PREM14A
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

SCHEDULE 14A

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

 

Filed by the Registrant  ☒                            Filed by a Party other than the Registrant  ☐

Check the appropriate box:

 

Preliminary Proxy Statement

 

Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

Definitive Proxy Statement

 

Definitive Additional Materials

 

Soliciting Material under §240.14a-12

Tokai Pharmaceuticals, Inc.

(Name of the Registrant as Specified in its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

 

No fee required.

 

Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

  (1) Title of each class of securities to which transaction applies:

 

       Common Stock, $0.001 par value per share (“Common Stock”), of Tokai Pharmaceuticals, Inc. (“Tokai”)

 

 

  (2) Aggregate number of securities to which transaction applies:

 

       36,911,631 shares of Common Stock to be issued by Tokai pursuant to that certain 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 (“Otic”), and the shareholders of Otic named therein.

 

 

  (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

       The proposed maximum aggregate value of the transaction was calculated based on the product of 36,911,631 shares of Common Stock multiplied by $1.00 per share (the average of the high and low trading prices of the Common Stock on The NASDAQ Global Market on January 20, 2017). In accordance with Section 14(g) of the Securities Exchange Act of 1933, as amended, the filing fee equals the product of 0.0001159 multiplied by the maximum aggregate value of the transaction.

 

 

  (4) Proposed maximum aggregate value of transaction:

 

       $36,911,631

 

 

  (5) Total fee paid:

 

       $4,279

 

 

Fee paid previously with preliminary materials.

 

Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

  (1) Amount Previously Paid:
 

 

 

 

  (2) Form, Schedule or Registration Statement No.:
 

 

 

 

  (3) Filing Party:
 

 

 

 

  (4) Date Filed:
 

 

 

 


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PRELIMINARY PROXY STATEMENT—SUBJECT TO COMPLETION

DATED JANUARY 23, 2017

 

 

LOGO

TOKAI PHARMACEUTICALS, INC.

255 State Street, 6th Floor

Boston, Massachusetts 02109

(617) 225-4305

            , 2017

Dear Stockholder:

You are invited to attend a special meeting of the stockholders of Tokai Pharmaceuticals Inc., a Delaware corporation (“Tokai”), to be held on                          , 2017 at          local time, at the offices of Wilmer Cutler Pickering Hale and Dorr LLP, 60 State Street, Boston, Massachusetts 02109.

As previously announced, on December 21, 2016, Tokai, Otic Pharma, Ltd., a private limited company organized under the laws of the State of Israel (“Otic”), and the shareholders of Otic named therein (each, a “Seller” and collectively, the “Sellers”), entered into a Share Purchase Agreement (the “Share Purchase Agreement”), pursuant to which, among other things, each Seller has agreed to sell to Tokai, and Tokai has agreed to purchase from each Seller, all of the ordinary and preferred shares of Otic (each an “Otic Share” and collectively, the “Otic Shares”) in exchange for shares of Tokai common stock (the “Otic Transaction”), on the terms and subject to the conditions set forth in the Share Purchase Agreement. The Otic Transaction will result in a pharmaceutical company focused on the development and commercialization of products for ear, nose and throat (“ENT”) disorders, including Otic’s lead candidate which is a nasally-administered, combination drug product intended to address the underlying cause of otitis media and Eustachian tube dysfunction. As a result of the Otic Transaction, Otic will become a wholly owned subsidiary of Tokai and the Sellers are expected to own approximately 60% of the Tokai common stock.

In addition, Tokai has entered into a stock purchase agreement dated January     , 2017 with Otic and certain purchasers set forth therein pursuant to which the purchasers have agreed to purchase                  shares of Tokai common stock at a price of $        per share (the “Tokai Stock Purchase Agreement”). The Tokai Stock Purchase Agreement provides that the purchase and sale of the Tokai common stock will occur immediately following the closing of the Otic Transaction.

Shares of Tokai common stock are currently listed on The NASDAQ Global Market (“NASDAQ”) under the symbol “TKAI.” Tokai, in coordination with Otic, intends to file an initial listing application for the combined company with The NASDAQ Stock Market LLC pursuant to NASDAQ Listing Rules 1017 and 5110. After completion of the Otic Transaction, Tokai will be renamed “OticPharma, Inc.” and expects to trade on The NASDAQ Global Market under the symbol “AOME.” On                 , 2017, the last trading day before the date of this proxy statement, the closing sale price of Tokai common stock was $        per share.

Tokai is holding a special meeting of its stockholders in order to obtain the stockholder approvals necessary to complete the Otic Transaction and related matters. At the Tokai special meeting, Tokai will ask its stockholders to approve the issuances of Tokai common stock pursuant to the Share Purchase Agreement and pursuant to the related Tokai Stock Purchase Agreement; approve an amendment to Tokai’s Amended and Restated Certificate of Incorporation effecting a reverse stock split of outstanding Tokai common stock at a ratio


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ranging from              :1 to             :1 as determined by the Tokai board of directors and agreed to by Otic; and approve the adjournment of the special meeting by Tokai’s board of directors, in its discretion, if necessary or appropriate, to solicit additional proxies to approve the other proposals, each as described in the accompanying proxy statement.

As described in the accompanying proxy statement, certain stockholders, directors and officers of Tokai, who hold in the aggregate approximately 36.3% of the outstanding common stock of Tokai (collectively, the “Designated Tokai Equityholders”), have entered into a support agreement with Otic (the “Support Agreement”). The Support Agreement places certain restrictions on the transfer of Tokai common stock held by the Designated Tokai Equityholders and includes an agreement to vote in favor of the issuance of Tokai common stock in the Otic Transaction and against any “acquisition proposal.”

After careful consideration and consultation with its financial advisor and outside legal counsel, the Tokai board of directors unanimously determined that the Otic Transaction, on the terms and subject to the conditions set forth in the Share Purchase Agreement, is fair to, and in the best interests of, Tokai and its stockholders and unanimously approved and declared advisable the Share Purchase Agreement, the issuance of Tokai common stock to the Sellers pursuant to the Share Purchase Agreement and the other transactions contemplated by the Share Purchase Agreement in accordance with the requirements of Delaware law.

The Tokai board of directors unanimously recommends that you vote “FOR” the approval of the issuances of Tokai common stock pursuant to the Share Purchase Agreement and pursuant to the related Tokai Stock Purchase Agreement and “FOR” each of the other proposals described in more detail in the accompanying proxy statement.

Your vote is important. It is important that your shares be represented and voted whether or not you plan to attend the special meeting in person. Whether or not you plan to attend the special meeting in person, we encourage you to read this proxy statement and submit your proxy or voting instructions as soon as possible. Please review the instructions on each of your voting options described in the proxy statement.

Sincerely,

 

Jodie P. Morrison

President and Chief Executive Officer

The accompanying proxy statement is dated                 , 2017 and is first being mailed to stockholders on or about                 , 2017.


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TOKAI PHARMACEUTICALS, INC.

 

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD ON                 , 2017

 

 

To the Stockholders of Tokai Pharmaceuticals, Inc.:

You are cordially invited to attend a special meeting of stockholders of Tokai Pharmaceuticals, Inc. to be held on                 , 2017 at 9:00 a.m., Eastern Time, at the offices of Wilmer Cutler Pickering Hale and Dorr LLP, 60 State Street, Boston, Massachusetts 02109. At the special meeting, stockholders will consider and vote on the following matters:

 

  1. To approve the issuances of shares of common stock of Tokai, par value $0.001 per share (“Tokai common stock”), pursuant to (i) the terms of the Share Purchase Agreement, dated as of December 21, 2016 (the “Share Purchase Agreement”), by and among Tokai, Otic Pharma, Ltd., a private limited company organized under the laws of the State of Israel (“Otic”), and the shareholders of Otic named therein (each a “Seller” and collectively, the “Sellers”) (the “Otic Transaction”) and (ii) the terms of the Tokai Stock Purchase Agreement, dated as of January     , 2017 (the “Tokai Stock Purchase Agreement”), by and among Tokai, Otic, and the purchasers set forth therein (the “Purchasers”) (the issuance pursuant to the Tokai Stock Purchase herein referred to as the “Equity Financing”) (such proposal, the “Share Issuances Proposal”). A copy of the Share Purchase Agreement is attached as Annex A to the accompanying proxy statement and a copy of the form of Tokai Stock Purchase Agreement is attached as Annex B to the accompanying proxy statement;

 

  2. 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, as more fully set forth in the accompanying proxy statement (the “Reverse Stock Split Proposal”). A copy of the form of amendment to Tokai’s Amended and Restated Certificate of Incorporation to effect the reverse stock split is attached as Annex C to the accompanying proxy statement;

 

  3. 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 (the “Adjournment Proposal”); and

 

  4. Any other business that may properly come before the special meeting and any adjournments or postponements thereof.

The accompanying proxy statement and its annexes more fully describe these items of business. Tokai urges you to read this information carefully.

The Tokai board of directors unanimously recommends that you vote “FOR” the Share Issuances Proposal and “FOR” each of the other proposals described in more detail in the accompanying proxy statement.

Each of the Share Issuances Proposal, Reverse Stock Split Proposal and Adjournment Proposal is an independent proposal, and none is conditioned upon the approval of any other proposal. The approval of the Share Issuances Proposal is required to consummate the Otic Transaction. The Otic Transaction may be consummated regardless of whether the Tokai stockholders approve or do not approve the Reverse Stock Split Proposal or the Adjournment Proposal. If the Share Issuances Proposal is not approved and the Otic Transaction is not consummated, Tokai’s board of directors may still determine to proceed with the reverse stock split if the Reverse Stock Split Proposal is approved.


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Only stockholders of record of shares of Tokai common stock at the close of business on                 , 2017, the record date for the special meeting, are entitled to notice of and to vote at the special meeting and any adjournments or postponements of the special meeting. If you have any questions concerning the Otic Transaction, the related Equity Financing, the proposed reverse stock split, the special meeting or the accompanying proxy statement, need help voting your shares of Tokai common stock, or would like additional copies, without charge, of the enclosed proxy statement or proxy card, please contact Tokai Pharmaceuticals, Inc., 255 State Street, 6th Floor, Boston, Massachusetts 02109, Attention: Investor Relations, telephone: (617) 225-4305.

Please review in detail the attached proxy statement for a more complete statement regarding each of the Share Issuances Proposal, the Reverse Stock Split Proposal and the Adjournment Proposal, including descriptions of the Share Purchase Agreement and Tokai Stock Purchase Agreement, the background of the decision to enter into the Otic Transaction, the reasons that our board of directors has decided to recommend that you approve each of the Share Issuances Proposal, the Reverse Stock Split Proposal and the Adjournment Proposal and the section beginning on page 29 entitled “Risk Factors,” describing certain risk factors relating to the Otic Transaction. Because of the significance of the Otic Transaction, your participation in the special meeting, in person or by proxy, is especially important. We hope that you will be able to attend the special meeting.

By Order of the Board of Directors,

Jodie P. Morrison

President and Chief Executive Officer

Boston, Massachusetts

Dated:                 , 2017

YOU MAY OBTAIN ADMISSION TO THE SPECIAL MEETING BY IDENTIFYING YOURSELF AT THE SPECIAL MEETING AS A STOCKHOLDER AS OF THE RECORD DATE. IF YOU ARE A RECORD OWNER, POSSESSION OF A COPY OF A PROXY CARD WILL BE ADEQUATE IDENTIFICATION. IF YOU ARE A BENEFICIAL (BUT NOT RECORD) OWNER, A COPY OF AN ACCOUNT STATEMENT FROM YOUR BANK, BROKER OR OTHER NOMINEE SHOWING SHARES HELD FOR YOUR BENEFIT ON                     , 2017 WILL BE ADEQUATE IDENTIFICATION.

WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING, IF YOU ARE A RECORD OWNER PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE ENCLOSED ENVELOPE IN ORDER TO HELP ENSURE REPRESENTATION OF YOUR SHARES AT THE SPECIAL MEETING. NO POSTAGE NEED BE AFFIXED IF THE PROXY CARD IS MAILED IN THE UNITED STATES. ALTERNATIVELY, YOU MAY SUBMIT YOUR VOTE VIA THE INTERNET OR BY TELEPHONE BY FOLLOWING THE INSTRUCTIONS SET FORTH ON THE ENCLOSED PROXY CARD.

These transactions have not been approved or disapproved by the Securities and Exchange Commission (the “SEC”), and the SEC has not passed upon the fairness or merits of these transactions nor upon the accuracy or adequacy of the information contained in this proxy statement. Any representation to the contrary is unlawful.


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Table of Contents

 

    Page

SUMMARY

    1   

The Parties Involved in the Transaction

    1   

The Transaction Structure

    2   

Effect of the Otic Transaction on Otic Share Options, Otic Warrants and Tokai Stock Options

    3   

Expected Timing of the Otic Transaction

    3   

Tokai Board Recommendations and Reasons for the Otic Transaction

    3   

Opinion of Tokai’s Financial Advisor

    4   

The Tokai Special Meeting

    5   

Market Price and Dividend Information

    5   

No Solicitation; Third Party Competing Proposals

    5   

Changes to Board Recommendation

    5   

Conditions to Consummation of the Otic Transaction

    6   

Termination of the Share Purchase Agreement

    6   

Termination Fee and Expenses

    6   

Support Agreement

    8   

Interests of Tokai’s Directors and Executive Officers

    8   

Executive Officers and Directors Following the Otic Transaction

    8   

Regulatory Approvals

    9   

Material U.S. Federal Income Tax Consequences of the Transaction to Tokai Stockholders

    9   

Risk Factors

    9   

NASDAQ Global Market Listing

    9   

Anticipated Accounting Treatment

    9   

No Appraisal Rights

    10   

Equity Financing

    10   

Reverse Stock Split

    10   

QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE OTIC TRANSACTION

    11   

SELECTED HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

    17   

Selected Historical Consolidated Financial Data of Tokai

    17   

Selected Historical Consolidated Financial Data of Otic

    19   

Selected Unaudited Pro Forma Combined Financial Data of Tokai and Otic

    20   

Comparative Historical and Unaudited Pro Forma Per Share Data

    22   

 

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DESCRIPTION OF TOKAI COMMON STOCK

    24   

Common Stock

    24   

Preferred Stock

    25   

Stock Options

    25   

Provisions of Tokai’s Certificate of Incorporation and By-laws and Delaware Law That May Have Anti-Takeover Effects

    25   

NASDAQ Global Market Listing

    27   

MARKET PRICE AND DIVIDEND INFORMATION

    28   

Market Price of Tokai Common Stock

    28   

Dividends

    28   

RISK FACTORS

    29   

Risks Related to the Otic Transaction

    29   

Risks Related to the Otic Business

    34   

Risks Related to the Combined Company

    54   

Risks Related to the Proposed Reverse Stock Split

    62   

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

    64   

INFORMATION ABOUT THE SPECIAL MEETING

    65   

General

    65   

Date, Time and Place

    65   

Purposes of the Tokai Special Meeting

    65   

Recommendation of the Tokai Board of Directors

    65   

Stockholders Entitled to Vote; Record Date

    66   

Quorum and Broker Non-Votes

    66   

Required Vote

    66   

Voting by Stockholders

    67   

Revocation of Proxies

    68   

Voting by Tokai’s Directors, Executive Officers and Certain Stockholders

    68   

Solicitation of Proxies

    68   

No Appraisal Rights

    69   

Householding

    69   

Tabulation of Votes

    69   

Adjournments and Postponements

    69   

Attending the Special Meeting

    69   

THE OTIC TRANSACTION

    70   

The Transaction Structure

    70   

 

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    Page

Consideration

    70   

Effect of the Otic Transaction on Otic Share Options, Otic Warrants and Tokai Stock Options

    70   

Expected Timing of the Otic Transaction

    71   

Background of the Otic Transaction

    71   

Recommendation of the Tokai Board of Directors

    81   

Reasons for the Otic Transaction

    81   

Interests of Tokai’s Directors and Executive Officers

    83   

Opinion of Tokai’s Financial Advisor

    86   

Material U.S. Federal Income Tax Consequences of the Transaction to Tokai Stockholders

    95   

Regulatory Approvals

    95   

Anticipated Accounting Treatment

    95   

No Appraisal Rights

    96   

TERMS OF THE SHARE PURCHASE AGREEMENT

    97   

Explanatory Note Regarding the Share Purchase Agreement

    97   

The Otic Transaction Structure

    97   

Consideration

    98   

Exchange Ratio

    98   

Effect of the Otic Transaction on Otic Share Options, Otic Warrants and Tokai Stock Options

    98   

Directors and Officers of Tokai Following the Otic Transaction

    99   

Conditions to the Consummation of the Otic Transaction

    99   

Representations and Warranties

    101   

No Solicitation; Third Party Competing Proposal

    101   

Changes to Board Recommendation

    103   

Meeting of Tokai Stockholders

    104   

Covenants; Conduct of the Businesses

    104   

Indemnification and Insurance

    108   

Other Agreements

    109   

Lock-up Agreements

    110   

Termination of the Share Purchase Agreement

    110   

Termination Fee and Expenses

    112   

Regulatory Approvals

    113   

Amendments and Waivers

    113   

Specific Performance

    113   

Third Party Beneficiaries

    114   

 

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AGREEMENTS RELATED TO THE SHARE PURCHASE AGREEMENT

    115   

Support Agreement

    115   

Tokai Stock Purchase Agreement

    115   

Registration Rights Agreement

    115   

SHARE ISSUANCES PROPOSAL

    117   

REVERSE STOCK SPLIT PROPOSAL

    118   

Purpose

    119   

NASDAQ Listing Requirements

    119   

Principal Effects of the Reverse Stock Split

    119   

Risks of the Reverse Stock Split

    120   

Procedure for Effecting Reverse Stock Split and Exchange of Stock Certificates

    120   

Fractional Shares

    121   

Material U.S. Federal Income Tax Consequences of the Reverse Stock Split

    121   

Vote Required; Recommendation of the Tokai Board of Directors

    124   

ADJOURNMENT PROPOSAL

    125   

TOKAI’S BUSINESS

    126   

OTIC’S BUSINESS

    127   

TOKAI’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

    138   

Overview

    138   

Financial Operations Overview

    139   

Critical Accounting Policies and Significant Judgments and Estimates

    141   

JOBS Act

    143   

Results of Operations

    143   

Liquidity and Capital Resources

    148   

Contractual Obligations and Commitments

    152   

Off-Balance Sheet Arrangements

    152   

Recently Issued Accounting Pronouncements

    152   

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT TOKAI’S MARKET RISK

    153   

OTIC’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

    154   

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT OTIC’S MARKET RISK

    164   

Interest Rate Risk

    164   

Foreign Exchange Rate Risk

    164   

Effects of Inflation

    164   

 

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EXECUTIVE OFFICERS AND DIRECTORS FOLLOWING THE OTIC TRANSACTION

    165   

Executive Officers and Directors

    165   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF TOKAI

    169   

UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

    171   

WHERE YOU CAN FIND MORE INFORMATION; INCORPORATION BY REFERENCE

    182   

OTHER MATTERS

    184   

Stockholder Proposals

    184   

Communication with the Tokai Board of Directors

    184   

INDEX TO TOKAI CONSOLIDATED FINANCIAL STATEMENTS

    F-1   

INDEX TO OTIC CONSOLIDATED FINANCIAL STATEMENTS

    F-39   

 

ANNEX A:

   SHARE PURCHASE AGREEMENT

ANNEX B:

   FORM OF TOKAI STOCK PURCHASE AGREEMENT

ANNEX C:

   FORM OF CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF TOKAI PHARMACEUTICALS, INC. (REGARDING THE REVERSE STOCK SPLIT)

ANNEX D:

   OPINION OF WEDBUSH SECURITIES INC.

 

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SUMMARY

This summary, together with the section of this proxy statement entitled “Questions and Answers About the Special Meeting and the Otic Transaction,” highlights selected information from this proxy statement and may not contain all of the information that is important to you as a stockholder of Tokai or that you should consider before voting on the proposals being considered at the special meeting. To better understand the Otic Transaction and the related Equity Financing, you should read carefully this entire proxy statement and all of its annexes, including the Share Purchase Agreement, which is attached as Annex A, and the Tokai Stock Purchase Agreement, a form of which is attached as Annex B, before voting on the proposals being considered at the special meeting. This summary includes page references directing you to more complete descriptions. For more information, please see the section entitled “Where You Can Find More Information; Incorporation by Reference,” beginning on page 182 of this proxy statement.

The Parties Involved in the Transaction

Tokai Pharmaceuticals, Inc.

Tokai Pharmaceuticals, Inc. (“Tokai”) is a biopharmaceutical company focused on developing and commercializing innovative therapies for prostate cancer and other hormonally driven diseases. Tokai has focused substantially all of its research and development efforts on the development of galeterone, an oral small molecule, including clinical trials of galeterone for the treatment of patients with metastatic castration-resistant prostate cancer (“mCRPC”). Tokai also has a drug discovery program, known as ARDA (androgen receptor degradation agents), under which it was seeking to identify and develop novel compounds for patients with androgen receptor signaling diseases, including prostate cancer, either alone or in combination with other products.

In July 2016, Tokai announced its plan to discontinue ARMOR3-SV, its pivotal Phase 3 clinical trial comparing galeterone to Xtandi® (enzalutamide) in treatment-naïve mCRPC patients whose prostate tumors express the AR-V7 splice variant, following the recommendation made by the trial’s independent data monitoring committee in July 2016. In addition, in August 2016, Tokai determined to discontinue enrollment in its Phase 2 ARMOR2 expansion clinical trial of galeterone in mCRPC patients with acquired resistance to Xtandi® (enzalutamide) and not to proceed with its planned clinical trials of galeterone. Only patients in the ARMOR2 trial are continuing treatment at this time.

In September 2016, Tokai completed a workforce reduction, which was designed to reduce its operating expenses while it conducted a review of development options for galeterone and its ARDA program.

For more information on Tokai’s business, see the section entitled “Tokai’s Business,” beginning on page 126 of this proxy statement.

Otic Pharma, Ltd.

Otic Pharma, Ltd. (“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”). The company 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.

 



 

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Otic has completed four clinical trials of OP-01 in 353 subjects, 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 formulation of OP-01 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 affect more than 700 million adults and children every year. OM is a common disorder seen in pediatric practice and 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. Otic is planning to initiate multiple phase 1 clinical studies of OP-02 in 2017 to explore the safety and tolerability of OP-02, as well as explore how OP-02 affects Eustachian tube function (pharmacodynamics). These phase 1 studies will evaluate single and repeated intranasal doses of OP-02 in adults. Upon completion of these studies, Otic expects that its initial phase 2 studies of OP-02 will focus on prevention of acute, recurrent, and chronic OM in children.

For more information on Otic’s business, see the section entitled “Otic’s Business,” beginning on page 127 of this proxy statement.

