regulation S Shareholder agrees (i) not to, in connection with the transactions contemplated by this Agreement, engage in any “directed selling efforts” within the United States, as such term is defined in Regulation S under the
Securities Act, (ii) not to resell any Public Company Common Stock received pursuant to this Agreement except in accordance with the provisions of Regulation S under the Securities Act, pursuant to an effective registration statement or
pursuant to an available exemption from registration and agrees not to engage in hedging transactions with regard to such shares of Public Company Common Stock, (iii) that Public Company will not register any proposed transfer of any shares of
Public Company Common Stock by such Shareholder to the extent such transfer is proposed to not be made in accordance with the provisions of Regulation S, pursuant to an effective registration statement or pursuant to an available exemption from
registration and (iv) not to sell or offer to sell any shares of Public Company Common Stock to any “U.S. person” (as such term is defined in Regulation S under the Securities Act), or for the account
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or benefit of any “U.S. person” (as such term is defined in Regulation S under the Securities Act), in each case until the date that is
six-months
following the Closing Date.
ARTICLE VII
CONDITIONS TO TRANSACTION
7.1
Conditions to Each Party
’
s Obligation To Effect the Transaction
. The respective obligations of each party to
this Agreement to effect the Transaction shall be subject to the satisfaction prior to the Closing Date of the following conditions:
(a)
Stockholder Approval
. The Public Company Voting Proposal shall have been approved at the Public Company Meeting, at which a quorum is present, by the requisite vote of the stockholders of Public Company under applicable law and stock market
regulation.
(b)
Governmental Approvals
. All authorizations, consents, including each of the Israeli Tax Rulings, orders or
approvals of, or declarations or filings with, or expirations of waiting periods imposed by, any Governmental Entity in connection with the Transaction and the consummation of the other transactions contemplated by this Agreement, the failure of
which to file, obtain or occur is reasonably likely to have a Public Company Material Adverse Effect or a Otic Pharma Material Adverse Effect, shall have been filed, been obtained or occurred on terms and conditions that would not reasonably be
likely to have a Public Company Material Adverse Effect or a Otic Pharma Material Adverse Effect.
(c)
No Injunctions
. No
Governmental Entity of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any order, executive order, stay, decree, judgment or injunction (preliminary or permanent) or statute, rule or regulation which is in effect
and which has the effect of making the Transaction illegal or otherwise prohibiting consummation of the Transaction.
(d)
NASDAQ
Notification
. The NASDAQ Listing Application shall have been approved.
7.2
Additional Conditions to the Obligations of Public
Company
. The obligations of Public Company to effect the Transaction shall be subject to the satisfaction on or prior to the Closing Date of each of the following additional conditions, any of which may be waived in writing exclusively by Public
Company:
(a)
Representations and Warranties
. The representations and warranties of Otic Pharma set forth in this Agreement and in
any certificate or other writing delivered by Otic Pharma pursuant hereto shall be true and correct (i) as of the date of this Agreement (except in the case of this clause (i), (A) to the extent such representations and warranties are
specifically made as of a particular date, in which case such representations and warranties shall be true and correct as of such date and (B) where the failure to be true and correct (without regard to any materiality, Otic Pharma Material
Adverse Effect or knowledge qualifications contained therein), individually or in the aggregate, has not had, and is not reasonably likely to have, a Otic Pharma Material Adverse Effect) and (ii) as of the Closing Date as though made on and as
of the Closing Date (except in the case of this clause (ii), (A) to the extent such representations and warranties are specifically made as of a particular date, in which case such representations and warranties shall be true and correct as of such
date, (B) for changes contemplated by this Agreement and (C) where the failure to be true and correct (without regard to any materiality, Otic Pharma Material Adverse Effect or knowledge qualifications contained therein), individually or
in the aggregate, has not had, and is not reasonably likely to have, a Otic Pharma Material Adverse Effect);
provided
,
however
, that the representations and warranties made by Shareholders in Sections 2.1, 2.2(a) and 2.3 and the
representations and warranties made by Otic Pharma in Sections 3.2, 3.4(a) and 3.7(i) shall not be subject to the qualification set forth in clause (C) above;
provided
,
further
, that the representations and warranties set forth in
Section 3.2(a) shall be true and correct except for such inaccuracies as are in the aggregate
de minimis
.
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(b)
Performance of Obligations of Shareholders and Otic Pharma
. The Shareholders and Otic
Pharma shall have performed in all material respects all obligations required to be performed by them under this Agreement on or prior to the Closing Date.
(c)
No Otic Pharma Material Adverse Effect
. No Otic Pharma Material Adverse Effect shall have occurred since the date of this
Agreement and be continuing.
(d)
Third Party Consents
. Otic Pharma shall have obtained (i) all consents and approvals of
third parties listed in Section 7.2(d)(i) of the Otic Pharma Disclosure Schedule and (ii) any other required consent or approval of any third party (other than a Governmental Entity) the failure of which to obtain, individually or in the
aggregate, is reasonably likely to have a Otic Pharma Material Adverse Effect (it being understood and agreed that the failure to obtain or effect any or all of the consents and approvals listed in Section 7.2(d)(ii) of the Otic Pharma Disclosure
Schedule will not be reasonably likely to have a Otic Pharma Material Adverse Effect).
(e)
Resignations
. Public Company shall
have received copies of the resignations, effective as of the Closing, of each director of Otic Pharma and its Subsidiaries.
(f)
Officers’ Certificate
. Public Company shall have received an officers’ certificate duly executed by each of the Chief Executive Officer and Chief Financial Officer of Otic Pharma to the effect that the conditions of Sections 7.2(a),
(b) and (c) have been satisfied.
7.3
Additional Conditions to the Obligations of Otic Pharma
. The obligation of Otic Pharma
to effect the Transaction shall be subject to the satisfaction on or prior to the Closing Date of each of the following additional conditions, any of which may be waived, in writing, exclusively by Otic Pharma:
(a)
Representations and Warranties
. The representations and warranties of Public Company set forth in this Agreement and in any
certificate or other writing delivered by Public Company pursuant hereto shall be true and correct (i) as of the date of this Agreement (except in the case of this clause (i), (A) to the extent such representations and warranties are
specifically made as of a particular date, in which case such representations and warranties shall be true and correct as of such date and (B) where the failure to be true and correct (without regard to any materiality, Public Company Material
Adverse Effect or knowledge qualifications contained therein), individually or in the aggregate, has not had, and is not reasonably likely to have, a Public Company Material Adverse Effect) and (ii) as of the Closing Date as though made on and
as of the Closing Date (except in the case of this clause (ii), (A) to the extent such representations and warranties are specifically made as of a particular date, in which case such representations and warranties shall be true and correct as of
such date, (B) for changes contemplated by this Agreement and (C) where the failure to be true and correct (without regard to any materiality, Public Company Material Adverse Effect or knowledge qualifications contained therein),
individually or in the aggregate, has not had, and is not reasonably likely to have, a Public Company Material Adverse Effect);
provided
,
however
,
that the representations and warranties made by Public Company in Sections 4.2,
4.4(a), 4.4(d) and 4.7(i) shall not be subject to the qualification set forth in clause (C) above;
provided
,
further
, that the representations and warranties set forth in Section 4.2(a) shall be true and correct except for such
inaccuracies as are in the aggregate
de minimis
.
(b)
Performance of Obligations of Public Company
. Public Company shall
have performed in all material respects all obligations required to be performed by them under this Agreement on or prior to the Closing Date.
(c)
No Public Company Material Adverse Effect
. No Public Company Material Adverse Effect shall have occurred since the date of this
Agreement and be continuing.
(d)
Third Party Consents
. Public Company shall have obtained (i) all consents and approvals of
third parties listed in Section 7.3(d)(i) of the Public Company Disclosure Schedule and (ii) any other consent or
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approval of any third party (other than a Governmental Entity) the failure of which to obtain, individually or in the aggregate, is reasonably likely to have an Public Company Material Adverse
Effect (it being understood and agreed that the failure to obtain or effect any or all of the consents and approvals listed in Section 7.3(d)(ii) of the Public Company Disclosure Schedule will not be reasonably likely to have a Public Company
Material Adverse Effect).
(e)
Resignations
. Otic Pharma shall have received copies of the resignations, effective as of the
Closing, of the directors of Public Company who will not continue to serve in such roles after the Closing.
(f)
Israeli Tax
Rulings
. Otic Pharma shall have prepared, filed and received all Israeli Tax Rulings with respect to the transactions contemplated hereunder.
(g)
Office of the Chief Scientist
. The Public Company shall have delivered to Otic Pharma an executed copy of an undertaking in the
standard form required by the OCS from
non-Israeli
residents investing in Israeli companies which have received support from the OCS, substantially in the form attached hereto as
Exhibit C
(the
“
OCS Undertaking
”).
(h)
Officers’ Certificate
. Otic Pharma shall have received an officers’
certificate duly executed by each of the Chief Executive Officer and Chief Financial Officer of Public Company to the effect that the conditions of Sections 7.3(a), (b), and (c) have been satisfied.
ARTICLE VIII
TERMINATION AND AMENDMENT
8.1
Termination
. This Agreement may be terminated at any time prior to the Closing (with respect to Sections 8.1(b) through 8.1(k), by
written notice by the terminating party to the other party), whether before or, subject to the terms hereof, after approval of the Transaction by the stockholders of Otic Pharma or Public Company:
(a) by mutual written consent of Public Company and Otic Pharma;
(b) by either Public Company or Otic Pharma if the Transaction shall not have been consummated by April 30, 2016 (the “
Outside
Date
”) (provided that the right to terminate this Agreement under this Section 8.1(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been a principal cause of or resulted in the failure
of the Transaction to occur on or before the Outside Date);
(c) by either Public Company or Otic Pharma if a Governmental Entity of
competent jurisdiction shall have issued a
non-appealable
final order, decree or ruling or taken any other
non-appealable
final action, in each case having the effect of
permanently restraining, enjoining or otherwise prohibiting the Transaction;
provided
,
however
, that a party hereto shall not be permitted to terminate this Agreement pursuant to this Section 8.1(c) if the issuance of any such order,
decree, ruling or other action is attributable to the failure of such party (or any Affiliate of such party) to perform in any material respect any covenant in this Agreement required to be performed by such party (or any Affiliate of such party) at
or prior to the Closing;
(d) by either Public Company or Otic Pharma if at the Public Company Meeting (including any adjournment or
postponement permitted by this Agreement), at which a vote on the Public Company Voting Proposal is taken, the requisite vote of the stockholders of Public Company in favor of Public Company Voting Proposal shall not have been obtained;
(e) by Public Company, if Otic Pharma shall have knowingly and materially breached its obligations under Section 6.1 of this Agreement;
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(f) by Otic Pharma, if at any time prior to the receipt of the Public Company Stockholder
Approval: (i) Public Company Board shall have failed to give its recommendation to the approval of the Public Company Voting Proposal in the Proxy Statement or shall have withdrawn or modified its recommendation of the Public Company Voting
Proposal; (ii) Public Company Board (or any committee thereof) shall have approved or recommended to the stockholders of Public Company an Acquisition Proposal; (iii) a tender offer or exchange offer for outstanding shares of Public
Company Common Stock is commenced (other than by Otic Pharma or an Affiliate of Otic Pharma), and Public Company Board (or any committee thereof) recommends that the stockholders of Public Company tender their shares in such tender or exchange offer
or, within ten Business Days after the commencement of such tender offer or exchange offer, Public Company Board fails to recommend against acceptance of such offer; or (iv) Public Company shall have knowingly and materially breached its obligations
under Section 6.1 or Section 6.5(b) of this Agreement;
(g) by Public Company, if there has been a material breach of or failure to
perform any representation, warranty, covenant or agreement set forth in this Agreement (other than those referred to elsewhere in this Section 8.1) on the part of Otic Pharma, which breach would cause the conditions set forth in Section 7.2(a)
or (b) not to be satisfied;
provided
that Public Company is not then in material breach of any representation, warranty or covenant under this Agreement and
provided
,
further, that if such breach or failure to perform
is curable by Otic Pharma, as applicable, then this Agreement shall not terminate pursuant to this Section 8.1(g) as a result of such particular breach or failure until the earlier of the Outside Date or the expiration of a thirty
(30) day period commencing upon delivery of written notice from Public Company to Otic Pharma of such breach or failure, and it being understood that this Agreement shall not terminate pursuant to this Section 8.1(g) as a result of such
particular breach or violation if such breach or violation is cured prior to such termination becoming effective;
(h) by Otic Pharma, if
there has been a material breach of or failure to perform any representation, warranty, covenant or agreement set forth in this Agreement (other than those referred to elsewhere in this Section 8.1) on the part of Public Company, which breach
would cause the conditions set forth in Section 7.3(a) or (b) not to be satisfied;
provided
that Otic Pharma is not then in material breach of any representation, warranty or covenant under this Agreement and
provided
,
further, that if such breach or failure to perform is curable by Public Company, then this Agreement shall not terminate pursuant to this Section 8.1(h) as a result of such particular breach or failure until the earlier of the
Outside Date or the expiration of a thirty (30) day period commencing upon delivery of written notice from Otic Pharma to Public Company of such breach or failure, and it being understood that this Agreement shall not terminate pursuant to this
Section 8.1(h) as a result of such particular breach or violation if such breach or violation is cured prior to such termination becoming effective;
(i) [Intentionally omitted]
(j) [Intentionally omitted]
(k) by Public Company if, at any time prior to the receipt of the Public Company Stockholder Approval, each of the following occur:
(A) Public Company shall have received a Superior Proposal; (B) Public Company shall have complied in all material respects with its obligations under Section 6.1 in order to accept such Superior Proposal; (C) the Public Company
Board approves, and Public Company concurrently with the termination of this Agreement enters into, a definitive agreement with respect to such Superior Proposal; and (D) prior to or concurrently with such termination, Public Company pays to
Otic Pharma the amount contemplated by Section 8.3(c).