The Transaction Structure

(pages 70, 97)

Upon the terms and subject to the conditions set forth in the Share Purchase Agreement, dated as of December 21, 2016 (the “Share Purchase Agreement”), by and among Tokai, Otic and the shareholders of Otic (each a “Seller” and collectively, the “Sellers”), Tokai will acquire all of the ordinary and preferred shares of Otic in exchange for the issuance to the Sellers of a specified number of shares of Tokai common stock and to assume all outstanding share options and warrants of Otic. Following the Otic Transaction, Otic will be a wholly owned subsidiary of Tokai.

Based on the outstanding share capital of Otic as of the date of the Share Purchase Agreement and the shares issuable upon exercise of warrants to purchase shares of Otic and the conversion of certain outstanding debt facilities of Otic into shares of Otic that are expected to be exercised or converted prior to the closing of the Otic Transaction, Tokai expects to issue              shares of Tokai common stock in the Otic Transaction. If all of Otic’s outstanding options and warrants are exercised prior to closing, Tokai will issue a total of 36,911,631 shares of Tokai common stock in the Otic Transaction. Following the closing of the Otic Transaction, the shareholders of Otic are expected to hold approximately 60% of the outstanding shares of Tokai common stock, excluding for this purpose the effect on ownership of the issuance of shares in the Equity Financing. The relative percentage ownership of the combined company was derived using a stipulated value of Otic of approximately $50.0 million and of Tokai of approximately $33.0 million.

The issuance of Tokai common stock to the Sellers will be issued in transactions exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”) in reliance on Section 4(a)(2) of the Securities Act and Regulation D or Regulation S promulgated thereunder and may not be offered or sold by the holders of those shares absent registration or an applicable exemption from registration requirements.

 



 

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Effect of the Otic Transaction on Otic Share Options, Otic Warrants and Tokai Stock Options

(pages 70-71, 98-99)

Otic Share Options and Otic Warrants

Pursuant to the Share Purchase Agreement, at closing Tokai will assume the outstanding share option awards and warrants of Otic (other than warrants of Otic that are exercised in connection with the Otic Transaction). Each of these options and warrants will be adjusted to reflect a ratio of                  shares of Tokai common stock for each Otic share. Accordingly, at closing, each of Otic’s outstanding share option awards and warrants will become exercisable, as the case may be, for or into                  shares of Tokai common stock for each Otic share it was previously exercisable for, at a correspondingly adjusted exercise price, provided that the exercise price of such stock options and warrants will be rounded down to the nearest whole share and the exercise prices will be rounded up to the nearest cent, and no cash payment will be made in respect of such rounding. After giving effect to the ratio, and assuming no exercise of, or other change in the number of, outstanding share option awards and warrants of Otic from the date of the Share Purchase Agreement, Tokai will assume options to purchase              shares of Tokai common stock at a weighted average exercise price of $         per share and warrants to purchase              shares of Tokai common stock at a weighted average exercise price of $         per share. If all of these options and warrants were exercised prior to the closing of the Otic Transaction, Tokai would issue 36,911,631 shares of common stock and the Otic shareholders would own approximately 62% of the outstanding shares of Tokai common stock.

Tokai Options

Upon closing of the Otic Transaction, all of Tokai’s outstanding stock options will remain outstanding and in effect. Tokai’s board of directors has determined that the Otic Transaction constitutes a change in control for purposes of Tokai’s stock options. As a result, if any holder of Tokai stock options (other than Tokai’s non-employee directors) is terminated without cause or resigns for good reason following the closing, such holder’s stock options will immediately vest in full. Stock options held by Tokai’s non-employee directors will vest in full immediately upon closing.

Expected Timing of the Otic Transaction

(page 71)

Unless the Share Purchase Agreement is earlier terminated pursuant to its terms, the Otic Transaction will be consummated as promptly as practicable, but in no event later than the second business day following the satisfaction or waiver of the conditions to closing, or as Tokai and Otic agree. However, because the Otic Transaction is subject to a number of conditions to closing, neither Tokai nor Otic can predict exactly when the closing will occur or if it will occur at all.

Tokai Board Recommendation and Reasons for the Otic Transaction

(pages 65-66, 81-83, 103-104, 117, 124-125)

The Tokai board of directors has determined and believes that each of the proposals to be voted on at the special meeting is fair to, advisable, and in the best interests of Tokai and its stockholders and has approved such items. The Tokai board of directors recommends that Tokai stockholders vote “FOR” each of the proposals to be voted on. For more information on the Tokai board of directors’ recommendation see the section entitled “Information About the Special Meeting—Recommendation of the Tokai Board of Directors,” beginning on page 65 of this proxy statement, and the section entitled “Terms of the Share Purchase Agreement—Changes to Board Recommendation,” beginning on page 103 of this proxy statement.

 



 

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In reaching its unanimous decision to approve the Share Purchase Agreement and the issuance of Tokai common stock pursuant to the Share Purchase Agreement, the Tokai board of directors considered a number of factors, including, among others, the following:

 

    that Otic’s portfolio of products for ENT disorders, including Otic’s lead candidate, which is a nasally-administered, combination drug product (OP-02) intended to address the underlying cause of otitis media and Eustachian tube dysfunction (OM/ETD), represents a meaningful market opportunity, and may provide new medical benefits for patients;

 

    that the Otic Transaction would provide existing Tokai stockholders with the opportunity to participate in the potential growth of the combined company following the transaction; and

 

    that Tokai had discontinued its pivotal Phase 3 clinical trial of galeterone following the recommendation made by the trial’s independent data monitoring committee and has discontinued enrollment in its Phase 2 clinical trial of galeterone.

For more information on the Tokai board of directors’ reasons for approving the Otic Transaction, see the section entitled “The Otic Transaction—Reasons for the Otic Transaction,” beginning on page 81 of this proxy statement.

Opinion of Tokai’s Financial Advisor

(pages 86-95)

The Tokai board of directors engaged Wedbush Securities Inc. (“Wedbush”) to provide financial advisory and investment banking services and to consider and evaluate potential strategic transactions, and ultimately requested that Wedbush render an opinion as to whether the ratio of shares of Tokai common stock issued for the Otic share capital (as described more fully in the section entitled “Terms of the Share Purchase Agreement—Exchange Ratio,” beginning on page 98 of this proxy statement, the “exchange ratio”) in connection with the Otic Transaction was fair to the stockholders of Tokai from a financial point of view. At the December 21, 2016 meeting of the Tokai board of directors, Wedbush rendered its oral opinion, subsequently confirmed by delivery of a written opinion dated December 21, 2016, to the Tokai board of directors that, as of the date of such opinion, and based upon the assumptions made, procedures followed, matters considered, and qualifications and limitations of the review set forth in its written opinion, the exchange ratio was fair to the stockholders of Tokai from a financial point of view.

The full text of Wedbush’s written opinion, which sets forth the procedures followed, assumptions made, matters considered, and limitations and qualifications of the review undertaken in connection with the opinion, is attached as Annex D. Wedbush’s opinion was intended for the use and benefit of the Tokai board of directors (in its capacity as such) in connection with its evaluation of the Otic Transaction. Wedbush’s opinion was not intended to be used for any other purpose without Wedbush’s prior written consent in each instance, except as Tokai’s counsel advises is required by law. Wedbush has consented to the use of Wedbush’s opinion in this proxy statement. Wedbush’s opinion does not address Tokai’s underlying business decision to enter into the Share Purchase Agreement or complete the Otic Transaction, the relative merits of the Otic Transaction compared to any alternative transactions or strategies that were or may be available to Tokai and the other proposals to be addressed at the special meeting. Wedbush’s opinion did not constitute a recommendation to the Tokai board of directors as to how to act or to any Tokai stockholder or any other person as to how to vote with respect to the Otic Transaction or any other matter (including, without limitation, the amount of consideration to be paid).

 



 

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The Tokai Special Meeting

(pages 11-16, 65-69)

Tokai will hold a special meeting of the Tokai stockholders on                     , 2017, at          local time, at the offices of Wilmer Cutler Pickering Hale and Dorr LLP, 60 State Street, Boston, Massachusetts 02109 to vote on the issuance of Tokai common stock in the Otic Transaction and the related issuance of Tokai common stock in the Equity Financing and other related actions, including the proposed reverse stock split.

Market Price and Dividend Information

(page 28)

Tokai’s common stock trades under the symbol “TKAI” on The NASDAQ Global Market and has been publicly traded since September 17, 2014. On December 21, 2016, the last trading day prior to the Tokai board of directors’ approval of the Otic Transaction, the reported closing price of the Tokai common stock was $1.01 per share. On                 , 2017, the latest practicable trading date before the filing of this proxy statement, the reported closing price of the Tokai common stock was $        per share. Because the price of Tokai common stock is subject to fluctuation, the market value of the shares of Tokai common stock that Otic shareholders will be entitled to receive pursuant to the terms of the Share Purchase Agreement may increase or decrease.

Neither Tokai nor Otic has ever declared or paid cash dividends on its capital stock. Any determination to pay dividends following consummation of the Otic Transaction or otherwise will be at the discretion of Tokai’s then-current board of directors and will depend upon a number of factors, including its results of operations, financial condition, future prospects, contractual restrictions, restrictions imposed by applicable law and other factors Tokai’s then-current board of directors deems relevant.

No Solicitation; Third Party Competing Proposals

(pages 101-103)

Under the Share Purchase Agreement, both Tokai and Otic are subject to customary covenants restricting the solicitation of competing offers. However, subject to certain requirements set forth in the Share Purchase Agreement, Tokai is entitled to furnish non-public information to, and engage in discussions or negotiations with, third parties who submit a bona fide, unsolicited written proposal to acquire 50% or more of the equity securities or consolidated total assets of Tokai, so long as the Tokai board of directors determines in its good faith judgment that such acquisition proposal is more favorable to the holders of Tokai’s capital stock than the transactions contemplated by the Share Purchase Agreement (after consultation with its financial and legal advisors) and which Tokai’s board of directors determines to be reasonably capable of being completed on the terms proposed.

Changes to Board Recommendation

(pages 103-104)

Prior to Tokai stockholder approval of the Share Purchase Agreement and the issuance of Tokai common stock to the Sellers pursuant to the Share Purchase Agreement, the Tokai board of directors is permitted to withhold, withdraw or modify, or publicly propose to withdraw or modify, its approval or recommendation that Tokai stockholders vote in favor of the Share Issuances Proposal if the Tokai board of directors determines in good faith (after consultation with outside legal counsel) that the failure to do so could reasonably be expected to be inconsistent with its fiduciary obligations under applicable law.

 



 

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Conditions to Consummation of the Otic Transaction

(pages 99-101)

The Share Purchase Agreement sets forth certain conditions to the obligations of the parties in the transaction, including:

 

    Tokai stockholders approving the Share Issuances Proposal;

 

    the filing, obtainment or occurrence of all authorizations and consents, including Israeli tax rulings described in the Share Purchase Agreement;

 

    the absence of any order, executive order, stay, decree, judgment or injunction (preliminary or permanent) or statute, rule, or regulation prohibiting consummation of the Otic Transaction;

 

    the approval of an initial listing application on The NASDAQ Global Market with respect to the shares of Tokai common stock to be issued in the Otic Transaction;

 

    the accuracy of representations and warranties, subject to customary materiality standards;

 

    the performance of covenants in all material respects;

 

    the absence of any continuing Tokai or Otic material adverse effect; and

 

    resignations of the directors of Tokai who will not continue to serve as directors following closing of the Otic Transaction pursuant to the terms of the Share Purchase Agreement.

Termination of the Share Purchase Agreement

(pages 110-111)

The Share Purchase Agreement includes certain termination rights, including:

 

    by either Tokai or Otic upon mutual written consent;

 

    by either Tokai or Otic, if the Otic Transaction is not consummated by April 30, 2017;

 

    by either Tokai or Otic, if a final non-appealable governmental order is issued permanently restraining or prohibiting the Otic Transaction;

 

    by either Tokai or Otic, if Tokai’s stockholders fail to approve the Otic Transaction at the special meeting of Tokai stockholders;

 

    by either Tokai or Otic, if there is a breach such that the applicable accuracy of representations condition cannot be satisfied;

 

    by Tokai, if Otic has knowingly and materially breached its non-solicitation obligations;

 

    by Tokai, if Tokai complies with its non-solicitation obligations in order to accept a superior proposal and pays to Otic the Tokai termination fee; and

 

    by Otic, if certain triggering events occur, such as a change of the Tokai board of directors’ recommendation that the Tokai or Otic stockholders vote “FOR” the Share Issuances Proposal, breach of Tokai’s non-solicitation covenants, or approval by the Tokai board of directors of a competing proposal.

Termination Fee and Expenses

(pages 112-113)

Under the terms of the Share Purchase Agreement, all fees and expenses incurred in connection with the Share Purchase Agreement are to be paid by the party incurring such expenses, regardless of whether the Otic Transaction is consummated.

 



 

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However, Otic must pay Tokai a termination fee of $1.5 million if:

 

    Tokai has terminated the Share Purchase Agreement as a result of a knowing and material breach by Otic of its non-solicitation obligations in the Share Purchase Agreement; or

 

    Tokai has terminated the Share Purchase Agreement as a result of a material breach or failure to perform by Otic of any representation, warranty, covenant or agreement set forth in the Share Purchase Agreement, which breach has caused a closing condition in the Share Purchase Agreement not to be satisfied and remains uncured by Otic prior to the earlier of the Outside Date and the expiration of a 30-day period commencing upon delivery of written notice from Tokai to Otic of such breach.

Tokai must pay Otic a termination fee of $1.0 million (the “Tokai termination fee”) if:

 

    Tokai has terminated the Share Purchase Agreement at any time prior to the approval by Tokai’s stockholders of the issuance of the shares of Tokai common stock in the Otic Transaction and each of the following has occurred: Tokai received a superior proposal (as such term is defined in the section entitled, “Terms of the Share Purchase Agreement—No Solicitation; Third Party Competing Proposal” in this proxy statement beginning on page 101); Tokai has complied in all material respects with its non-solicitation obligations in the Share Purchase Agreement in order to accept such superior proposal; and the Tokai board of directors approved, and Tokai concurrently with termination of the Share Purchase Agreement entered into, a definitive agreement with respect to such superior proposal;

 

    so long as prior to the termination of the Share Purchase Agreement, any person makes an acquisition proposal or amends an acquisition proposal made prior to the date of the Share Purchase Agreement with respect to Tokai and within 12 months after such termination Tokai enters into a definitive agreement to consummate, or consummates, any acquisition and:

 

    either Otic or Tokai has terminated the Share Purchase Agreement and the Otic Transaction has not been consummated prior to the outside date; provided, such terminating party did not cause such failure to fulfill any obligation under the Share Purchase Agreement and was not a principal cause of or resulted in the failure of the Otic Transaction to so occur prior to the outside date; or

 

    Otic has terminated the Share Purchase Agreement as a result of a material breach or failure to perform by Tokai of any representation, warranty, covenant or agreement set forth in the Share Purchase Agreement, which breach has caused a closing condition in the Share Purchase Agreement not to be satisfied and remains uncured by Tokai prior to the earlier of the Outside Date and the expiration of a 30-day period commencing upon delivery of written notice from Otic to Tokai of such breach; or

 

    Otic has terminated the Share Purchase Agreement at any time prior to the approval by Tokai’s stockholders of the issuance of the shares of Tokai common stock in the Otic Transaction due to the occurrence of any of the following:

 

    Tokai’s board of directors failed to recommend that the stockholders of Tokai vote to approve the issuance of Tokai common stock in the Otic Transaction or withdrew or modified its recommendation;

 

    Tokai’s board of directors (or any committee thereof) approved or recommended to the Tokai stockholders an acquisition proposal;

 

   

a tender or exchange offer for outstanding shares of Tokai’s common stock was commenced and Tokai’s board of directors recommended that the Tokai stockholders tender or exchange

 



 

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their shares in such offer or failed to recommend against such offer within ten business days of its commencement; or

 

    Tokai has knowingly and materially breached its no solicitation obligations in to the Share Purchase Agreement.

Support Agreement

(page 115)

Certain stockholders, directors and officers of Tokai, who as of December 31, 2016 collectively owned approximately 36.3% of outstanding Tokai common stock, have agreed to vote in favor of the issuance of Tokai common stock in the Otic Transaction and against any “acquisition proposal.”

Interests of Tokai’s Directors and Executive Officers

(pages 83-86)

In considering the recommendation of the Tokai board of directors with respect to the issuance of shares of Tokai common stock pursuant to the Share Purchase Agreement and the other matters to be voted upon by Tokai stockholders at the Tokai special meeting, Tokai stockholders should be aware that certain members of the Tokai board of directors and the executive officers of Tokai have interests in the Otic Transaction that may be different from, or in addition to, interests they have as Tokai stockholders, including:

 

    each of Tokai’s executive officers is party to an employment agreement that provides for severance benefits in the event of a qualifying termination of employment during the period of time commencing on the closing of the Otic Transaction and ending one year following the closing of the Otic Transaction;

 

    the stock option agreements evidencing the stock options held by each of Tokai’s executive officers provide that upon a qualifying termination of employment during the period of time commencing on the closing of the Otic Transaction and ending one year following the closing of the Otic Transaction, the stock options will vest in full;

 

    the stock option agreements evidencing the stock options held by each of Tokai’s non-employee directors provide that upon the closing of the Otic Transaction, the stock options will vest in full; and

 

    under the Share Purchase Agreement, Tokai’s directors and executive officers are entitled to continued indemnification, expense advancement and insurance coverage.

Executive Officers and Directors Following the Otic Transaction

(pages 99, 165-168)

Immediately following the completion of the Otic Transaction, the executive management team of the combined company is expected to be composed of the current executive team of Otic: Gregory J. Flesher, President and Chief Executive Officer; Christine G. Ocampo, Chief Financial and Compliance Officer; and Dr. Catherine C. Turkel, Chief Development Officer.

The combined company’s board of directors will initially be fixed at seven members, consisting of (i) four members designated by Otic: Keith A. Katkin as Chairman, Gregory J. Flesher, Gary A. Lyons and Erez Chimovits and (ii) three board members designated by Tokai, which may include existing board members and up to one new member designated by Tokai.

 



 

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Regulatory Approvals

(pages 95, 113)

Neither Tokai nor Otic is required to make any filings or to obtain approvals or clearances from any regulatory authorities in the United States or other countries to consummate the Otic Transaction contemplated by the Share Purchase Agreement. In Israel, Otic is required to prepare, file and receive all Israeli tax rulings with respect to the Otic Transaction, and Tokai is required to deliver to Otic an executed copy of an undertaking in the standard form required by the Office of the Chief Scientist (“OCS”) from non-Israeli residents investing in Israeli companies which have received support from the OCS. In the United States, Tokai must comply with applicable federal and state securities laws and NASDAQ rules and regulations in connection with the issuance of shares of Tokai common stock in the Otic Transaction and the related issuance of shares of Tokai common stock in the Equity Financing, including the filing with the SEC of this proxy statement.

Material U.S. Federal Income Tax Consequences of the Transaction to Tokai Stockholders

(page 95)

Neither the Otic Transaction nor the related Equity Financing will result in any taxable gain or loss for U.S. federal income tax purposes to any Tokai stockholder in his, her or its capacity as a Tokai stockholder.

Risk Factors

(pages 29-63)

The Otic Transaction involves a number of risks. In addition, both Tokai and Otic are subject to various risks associated with their businesses and their industries that will be implicated in the case of Tokai if the Otic Transaction is not consummated and in the case of Otic if the Otic Transaction is consummated. You should consider all the information contained in this proxy statement in deciding how to vote for the proposals presented in this proxy statement, including the possibility that the Otic Transaction may not be completed. These risks are discussed in greater detail under the section entitled “Risk Factors,” beginning on page 29 of this proxy statement. Tokai encourages you to read and consider all of these risks carefully.

NASDAQ Global Market Listing

(pages 27, 119)

The Share Purchase Agreement requires Tokai to use its commercially reasonable efforts to maintain its existing listing on NASDAQ, to obtain approval of the listing of the combined company on NASDAQ and to cause the shares of Tokai common stock being issued in the Otic Transaction to be approved for listing, subject to notice of issuance, on NASDAQ at or prior to the consummation of the Otic Transaction. Tokai, with cooperation from Otic, intends to file an initial listing application with NASDAQ, in satisfaction of Tokai’s obligations under the Share Purchase Agreement, and toward fulfillment of one of the conditions to the consummation of the Otic Transaction under the Share Purchase Agreement (which is more fully described in the section of this proxy statement entitled, “Terms of the Share Purchase Agreement—Conditions to the Consummation of the Otic Transaction”).

Anticipated Accounting Treatment

(pages 95-96)

Because Otic has been determined to be the accounting acquirer in the Otic Transaction, but not the legal acquirer, the Otic Transaction will be treated by Tokai as a reverse acquisition under the acquisition method of accounting in accordance with accounting principles generally accepted in the United States (“GAAP”). For accounting purposes, Otic is considered to be acquiring Tokai in the Otic Transaction.

 



 

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As a result, upon consummation of the Otic Transaction, (1) the historical financial statements of Otic will become the historical financial statements of the combined company and (2) Otic will record the business combination in its financial statements and will apply the acquisition method to account for the acquired assets and assumed liabilities of the Tokai as of the closing date of the transaction. Applying the acquisition method includes recording the identifiable assets acquired and liabilities assumed at their fair values, and recording goodwill for the excess of the purchase price over the aggregate fair value of the identifiable assets acquired and liabilities assumed, if any, or recording a bargain purchase gain if the aggregate fair value of the identifiable assets acquired and liabilities assumed exceeds the purchase price for the acquisition.

No Appraisal Rights

(pages 69, 96)

Holders of Tokai common stock will not be entitled to any dissenters’ rights or appraisal rights with respect to any of the proposals to be voted on at the special meeting.

Equity Financing

(page 115)

In connection with the Otic Transaction, Tokai has entered into the Tokai Stock Purchase Agreement dated January                     , 2017 with Otic and certain purchasers set forth therein pursuant to which the purchasers have agreed to purchase              shares of Tokai common stock at a price of $1.11 per share. The Tokai Stock Purchase Agreement provides that the purchase and sale of the Tokai common stock will occur immediately following the closing of the Otic Transaction.

Reverse Stock Split

(pages 118-124)

Under the Share Purchase Agreement, Tokai has agreed to seek stockholder approval of a reverse stock split with the specific terms to be proposed by Tokai and approved by Otic to the extent necessary in order to maintain Tokai’s listing on NASDAQ. Based on information currently available to Tokai, Tokai anticipates that it will be unable to meet the $4.00 minimum bid price initial listing requirement at the closing of the Otic Transaction unless it effects a reverse stock split.

 



 

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QUESTIONS AND ANSWERS ABOUT

THE SPECIAL MEETING AND THE OTIC TRANSACTION

The following section provides answers to frequently asked questions about the Otic Transaction. This section, however, provides only summary information. For a more complete response to these questions and for additional information, please refer to the cross-referenced sections.

 

Q: When and where is the special meeting of the Tokai stockholders being held?

 

A: The special meeting will be held on                 , 2017 at          local time, at the offices of Wilmer Cutler Pickering Hale and Dorr LLP, 60 State Street, Boston, Massachusetts 02109. For more information see the section entitled “Information About the Special Meeting,” beginning on page 65 of this proxy statement.