8.2
Effect of Termination
. In the event of termination of this Agreement as
provided in Section 8.1, this Agreement shall immediately become void and there shall be no liability or obligation on the part of Public Company, Otic Pharma, or their respective officers, directors, stockholders or Affiliates;
provided
that (a) any such termination shall not relieve any party from liability for any knowing and intentional breach of this Agreement and (b) the provisions of Sections 3.20 and 4.21 (Brokers; Fees and Expenses), Section 5.3
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(Confidentiality), this Section 8.2 (Effect of Termination), Section 8.3 (Fees and Expenses) and Article IX (Miscellaneous) of this Agreement and the Confidentiality Agreement shall
remain in full force and effect and survive any termination of this Agreement.
8.3
Fees and Expenses
.
(a) Except as set forth in this Section 8.3, all fees and expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses, whether or not the Transaction is consummated.
(b) Otic Pharma
shall pay Public Company a termination fee of $1,500,000 (the “
Otic Pharma Termination Fee
”) in the event of the termination of this Agreement:
(i) by Public Company pursuant to Sections 8.1(e); or
(ii) by Public Company pursuant to Section 8.1(g).
(c) Public Company shall pay Otic Pharma a termination fee of $1,000,000 (the “
Public Company Termination Fee
”) in the event
of the termination of this Agreement:
(i) by Otic Pharma pursuant to Section 8.1(f);
(ii) by Public Company pursuant to Section 8.1(k); or
(iii) by Public Company or Otic Pharma, as applicable, pursuant to Sections 8.1(b) or 8.1(h), so long as (A) prior to the termination of
this Agreement, any person makes an Acquisition Proposal or amends an Acquisition Proposal made prior to the date of this Agreement with respect to Public Company; and (B) within 12 months after such termination Public Company enters into a
definitive agreement to consummate, or consummates, any Acquisition Proposal (regardless of whether made before or after the termination of this Agreement); provided that for purposes of this Section 8.3(c)(iii), the references to 15% in the
definition of Acquisition Proposal shall be deemed to be 50%).
(d) Any fee due under Section 8.3(b)(i) or 8.3(c)(i) shall be paid by
wire transfer of same day funds within one Business Day of the date of termination of this Agreement. Any fee due under Section 8.3(b)(ii) or 8.3(c)(ii) shall be paid by wire transfer of same day funds on the date of termination of this Agreement
(and shall be a condition to the effectiveness of such termination). Any fee due under Section 8.3(c)(iii) shall be paid by wire transfer of
same-day
funds within two Business Days after the date on which the
transaction referenced in Section 8.3(c)(iii)(B) is consummated. If one party fails to promptly pay to the other any expense reimbursement or fee due hereunder, the defaulting party shall pay the costs and expenses (including legal fees and
expenses) in connection with any action, including the filing of any lawsuit or other legal action, taken to collect payment, together with interest on the amount of any unpaid fee at the publicly announced prime rate of Bank of America, N.A. plus
five percent per annum, compounded quarterly, from the date such expense reimbursement or fee was required to be paid.
(e) The parties
hereto acknowledge that the agreements contained in this Section 8.3 are an integral part of the transactions contemplated by this Agreement, and that, without these agreements, the parties hereto would not enter into this Agreement.
Notwithstanding Section 8.2 or any other provision of this Agreement, payment of the termination fees described in this Section 8.3 shall constitute the sole and exclusive remedy of Public Company or Otic Pharma, as applicable in
connection with any termination of this Agreement in the circumstances in which such fees became payable. In the event that Public Company or Otic Pharma shall receive the payment of a termination fee, the receipt of such fee shall be deemed to be
liquidated damages for any and all losses or damages suffered or incurred by Public Company and any of its Affiliates or Otic Pharma and any of its Affiliates, as applicable, or any other person in connection with this Agreement (and the
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termination hereof), the transactions contemplated hereby (and the abandonment thereof) or any matter forming the basis for such termination, and none of the Public Company, any of its Affiliates
or Otic Pharma or any of its Affiliates, as applicable, or any other person, shall be entitled to bring or maintain any other claim, action or proceeding against Public Company or Otic Pharma, as applicable, or any of their respective Affiliates
arising out of this Agreement, any of the transactions contemplated hereby or any matters forming the basis for such termination.
(f)
The parties hereto acknowledge and agree that (i) in no event shall Otic Pharma be required to pay Otic Pharma Termination Fee on more than one occasion, nor shall Public Company be required to pay Public Company Termination Fee on more than
one occasion and (ii) in each case whether or not such fee may be payable under more than one provision of this Agreement at the same or at different times and the occurrence of different events.
8.4
Amendment
. This Agreement may be amended by the parties hereto, with respect to Public Company and Otic Pharma, by action taken or
authorized by their respective Boards of Directors, and, with respect to the Shareholders, by action taken by the Shareholders holding a majority of the issued and outstanding Otic Pharma Share Capital, at any time before or after approval of the
matters presented in connection with the Transaction by the stockholders of any of the parties, but, after any such approval, no amendment shall be made which by law requires further approval by such stockholders without such further approval. This
Agreement may not be amended except by an instrument in writing signed on behalf of each of Public Company, Otic Pharma and the Shareholders holding a majority of the issued and outstanding Otic Pharma Share Capital.
8.5
Extension; Waiver
. At any time prior to the Closing, Public Company or Otic Pharma, by action taken or authorized by their
respective Boards of Directors, or the Shareholders holding a majority of the issued and outstanding Otic Pharma Share Capital, may, to the extent legally allowed, (a) extend the time for the performance of any of the obligations or other acts
of the other parties hereto, (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (c) waive compliance with any of the agreements or conditions contained herein.
Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party. Such extension or waiver shall not be deemed to apply to any time for performance,
inaccuracy in any representation or warranty, or noncompliance with any agreement or condition, as the case may be, other than that which is specified in the extension or waiver. The failure of any party to this Agreement to assert any of its rights
under this Agreement or otherwise shall not constitute a waiver of such rights.
8.6
Procedure for Termination, Amendment, Extension or
Waiver
. A termination of this Agreement pursuant to Section 8.1, an amendment, modification or supplement of this Agreement pursuant to Section 8.4 or an extension or waiver of this Agreement pursuant to Section 8.5 shall, in
order to be effective, require action by the respective boards of directors of the applicable parties.
ARTICLE IX
MISCELLANEOUS
9.1
Non-survival
of Representations, Warranties and Agreements
. None of the representations, warranties, covenants and agreements in this Agreement shall survive the Closing, except for the agreements
contained in Article I, Article II, Section 6.9, 6.12 and 6.13 and this Article IX. This Section 9.1 shall have no effect upon any other obligations of the parties hereto, whether to be performed before or after the consummation of the
Transaction.
9.2
Notices
. All notices and other communications hereunder shall be in writing and shall be deemed duly delivered
(i) three Business Days after being sent by registered or certified mail, return receipt requested,
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postage prepaid, or (ii) one Business Day after being sent for next Business Day delivery, fees prepaid, via a reputable overnight courier service, in each case to the intended recipient as
set forth below:
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(a)
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if to Public Company, to
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Tokai Pharmaceuticals, Inc.
Jodie P. Morrison
President
and Chief Executive Officer
255 State Street, 6th Floor
Boston, MA 02109
with a copy
(which shall not constitute notice) to:
Wilmer Cutler Pickering Hale and Dorr LLP
60 State Street
Boston, MA
02109
Attn: Stuart M. Falber, Esq.
Hal J. Leibowitz, Esq.
Telecopy: (617)
526-5000
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(b)
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if to Otic Pharma, to
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Otic Pharma, Ltd.
Gregory J. Flesher
Chief
Executive Officer
19900 MacArthur Blvd., Suite 550
Irvine, California 92612
with
copies (which shall not constitute notice) to:
Gibson, Dunn & Crutcher, LLP
555 Mission Street, Suite 3000
San Francisco, California 94105
Attn: Ryan A. Murr
and
Yigal Arnon & Co.
22
Rivlin Street
Jerusalem 9424018, Israel
Attn: Barry Levenfeld
Any
party to this Agreement may give any notice or other communication hereunder using any other means (including personal delivery, messenger service, telecopy, ordinary mail or electronic mail), but no such notice or other communication shall be
deemed to have been duly given unless and until it actually is received by the party for whom it is intended. Any party to this Agreement may change the address to which notices and other communications hereunder are to be delivered by giving the
other parties to this Agreement notice in the manner herein set forth.
9.3
Entire Agreement
. This Agreement (including the
Schedules and Exhibits hereto and the documents and instruments referred to herein that are to be delivered at the Closing) constitutes the entire agreement among the parties to this Agreement and supersedes any prior understandings, agreements or
representations by or among the parties hereto, or any of them, written or oral, with respect to the subject matter hereof and the parties hereto expressly disclaim reliance on any such prior understandings, agreements or representations to the
extent not embodied in this Agreement. Notwithstanding the foregoing, the Confidentiality Agreement shall remain in effect in accordance with its terms.
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9.4
No Third Party Beneficiaries
. This Agreement is not intended to, and shall not, confer
upon any other person any rights or remedies hereunder, except as set forth in or contemplated by the terms and provisions of Section 6.9.
9.5
Assignment
. No party may assign any of its rights or delegate any of its performance obligations under this Agreement, in whole or
in part, by operation of law or otherwise without the prior written consent of the other parties, and any such assignment without such prior written consent shall be null and void. Subject to the preceding sentence, this Agreement shall be binding
upon, inure to the benefit of, and be enforceable by, the parties hereto and their respective successors and permitted assigns. Any purported assignment of rights or delegation of performance obligations in violation of this Section 9.5 is
void.
9.6
Severability
. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any
jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. If the final judgment
of a court of competent jurisdiction declares that any term or provision hereof is invalid or unenforceable, the parties hereto agree that the court making such determination shall have the power to limit the term or provision, to delete specific
words or phrases, or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this
Agreement shall be enforceable as so modified. In the event such court does not exercise the power granted to it in the prior sentence, the parties hereto agree to replace such invalid or unenforceable term or provision with a valid and enforceable
term or provision that will achieve, to the extent possible, the economic, business and other purposes of such invalid or unenforceable term.
9.7
Counterparts and Signature
. This Agreement may be executed in two or more counterparts (including by facsimile or by an electronic
scan delivered by electronic mail), each of which shall be deemed an original but all of which together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each of the parties hereto and
delivered to the other parties, it being understood that all parties need not sign the same counterpart. This Agreement may be executed and delivered by facsimile or by an electronic scan delivered by electronic mail.
9.8
Interpretation
. When reference is made in this Agreement to an Article or a Section, such reference shall be to an Article or
Section of this Agreement, unless otherwise indicated. The table of contents, table of defined terms and headings contained in this Agreement are for convenience of reference only and shall not affect in any way the meaning or interpretation of this
Agreement. The language used in this Agreement shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction shall be applied against any party. Whenever the context may require,
any pronouns used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural, and vice versa. Any reference to any federal, state, local or foreign
statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. Whenever the words “include,” “includes” or “including” are used in this
Agreement, they shall be deemed to be followed by the words “without limitation.” Where this Agreement refers to information that was “made available”, that means that such information was either (i) provided directly to the
Public Company or Otic Pharma, as applicable, by the other party, (ii) included in the virtual data rooms established by Public Company and Otic Pharma created for the purposes of providing information to the other party in connection with this
Agreement at least three Business Days prior to the execution and delivery of this Agreement or (iii) solely with respect to information made available by Public Company, filed with and publicly available on the SEC’s EDGAR system prior to
the date of this Agreement. No summary of this Agreement prepared by any party shall affect the meaning or interpretation of this Agreement.
9.9
Governing Law
. All matters arising out of or relating to this Agreement and the transactions contemplated hereby (including its
interpretation, construction, performance and enforcement) shall be governed
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by and construed in accordance with the internal laws of the State of Delaware without giving effect to any choice or conflict of law provision or rule (whether of the State of Delaware or any
other jurisdiction) that would cause the application of laws of any jurisdictions other than those of the State of Delaware; provided, that this Agreement will be governed by and construed in accordance with the laws of the State of Israel solely to
the extent necessary to effect the purchase by the Public Company and the sale by the Shareholders of the shares of Otic Pharma Share Capital and the transactions related thereto.
9.10
Remedies
. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party will be deemed
cumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such party, and the exercise by a party of any one remedy will not preclude the exercise of any other remedy. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement, this being in addition to any other remedy to which they are entitled at law or in equity.