 

Q: Why did I receive these proxy materials?

 

A: Tokai’s board of directors has made these materials available to you in connection with the solicitation of proxies for use at its special meeting of stockholders to be held on                 , 2017. As a holder of common stock, you are invited to attend the special meeting and are requested to vote on the items of business described in this proxy statement. This proxy statement includes information that we are required to provide to you under SEC rules and that is designed to assist you in voting your shares. For more information see the section entitled “Information About the Special Meeting,” beginning on page 65 of this proxy statement.

 

Q: Who can vote at the special meeting?

 

A: To be entitled to vote, you must have been a stockholder of record at the close of business on                 , 2017, the record date for Tokai’s special meeting. There were                  shares of our common stock outstanding and entitled to vote at the special meeting as of the record date.

 

Q: How many votes do I have?

 

A: Each share of Tokai common stock that you own as of the record date will entitle you to one vote on each matter considered at the special meeting.

 

Q: How do I vote?

 

A: If you are the “record holder” of your shares, meaning that your shares are registered in your name in the records of Tokai’s transfer agent, Continental Stock Transfer & Trust Company, you may vote your shares at the meeting in person or by proxy as follows:

 

  1. Over the Internet: To vote over the Internet, please go to the following website: www.proxypush.com/tkai, and follow the instructions at that site for submitting your proxy electronically. If you vote over the Internet, you do not need to complete and mail your proxy card or vote your proxy by telephone. You must specify how you want your shares voted or your Internet vote cannot be completed, and you will receive an error message. You must submit your Internet proxy before 11:59 p.m., Eastern Time, on                 , 2017, the day before the special meeting, for your proxy to be valid and your vote to count.

 

  2. By Telephone: To vote by telephone, please call (866) 206-4382 and follow the instructions provided on the proxy card. If you vote by telephone, you do not need to complete and mail your proxy card or vote your proxy over the Internet. You must specify how you want your shares voted and confirm your vote at the end of the call or your telephone vote cannot be completed. You must submit your telephonic proxy before 11:59 p.m., Eastern Time, on                 , 2017, the day before the special meeting, for your proxy to be valid and your vote to count.

 

  3.

By Mail: To vote by mail, you must mark, sign and date the proxy card and then mail the proxy card in accordance with the instructions on the proxy card. If you vote by mail, you do not need to

 

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  vote your proxy over the Internet or by telephone. Mediant Communications, Inc. must receive the proxy card not later than                 , 2017, the day before the special meeting, for your proxy to be valid and your vote to count. If you return your proxy card but do not specify how you want your shares voted on any particular matter, they will be voted in accordance with the recommendations of our board of directors.

 

  4. In Person at the Meeting: If you attend the special meeting, you may deliver your completed proxy card in person or you may vote by completing a ballot, which Tokai will provide to you at the meeting.

If your shares are held in “street name,” meaning they are held for your account by an intermediary, such as a broker, then you are deemed to be the beneficial owner of your shares and the broker that actually holds the shares for you is the record holder and is required to vote the shares it holds on your behalf according to your instructions. The proxy materials, as well as voting and revocation instructions, should have been forwarded to you by the broker that holds your shares. In order to vote your shares, you will need to follow the instructions that your broker provides you. Many brokers solicit voting instructions over the Internet or by telephone.

If you do not give instructions to your broker, your broker will not be able to vote your shares with respect to “non-discretionary” items. Each of the Share Issuances Proposal, the Reverse Stock Split Proposal and the Adjournment Proposal are “non-discretionary” items. Accordingly, if you do not give your broker voting instructions on any of these proposals, your broker may not vote your shares with respect to such matter and your shares will be counted as “broker non-votes” with respect to such proposal. A “broker non-vote” occurs when shares held by a broker are not voted with respect to a particular proposal because the broker does not have or did not exercise discretionary authority to vote on the matter and has not received voting instructions from its clients.

Regardless of whether your shares are held in street name, you are welcome to attend the meeting. You may not vote shares held in street name in person at the meeting, however, unless you obtain a legal proxy, executed in your favor, from the holder of record (i.e., your broker). A legal proxy is not the form of proxy included with this proxy statement.

 

Q: Can I change my vote?

 

A: If your shares are registered directly in your name, you may revoke your proxy and change your vote at any time before the vote is taken at the special meeting. To do so, you must do one of the following:

 

  1. Vote over the Internet or by telephone as instructed above. Only your latest Internet or telephone vote is counted.

 

  2. Sign and return a new proxy card. Only your latest dated and timely received proxy card will be counted.

 

  3. Attend the special meeting and vote in person as instructed above. Attending the special meeting will not alone revoke your Internet vote, telephone vote or proxy card submitted by mail, as the case may be.

 

  4. Give Tokai’s corporate secretary written notice before or at the meeting that you want to revoke your proxy.

If your shares are held in “street name,” you may submit new voting instructions by contacting your broker or other nominee. You may also vote in person at the special meeting if you obtain a legal proxy as described in the answer above.

 

Q: How many shares must be represented to have a quorum and hold the special meeting?

 

A:

A majority of Tokai’s shares of common stock outstanding at the record date must be present in person or represented by proxy to hold the special meeting. This is called a quorum. For purposes of determining whether a quorum exists, Tokai counts as present any shares that are voted over the Internet, by telephone, by completing and submitting a proxy card by mail or that are represented in

 

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  person at the meeting. Further, for purposes of establishing a quorum, Tokai will count as present shares that a stockholder holds even if the stockholder votes to abstain or only votes on one of the proposals. In addition, Tokai will count as present shares held in “street name” by brokers who indicate on their proxies that they do not have authority to vote those shares. If a quorum is not present, Tokai expects to adjourn the special meeting until it obtains a quorum.

 

Q: What vote is required to approve each matter and how are votes counted?

 

A: Proposal 1—Share Issuances Proposal

Approval of the Share Issuances Proposal requires the affirmative vote of a majority of the shares of Tokai common stock, present in person or represented by proxy and entitled to vote on the subject matter (excluding broker non-votes and abstentions).

Certain Tokai stockholders and directors and officers, who as of December 31, 2016 in the aggregate own approximately 36.3% of the outstanding shares of Tokai common stock, are parties to a Support Agreement with Tokai and Otic, under which such stockholders have agreed to vote in favor of the issuance of Tokai common stock in the Otic Transaction and against any “acquisition proposal.” For a more complete description of the Support Agreement, Tokai urges you to read the section entitled “Agreements Related to the Share Purchase Agreement—Support Agreement,” beginning on page 115 of this proxy statement.

Proposal 2—Reverse Stock Split Proposal

Approval of the Reverse Stock Split Proposal requires the affirmative vote of a majority of the shares of Tokai common stock outstanding and entitled to vote at the special meeting (broker non-votes and abstentions will have the same effect as voting against the Reverse Stock Split Proposal).

Proposal 3—Adjournment Proposal

Approval of the Adjournment Proposal requires the affirmative vote of a majority of the shares of Tokai common stock, present in person or represented by proxy and entitled to vote on the subject matter (excluding broker non-votes and abstentions).

 

Q: Who will count the vote?

 

A: The votes will be counted, tabulated and certified by Mediant Communications, Inc.

 

Q: Where can I find the voting results?

 

A: Tokai plans to announce preliminary voting results at the special meeting and will report final voting results in a Current Report on Form 8-K filed with the SEC within four business days following the date of the special meeting.

 

Q: Who will bear the costs of soliciting these proxies?

 

A: Tokai will bear the cost of soliciting proxies. In addition to solicitation by mail, Tokai’s directors, officers and employees may solicit proxies by telephone, e-mail, facsimile, and in person without additional compensation. Tokai may reimburse brokers or persons holding stock in their names, or in the names of their nominees, for their expenses in sending proxies and proxy material to beneficial owners.

 

Q: What is the Otic Transaction?

Tokai, Otic and the Sellers have entered into a Share Purchase Agreement, dated as of December 21, 2016. Under the Share Purchase Agreement, Tokai will acquire all of the ordinary and preferred shares of Otic in exchange for the issuance to the Sellers of a specified number of shares of Tokai common stock and will assume all outstanding share options and warrants of Otic. Accordingly, following the Otic Transaction, Otic will be a wholly owned subsidiary of Tokai.

Based on the outstanding share capital of Otic as of the date of the Share Purchase Agreement and the shares issuable upon exercise of warrants to purchase shares of Otic and the conversion of certain

 

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outstanding debt facilities of Otic into shares of Otic that are expected to be exercised or converted prior to the closing of the Otic Transaction, Tokai expects to issue              shares of Tokai common stock in the Otic Transaction. If all of Otic’s outstanding options and warrants are exercised prior to closing, Tokai will issue a total of 36,911,631 shares of Tokai common stock in the Otic Transaction. Following the closing of the Otic Transaction, the stockholders of Otic are expected to hold approximately 60% of the outstanding shares of Tokai common stock, excluding for this purpose the effect on ownership of the issuance of shares in the Equity Financing. The relative percentage ownership of the combined company was derived using a stipulated value of Otic of approximately $50.0 million and of Tokai of approximately $33.0 million.

After the Otic Transaction, Tokai will change its corporate name to “OticPharma, Inc.”

 

Q: Why are the two companies proposing the transaction?

 

A: The Otic Transaction will result in a pharmaceutical company focused on the development and commercialization of products for ENT disorders, including Otic’s lead candidate, which is a nasally-administered, combination drug product (OP-02) intended to address the underlying cause of otitis media and Eustachian tube dysfunction (“OM/ETD”). For a discussion of Tokai’s reasons for the Otic Transaction, Tokai urges you to read the section entitled “The Otic Transaction—Reasons for the Otic Transaction,” beginning on page 81 of this proxy statement.

 

Q: What is the consideration to be paid by Tokai in the transaction?

 

A: At the closing of the transaction, all of the outstanding ordinary and preferred shares of Otic immediately prior to the closing of the Otic Transaction will be exchanged for a specified number of shares of Tokai common stock, and Tokai will assume all outstanding share options and warrants of Otic. Based on the number of outstanding shares of Otic as of the date of the Share Purchase Agreement, and shares issuable upon exercise of warrants to purchase shares of Otic and the conversion of certain outstanding debt facilities of Otic into shares of Otic that are expected to be exercised or converted prior to the closing of the Otic Transaction, Tokai expects to issue              shares of Tokai common stock in the Otic Transaction. If all of Otic’s outstanding options and warrants are exercised prior to closing, Tokai will issue a total of 36,911,631 shares of Tokai common stock in the Otic Transaction. The consideration that each Seller will receive at closing depends on an allocation schedule that Otic will deliver to Tokai prior to closing, which reflects the consideration that each Seller is due upon closing of the Otic Transaction according to Otic’s organizational documents. See “Terms of the Share Purchase Agreement—Exchange Ratio,” beginning on page 98 of this proxy statement.

In connection with the Otic Transaction, each outstanding Otic option that is not exercised prior to the closing of the Otic Transaction will be assumed on the same terms and conditions as were applicable under the Otic share incentive plan, into an option to acquire such number of shares of Tokai common stock as is equal to the number of Otic shares subject to such unexercised option multiplied by                 , at a correspondingly adjusted exercise price.

In connection with the Otic Transaction, each outstanding warrant of Otic that is not exercised prior to the closing of the Otic Transaction will be assumed by Tokai on the same terms and conditions into a warrant to acquire such number of shares of Tokai common stock as is equal to the number of Otic shares subject to the warrant multiplied by                 , at a correspondingly adjusted exercise price.

 

Q: In addition to the requirement of obtaining Tokai stockholder approval, what else is required to consummate the Otic Transaction?