9.11
Submission to Jurisdiction
. Each of the parties to this Agreement (a) consents to submit itself to the exclusive personal
jurisdiction of the Court of Chancery of the State of Delaware, New Castle County, or, if that court does not have jurisdiction, a federal court sitting in Wilmington, Delaware in any action or proceeding arising out of or relating to this Agreement
or any of the transactions contemplated by this Agreement, (b) agrees that all claims in respect of such action or proceeding shall be heard and determined in any such court, (c) agrees that it shall not attempt to deny or defeat such
personal jurisdiction by motion or other request for leave from any such court and (d) agrees not to bring any action or proceeding arising out of or relating to this Agreement or any of the transaction contemplated by this Agreement in any
other court. Each of the parties hereto waives any defense of inconvenient forum to the maintenance of any action or proceeding so brought and waives any bond, surety or other security that might be required of any other party with respect thereto.
Any party may make service on another party by sending or delivering a copy of the process to the party to be served at the address and in the manner provided for the giving of notices in Section 9.2. Nothing in this Section 9.11, however,
shall affect the right of any party to serve legal process in any other manner permitted by law.
9.12
WAIVER OF JURY TRIAL
. EACH
OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY
OR THE ACTIONS OF ANY PARTY HERETO IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT OF THIS AGREEMENT.
9.13
Disclosure
Schedule
. Each of the Otic Pharma Disclosure Schedule and the Public Company Disclosure Schedule shall be arranged in sections corresponding to the numbered sections contained in this Agreement, and the disclosure in any section shall qualify
only (a) the corresponding section of this Agreement and (b) the other sections of this Agreement, to the extent that it is reasonably apparent from a reading of such disclosure that it also qualifies or applies to such other sections. The
inclusion of any information in the Otic Pharma Disclosure Schedule or the Public Company Disclosure Schedule, as applicable, shall not be deemed to be an admission or acknowledgment, in and of itself, that such information is required by the terms
hereof to be disclosed, is material, has resulted in or would result in a Otic Pharma Material Adverse Effect or a Public Company Material Adverse Effect, as applicable, or is outside the Ordinary Course of Business.
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
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TOKAI PHARMACEUTICALS, INC.
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By:
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/s/ Jodie P. Morrison
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Name:
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Jodie Morrison
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Title:
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Chief Executive Officer
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OTIC PHARMA, LTD.
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By:
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/s/ Gregory Flesher
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Name:
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Gregory Flesher
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Title:
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Chief Executive Officer
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SHAREHOLDER
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INCENTIVE II MANAGEMENT LTD.
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By:
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/s/ Eyal Lifschitz, Boris Lifschitz
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Name: Eyal Lifschitz, Boris Lifschitz
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Title:
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[Signature Page to Share Purchase Agreement]
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SHAREHOLDER
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PURE ACOUSTICS INC.
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By:
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/s/ Rami Ezratty
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Name: Rami Ezratty
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Title: President
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[Signature Page to Share Purchase Agreement]
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SHAREHOLDER
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PEREGRINE VC INVESTMENTS II (ISRAEL), L.P.
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By:
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/s/ Eyal Lifschitz, Boris Lifschitz
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Name: Eyal Lifschitz, Boris Lifschitz
Peregrine Ventures
Management Ltd.
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[Signature Page to Share Purchase Agreement]
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SHAREHOLDER
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PEREGRINE VC INVESTMENTS II (US INVESTORS), L.P.
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By:
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/s/ Eyal Lifschitz, Boris Lifschitz
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Name: Eyal Lifschitz, Boris Lifschitz
Peregrine Ventures
Management Ltd.
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[Signature Page to Share Purchase Agreement]
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SHAREHOLDER
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PEREGRINE VC INVESTMENTS II (OTHER INVESTORS), L.P.
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By:
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/s/ Eyal Lifschitz, Boris Lifschitz
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Name: Eyal Lifschitz, Boris Lifschitz
Peregrine Ventures
Management Ltd.
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[Signature Page to Share Purchase Agreement]
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SHAREHOLDER
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PEREGRINE II MANAGEMENT LTD.
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By:
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/s/ Eyal Lifschitz, Boris Lifschitz
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Name: Eyal Lifschitz, Boris Lifschitz
Peregrine Ventures
Management Ltd.
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[Signature Page to Share Purchase Agreement]
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SHAREHOLDER
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DAN WIZNIZER LTD.
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By:
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/s/ Dan Wiznizer
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Name: Dan Wiznizer
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Title: CEO
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[Signature Page to Share Purchase Agreement]
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SHAREHOLDER
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ORBIMED ISRAEL PARTNERS LIMITED PARTNERSHIP
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By:
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/s/ Nissim Darvish Erez Chimovitz
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Name: Nissim Darvish Erez Chimovitz
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Title: Senior Managing Director
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[Signature Page to Share Purchase Agreement]
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SHAREHOLDER
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PONTIFAX (ISRAEL) III LIMITED PARTNERSHIP
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By:
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/s/ Tomer Kariv
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Name: Tomer Kariv
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Title:
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[Signature Page to Share Purchase Agreement]
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SHAREHOLDER
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PONTIFAX (CAYMAN) III LIMITED PARTNERSHIP
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By:
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/s/ Tomer Kariv
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Name: Tomer Kariv
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Title:
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[Signature Page to Share Purchase Agreement]
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SHAREHOLDER
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/s/ Dr. Gadi Riesenfeld
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Dr. Gadi Riesenfeld
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[Signature Page to Share Purchase Agreement]
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SHAREHOLDER
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/s/ Yosef Krespi
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Yosef Krespi
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[Signature Page to Share Purchase Agreement]
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SHAREHOLDER
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/s/ Yosef and Lusi Krespi
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Yosef and Lusi Krespi
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[Signature Page to Share Purchase Agreement]
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SHAREHOLDER
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/s/ Lisandro Yelin
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Lisandro Yelin
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[Signature Page to Share Purchase Agreement]
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SHAREHOLDER
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/s/ Dr. Eran Eilat
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Dr. Eran Eilat
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[Signature Page to Share Purchase Agreement]
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SHAREHOLDER
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/s/ Anat Nursella
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Chen Schor (by proxy)
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[Signature Page to Share Purchase Agreement]
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SHAREHOLDER
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OTODYNE INC. (by proxy)
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By:
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/s/ Gregory J. Flesher
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Name: Gregory J. Flesher
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Title: Chief Executive Officer
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[Signature Page to Share Purchase Agreement]
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SHAREHOLDER
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/s/ Anat Nursella
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Rodrigo Yelin (by proxy)
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[Signature Page to Share Purchase Agreement]
ANNEX B: FORM OF TOKAI STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (“
Agreement
”) is made as of
[ ] [ ], 201[ ] (the “
Effective Date
”), by and among Tokai Pharmaceuticals, Inc., a Delaware corporation (the
“
Company
”), each of those persons and entities, severally and not jointly, listed as a Purchaser on the Schedule of Purchasers attached as
Exhibit A
hereto (the “
Schedule of Purchasers
”). The persons and
entities listed as Purchasers on the Schedule of Purchasers are hereinafter collectively referred to herein as “
Purchasers
” and each individually as a “
Purchaser
.”
BACKGROUND
A. On
December , 2016, the Company entered into a Share Purchase Agreement with Otic Pharma, Ltd. (“
Otic
”) and its shareholders (as amended from time to time, the “
Otic Share Purchase Agreement
”),
pursuant to which the Company has agreed to issue shares of its Common Stock (the “
Otic Acquisition Shares
”) to the shareholders of Otic in consideration for the acquisition of 100% of the issued and outstanding capital stock of
Otic, whereupon Otic will become a wholly-owned subsidiary of the Company (the “
Otic Acquisition
”).
B. The closing of
the transactions contemplated under the Otic Share Purchase Agreement is conditioned upon, among other things, the approval of the issuance of the Otic Acquisition Shares by the stockholders of the Company at a special meeting of stockholders.
C. The Company is entering into this Agreement with the Purchasers to provide for the offering and sale of Common Stock, conditioned upon, and
subject to, the closing of the Otic Acquisition under the Otic Share Purchase Agreement.
AGREEMENT
In consideration of the mutual covenants contained in this Agreement, and for other good and valuable consideration, the receipt of which is
hereby acknowledged, the Company, and each Purchaser (severally and not jointly) hereby agree as follows:
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1.
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AUTHORIZATION OF SALE OF THE SHARES.
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The Company has authorized the sale and issuance
of shares of its Common Stock, par value $0.0001 per share (the “
Common Stock
”), on the terms and subject to the conditions set forth
in this Agreement. The shares of Common Stock sold hereunder at the Closing (as defined below) shall be referred to as the “
Shares
.”
|
2.
|
AGREEMENT TO SELL AND PURCHASE THE SHARES.
|
(a)
Sale of Shares
. At the Closing
(as defined in
Section 3
), the Company will sell to each Purchaser, and each Purchaser will purchase from the Company, the number of Shares set forth opposite such Purchaser’s name on the Schedule of Purchasers at a purchase price
of $1.11 per Share (subject to appropriate adjustment for stock splits, stock dividends, recapitalizations and similar transactions affecting the Common Stock). The aggregate purchase price for the Shares purchased by each Purchaser is set
forth opposite such Purchaser’s name on the Schedule of Purchasers.
(b)
Separate Agreement
. Each Purchaser shall severally,
and not jointly, be liable for only the purchase of the Shares that appear on the Schedule of Purchasers that relate to such Purchaser. The Company’s agreement with each of the Purchasers, is a separate agreement, and the sale of Shares to each
of the Purchasers is a separate sale. The obligations of each Purchaser hereunder are expressly not conditioned on the purchase by any or all of the other Purchasers of the Shares such other Purchasers have agreed to purchase.
B - 1
(a)
Closing
. The closing of the purchase and sale of the
Shares (which Shares are set forth in the Schedule of Purchasers) pursuant to this Agreement (the “
Closing
”) shall be held immediately following the satisfaction or waiver of the closing conditions set forth in Sections 6
and 7, including the closing of the Otic Acquisition , with the Closing to occur at the offices of the Company, or on such other date and at such other place as may be agreed to by the Company and the Purchasers (the “
Closing
Date
”). At or prior to the Closing, each Purchaser shall execute any related agreements or other documents required to be executed hereunder, dated on or before the Closing Date.
(b)
Issuance of the Shares at the Closing
. At the Closing, the Company shall issue or deliver to each Purchaser evidence of a book
entry position evidencing the Shares purchased by such Purchaser hereunder, registered in the name of such Purchaser, or in such nominee name(s) as designated by such Purchaser, representing the number of Shares to be purchased by such Purchaser at
such Closing as set forth in the Schedule of Purchasers against payment of the purchase price for such Shares. The name(s) in which the Shares are to be issued to each Purchaser are set forth in the Purchaser Questionnaire and the Selling
Stockholder Notice and Questionnaire in the form attached hereto as
Appendices I
and
II
(the “
Purchaser Questionnaire
” and the “
Selling Stockholder Questionnaire
,” respectively), as completed by each
Purchaser. The Purchaser Questionnaire shall be provided to the Company in connection with the execution of this Agreement and the Selling Stockholder Questionnaire shall be provided to the Company no later than the Closing Date.
(c)
Delivery of the Registration Rights Agreement
. At or before the Closing, the Company and each Purchaser shall execute and deliver
the Registration Rights Agreement in the form attached hereto as
Appendix III
(the “Registration Rights Agreement”), with respect to the registration of the Shares under the Securities Act of 1933, as amended (the
“
Securities Act
”).
|
4.
|
REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY.
|
Except as set forth on the
Schedule of Exceptions delivered to the Purchasers concurrently with the execution of this Agreement (the “
Schedule of Exceptions
”) or as otherwise described in the SEC Documents (as defined below), which disclosures qualify these
representations and warranties in their entirety, the Company hereby represents and warrants as of the date hereof, and covenants with, the Purchasers as follows:
(a)
Organization and Standing
. The Company: (a) has been duly incorporated and is validly existing as a corporation in good
standing under the laws of Delaware with full corporate power and authority to own or lease, as the case may be, and to operate its properties and conduct its business as presently conducted, and (b) is duly qualified to do business as a
foreign corporation and is in good standing under the laws of each jurisdiction which requires such qualification, except in the case of clause (b) above, to the extent that the failure to be so qualified or be in good standing would not
reasonably be expected to result in (i) a material adverse effect on the validity or enforceability of this Agreement, (ii) a material adverse effect on the condition (financial or otherwise), earnings, business or properties of the
Company, or (iii) a material adverse effect on the Company’s ability to perform in any material respect its obligations under this Agreement (any of clauses (i), (ii) or (iii), a “
Material Adverse Effect
”). The Company has
no subsidiaries.
(b)
Corporate Power; Authorization
. The Company has all requisite corporate power and authority, and has
taken all requisite corporate action, to execute and deliver this Agreement and the Registration Rights Agreement (as defined below, and together with the Agreement, the “
Transaction Documents
”), and, subject to any required
stockholder approval under the rules and regulations of NASDAQ, to sell and issue the Shares and carry out and perform all of its obligations under the Transaction Documents. Each Transaction Document constitutes the legal, valid and binding
obligation of the Company, enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting the enforcement of creditors’ rights
generally, (ii) as limited by equitable principles generally,
B - 2
including any specific performance and (iii) with respect to the Registration Rights Agreement, as rights to indemnity or contribution may be limited by state or federal laws or public
policy underlying such laws.
(c)
Issuance and Delivery of the Shares
. The Shares have been duly authorized and, when issued and
paid for in compliance with the provisions of this Agreement, will be validly issued, fully paid and
non-assessable
and free of any security interest, lien, pledge, claim, charge, escrow, encumbrance, right of
first offer, right of first refusal, preemptive right, mortgage, indenture, security agreement or other restriction (“
Encumbrance
”) other than restrictions on transfer under the Transaction Documents, applicable state and federal
securities laws and Encumbrances created by or imposed by the Purchasers. Assuming the accuracy of the representations made by each Purchaser in
Section 5
, the offer and issuance by the Company of the Shares is exempt from registration
under the Securities Act.
(d)
SEC Documents; Financial Statements
. The Company has filed in a timely manner all documents that the
Company was required to file with the Securities and Exchange Commission (the “
Commission
”) under Sections 13, 14(a) and 15(d) the Securities
Exchange Act
of 1934, as amended (the “Exchange Act”), since becoming
subject to the requirements of the Exchange Act. As of their respective filing dates (or, if amended prior to the date of this Agreement, when amended), all documents filed by the Company with the Commission since January 1, 2016 (the
“
SEC Documents
”) complied in all material respects with the requirements of the Exchange Act and the rules and regulations of the Commission promulgated thereunder. None of the SEC Documents as of their respective dates contained
any untrue statement of material fact or omitted to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading. The financial
statements of the Company included in the SEC Documents (the “
Financial Statements
”) present fairly the financial condition, results of operations and cash flows of the Company as of the dates and for the periods indicated, comply
as to form with the applicable accounting requirements of the Exchange Act and have been prepared in conformity with United States generally accepted accounting principles applied on a consistent basis throughout the periods involved (except as
otherwise noted therein). PricewaterhouseCoopers LLP, who have certified certain financial statements of the Company delivered their report with respect to the audited financial statements and schedules included in the SEC Documents, are independent
public accountants with respect to the Company within the meaning of Regulation
S-X.
(e)
Capitalization
. The authorized capital stock of the Company is as set forth in the SEC Documents. As of the Effective Date, there are no shares of Preferred Stock issued and outstanding and there are
[ ] shares of Common Stock issued and outstanding, of which no shares are owned by the Company. There are no other shares of any other class or series of capital stock of the
Company issued or outstanding. The Company has no capital stock reserved for issuance, except that, as of the Effective Date, there are (i) [ ] shares of Common Stock reserved
for issuance pursuant to the Company’s stock incentive plans, of which [ ] shares are issuable upon the exercise of stock options outstanding on the date hereof and
[ ] shares are issuable upon the vesting of restricted stock units outstanding on the date hereof, (ii) [ ]
shares of Common Stock reserved for issuance pursuant to the Company’s employee stock purchase plan and (iii) [ ] shares of Common Stock reserved for issuance upon the
exercise of outstanding warrants. There are no bonds, debentures, notes or other indebtedness having general voting rights (or convertible into securities having such rights) (“
Voting Debt
”) of the Company issued and
outstanding. Except as stated above, and except for the obligations to issue the Otic Acquisition Shares under the Otic Share Purchase Agreement, there are no existing options, warrants, calls, subscriptions or other rights, agreements,
arrangements or commitments relating to the issued or unissued capital stock of the Company, obligating the Company to issue, transfer, sell, redeem, purchase, repurchase or otherwise acquire or cause to be issued, transferred, sold, redeemed,
purchased, repurchased or otherwise acquired any capital stock or Voting Debt of, or other equity interest in, the Company or securities or rights convertible into or exchangeable for such shares or equity interests or obligations of the Company to
grant, extend or enter into any such option, warrant, call, subscription or other right, agreement, arrangement or commitment. The issuance of Common Stock or other securities pursuant to any provision of this Agreement will not give rise to
any preemptive rights or rights of first refusal on behalf of any natural person or legal entity (each
B - 3
a “
Person
”) or result in the triggering of any anti-dilution rights. There are no agreements or arrangements under which the Company is obligated to register the sale of any of
its securities under the Securities Act.
(f)
Litigation
. No action, suit or proceeding by or before any court or governmental
agency, authority or body or any arbitrator involving the Company or its property is pending or, to the best knowledge of the Company, threatened that will have a Material Adverse Effect, whether or not arising from transactions in the ordinary
course of business.
(g)
Governmental Consents
. No consent, approval, order or authorization of, or registration, qualification,
designation, declaration or filing with, any federal, state, or local governmental authority on the part of the Company is required in connection with the consummation of the transactions contemplated by this Agreement or the Registration Rights
Agreement except for (a) the approval by the NASDAQ Stock Market of the listing of the Shares and (b) the filing of one or more registration statements and all amendments thereto with the Commission as contemplated by the Registration
Rights Agreement.
(h)
No Default or Consents
. Neither the execution, delivery or performance of the Transaction Documents by the
Company nor the consummation of any of the transactions contemplated thereby (including, without limitation, the issuance and sale by the Company of the Shares) will conflict with, result in a breach or violation of, or imposition of any lien,
charge or Encumbrance upon any property or assets of the Company pursuant to, (i) the certificate of incorporation or
by-laws
of the Company, (ii) the terms of any indenture, contract, lease,
mortgage, deed of trust, note agreement, loan agreement or other agreement, obligation, condition, covenant or instrument to which the Company is a party or bound or to which its or their property is subject, or (iii) any statute, law, rule,
regulation, judgment, order or decree applicable to the Company of any court, regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over the Company or any of its properties, except in the case
of clauses (ii) and (iii) above, for any conflict, breach or violation of, or imposition that would not have a Material Adverse Effect.
(i)
No Material Adverse Change
. Since September 30, 2016, there have not been any material adverse changes in the assets,
liabilities, financial condition, business or operations of the Company from that reflected in the Financial Statements except for the continued incurrence of losses and changes in the ordinary course of business which have not had, either
individually or in the aggregate, a Material Adverse Effect.
(j)
No General Solicitation
. Neither the Company nor any Person
acting on its behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D promulgated under the Securities Act) in connection with the offer or sale of the Shares.
(k)
No Integrated Offering
. Neither of the Company or any Person acting on its behalf has, directly or indirectly, made any offers or
sales of any security or solicited any offers to buy any Company security, under circumstances that would adversely affect reliance by the Company on Section 4(a)(2) of the Securities Act or require registration of any of the Shares under the
Securities Act or cause this offering of the Shares to be integrated with prior offerings by the Company for purposes of the Securities Act.
(l)
Sarbanes-Oxley Act
. There is and has been no failure on the part of the Company and any of the Company’s directors or
officers, in their capacities as such, to comply in any material respect with any applicable provision of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated in connection therewith, including, without limitation,
Section 402 relating to loans.
(m)
Intellectual Property
. The Company owns, possesses, licenses or has other rights to use,
on reasonable terms, all patents, patent applications, trade and service marks, trade and service mark registrations, trade names, copyrights, licenses, inventions, trade secrets, technology,
know-how
and
other intellectual property (collectively, the “
Intellectual Property
”) that it uses in the conduct of the Company’s business (the “
Company Intellectual Property
”). To the knowledge of the Company, there are no
rights of third parties to any Company
B - 4
Intellectual Property, other than as licensed by the Company. To the knowledge of the Company, there is no infringement by third parties of any Company Intellectual Property. There is no pending
or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others challenging the Company’s rights in or to any Company Intellectual Property. There is no pending or, to the Company’s knowledge, threatened action,
suit, proceeding or claim by others challenging the validity or scope of any Company Intellectual Property. There is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others that the Company infringes or
otherwise violates any patent, trademark, copyright, trade secret or other proprietary rights of others. The Company is not aware of any facts required to be disclosed to the U.S. Patent and Trademark Office (“
USPTO
”) which have not
been disclosed to the USPTO and which would preclude the grant of a patent in connection with any patent application of the Company Intellectual Property or would form the basis of a finding of invalidity with respect to any issued patents of the
Company Intellectual Property that would have a Material Adverse Effect.
(n)
Compliance with NASDAQ Continued Listing
Requirements
. The Company is in compliance with applicable NASDAQ continued listing requirements. There are no proceedings pending or, to the Company’s knowledge, threatened against the Company relating to the continued listing of the
Common Stock on NASDAQ and the Company has not received any notice of, nor to the Company’s knowledge is there any reasonable basis for, the delisting of the Common Stock from NASDAQ.
(o)
Disclosure
. The Company understands and confirms that the Purchasers will rely on the foregoing representations in effecting
transactions in securities of the Company.
(p)
Contracts
. Each franchise, contract or other document of a character required to be
described in the SEC Documents or to be filed as an exhibit to the SEC Documents under the Securities Act and the rules and regulations promulgated thereunder is so described or filed.
(q)
Properties and Assets
. The Company holds all the properties it owns free from liens and encumbrances and leases all properties
leased by it under valid and enforceable leases, except as such would not have a Material Adverse Effect.
(r)
Compliance
. Except
as would not result in a Material Adverse Effect: (i) the Company is and has been in compliance with statutes, laws, ordinances, rules and regulations applicable to the Company for the ownership, testing, development, manufacture, packaging,
processing, use, labeling, storage, or disposal of any product manufactured by or on behalf of the Company or
out-licensed
by the Company (a “
Company Product
”), including without limitation,
the Federal Food, Drug, and Cosmetic Act, 21 U.S.C. § 301, et seq., the Public Health Service Act, 42 U.S.C. § 262, similar laws of other governmental entities and the regulations promulgated pursuant to such laws (collectively,
“
Applicable Laws
”); (ii) the Company possesses all licenses, certificates, approvals, authorizations, permits and supplements or amendments thereto required by any such Applicable Laws and/or for the ownership of its properties or
the conduct of its business as it relates to a Company Product and as described in the SEC Documents (collectively, “
Authorizations
”) and such Authorizations are valid and in full force and effect and the Company is not in violation
of any term of any such Authorizations; (iii) the Company has not received any written notice of adverse finding, warning letter or other written correspondence or notice from the U.S. Food and Drug Administration (the “
FDA
”)
or any other governmental entity alleging or asserting noncompliance with any Applicable Laws or Authorizations relating to a Company Product; (iv) the Company has not received written notice of any ongoing claim, action, suit, proceeding,
hearing, enforcement, investigation, arbitration or other action from any governmental entity or third party alleging that any Company Product, operation or activity related to a Company Product is in violation of any Applicable Laws or
Authorizations or has any knowledge that any such governmental entity or third party is considering any such claim, litigation, arbitration, action, suit, investigation or proceeding, nor, to the Company’s knowledge, has there been any
noncompliance with or violation of any Applicable Laws by the Company that would reasonably be expected to require the issuance of any such written notice or result in an investigation, corrective action, or enforcement action by the FDA or similar
governmental entity with respect to a Company Product; (v) the
B - 5
Company has not received written notice that any governmental entity has taken, is taking or intends to take action to limit, suspend, modify or revoke any Authorizations or has any knowledge
that any such governmental entity has threatened or is considering such action with respect to a Company Product; and (vi) the Company has filed, obtained, maintained or submitted all reports, documents, forms, notices, applications, records,
claims, submissions and supplements or amendments as required by any Applicable Laws or Authorizations and that all such reports, documents, forms, notices, applications, records, claims, submissions and supplements or amendments were complete,
correct and not misleading on the date filed (or were corrected or supplemented by a subsequent submission). To the Company’s knowledge, neither the Company nor any of its directors, officers, employees or agents, has made, or caused the making
of, any false statements on, or material omissions from, any other records or documentation prepared or maintained to comply with the requirements of the FDA or any other governmental entity.
(s)
Taxes
. The Company has filed all tax returns that are required to be filed or has requested extensions thereof (except in any case
in which the failure so to file would not have a Material Adverse Effect, whether or not arising from transactions in the ordinary course of business) and has paid all taxes required to be paid by it and any other assessment, fine or penalty levied
against it, to the extent that any of the foregoing is due and payable, except for any such assessment, fine or penalty that is currently being contested in good faith or as would not have a Material Adverse Effect, whether or not arising from
transactions in the ordinary course of business.
(t)
Transfer Taxes
. There are no transfer taxes or other similar fees or charges
under Federal law or the laws of any state, or any political subdivision thereof, required to be paid in connection with the execution and delivery of this Agreement or the issuance by the Company or sale by the Company of the Shares to the
Purchasers.
(u)
Investment Company
. The Company is not, and, immediately after giving effect to the offering and sale of the
Shares, will not be, an “investment company” as defined in the Investment Company Act of 1940, as amended.
(v)
Insurance
. The Company is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are reasonable and customary in the business in which it is engaged; all policies of insurance and
fidelity or surety bonds insuring the Company or its businesses, assets, employees, officers and directors are in full force and effect; the Company is in compliance with the terms of such policies and instruments in all material respects; and there
are no claims by the Company under any such policy or instrument as to which any insurance company is denying liability or defending under a reservation of rights clause; the Company has not been refused any insurance coverage sought or applied for;
and the Company has no reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost
that would not have a Material Adverse Effect, whether or not arising from transactions in the ordinary course of business.
(w)
Price
of Common Stock
. The Company has not taken, directly or indirectly, any action designed to cause or result in, or that has constituted or that would reasonably be expected to constitute the stabilization or manipulation of the price of any
securities of the Company to facilitate the sale or resale of the Shares.