 

A: In addition to the requirement of obtaining Tokai stockholder approval, each of the other closing conditions set forth in the Share Purchase Agreement must be satisfied or waived, including:

 

    the filing, obtainment or occurrence of all authorizations and consents, including Israeli tax rulings described in the Share Purchase Agreement;

 

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    the absence of any order, executive order, stay, decree, judgment or injunction (preliminary or permanent) or statute, rule, or regulation prohibiting consummation of the Otic Transaction;

 

    the approval of an initial listing application on The NASDAQ Global Market with respect to the shares of Tokai common stock to be issued in the Otic Transaction;

 

    the accuracy of representations and warranties, subject to customary materiality standards;

 

    the performance of covenants in all material respects;

 

    the absence of any continuing Tokai or Otic material adverse effect; and

 

    resignations of the directors of Tokai who will not continue to serve as directors following closing of the Otic Transaction pursuant to the terms of the Share Purchase Agreement.

For a more complete description of the closing conditions under the Share Purchase Agreement, Tokai urges you to read the section entitled “Terms of the Share Purchase Agreement—Conditions to the Consummation of the Otic Transaction,” beginning on page 99 of this proxy statement.

 

Q: Who will be the directors of Tokai following the Otic Transaction?

 

A: The combined company’s board of directors will initially be fixed at seven members, consisting of (i) four members designated by Otic: Keith A. Katkin as Chairman, Gregory J. Flesher, Gary A. Lyons and Erez Chimovits and (ii) three board members designated by Tokai, which may include existing board members and up to one new member designated by Tokai. For more information on the leadership of the combined company following the transaction, see the section entitled “Executive Officers and Directors Following the Otic Transaction,” beginning on page 165 of this proxy statement.

 

Q: Who will be the executive officers of Tokai immediately following the Otic Transaction?

 

A: Immediately following the completion of the Otic Transaction, the executive management team of the combined company is expected to be composed of the current executive team of Otic: Gregory J. Flesher, serving as President and Chief Executive Officer, Christine G. Ocampo, serving as Chief Financial and Compliance Officer and Dr. Catherine C. Turkel, serving as Chief Development Officer. For more information on the leadership of the combined company following the transaction, see the section entitled “Executive Officers and Directors Following the Otic Transaction,” beginning on page 165 of this proxy statement.

 

Q: What will happen to Tokai if, for any reason, the Otic Transaction does not close?

 

A: If the Otic Transaction does not close for any reason, the Tokai board of directors may elect to, among other things, attempt to complete another strategic transaction, attempt to sell or otherwise dispose of the various assets of Tokai, dissolve or liquidate the assets of Tokai or seek to continue to operate the business of Tokai. If Tokai seeks another strategic transaction or attempts to sell or otherwise dispose of the various assets of Tokai, there is no assurance that Tokai will be able to do so, that the terms would be equal to or superior to the terms of the Otic Transaction or as to the timing of such transaction. If Tokai decides to dissolve and liquidate its assets, Tokai would be required to pay all of its debts and contractual obligations, and to set aside certain reserves for potential future claims, and there can be no assurances as to the amount or timing of available cash left to distribute to stockholders after paying the debts and other obligations of Tokai and setting aside funds for reserves.

If Tokai were to seek to continue its business, it would need to complete its assessment of its galeterone and ARDA programs to determine whether and how to continue one or both of these development programs or acquire one or more other product candidates. Tokai would also need to raise funds to support continued operations and reassess its workforce requirements in consideration of its reduced workforce.

For information on reasons that the Otic Transaction might not close, see the sections entitled “Terms of the Share Purchase Agreement—Conditions to the Consummation of the Otic Transaction” and “Terms

 

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of the Share Purchase Agreement—Termination of the Share Purchase Agreement,” beginning on pages 99 and 110, respectively. For more information on potential consequences for Tokai stockholders should the Otic Transaction not close, see the section entitled “Risk Factors,” beginning on page 29 of this proxy statement.

 

Q: When do you expect the Otic Transaction to be consummated?

 

A: Tokai anticipates that the closing of the Otic Transaction will occur sometime soon after the Tokai special meeting to be held on                 , 2017, but Tokai cannot predict the exact timing. For more information, please see the sections entitled “Terms of the Share Purchase Agreement—Conditions to the Consummation of the Otic Transaction,” beginning on page 99, and “The Otic Transaction—Expected Timing of the Otic Transaction,” beginning on page 71, each in this proxy statement.

 

Q: What are the material U.S. federal income tax consequences of the Otic Transaction to Tokai stockholders?

 

A: Tokai stockholders will not recognize gain or loss in connection with the Otic Transaction or the related Equity Financing with respect to their shares of Tokai common stock. For more information on the material U.S. federal income tax consequences of the Otic Transaction and the related Equity Financing to Tokai stockholders, see the section entitled “The Otic Transaction—Material U.S. Federal Income Tax Consequences to Tokai Stockholders,” beginning on page 95 of this proxy statement.

 

Q: What is the reverse stock split and why is it necessary?

 

A: Pursuant to the Share Purchase Agreement, Tokai agreed with Otic to seek stockholder approval for a reverse stock split with the specific terms to be proposed by Tokai and approved by Otic to the extent necessary in order to maintain Tokai’s listing on NASDAQ. Based on information currently available to Tokai, Tokai anticipates that it will be unable to meet the $4.00 minimum bid price initial listing requirement at the closing of the Otic Transaction unless it effects a reverse stock split. Therefore Tokai is seeking to effect a reverse stock split of Tokai’s issued and outstanding shares of common stock, pursuant to which any number of outstanding shares between and including                  and                 , such number to be determined by the Tokai board of directors at any time within          months of the date of the special meeting with the agreement of Otic, would be combined and reclassified into one share of Tokai common stock (the “reverse stock split”). The Tokai board of directors believes that the completion of the reverse stock split will cause the price of Tokai common stock to increase, which may encourage interest and trading in its common stock and may reduce the risk of a delisting of Tokai common stock from NASDAQ. There are no specified time restrictions on the reverse stock split. For more information on the reverse stock split, see the section entitled “Reverse Stock Split Proposal,” beginning on page 118 of this proxy statement.

 

Q: As a Tokai stockholder, how does the Tokai board of directors recommend that I vote?

 

A: The Tokai board of directors unanimously recommends that you vote (1) “FOR” the Share Issuances Proposal; (2) “FOR” the Reverse Stock Split Proposal; and (3) “FOR” the Adjournment Proposal. The approval by Tokai stockholders of the Share Issuances Proposal is required to complete the Otic Transaction described in this proxy statement. For more information on the Tokai board of directors’ recommendations to Tokai stockholders regarding the proposals to be voted on at the special stockholder meeting, see the section entitled “The Otic Transaction—Recommendation of the Tokai Board of Directors,” beginning on page 81 of this proxy statement.

 

Q: What risks should I consider in deciding whether to vote in favor of the proposals described in this proxy statement?

 

A: You should carefully review the section entitled “Risk Factors,” beginning on page 29 of this proxy statement, which sets forth certain risks and uncertainties related to the Otic Transaction, including risks and uncertainties to which Tokai, as an independent company, is subject, risks and uncertainties of the Otic business, which will be the business of the combined company following completion of the Otic Transaction, and additional risks and uncertainties to which the combined company will be subject.

 

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SELECTED HISTORICAL AND UNAUDITED PRO FORMA

COMBINED FINANCIAL INFORMATION

Selected Historical Consolidated Financial Data of Tokai

The following table summarizes Tokai’s consolidated financial data. Tokai has derived the consolidated statement of operations data for the years ended December 31, 2015, 2014 and 2013 and the consolidated balance sheet data as of December 31, 2015 and 2014 from Tokai’s audited consolidated financial statements included elsewhere in this proxy statement. Tokai has derived the consolidated statement of operations data for the year ended December 31, 2012 and the consolidated balance sheet data as of December 31, 2013 and 2012 from Tokai’s audited consolidated financial statements not included in this proxy statement. The statement of operations data for the nine months ended September 30, 2016 and 2015 and the balance sheet data as of September 30, 2016 have been derived from Tokai’s unaudited financial statements included elsewhere in this proxy statement and have been prepared on the same basis as the audited financial statements. In the opinion of Tokai’s management, the unaudited financial data reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the financial information in those statements. You should read the following selected consolidated financial data together with Tokai’s consolidated financial statements and the related notes appearing at the end of this proxy statement and the section entitled “Tokai’s Management’s Discussion and Analysis of Financial Condition and Results of Operations,” beginning on page 138 of this proxy statement. Tokai’s historical results are not necessarily indicative of results that should be expected in the future, and results for the nine months ended September 30, 2016 are not necessarily indicative of the results that should be expected for the full year ending December 31, 2016.

 

    Year Ended December 31,     Nine Months
Ended
September 30,
 
    2015     2014     2013     2012     2016     2015  
    (in thousands, except per share data)  

  Statement of Operations Data:

           

  Revenue

  $ —        $ —        $ —        $ —        $ —        $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

  Operating expenses:

           

  Research and development (1)

    32,638        14,577        12,201        7,370        23,988        24,905   

  General and administrative (1)

    12,623        8,885        3,548        2,279        10,375        9,284   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

  Total operating expenses

    45,261        23,462        15,749        9,649        34,363        34,189   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

  Loss from operations

    (45,261     (23,462     (15,749     (9,649     (34,363     (34,189

  Interest and other income (expense), net

    174        166        24        —          141        119   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

  Net loss

    (45,087     (23,296     (15,725     (9,649     (34,222     (34,070

  Accretion of redeemable convertible preferred stock to redemption value

    —          —          (94     (34     —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

  Net loss attributable to common stockholders

  $ (45,087   $ (23,296   $ (15,819   $ (9,683   $ (34,222   $ (34,070
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

  Net loss per share attributable to common stockholders, basic and diluted

  $ (2.01   $ (3.60   $ (38.02   $ (31.09   $ (1.51   $ (1.52
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

  Weighted average common shares outstanding, basic and diluted

    22,484        6,469        416        311        22,632        22,449   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1) Amounts include stock-based compensation expense as follows:

 

     Year Ended December 31,      Nine Months
Ended
September 30,
 
     2015      2014      2013      2012      2016      2015  
     (in thousands)  

  Research and development

   $ 634       $ 552       $ 91       $ 87       $ 498       $ 464   

  General and administrative

     2,267         1,556         147         123         2,162         1,580   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

  Total

   $ 2,901       $ 2,108       $ 238       $ 210       $ 2,660       $ 2,044   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     As of December 31,     As of
September 30,

2016
 
     2015      2014      2013     2012    
     (in thousands)  

  Balance Sheet Data:

            

  Cash, cash equivalents and marketable securities

   $ 63,957       $ 105,256       $ 31,753      $ 11,691      $ 34,718   

  Working capital

     61,008         103,268         29,969        9,908        29,990   

  Total assets

     67,974         107,744         32,287        11,962        36,721   

  Redeemable convertible preferred stock

     —           —           85,345        49,845        —     

  Total stockholders’ equity (deficit)

     61,724         103,501         (55,267     (39,901     30,257   

 

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Selected Historical Consolidated Financial Data of Otic

The following table summarizes Otic’s consolidated financial data. Otic has derived the consolidated statements of operations data for the years ended December 31, 2015 and 2014 and the consolidated balance sheet data as of December 31, 2015 and 2014 from Otic’s audited consolidated financial statements included elsewhere in this proxy statement. The consolidated statement of operations data for the nine months ended September 30, 2016 and 2015 and the consolidated balance sheet data as of September 30, 2016 have been derived from Otic’s unaudited consolidated financial statements included elsewhere in this proxy statement and have been prepared on the same basis as the audited consolidated financial statements. In the opinion of Otic’s management, the unaudited consolidated financial data reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the financial information in those statements. You should read the following selected consolidated financial data together with Otic’s consolidated financial statements and the related notes appearing at the end of this proxy statement and “Otic’s Management’s Discussion and Analysis of Financial Condition and Results of Operations,” beginning on page 154 of this proxy statement. Otic’s historical results are not necessarily indicative of results that should be expected in the future, and results for the nine months ended September 30, 2016 are not necessarily indicative of the results that should be expected for the full year ending December 31, 2016.