(x)
Governmental Permits, Etc
. The Company possesses all
licenses, certificates, permits and other authorizations issued by all applicable authorities necessary to conduct its business, and the Company has not received any notice of proceedings relating to the revocation or modification of any such
certificate, authorization or permit which failure to possess or proceedings, singly or in the aggregate, would have a Material Adverse Effect, whether or not arising from transactions in the ordinary course of business.
(y)
Internal Control over Financial Reporting; Sarbanes-Oxley Matters
. The Company maintains a system of internal accounting controls
which are designed to provide reasonable assurance that (i) transactions
B - 6
are executed in accordance with management’s general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity
with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for
assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. The Company’s internal controls over financial reporting are designed 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 and the Company is not aware of any material weakness in its internal controls over
financial reporting. The Company maintains “disclosure controls and procedures” (as such term is defined in Rule
13a-15(e)
under the Exchange Act).
(z)
Foreign Corrupt Practices
. The Company has not nor, to the knowledge of the Company, has any director, officer, agent, or employee
of the Company taken any action, directly or indirectly, that would result in a violation by such persons of the Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder (the “
FCPA
”), including,
without limitation, making use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay or authorization of the payment of any money, or other property, gift, promise to give,
or authorization of the giving of anything of value to any “foreign official” (as such term is defined in the FCPA) or any foreign political party or official thereof or any candidate for foreign political office, in contravention of the
FCPA; and the Company.
(aa)
Labor
. No labor problem or dispute with the employees of the Company exists or, to the knowledge of
the Company, is threatened, and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its principal suppliers or contractors, that would have a Material Adverse Effect, whether or not arising from
transactions in the ordinary course of business.
(bb)
ERISA
. None of the following events has occurred or exists: (i) a
failure to fulfill the obligations, if any, under the minimum funding standards of Section 302 of the United States Employee Retirement Income Security Act of 1974, as amended (“
ERISA
”), and the regulations and published
interpretations thereunder with respect to a Plan that is required to be funded, determined without regard to any waiver of such obligations or extension of any amortization period; (ii) an audit or investigation by the Internal Revenue
Service, the U.S. Department of Labor, the Pension Benefit Guaranty Corporation or any other federal or state governmental agency or any foreign regulatory agency with respect to the employment or compensation of employees by any of the Company that
could have a Material Adverse Effect; (iii) any breach of any contractual obligation, or any violation of law or applicable qualification standards, with respect to the employment or compensation of employees by the Company that would
reasonably be expected to have a Material Adverse Effect. None of the following events has occurred or is reasonably likely to occur: (i) a material increase in the aggregate amount of contributions required to be made to all Plans in the
current fiscal year of the Company compared to the amount of such contributions made in the most recently completed fiscal year of the Company except as a result of the Otic Acquisition; (ii) a material increase in the “accumulated
post-retirement benefit obligations” (within the meaning of Statement of Financial Accounting Standards 106) of the Company compared to the amount of such obligations in the most recently completed fiscal year of the Company; (iii) any
event or condition giving rise to a liability under Title IV of ERISA that could have a Material Adverse Effect; or (iv) the filing of a claim by one or more employees or former employees of the Company related to their employment that could
have a Material Adverse Effect. For purposes of this paragraph, the term “Plan” means a plan (within the meaning of Section 3(3) of ERISA) subject to Title IV of ERISA with respect to which the Company may have any liability.
(cc)
Environmental Laws
. The Company (i) is in compliance with any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants (“
Environmental Laws
”), (ii) has received and is in compliance with all
permits, licenses or other approvals required of them under applicable Environmental Laws to conduct its business and (iii) has not received notice of any actual or potential liability under any environmental law, except where such
non-compliance
with Environmental Laws, failure to receive
B - 7
required permits, licenses or other approvals, or liability would not, individually or in the aggregate, have a Material Adverse Effect, whether or not arising from transactions in the ordinary
course of business. The Company has not been named as a “potentially responsible party” under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended.
(dd)
Money Laundering Laws
. The operations of the Company are and have been conducted at all times in compliance in all material
respects with applicable money laundering statutes and the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any governmental agency (collectively, the “
Money
Laundering Laws
”) and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company with respect to the Money Laundering Laws is pending or, to the knowledge of the
Company, threatened.
(ee)
OFAC
. Neither the Company nor, to the knowledge of the Company, any director, officer, agent or employee
of the Company (i) is currently subject to any sanctions administered or imposed by the United States (including any administered or enforced by the Office of Foreign Assets Control of the U.S. Treasury Department, the U.S. Department of State,
or the Bureau of Industry and Security of the U.S. Department of Commerce), the United Nations Security Council, the European Union, or the United Kingdom (including sanctions administered or controlled by Her Majesty’s Treasury) (such
sanctions, collectively, “
Sanctions
” and such persons, collectively, “
Sanction Persons
”) or (ii) will, directly or indirectly, use the proceeds of this offering, or lend, contribute or otherwise make available
such proceeds to any subsidiary, joint venture partner or other person in any manner that will result in a violation of any economic Sanctions by, or could result in the imposition of Sanctions against, any person (including any person participating
in the offering, whether as underwriter, advisor, Purchaser or otherwise). Neither the Company nor, to the knowledge of the Company, any director, officer, agent, or employee of the Company is a person that is, or is 50% or more owned or otherwise
controlled by a person that is: (x) the subject of any Sanctions; or (y) located, organized or resident in a country or territory that is, or whose government is, the subject of Sanctions that broadly prohibit dealings with that country or
territory (currently, Cuba, Iran, North Korea, Sudan, and Syria) (collectively, “
Sanctioned Countries
” and each, a “
Sanctioned Country
”). Except as has been disclosed to the Purchasers, or is not material to the
analysis under any Sanctions, the Company has not engaged in any dealings or transactions with or for the benefit of a Sanctioned Person, or with or in a Sanctioned Country, in the preceding three years, nor does the Company have any plans to
increase its dealings or transactions with Sanctioned Persons or with or in Sanctioned Countries.
(ff)
Compliance in Clinical
Trials
. The clinical studies and tests conducted by the Company or on behalf of the Company, have been and, if still pending, are being conducted in all material respects pursuant to all Applicable Laws and Authorizations; the descriptions of
the results of such clinical studies and tests contained in the SEC Documents are accurate in all material respects; the Company is not aware of any clinical studies or tests, the results of which the Company believes reasonably call into question
the research, nonclinical or clinical study or test results described or referred to in the SEC Documents when viewed in the context in which such results are described; and the Company has not received any written notices or correspondence from any
governmental entity requiring the termination, suspension or material modification of any clinical study or test conducted by or on behalf of the Company.
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5.
|
REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PURCHASERS.
|
(a) Each Purchaser,
severally and not jointly, represents and warrants to and covenants with the Company that:
i. Such Purchaser (if an entity) is a validly
existing corporation, limited partnership or limited liability company and has all requisite corporate, partnership or limited liability company power and authority to enter into and consummate the transactions contemplated by the Transaction
Documents and to carry out its obligations hereunder and thereunder, and to invest in the Shares pursuant to this Agreement.
B - 8
ii. Such Purchaser acknowledges that it can bear the economic risk and complete loss of its
investment in the Shares and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment contemplated hereby.
iii. Such Purchaser has had an opportunity to receive, review and understand all information related to the Company requested by it and to
ask questions of and receive answers from the Company regarding the Company, its business and the terms and conditions of the offering of the Shares, and has conducted and completed its own independent due diligence. Such Purchaser acknowledges that
the Company has made available the SEC Documents. Based on the information such Purchaser has deemed appropriate, and without reliance upon any placement agent, it has independently made its own analysis and decision to enter into the Transaction
Documents. Such Purchaser is relying exclusively on its own sources of information, investment analysis and due diligence (including professional advice it deems appropriate) with respect to the execution, delivery and performance of the Transaction
Documents, the Shares and the business, condition (financial and otherwise), management, operations, properties and prospects of the Company, including but not limited to all business, legal, regulatory, accounting, credit and tax matters.
iv. The Shares to be received by such Purchaser hereunder will be acquired for such Purchaser’s own account, not as nominee or agent,
and not with a view to the resale or distribution of any part thereof in violation of the Securities Act.
v. Such Purchaser has no
present intention of selling, granting any participation in, or otherwise distributing the same in violation of the Securities Act without prejudice, however, to such Purchaser’s right at all times to sell or otherwise dispose of all or any
part of such Shares in compliance with applicable federal and state securities laws.
vi. Such Purchaser is not a broker-dealer
registered with the Commission under the Exchange Act or an entity engaged in a business that would require it to be so registered, nor is the Purchaser affiliated with a registered broker dealer. Such Purchaser is not party to any agreement for
distribution of any of the Shares.
vii. Such Purchaser understands that the Shares are characterized as “restricted
securities” under the U.S. federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold without
registration under the Securities Act only in certain limited circumstances. Purchaser will not, directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of (or solicit any offers to buy, purchase or otherwise acquire or take a
pledge of) any of the securities purchased hereunder except in compliance with the Securities Act, applicable blue sky laws, and the rules and regulations promulgated thereunder.
viii. Such Purchaser is an “accredited investor” within the meaning of Rule 501(a) under the Securities Act.
ix. Such Purchaser has determined based on its own independent review and such professional advice as it deems appropriate that its purchase
of the Shares and participation in the transactions contemplated by the Transaction Documents (i) are fully consistent with its financial needs, objectives and condition, (ii) comply and are fully consistent with all investment policies,
guidelines and other restrictions applicable to such Purchaser, (iii) have been duly authorized and approved by all necessary action, (iv) do not and will not violate or constitute a default under such Purchaser’s charter,
by-laws
or other constituent document or under any law, rule, regulation, agreement or other obligation by which such Purchaser is bound and (v) are a fit, proper and suitable investment for such Purchaser,
notwithstanding the substantial risks inherent in investing in or holding the Shares.
x. The execution, delivery and performance by such
Purchaser of the Transaction Documents to which such Purchaser is a party have been duly authorized and each has been duly executed and when delivered
B - 9
will constitute the valid and legally binding obligation of such Purchaser, enforceable against such Purchaser in accordance with their respective terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of general applicability, relating to or affecting creditors’ rights generally.
xi. Such Purchaser shall have completed or caused to be completed and delivered to the Company at no later than the Closing Date, the
Purchaser Questionnaire and the Selling Stockholder Questionnaire for use in preparation of the registration statement meeting the requirements set forth in the Registration Rights Agreement and covering the resale by the Purchasers of the
Registrable Securities (as defined in the Registration Rights Agreement) (the “
Registration Statement
”), and the answers to the Purchaser Questionnaire and the Selling Stockholder Questionnaire are true and correct as of the date of
this Agreement and will be true and correct as of the Closing and the effective date of the Registration Statement;
provided
, that the Purchasers shall be entitled to update the information in the Selling Stockholder Questionnaire by
providing notice thereof to the Company before the effective date of such Registration Statement.
xii. Such Purchaser understands that
no United States federal or state agency, or similar agency of any other country, has reviewed, approved, passed upon, or made any recommendation or endorsement of the Company or the purchase of the Shares.
xiii. Such Purchaser has no present intent to effect a “change of control” of the Company as such term is understood under the
rules promulgated pursuant to Section 13(d) of the Exchange Act.
xiv. Such Purchaser has not taken any of the actions set forth in, and
is not subject to, the disqualification provisions of Rule 506(d)(1) of the Securities Act.
xv. Such Purchaser did not learn of the
investment in the Shares as a result of any general solicitation or general advertising.
xvi. Such Purchaser’s residence (if an
individual) or offices in which its investment decision with respect to the Shares was made (if an entity) are located at the address immediately below such Purchaser’s name on its signature page hereto.
xvii. Such Purchaser (including any person controlling, controlled by, or under common control with such Purchaser, as the term
“control” is defined pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and its implementing regulations (the “
HSR Act
”)) in connection with the consummation of the transactions contemplated
by this Agreement will not be required to and will not complete a filing with the U.S. government pursuant to the HSR Act.
(b) Other than
consummating the transactions contemplated hereunder, such Purchaser has not, nor has any person acting on behalf of or pursuant to any understanding with such Purchaser, directly or indirectly executed any purchases or sales, including all
“short sales” as defined in Rule 200 of Regulation SHO under the Exchange Act (but shall not be deemed to include the location and/or reservation of borrowable shares of Common Stock) (“
Short Sales
”), of the securities of
the Company during the period commencing as of the time that such Purchaser was first contacted by the Company or any other person regarding the transactions contemplated hereby and ending immediately prior to the Effective Date. Notwithstanding the
foregoing, in the case of a Purchaser that is a multi-managed investment vehicle whereby separate portfolio managers manage separate portions of such Purchaser’s assets and the portfolio managers have no direct knowledge of the investment
decisions made by the portfolio managers managing other portions of such Purchaser’s assets, the representation set forth above shall only apply with respect to the portion of assets managed by the portfolio manager that made the investment
decision to purchase the Shares covered by this Agreement. Other than to other persons party to this Agreement, such Purchaser has maintained the confidentiality of all disclosures made to it in connection with this transaction (including the
existence and terms of this transaction). Notwithstanding the foregoing, for avoidance of doubt, nothing contained herein shall constitute a representation or warranty, or
B - 10
preclude any actions, with respect to the identification of the availability of, or securing of, available shares to borrow in order to effect Short Sales or similar transactions in the future.
(c) Purchaser understands that nothing in this Agreement or any other materials presented to Purchaser in connection with the purchase
and sale of the Shares constitutes legal, tax or investment advice. Purchaser has consulted such legal, tax and investment advisors as it, in its sole discretion, has deemed necessary or appropriate in connection with its purchase of the Shares.
(d)
Legends.
(a)
Purchaser understands that, until such time as the Shares have been sold pursuant to the Registration Statement or the Shares may be sold pursuant to Rule 144 under the Securities Act (“
Rule 144
”) without any restriction as to the
number of securities as of a particular date that can then be immediately sold, the book entry notations evidencing the Shares may bear one or more legends in substantially the following form and substance:
“THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY
OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE
REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION WHICH IS EXEMPT FROM, OR NOT SUBJECT TO,
SUCH REGISTRATION, IN EACH CASE IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS, AND IN THE CASE OF A TRANSACTION EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION, UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO
IT THAT SUCH TRANSACTION DOES NOT REQUIRE REGISTRATION UNDER THE SECURITIES ACT AND SUCH OTHER APPLICABLE LAWS.”
In addition, book
entry notations representing the Shares may contain:
(i) Any legend required by the laws of the State of California, including any legend
required by the California Department of Corporations.
(ii) Any legend required by the blue sky laws of any other state to the extent
such laws are applicable to the sale of such Shares hereunder.
(iii) A legend regarding affiliate status of the Purchasers set forth in
Schedule 1 hereto, in the form included therein.
(b) The Company agrees that at such time as such legend is no longer required under this
section, it will, no later than three business days following the delivery by a Purchaser to the Company or the Company’s transfer agent of a certificate representing Shares, and if such Shares are certificated, issued with a restrictive
legend, together with such representations and covenants of such Purchaser or such Purchaser’s executing broker as the Company may reasonably require in connection therewith, deliver or cause to be delivered to such Purchaser a book entry
position representing such shares that is free from any legend referring to the Securities Act. The Company shall not make any notation on its records or give instructions to any transfer agent of the Company that enlarge the restrictions on
transfer set forth in this section. To the extent that certificates or book entry positions are issued representing the Shares, such certificates or book entry positions subject to legend removal hereunder shall be transmitted by the transfer agent
of the Company to the Purchasers by crediting the account of such Purchaser’s prime broker with the Depository Trust Company (“
DTC
”). All costs and expenses related to the removal of the legends and the reissuance of any Shares
shall be borne by the Company.
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(c) The restrictive legend set forth in this section above shall be removed and the Company shall
issue a certificate or book entry position without such restrictive legend or any other restrictive legend to the holder of the applicable shares upon which it is stamped or issue to such holder by electronic delivery with the applicable balance
account at DTC or in physical certificated shares, if appropriate, if (i) such Shares are registered for resale under the Securities Act (
provided
that, if the Purchaser is selling pursuant to an effective registration statement
registering the Shares for resale, the Purchaser agrees to only sell such Shares during such time that such registration statement is effective and such Purchaser is not aware or has not been notified by the Company that such registration statement
has been withdrawn or suspended, and only as permitted by such registration statement); (ii) such Shares are sold or transferred pursuant to Rule 144 (if the transferor is not an affiliate of the Company); or (iii) such Shares are eligible for
sale without the requirement for the Company to be in compliance with the current public information required under Rule 144 as to such securities and without volume or
manner-of-sale
restrictions. Subject to receipt of such representations, and covenants as are contemplated hereby, following the earlier of (i) the effective date
of the Registration Statement or (ii) Rule 144 becoming available for the resale of the Shares, without the requirement for the Company to be in compliance with the current public information required under Rule 144 as to the Shares and without
volume or
manner-of-sale
restrictions, the Company shall issue to the Company’s transfer agent the instructions with respect to legend removal consistent with this
section. Any fees (with respect to the transfer agent, the Company’s counsel or otherwise) associated with the issuance of such opinion or the removal of such legend shall be borne by the Company.
(e)
Restricted Shares
. Purchaser understands that the Shares are characterized as “restricted securities” under the federal
securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such Shares may be resold without registration under the Securities Act only in
certain limited circumstances. In this connection, such Purchaser represents that it is familiar with Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Securities Act.
(f)
Exculpation Among Purchasers
. Purchaser acknowledges that it is not relying upon any other Purchaser, or any officer, director,
employee, agent, partner, member or affiliate of any such other Purchaser, in making its investment or decision to invest in the Company. Purchaser agrees that neither any Purchaser nor the respective controlling Persons, officers, directors,
partners, agents, or employees of any Purchaser shall be liable to any other Purchaser for any action heretofore taken or omitted to be taken by any of them in connection with the purchase of the Shares.
|
6.
|
CONDITIONS TO COMPANY’S OBLIGATIONS AT THE CLOSING.
|
The Company’s obligation
to complete the sale and issuance of the Shares and deliver Shares to each Purchaser, individually, as set forth in the Schedule of Purchasers at the Closing shall be subject to the fulfillment of the following conditions to the extent not waived by
the Company:
(a)
Receipt of Payment
. The Company shall have received payment, by wire transfer of immediately available funds, in
the full amount of the purchase price for the number of Shares being purchased by such Purchaser at the Closing as set forth in the Schedule of Purchasers.
(b)
Representations and Warranties
. The representations and warranties made by the Purchasers in
Section 5
hereof shall be
true and correct in all material respects when made, and shall be true and correct in all material respects on the Closing Date with the same force and effect as if they had been made on and as of said date.
6.3
Performance
. The Purchasers shall have performed in all material respects all obligations and covenants herein required to be
performed by them on or prior to the Closing Date.
(c)
Receipt of Executed Documents
. Each of the Purchasers shall have executed
and delivered to the Company the Registration Rights Agreement, the Purchaser Questionnaire and the Selling Stockholder Questionnaire.
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(d)
Share Purchase Agreement
. The Company and the other parties thereto shall have
executed and delivered to the Purchasers copies of the Share Purchase Agreement.
(e)
Otic Acquisition
. The Otic Acquisition shall
have been completed pursuant to the Otic Share Purchase Agreement.
|
7.
|
CONDITIONS TO PURCHASERS’ OBLIGATIONS AT THE CLOSING.
|
Each Purchaser’s
obligation to accept delivery of the Shares and to pay for the Shares shall be subject to the fulfillment of the following conditions to the extent not waived by such Purchaser:
(a)
Performance
. The Company shall have performed in all material respects all obligations and covenants herein required to be
performed by it on or prior to the Closing Date.
(b)
Receipt of Executed Registration Rights Agreement.
The Company shall
have executed and delivered to the Purchasers the Registration Rights Agreement.
(c)
Legal Opinion
. The Purchasers shall have
received an opinion, dated as of the Closing Date, in form and substance reasonably acceptable to the Purchasers.
(d)
Certificate
.
Each Purchaser shall have received a certificate signed by the Chief Executive Officer or the Chief Financial Officer to the effect the Company has satisfied in all material respects all of the conditions set forth in this
Section 7
.
(e)
Good Standing
. The Company is validly existing as a corporation in good standing under the laws of Delaware.
(f)
Nasdaq Approval
. The Company shall have filed with NASDAQ a Notification Form: Listing of Additional Shares for the listing of the
Shares, and, if required, shall have obtained stockholder approval of the issuance of the Shares hereunder
(g)
Judgments
. No
judgment, writ, order, injunction, award or decree of or by any court, or judge, justice or magistrate, including any bankruptcy court or judge, or any order of or by any governmental authority, shall have been issued, and no action or proceeding
shall have been instituted by any governmental authority, enjoining or preventing the consummation of the transactions contemplated hereby.
(h)
Share Purchase Agreement
.
The Company shall have executed and delivered to the Purchasers copies of the Share Purchase
Agreement.
(i)
Stop Orders
. No stop order or suspension of trading shall have been imposed by the NASDAQ Stock Market, the
Commission or any other governmental regulatory body with respect to public trading in the Common Stock (any such order or suspension, a “
Suspension
”).
(j)
Otic Acquisition
. The Otic Acquisition shall have been completed pursuant to the Otic Share Purchase Agreement.
|
8.
|
TERMINATION OF OBLIGATIONS TO EFFECT CLOSING; EFFECTS.
|
(a) This Agreement may be
terminated, on a
Purchaser-by-Purchaser
basis, as follows:
i. upon the mutual written consent of the Company and such Purchaser;
ii. by the Company if any of the conditions set forth in
Sections
6
shall have become incapable of fulfillment, and
shall not have been waived by the Company or satisfied by , 2017; or
B - 13
iii. by such Purchaser if the Otic Share Purchase Agreement shall have been terminated without
the Company having consummated the Otic Acquisition;
Provided
,
however
, that, except in the case of clause (b) above, the party
seeking to terminate its obligation to effect the Closing shall not then be in breach of any of its representations, warranties, covenants or agreements contained in this Agreement or the other Transaction Documents if such breach has resulted in
the circumstances giving rise to such party’s seeking to terminate its obligation to effect the Closing.
(b) If this Agreement is
terminated by either the Company or a Purchaser pursuant to the provisions of
Section 8(a)
, this Agreement with respect to the Company and such Purchaser shall forthwith become void and there shall be no further obligations or liability on
the part of the Company or such Purchaser or their respective stockholders, directors, officers, employees, agents or representatives, except for the provisions of
Sections 10.4
with respect to the Confidentiality Obligations (as defined
below),
12
and
13
, which shall survive any termination of this Agreement;
provided
, that nothing in this
Section 8
shall be deemed (i) to release any party from any liability for any knowing or intentional
breach by such party of the terms and provisions of this Agreement or the other Transaction Documents, or (ii) to impair the right of any party to compel specific performance by any other party of its obligations under this Agreement or the
other Transaction Documents, in either case, which may have arisen prior to termination of this Agreement.
The Company and each Purchaser (severally and not jointly) hereby
represent that there are no other brokers or finders entitled to compensation, commissions, placement agent’s fees or similar payments in connection with the sale of the Shares, and shall indemnify each other for any such fees for which they
are responsible.
|
10.
|
ADDITIONAL AGREEMENTS OF THE PARTIES.
|
(a)
NASDAQ Listing.
The Company will use
commercially reasonable efforts to continue the listing and trading of its Common Stock on NASDAQ and, in accordance, therewith, will use commercially reasonable efforts to comply in all respects with the Company’s reporting, filing and other
obligations under the bylaws or rules of such market or exchange, as applicable.
(b)
Termination of Covenants
. The provisions of
Section 10.1
shall terminate and be of no further force and effect on the date on which the Company’s obligations under the Registration Rights Agreement to register or maintain the effectiveness of any registration covering the
Registrable Securities (as such term is defined in the Registration Rights Agreement) shall terminate.
(c)
Integration.
The
Company shall not, and shall use its commercially reasonable efforts to ensure that no affiliate of the Company shall, sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in
Section 2
of the Securities Act) that will be integrated with the offer or sale of the Shares in a manner that would require the registration under the Securities Act of the sale of the Shares to the Purchasers, or that will be
integrated with the offer or sale of the Shares for purposes of the rules and regulations of any trading market such that it would require stockholder approval prior to the closing of such other transaction unless stockholder approval is obtained
before the closing of such subsequent transaction.
(d)
Short Sales and Confidentiality After the Date Hereof
. Each Purchaser
covenants that neither it nor any affiliates acting on its behalf or pursuant to any understanding with it will execute any Short Sales during the period from the date hereof until the earlier of such time as (i) after the transactions
contemplated by this Agreement are first publicly announced or (ii) this Agreement is terminated in full. Except (x) as required by applicable law or the listing rules of any applicable national or regional securities exchange, (y) as
required to be disclosed in filings or other submissions to any court, regulatory body, administrative agency, governmental
B - 14
body, arbitrator or other legal authority having jurisdiction over a party hereto made to obtain necessary consents, approvals or filings, or (z) as provided by the terms and provisions of
the existing confidentiality and
non-use
obligations of the parties hereto (including the existence and terms of this transaction) (such obligations, the “
Confidentiality Obligations
”). Each
Purchaser understands and acknowledges that the Commission currently takes the position that coverage of short sales of shares of the Common Stock “against the box” prior to effectiveness of a resale registration statement with securities
included in such registration statement would be a violation of Section 5 of the Securities Act, as set forth in Item 239.10 of the Securities Act Rules Compliance and Disclosure Interpretations compiled by the Office of Chief Counsel,
Division of Corporation Finance.