 

     Year Ended
December 31,
    Nine Months
Ended
September 30,
 
         2015             2014         2016     2015  
    

(in thousands, except

per share data)

 

  Statement of Operations Data:

        

  Revenue

   $ —        $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

  Operating expenses:

        

  Research and development

     2,774        946        2,335        1,521   

  General and administrative

     1,415        208        1,326        566   
  

 

 

   

 

 

   

 

 

   

 

 

 

  Total operating expenses

     4,189        1,154        3,661        2,087   
  

 

 

   

 

 

   

 

 

   

 

 

 

  Loss from operations

     (4,189     (1,154     (3,661 )     (2,087

  Other income (expenses), net

     (25     (6     (479 )     17   
  

 

 

   

 

 

   

 

 

   

 

 

 

  Net loss

   $ (4,214   $ (1,160   $ (4,140   $ (2,070
  

 

 

   

 

 

   

 

 

   

 

 

 

  Net loss per share, basic and diluted

   $ (1.13   $ (0.49   $ (1.01   $ (0.65
  

 

 

   

 

 

   

 

 

   

 

 

 

  Weighted average ordinary shares outstanding, basic and diluted

     606        555        711        898   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     As of
December 31,
     As of
September 30,
2016
 
     2015      2014     
    

(in thousands)

 

  Balance Sheet Data:

        

  Cash and cash equivalents

   $ 3,095       $ 1,565       $ 2,372   

  Working capital (deficit)

     2,693         1,477         (1,288

  Total assets

     3,298         1,637         2,529   

  Total shareholders’ equity (deficit)

     2,782         1,503         (1,216

 

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Selected Unaudited Pro Forma Combined Financial Data of Tokai and Otic

The following selected unaudited pro forma combined financial data presents the pro forma financial position and results of operations of the combined business based on the historical consolidated financial statements of Tokai and Otic, after giving effect to the Otic Transaction and the Equity Financing. The unaudited pro forma combined balance sheet data as of September 30, 2016 gives effect to the Otic Transaction and the Equity Financing as if each took place on September 30, 2016. The unaudited pro forma combined statement of operations data for the nine months ended September 30, 2016 and the year ended December 31, 2015 give effect to the Otic Transaction and the Equity Financing as if each took place on January 1, 2015. In the unaudited pro forma combined financial data, the Otic Transaction has been accounted for as a business combination, with Otic being the accounting acquirer. The allocation of purchase consideration reflected in the unaudited pro forma combined financial data is preliminary and will be adjusted based on the fair value of purchase consideration on the closing date of the Otic Transaction and upon completion of the final valuations of the fair value of the assets acquired and liabilities assumed of Tokai on the closing date of the Otic Transaction. Although Otic management believes that the fair values assigned to the assets to be acquired and liabilities to be assumed reflected in the unaudited pro forma combined financial data are based on reasonable estimates and assumptions using currently available data, the results of the final allocation could be materially different from the preliminary allocation.

The unaudited pro forma combined financial statements were prepared in accordance with Article 11 of SEC Regulation S-X. Accordingly, the historical consolidated financial data of Tokai and Otic has been adjusted to give pro forma effect to events that are (i) directly attributable to the Otic Transaction and the Equity Financing, (ii) factually supportable, and (iii) with respect to the unaudited pro forma combined statements of operations, expected to have a continuing impact on the combined results of operations of the combined company. In addition, the pro forma adjustments reflecting the completion of the Otic Transaction are based upon the application of the acquisition method of accounting in accordance with U.S. GAAP and upon the assumptions set forth in the unaudited pro forma combined financial statements.

The unaudited pro forma combined financial data is presented for illustrative purposes only and is not necessarily indicative of the financial condition or results of operations of future periods or the financial condition or results of operations that actually would have been realized had the entities been combined during the periods presented.

The following selected unaudited pro forma combined financial data should be read in conjunction with the section entitled “Unaudited Pro Forma Combined Financial Information,” beginning on page 171, Tokai’s audited and unaudited financial statements and the notes thereto included in this proxy statement beginning on page F-1, Otic’s audited and unaudited financial statements and the notes thereto beginning on page F-39, the sections entitled “Tokai’s Management’s Discussion and Analysis of Financial Condition and Results of Operations,” beginning on page 138, and “Otic’s Management’s Discussion and Analysis of Financial Condition and Results of Operations,” beginning on page 154, and the other information contained in this proxy statement.

 

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The following information does not give effect to the proposed reverse stock split of Tokai common stock described in the section entitled “Reverse Stock Split Proposal,” beginning on page 118 of this proxy statement.

 

     Pro Forma Combined  
     Year Ended
December 31, 2015
    Nine Months Ended
September 30, 2016
 
    

(in thousands, except

per share data)

 

  Statement of Operations Data:

    

  Revenue

   $ —        $ —     
  

 

 

   

 

 

 

  Operating expenses:

    

  Research and development

     35,412        26,323   

  General and administrative

     14,038        11,651   
  

 

 

   

 

 

 

  Total operating expenses

     49,450        37,974   
  

 

 

   

 

 

 

  Loss from operations

     (49,450     (37,974

  Other income (expense), net

     149        179  
  

 

 

   

 

 

 

  Net loss

   $ (49,301   $ (37,795
  

 

 

   

 

 

 

  Net loss per share, basic and diluted

   $ (0.93   $ (0.67
  

 

 

   

 

 

 

  Weighted average common shares outstanding, basic and diluted

     52,768        56,475   
  

 

 

   

 

 

 

 

     Pro Forma
Combined as of
September 30, 2016
 
     (in thousands)  

  Balance Sheet Data:

  

  Cash, cash equivalents and marketable securities

   $ 44,209   

  Working capital

     33,242   

  Total assets

     46,369   

  Total stockholders’ equity

     33,701   

 

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Comparative Historical and Unaudited Pro Forma Per Share Data

The information below reflects historical per share information for Tokai and Otic and unaudited pro forma per share information of the combined company as if Tokai and Otic had been combined as of or for the periods presented. The per share amounts below do not give effect to the proposed reverse stock split of Tokai common stock described in the section entitled “Reverse Stock Split Proposal,” beginning on page 118 of this proxy statement.

The pro forma amounts in the tables below have been derived from the unaudited pro forma combined financial information included in the section entitled “Unaudited Pro Forma Combined Financial Information,” beginning on page 171 of this proxy statement. The pro forma amounts are presented for illustrative purposes only and are not necessarily indicative of what the financial position or the results of operations of the combined company would have been had Tokai and Otic been combined as of or for the periods presented.

The tables below should be read in conjunction with the audited and unaudited consolidated financial statements of Tokai and the related notes, the audited and unaudited consolidated financial statements of Otic and the related notes, and the unaudited pro forma combined financial information and the related notes, all of which are included elsewhere in this proxy statement.

TOKAI

 

     As of or for
the Year
Ended

December 31,
2015
    As of or for
the Nine
Months

Ended
September 30,
2016
 

  Historical Per Common Share Data:

    

  Basic and diluted net loss per share

   $ (2.01   $ (1.51

  Book value per share

   $ 2.73      $ 1.34   

  Cash dividends declared per share

   $ —        $ —     

OTIC

 

     As of or for
the Year
Ended

December 31,
2015
    As of or for
the Nine
Months

Ended
September 30,
2016
 

  Historical Per Ordinary Share Data:

    

  Basic and diluted net loss per share

   $ (1.13   $ (1.01

  Book value per share

   $ 3.97      $ (1.64

  Cash dividends declared per share

   $ —        $ —     
    

  Pro Forma Equivalent Common Share Data:

    

  Basic and diluted net loss per share

   $ (0.27   $ (0.24

  Book value per share

   $ 0.93      $ (0.39

  Cash dividends declared per share

   $ —        $ —     

 

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UNAUDITED PRO FORMA COMBINED

 

     As of or for
the Year
Ended

December 31,
2015
    As of or for
the Nine
Months

Ended
September 30,
2016
 

  Pro Forma Per Common Share Data:

    

  Basic and diluted net loss per share

   $ (0.93   $ (0.67

  Book value per share

     N/A      $ 0.58   

  Cash dividends declared per share

   $ —        $ —     

 

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DESCRIPTION OF TOKAI COMMON STOCK

The following description of Tokai’s capital stock is intended as a summary only and therefore is not a complete description of Tokai’s capital stock. This description is based upon, and is qualified by reference to, Tokai’s certificate of incorporation, Tokai’s by-laws and applicable provisions of Delaware corporate law. You should read Tokai’s certificate of incorporation and by-laws for the provisions that are important to you.

Tokai’s authorized capital stock consists of 200,000,000 shares of common stock and 5,000,000 shares of preferred stock. As of December 31, 2016, 22,641,651 shares of common stock were outstanding and no shares of preferred stock were outstanding.

Common Stock

Annual Meeting

Annual meetings of Tokai’s stockholders are held on the date designated in accordance with Tokai’s by-laws. Written notice must be mailed to each stockholder entitled to vote not less than ten nor more than 60 days before the date of the meeting. The presence in person or by proxy of the holders of record of a majority of Tokai’s issued and outstanding shares entitled to vote at such meeting constitutes a quorum for the transaction of business at meetings of the stockholders. Special meetings of the stockholders may be called for any purpose only by the board of directors, and business transacted at any special meetings of stockholders shall be limited to matters relating to the purpose or purposes stated in the notice of such meeting. Except as may be otherwise provided by applicable law, Tokai’s certificate of incorporation or Tokai’s by-laws, all elections shall be decided by a plurality, and all other questions shall be decided by a majority, of the votes cast by stockholders entitled to vote thereon at a duly held meeting of stockholders at which a quorum is present.

Voting Rights

Each holder of common stock is entitled to one vote for each share held on all matters to be voted upon by stockholders.

Dividends

The holders of common stock, after any preferences of holders of any preferred stock, are entitled to receive dividends when and if declared by the board of directors out of legally available funds.

Liquidation and Dissolution

If Tokai is liquidated or dissolved, the holders of the common stock will be entitled to share in Tokai’s assets available for distribution to stockholders in proportion to the amount of common stock they own. The amount available for common stockholders is calculated after payment of liabilities. Holders of any preferred stock will receive a preferential share of Tokai’s assets before the holders of the common stock receive any assets.

Other Rights

Holders of common stock have no right to:

 

    convert the stock into any other security;

 

    have the stock redeemed;

 

    purchase additional stock; or

 

    maintain their proportionate ownership interest.

 

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The common stock does not have cumulative voting rights. Holders of shares of the common stock are not required to make additional capital contributions.

Transfer Agent and Registrar

Continental Stock Transfer & Trust Company is transfer agent and registrar for the common stock.

Preferred Stock

Under the terms of Tokai’s certificate of incorporation, Tokai’s board of directors is authorized to issue shares of preferred stock in one or more series without stockholder approval. Tokai’s board of directors has the discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred stock.

The purpose of authorizing Tokai’s board of directors to issue preferred stock and determine its rights and preferences is to eliminate delays associated with a stockholder vote on specific issuances. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions, future financings and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or could discourage a third party from seeking to acquire, a majority of Tokai’s outstanding voting stock. There are no shares of preferred stock outstanding, and Tokai has no present plans to issue any shares of preferred stock.