(e)
Securities Laws Disclosure; Publicity
. By 5:00 P.M., New York City time, on the second
trading day immediately following the Effective Date, the Company shall issue a press release disclosing the material terms of the transactions contemplated hereby. On or before 9:00 A.M., New York City time, on the third trading day
immediately following the execution of this Agreement, the Company will file a Current Report on
Form 8-K
(the “
8-K
”) with the Commission
describing the material terms of the Transaction Documents (and including as exhibits to such Current Report on
Form 8-K
the agreements required to be filed in connection therewith). Notwithstanding the
foregoing, the Company shall not publicly disclose the name of any Purchaser, or include the name of any Purchaser in any public filing with the Commission or any regulatory agency or NASDAQ, without the prior written consent of such Purchaser,
which consent shall not be unreasonably withheld, conditioned or delayed, except: (a) as required by federal securities law in connection with (i) any registration statement contemplated by the Registration Rights Agreement, (ii) the
filing of a proxy statement seeking stockholder approval of the issuance and sale of the Shares and (iii) the filing of final Transaction Documents with the Commission; and (b) as otherwise required by law or Nasdaq regulations , provided
that to the extent disclosure is permitted by law or NASDAQ regulations, the Company shall provide the Purchaser with prior notice of such disclosure under this clause (b). As of the time of the filing of the
8-K,
the Company shall not be aware that any Purchaser shall be in possession of any material,
non-public
information received from the Company, any subsidiary of the
Company or any of their respective officers, directors, employees or agents, pursuant to the transactions contemplated by this Agreement that is not disclosed in the
8-K,
press release or other disclosure by
the Company that complies with the requirements of Regulation FD.
(a)
Indemnification by the Company
. The Company agrees to
indemnify and hold harmless each of the Purchasers and each Person, if any, who controls any Purchaser within the meaning of the Securities Act (each, an “
Indemnified Party
”), against any losses, claims, damages, liabilities or
expenses, joint or several, to which such Indemnified Party may become subject under the Securities Act, the Exchange Act, or any other federal or state statutory law or regulation, or at common law (including in settlement of any litigation, if
such settlement is effected with the written consent of the Company), insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof as contemplated below) arise out of or are based in whole or in part on the
inaccuracy in the representations and warranties of the Company contained in this Agreement or the failure of the Company to perform its obligations hereunder, and will reimburse each Indemnified Party for legal and other expenses reasonably
incurred as such expenses are reasonably incurred by such Indemnified Party in connection with investigating, defending, settling, compromising or paying such loss, claim, damage, liability, expense or action;
provided
,
however
, that
the Company will not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon (i) the failure of such Indemnified Party to comply with the covenants and agreements contained
in
Sections 5
and
4
above respecting sale of the Shares, or (ii) the inaccuracy of any representations made by such Indemnified Party herein.
(b)
Indemnification by
Purchasers
. Each Purchaser shall severally, and not jointly, indemnify and hold harmless the other
Purchasers and the Company, each of its directors, and each Person, if any, who controls the Company within the meaning of the Securities Act, against any losses, claims, damages, liabilities or expenses to which the Company, each of its directors
or each of its controlling Persons may become subject, under the Securities Act, the Exchange Act, or any other federal or state statutory law or regulation, or at
B - 15
common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of such Purchaser) insofar as such losses, claims, damages, liabilities
or expenses (or actions in respect thereof as contemplated below) arise out of or are based upon (i) any failure by such Purchaser to comply with the covenants and agreements contained in Sections 5 and 4 above respecting the sale of the Shares
unless such failure by such Purchaser is directly caused by the Company’s failure to provide written notice of a Suspension to such Purchaser or (ii) the inaccuracy of any representation made by such Purchaser herein, in each case to the
extent, and will reimburse the Company, each of its directors, and each of its controlling Persons for any legal and other expense reasonably incurred, as such expenses are reasonably incurred by the Company, each of its directors, and each of its
controlling Persons in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action. No Purchaser shall be liable for the indemnification obligations of any other Purchaser.
All notices, requests, consents and other communications hereunder shall be
in writing, shall be sent by confirmed electronic mail, or mailed by first-class registered or certified airmail, or nationally recognized overnight express courier, postage prepaid, and shall be deemed given when so sent in the case of electronic
mail transmission, or when so received in the case of mail or courier, and addressed as follows:
if to the Company, to:
Tokai Pharmaceuticals, Inc.
255 State Street, 6
th
Floor
Boston, MA 02109
Attention:
[Chief Executive Officer]
E-Mail:
with copies (which shall not constitute notice) to:
Wilmer Cutler Pickering Hale and Dorr LLP
60 State Street
Boston, MA
02109
Attn: Stuart M. Falber, Esq.
Attn: Hal J. Leibowitz, Esq.
Otic Pharma, Ltd.
Gregory J.
Flesher
Chief Executive Officer
19900 MacArthur Blvd., Suite 550
Irvine, California 92612
Gibson, Dunn & Crutcher, LLP
555 Mission Street, Suite 3000
San Francisco, CA 94105
Attn:
Ryan A. Murr
or to such other person at such other place as the Company shall designate to the Purchasers in writing; and
if to the Purchasers, at the address as set forth at the end of this Agreement, or at such other address or addresses as may have been
furnished to the Company in writing.
(a)
Waivers and Amendments
. Neither this Agreement nor any
provision hereof may be changed, waived, discharged, terminated, modified or amended with respect to the Company and a Purchaser only with the written consent of the Company and such Purchaser.
B - 16
(b)
Headings
. The headings of the various sections of this Agreement have been inserted
for convenience of reference only and shall not be deemed to be part of this Agreement.
(c)
Severability
. In case any provision
contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby.
(d)
Replacement of Shares
. If the Shares are certificated and any certificate or instrument evidencing any Shares is mutilated, lost,
stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation thereof, or in lieu of and substitution therefor, a new certificate or instrument, but only upon receipt of evidence reasonably
satisfactory to the Company and the Company’s transfer agent of such loss, theft or destruction and the execution by the holder thereof of a customary lost certificate affidavit of that fact and an agreement to indemnify and hold harmless the
Company and the Company’s transfer agent for any losses in connection therewith or, if required by the transfer agent, a bond in such form and amount as is required by the transfer agent. The applicants for a new certificate or instrument under
such circumstances shall also pay any reasonable third-party costs associated with the issuance of such replacement Shares. If a replacement certificate or instrument evidencing any Shares is requested due to a mutilation thereof, the Company may
require delivery of such mutilated certificate or instrument as a condition precedent to any issuance of a replacement.
(e)
Independent Nature of Purchasers’ Obligations and Rights.
The obligations of each Purchaser under this Agreement are several and not joint with the obligations of any other Purchaser, and no Purchaser shall be responsible in any way for
the performance of the obligations of any other Purchaser under this Agreement. Nothing contained herein and no action taken by any Purchaser pursuant hereto, shall be deemed to constitute the Purchaser as a partnership, an association, a joint
venture or any other kind of entity, or create a presumption that the Purchasers are in any way acting in concert or as a group, or are deemed affiliates (as such term is defined under the Exchange Act) with respect to such obligations or the
transactions contemplated by this Agreement. Each Purchaser shall be entitled to independently protect and enforce its rights, including without limitation the rights arising out of this Agreement, and it shall not be necessary for any other
Purchaser to be joined as an additional party in any proceeding for such purpose.
(f)
Governing Law
. All questions concerning the
construction, validity, enforcement and interpretation of the Transaction Documents shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law
thereof. Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement and any other Transaction Documents (whether brought against a party hereto or its
respective affiliates, directors, officers, shareholders, employees or agents) shall be commenced exclusively in the state and federal courts sitting in New York, New York. Each party hereby irrevocably submits to the exclusive jurisdiction of the
state and federal courts sitting in the City and County of New York for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of
any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is
improper or is an inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or
certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof.
Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law.
(g)
Counterparts
. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one instrument, and shall
B - 17
become effective when one or more counterparts have been signed by each party hereto and delivered to the other parties. In the event that any signature is delivered by facsimile transmission or
by
e-mail
delivery of a “.pdf” format data file, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) the same with the
same force and effect as if such facsimile of “.pdf” signature were the original thereof.
(h)
Successors and Assigns.
Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto; provided, however, that a Purchaser may
not assign its rights and delegate its duties hereunder in whole or in part to an affiliate or to a third party acquiring some or all of its Shares in a transaction complying with applicable securities laws without the prior written consent of the
Company, provided such assignee agrees in writing to be bound by the provisions hereof that apply to Purchasers.
(i)
Entire
Agreement
. This Agreement and other documents delivered pursuant hereto, including the exhibit and the Schedule of Exceptions, constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and
thereof.
(j)
Payment of Fees and Expenses
. Each of the Company and the Purchasers shall bear its own expenses and legal fees
incurred on its behalf with respect to this Agreement and the transactions contemplated hereby. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable
attorney’s fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled.
(k)
Survival
. The representations, warranties, covenants and agreements made in this Agreement shall survive any investigation made by the Company or the Purchasers and the Closing.
[signature pages follow]
B - 18
IN WITNESS WHEREOF
, the parties hereto have caused this Agreement to be executed by their
duly authorized representatives as of the day and year first above written.
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TOKAI PHARMACEUTICALS, INC.
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By:
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Name:
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Title:
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B - 19
IN WITNESS WHEREOF
, the parties hereto have caused this Agreement to be executed by their
duly authorized representatives as of the day and year first above written.
B - 20
EXHIBIT A
SCHEDULE OF PURCHASERS
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Name and Address
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Number of
Shares
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Aggregate
Purchase Price of
Shares
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TOTAL
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B - 21
APPENDIX I
FORM OF PURCHASER QUESTIONNAIRE
B - 22
APPENDIX II
FORM OF SELLING STOCKHOLDER QUESTIONNAIRE
B - 23
APPENDIX III
FORM OF REGISTRATION RIGHTS AGREEMENT
B - 24
ANNEX C: FORM OF CERTIFICATE OF AMENDMENT OF THE RESTATED
CERTIFICATE OF INCORPORATION OF TOKAI PHARMACEUTICALS, INC.
(REGARDING THE REVERSE STOCK SPLIT)
Tokai Pharmaceuticals, Inc. (the “Corporation”), a corporation organized and existing under and by virtue of the provisions of the
General Corporation Law of the State of Delaware (the “General Corporation Law”), does hereby certify as follows:
1. The current
name of the Corporation is Tokai Pharmaceuticals, Inc.
2. The original certificate of incorporation of the Corporation was filed with the
Secretary of State of the State of Delaware on March 26, 2004 and was amended and restated on April 27, 2004, May 30, 2007, October 14, 2008, May 6, 2009, November 15, 2010, September 9, 2011 and May 10, 2013,
further amended on February 27, 2014, April 17, 2014 and August 29, 2014 and amended and restated on September 22, 2014.
3. The Board of Directors of the Corporation duly adopted resolutions pursuant to Section 242 of the General Corporation Law proposing
this Amendment of the Corporation’s Restated Certificate of Incorporation and declaring the advisability of this Amendment of the Restated Certificate of Incorporation and authorizing the appropriate officers of the Corporation to solicit the
consent of the stockholders therefor, which resolution setting forth the proposed amendment is as follows:
RESOLVED, that the first
paragraph of Article FOURTH of the Restated Certificate of Incorporation of the Corporation be amended to read in its entirety as follows:
Effective upon the filing of this Certificate of Amendment to the Restated Certificate of Incorporation with the Secretary of State of the
State of Delaware (the “Effective Time”), a
one-for-[ ]
reverse stock split of the Corporation’s common stock, $0.001 par value per
share (the “Common Stock”), shall become effective, pursuant to which each [ ] shares of Common Stock issued or outstanding (including treasury shares) immediately prior to the Effective Time
shall be reclassified and combined into one validly issued, fully paid and nonassessable share of Common Stock automatically and without any action by the holder thereof upon the Effective Time and shall represent one share of Common Stock from and
after the Effective Time (such reclassification and combination of shares, the “Reverse Stock Split”). The par value of the Common Stock following the Reverse Stock Split shall remain at $0.001 par value per share. No fractional shares of
Common Stock shall be issued as a result of the Reverse Stock Split and, in lieu thereof, upon surrender after the Effective Time of a certificate which formerly represented shares of Common Stock that were issued and outstanding immediately prior
to the Effective Time, any person who would otherwise be entitled to a fractional share of Common Stock as a result of the Reverse Stock Split, following the Effective Time, shall be entitled to receive a cash payment equal to the fraction of a
share of Common Stock to which such holder would otherwise be entitled multiplied by the fair value per share of the Common Stock immediately prior to the Effective Time as determined by the Board of Directors of the Corporation.
Each stock certificate that, immediately prior to the Effective Time, represented shares of Common Stock that were issued and outstanding
immediately prior to the Effective Time shall, from and after the Effective Time, automatically and without the necessity of presenting the same for exchange, represent that number of whole shares of Common Stock after the Effective Time into which
the shares formerly represented by such certificate have been reclassified (as well as the right to receive cash in lieu of fractional shares of Common Stock after the Effective Time); provided, however, that each person of record holding a
certificate that represented shares of Common Stock that were issued and outstanding immediately prior to the Effective Time shall receive, upon surrender of such certificate, a new certificate evidencing and representing the number of whole shares
of Common Stock after the Effective Time into which the shares of Common Stock formerly represented by such certificate shall have been reclassified.
The total number of shares of all classes of stock which the Corporation shall have authority to issue is 205,000,000 shares, consisting of
(i) 200,000,000 shares of Common Stock, $0.001 par value per share (“Common Stock”), and (ii) 5,000,000 shares of Preferred Stock, $0.001 par value per share (“Preferred Stock”).
C - 1
4: This Certificate of Amendment of the Restated Certificate of Incorporation has been duly
adopted by the stockholders of the Corporation in accordance with the provisions of Section 242 of the Delaware General Corporation Law.
IN WITNESS WHEREOF
, this Corporation has caused this Certificate of Amendment of the Amended and Restated Certificate of Incorporation
to be signed by its President and Chief Executive Officer this day of , 2017.
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Jodie P. Morrison
President and Chief Executive
Officer
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C - 2
ANNEX D: OPINION OF WEDBUSH SECURITIES INC.
Wedbush Securities Inc.
Two Embarcadero Center
Suite 600
San Francisco, CA 94111
December 22, 2016
Board of Directors
Tokai Pharmaceuticals, Inc.
255 State Street, 6th Floor
Boston, MA 02109
Members of the Board:
We understand that Tokai Pharmaceuticals, Inc. (“Tokai”) proposes to enter into a Share Purchase Agreement (the “Purchase
Agreement”) by and among Tokai, OticPharma, Ltd. (“Otic”), the shareholders of Otic (each a “Seller” and collectively, the “Sellers”) and the representative of the Sellers, pursuant to which, among other things,
the Sellers will sell to Tokai all of the allotted and issued Otic Shares (as defined below) in exchange for the issuance by Tokai to the Sellers of the Tokai Common Stock (as defined below) (the “Transaction”). Capitalized terms used but
not defined herein shall have the meanings given to such terms in the Purchase Agreement.
Pursuant to the Purchase Agreement, and as more
fully set forth in the Purchase Agreement, each Seller will sell to Tokai all of the ordinary shares, NIS 0.01 nominal value per share, of Otic (“Ordinary Shares”), and preferred shares, NIS 0.01 nominal value per share, of Otic
(“Preferred Shares,” together with Ordinary Shares, collectively, “Otic Shares”), owned by such Seller in exchange for the issuance by Tokai to such Seller of the number of shares of Common Stock, $0.001 par value per share, of
Tokai (“Tokai Common Stock”) equal to the portion of the Aggregate Closing Consideration payable to such Seller in accordance with the Otic Pharma Organizational Documents (such number of shares of Tokai Common Stock issued for each such
Otic Share, the “Exchange Ratio”). The terms and conditions of the Transaction are set forth in more detail in the Purchase Agreement.
You have asked us whether, in our opinion as investment bankers as of the date hereof, the Exchange Ratio in connection with the Transaction
is fair to the stockholders of Tokai from a financial point of view.
Wedbush Securities Inc. (“Wedbush”) is an investment
banking firm and member of The New York Stock Exchange and other principal stock exchanges in the United States, and is regularly engaged as part of its business in the valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, private placements, secondary distributions of listed and unlisted securities, and valuations for corporate, estate and other purposes.
For purposes of this opinion and in connection with our review, we have, among other things: (1) reviewed a draft of the Purchase
Agreement dated December 21, 2016, and we have assumed that no changes will be made to the Purchase Agreement that will be material to our analysis; (2) reviewed certain publicly available business and financial information relating to
Tokai and Otic, respectively; (3) reviewed certain internal information, primarily financial in nature, including financial and operating data furnished to us by the managements of Tokai and Otic, respectively, and approved for our use by
Tokai; (4) reviewed certain publicly available information with respect to other companies in the biopharmaceutical industry that we believe to be
D - 1
similar in certain respects to Otic; (5) considered the financial terms, to the extent publicly available, of selected recent business combinations and initial public offerings of companies
in the biopharmaceutical industry that we believe to be similar in certain respects to Otic, in whole or in part, and to the Transaction; and (6) made inquiries regarding and discussed the Purchase Agreement and other matters related thereto
with Tokai and Otic counsel. In addition, we have held discussions with the management of Tokai and Otic concerning their views as to the financial and other information described above. In addition to the foregoing, we have conducted such other
analyses and examinations and considered such other financial, economic and market criteria as we deem appropriate to arrive at our opinion.
In rendering this opinion, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information
that was publicly available or was furnished to or discussed with us by Tokai, Otic or any other party to the Purchase Agreement or otherwise reviewed by us. With respect to information provided to or reviewed by us, we have been advised by the
management of Tokai and Otic that such information was reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of Tokai or Otic, as applicable. We express no view as to the reasonableness of
such financial information or the assumptions on which it was based.
We have further relied on the assurances of management of Tokai that
they are unaware of any facts that would make the information provided to us incomplete or misleading. Except for certain estimates of liabilities expected to be incurred by Tokai in connection with a potential liquidation of Tokai prepared by
management of Tokai, we have not made or been provided with any independent evaluations or appraisals of any of the assets, properties, liabilities (including any contingent, derivative or
off-balance-sheet
assets or liabilities) or securities, nor have we made any physical inspection of the properties or assets, of Tokai or Otic. Further, as you are aware, Otic’s management did not provide us with, and we did not otherwise have access to,
financial forecasts regarding Otic’s business, other than certain operating expense forecasts for the five years ended December 31, 2021, and, accordingly we did not perform either a discounted cash flow analysis or any multiples-based
analyses with respect to Otic. With respect to the operating expense forecasts of Otic, upon the advice of Tokai and Otic, we have assumed that such projections have been reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the management of Otic as to the future operating expenses of Otic and that Otic will perform substantially in accordance with such projections. We assume no responsibility for and we express no view as to any such
projections or the assumptions on which they are based. We did not evaluate the solvency or fair value of Tokai, Otic or any of their respective subsidiaries (or the impact of the transaction thereon) under any law relating to bankruptcy, insolvency
or similar matters.
Our opinion is based on economic, market and other conditions as in effect on, and the information made available to
us as of, the date hereof. We have also relied on the accuracy and completeness of Tokai’s and Otic’s representations and warranties in the Purchase Agreement, without regard to any qualifications that may be set forth in disclosure
schedules or any other such qualifications. In addition, we have assumed that the Transaction will be consummated in accordance with the terms set forth in the Purchase Agreement without any waiver, amendment or delay of any terms or conditions that
would be material to our analysis. Representatives of Tokai have advised us, and we have further assumed that the final terms of the Purchase Agreement will not differ from the terms set forth in the draft we have reviewed in any respect material to
our analysis. Events occurring after the date hereof could materially affect the assumptions used in preparing this opinion. We have not undertaken any obligation to reaffirm or revise this opinion or otherwise comment upon any events occurring
after the date hereof.
We are not legal, tax or regulatory advisors and do not express any opinion as to any tax or other consequences
that may arise from the Transactions, nor does our opinion address any legal, regulatory or accounting matters, as to which we understand that Tokai has obtained such advice as it deemed necessary from qualified professionals. We are financial
advisors only and have relied upon, without independent verification, the assessment of Tokai and Otic and their legal, tax or regulatory advisors with respect to legal, tax or regulatory matters. We have assumed that the Transaction will have the
tax effects contemplated by the Purchase Agreement.
D - 2
In rendering this opinion, we express no opinion as to the amount or nature of any compensation
to any officers, directors, or employees of Tokai, or any class of such persons, whether relative to the Exchange Ratio or otherwise, or with respect to the fairness of any such compensation. We are not opining as to the merits of the Transaction as
compared with any alternative transactions or strategies that may be available to Tokai, or as to the likelihood of the consummation of the Transaction. At your direction, we have not been asked to, nor do we, offer any opinion as to the terms,
other than the Exchange Ratio to the extent expressly specified herein, of the Purchase Agreement or the form of the Transaction. Nor do we express any opinion with respect to the terms of any other agreement entered into or to be entered into in
connection with the Transaction. We express no opinion as to the price at which shares of Tokai Common Stock may trade at any time subsequent to the announcement or consummation of the Transaction. We have also assumed that all governmental,
regulatory or other consents and approvals necessary for the consummation of the Transaction will be obtained without imposition of any terms or conditions that would be material to our analysis.
Tokai has agreed to pay Wedbush fees for its services as financial advisor in connection with the Transaction. A portion of such fees becomes
payable upon delivery of this opinion and the substantial portion of such fees will become payable upon consummation of the Transaction. In addition, Tokai has agreed to reimburse us for all reasonable
out-of-pocket
expenses incurred by us and to indemnify us for certain liabilities arising out of our engagement. We may also provide investment banking and financial advisory services to Tokai, Otic and their
respective affiliates in the future for which we would expect to receive customary fees.
In the ordinary course of our business, we and
our affiliates may actively trade Tokai Common Stock or other instruments or obligations of Tokai for our own account and for the accounts of our customers and, accordingly, we may at any time hold a long or short position in Tokai Common Stock or
such instruments or obligations of Tokai.
This opinion is for the benefit and use of the board of directors of Tokai (in its capacity as
such) in connection with its evaluation of the Transaction and does not constitute a recommendation to the board of directors of Tokai as to how to act or to any holder of Tokai Common Stock or any other person as to how such holder or other person
should vote with respect to the Transaction or any other matter. This opinion may not be used for any other purpose without our prior written consent in each instance, except as expressly provided for in the engagement letter dated as of
August 31, 2016 between Tokai and Wedbush.
This opinion was approved by a fairness committee at Wedbush in accordance with the
requirements of FINRA Rule 5150.
Based upon and subject to the foregoing, it is our opinion that, as of the date hereof, the Exchange
Ratio in connection with the Transaction is fair to the stockholders of Tokai from a financial point of view.
Very truly yours,
/s/ Wedbush Securities Inc.
Wedbush Securities Inc.
D - 3
SPECIAL MEETING OF TOKAI PHARMACEUTICALS, INC.
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Date:
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●
,
●
,
2017
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Time:
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9:00 A.M. (Eastern Time)
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Place:
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60 State Street, Boston, MA 02109
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Please make your marks like
this:
☒
Use dark black pencil or pen only
Board of Directors Recommends a Vote
FOR
proposals 1, 2 and 3.
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1:
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To approve the issuances of shares of common stock of Tokai, par value $0.001 per share, pursuant to (i) the terms of the Share Purchase Agreement, dated as of
December 21, 2016, by and among Tokai, Otic Pharma, Ltd., a private limited company organized under the laws of the State of Israel, and the shareholders of Otic named therein and (ii) the terms of the Tokai Stock Purchase Agreement; dated as of
, 2017, by and among Tokai, Otic, and the purchasers set forth therein.
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For
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Against
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Abstain
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☐
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☐
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☐
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For
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Against
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Abstain
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2:
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To approve and adopt an amendment to Tokai’s Amended and Restated Certificate of Incorporation to effect a reverse stock split of Tokai
common stock, at a ratio ranging from
●
:1 to
●
:1, as determined by the Tokai board of directors and agreed to by Otic.
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☐
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☐
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☐
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For
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Against
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Abstain
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3:
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To adjourn the special meeting to solicit additional votes to approve the Share Issuances Proposal or the Reverse Stock Split Proposal, if necessary or appropriate.
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☐
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☐
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☐
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Note:
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The proxies are authorized to vote, in their discretion, upon such other business as may properly come before the meeting or any adjournment or postponement
thereof.
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To attend the meeting and vote your shares in person, please mark this box.
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☐
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Authorized Signatures - This section must be completed for your Instructions to be executed.
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Please Sign Here
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Please Date Above
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Please Sign Here
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Please Date Above
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Please sign exactly as your name(s) appears on your
stock certificate or book-entry record. If held in joint tenancy, all holders should sign. Trustees, administrators, etc., should include title and authority. Corporations should provide full name of corporation and title of authorized officer
signing the proxy.
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Please separate carefully at the perforation and return just this portion in the envelope provided.
Special Meeting of Tokai Pharmaceuticals, Inc.
to be held on
●
,
●
, 2017
for Holders as of
[ ], 2017
This
proxy is being solicited on behalf of the Board of Directors
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VOTE BY:
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INTERNET
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TELEPHONE
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Go To
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Call
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www.proxypush.com/tkai
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(866) 206-4382
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•
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Cast your vote online 24 hours a day/7 days a week.
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OR
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Use any touch-tone telephone toll-free 24 hours a day/7 days a week.
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Have your Proxy Card/Voting Instructions Form ready.
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MAIL
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•
•
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Have your Proxy Card/Voting Instruction Form ready.
Follow the simple recorded instructions.
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•
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View Meeting Documents.
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OR
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Mark, sign and date your Proxy Card/Voting Instruction Form.
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•
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Detach your Proxy Card/Voting Instruction Form.
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•
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Return your Proxy Card/Voting Instruction Form in the
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postage-paid envelope provided.
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The undersigned hereby appoints Jodie P. Morrison and John S. McBride, and each or any of them, as
the true and lawful attorneys of the undersigned, with full power of substitution and revocation, and authorizes them, and any of them, to vote all the shares of capital stock of Tokai Pharmaceuticals, Inc. that the undersigned is entitled to vote
at said meeting and any adjournment thereof upon the matters specified and upon such other matters as may be properly brought before the meeting or any adjournment thereof, conferring authority upon such true and lawful attorneys to vote in their
discretion on such other matters as may properly come before the meeting and revoking any proxy heretofore given.
THE SHARES
REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS GIVEN, (Reg 14a-4(b)(1)) SHARES WILL BE VOTED FOR THE PROPOSAL IN ITEM 1, FOR THE PROPOSAL IN ITEM 2, FOR THE PROPOSAL IN ITEM 3, AND AUTHORITY WILL BE DEEMED
GRANTED TO VOTE UPON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING.
All votes must be received by 11:59 P.M., Eastern
Time,
●
, 2017.
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PROXY TABULATOR FOR
TOKAI PHARMACEUTICALS, INC.
c/o MEDIANT COMMUNICATIONS
P.O. BOX 8016
CARY, NC 27512-9903
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