Stock Options

As of December 31, 2016, there were options to purchase a total of 1,896,169 shares of Tokai common stock outstanding at a weighted average exercise price of $6.55 per share.

Provisions of Tokai’s Certificate of Incorporation and By-laws and Delaware Law That May Have Anti-Takeover Effects

Staggered Board; Removal of Directors

Tokai’s certificate of incorporation and by-laws divide its board of directors into three classes with staggered three-year terms. In addition, a director is only able to be removed for cause and only by the affirmative vote of the holders of at least 75% of the votes that all of Tokai stockholders would be entitled to cast in an annual election of directors. Any vacancy on the Tokai board of directors, including a vacancy resulting from an enlargement of the board of directors, may only be filled by vote of a majority of the directors then in office. The classification of the board of directors and the limitations on the removal of directors and filling of vacancies could make it more difficult for a third party to acquire, or discourage a third party from seeking to acquire, control of Tokai.

Stockholder Action by Written Consent; Special Meetings

Tokai’s certificate of incorporation provides that any action required or permitted to be taken by its stockholders must be effected at a duly called annual or special meeting of such holders and may not be effected by any consent in writing by such holders. Tokai’s certificate of incorporation and by-laws also provide that, except as otherwise required by law, special meetings of Tokai’s stockholders can only be called by the board of directors.

Advance Notice Requirements for Stockholder Proposals

Tokai’s by-laws establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of stockholders, including proposed nominations of persons for election to the board of directors. Stockholders at an annual meeting may only consider proposals or nominations specified in the notice of meeting or brought before the meeting by or at the direction of the board of directors or by a stockholder of record on the

 

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record date for the meeting who is entitled to vote at the meeting and who has delivered timely written notice in proper form to Tokai’s secretary of the stockholder’s intention to bring such business before the meeting. These provisions could have the effect of delaying until the next stockholder meeting stockholder actions that are favored by the holders of a majority of Tokai’s outstanding voting securities.

Delaware Business Combination Statute

Tokai is subject to Section 203 of the Delaware General Corporate Law (“DGCL”). Subject to certain exceptions, Section 203 prevents a publicly-held Delaware corporation from engaging in a “business combination” with any “interested stockholder” for three years following the date that the person became an interested stockholder, unless the interested stockholder attained such status with the approval of the board of directors or unless the business combination is approved in a prescribed manner. A “business combination” includes, among other things, a merger or consolidation involving Tokai and the “interested stockholder” and the sale of more than 10% of Tokai’s assets. In general, an “interested stockholder” is any entity or person beneficially owning 15% or more of Tokai’s outstanding voting stock and any entity or person affiliated with or controlling or controlled by such entity or person.

Under Section 203, a business combination between a corporation and an interested stockholder is prohibited unless it satisfies one of the following conditions: before the stockholder became interested, the board of directors approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; upon closing of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding, shares owned by persons who are directors and also officers, and employee stock plans, in some instances; or at or after the time the stockholder became interested, the business combination was approved by the board of directors of the corporation and authorized at an annual or special meeting of the stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock which is not owned by the interested stockholder.

A Delaware corporation may “opt out” of these provisions with an express provision in its original certificate of incorporation or an express provision in its certificate of incorporation or by-laws resulting from a stockholders’ amendment approved by at least a majority of the outstanding voting shares. Tokai has not opted out of these provisions. As a result, mergers or other takeover or change in control attempts of Tokai may be discouraged or prevented. However, on December 21, 2016, the Tokai board of directors approved the transaction contemplated by the Share Purchase Agreement, rendering Section 203 inapplicable to the Otic Transaction to the fullest extent permitted by applicable law.

Amendment of Certificate of Incorporation and By-laws

The DGCL provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation’s certificate of incorporation or by-laws, unless a corporation’s certificate of incorporation or by-laws, as the case may be, requires a greater percentage. Tokai’s by-laws may be amended or repealed by a majority vote of its board of directors or by the affirmative vote of the holders of at least 75% of the votes that all of Tokai’s stockholders would be entitled to cast in any annual election of directors. In addition, the affirmative vote of the holders of at least 75% of the votes that all of Tokai’s stockholders would be entitled to cast in any annual election of directors is required to amend or repeal or to adopt any provisions inconsistent with any of the provisions of Tokai’s certificate of incorporation described above under “—Staggered Board; Removal of Directors” and “—Stockholder Action by Written Consent; Special Meetings.”

 

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NASDAQ Global Market Listing

Tokai common stock is quoted on The NASDAQ Global Market under the symbol “TKAI.” The Share Purchase Agreement requires Tokai to use its commercially reasonable efforts to continue its existing listing on NASDAQ, to obtain approval of the listing of the combined company on NASDAQ and to cause the shares of Tokai common stock being issued in the Otic Transaction to be approved for listing, subject to notice of issuance, on NASDAQ at or prior to the consummation of the Otic Transaction. Tokai, in coordination with Otic, intends to file certain notifications, including an initial listing application with NASDAQ, in satisfaction of Tokai’s obligations under the Share Purchase Agreement, and toward fulfillment of a condition to the consummation of the Otic Transaction under the Share Purchase Agreement (which is more fully described in the section of this proxy statement entitled, “Terms of the Share Purchase Agreement—Conditions to the Consummation of the Otic Transaction”).

 

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MARKET PRICE AND DIVIDEND INFORMATION

Market Price of Tokai Common Stock

Tokai’s common stock trades under the symbol “TKAI” on The NASDAQ Global Market and has been publicly traded since September 17, 2014. Prior to this time, there was no public market for Tokai’s common stock. The following table sets forth the high and low sales price of Tokai’s common stock as reported on The NASDAQ Global Market for the periods indicated. These per share prices do not give effect to the proposed reverse stock split of Tokai common stock, which is intended to be implemented prior to the consummation of the Otic Transaction.

 

     High      Low  

  Year Ended December 31, 2015

     

  First quarter

   $ 16.10       $ 11.10   

  Second quarter

   $ 14.45       $ 9.77   

  Third quarter

   $ 14.71       $ 9.95   

  Fourth quarter

   $ 12.93       $ 8.50   

  Year Ended December 31, 2016

     

  First quarter

   $ 8.63       $ 4.93   

  Second quarter

   $ 8.80       $ 5.03   

  Third quarter

   $ 5.86       $ 0.98   

  Fourth quarter

   $ 2.09       $ 0.73   

  Year Ending December 31, 2017

     

  First quarter (through January 20, 2017)

   $ 1.12       $ 0.96   

On December 21, 2016, the last trading day prior to the Tokai board of directors’ approval of the Otic Transaction, the reported closing price for Tokai common stock was $1.01 per share. On                 , 2017, the latest practicable trading date before the filing of this proxy statement, the reported closing price of Tokai common stock was $        per share.

Because the price of Tokai common stock is subject to fluctuation, the market value of the shares of Tokai common stock that Otic shareholders will be entitled to receive pursuant to the terms of the Share Purchase Agreement may increase or decrease.

Assuming approval of the application for initial listing with the NASDAQ Stock Market LLC, following the consummation of the Otic Transaction, Tokai common stock will be listed on The NASDAQ Global Market and will trade under Tokai’s new name, “OticPharma, Inc.” and new trading symbol, “AOME.”

As of                 , 2017, the record date for the Tokai special meeting, Tokai had approximately          holders of its common stock. For detailed information regarding the beneficial ownership of certain stockholders of Tokai, see the section entitled “Security Ownership of Certain Beneficial Owners and Management of Tokai,” beginning on page 169 of this proxy statement.

Dividends

Neither Tokai nor Otic has ever declared or paid cash dividends on its capital stock. Any determination to pay dividends following consummation of the Otic Transaction or otherwise will be at the discretion of Tokai’s then-current board of directors and will depend upon a number of factors, including its results of operations, financial condition, future prospects, contractual restrictions, restrictions imposed by applicable law and other factors Tokai’s then-current board of directors deems relevant.

 

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RISK FACTORS

In addition to the other information contained in this proxy statement, including the matters addressed in the section entitled “Cautionary Statement Regarding Forward-Looking Information,” beginning on page 64 of this proxy statement, you should carefully consider the following risk factors when deciding whether to vote to approve the proposals described in this proxy statement. You should also consider the information in our other reports on file with the SEC that are incorporated by reference into this proxy statement, including the risks related to the Tokai business that are incorporated by reference from Tokai’s Quarterly Report on Form 10-Q filed on November 3, 2016. See “Where You Can Find More Information; Incorporation by Reference,” beginning on page 182 of this proxy statement.

The following sets forth certain risks and uncertainties related to the Otic Transaction, including risks and uncertainties to which Tokai, as an independent company, is subject, risks and uncertainties related to the Otic business, which will be the business of the combined company following completion of the Otic Transaction, and additional risks and uncertainties to which the combined company will be subject.

Risks Related to the Otic Transaction

Because the exchange ratio is fixed and the market price of Tokai common stock has fluctuated and may continue to fluctuate, the Otic Transaction consideration at the closing may have a greater or lesser value than at the time the Share Purchase Agreement was signed.

The Share Purchase Agreement has fixed the exchange ratio for the Otic ordinary and preferred shares, as described more fully in the section entitled “Terms of the Share Purchase Agreement—Exchange Ratio,” beginning on page 98 of this proxy statement. Any changes in the market price of Tokai common stock before the completion of the Otic Transaction will not affect the number of shares Otic securityholders will be entitled to receive pursuant to the Share Purchase Agreement. Therefore, if before the completion of the Otic Transaction the market price of Tokai common stock increases from the market price on the date of the Share Purchase Agreement, then Otic securityholders could receive Otic Transaction consideration with substantially more value for their shares of Otic capital stock than the parties had negotiated for in the establishment of the exchange ratio. Stock price changes may result from a variety of factors, including, among others, general market and economic conditions, changes in Tokai’s businesses, operations and prospects, market assessments of the likelihood that the Otic Transaction will be completed, the timing of the Otic Transaction, regulatory considerations and other risk factors set forth or incorporated by reference in this proxy statement. Many of these factors are beyond Tokai’s control.

Because the lack of a public market for Otic shares makes it difficult to evaluate the fairness of the transaction, Tokai may pay more than the fair market value of the Otic shares.

The outstanding capital stock of Otic is privately held and is not traded in any public market. The lack of a public market makes it extremely difficult to determine the fair market value of Otic. Because the percentage of Tokai equity to be issued to Otic shareholders was determined based on negotiations between the parties, it is possible that the value of the Tokai common stock to be received by Otic shareholders will be less than the fair market value of Otic, or that the value of the Tokai common stock to be received by Otic shareholders will be more than the fair market value of Otic.

The Otic Transaction may be consummated even though material adverse changes may result solely from the announcement of the transaction, changes in the industry in which Tokai and Otic operate that apply to all companies generally and other causes.

In general, either Tokai or Otic can refuse to complete the Otic Transaction if there is a material adverse effect affecting the other party between December 21, 2016, the date of the Share Purchase Agreement, and the

 

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closing. However, certain types of changes do not permit either party to refuse to complete the transaction, even if such change could be deemed to have a material adverse effect on Tokai or Otic, including:

 

    any changes in prevailing economic or market conditions in the United States or any other jurisdiction in which Tokai or Otic has substantial business operations, except to the extent those changes have a disproportionate effect on Tokai or Otic and their respective subsidiaries relative to the other participants in the industry or industries in which Tokai or Otic and their respective subsidiaries operate in the relevant jurisdiction;

 

    changes or events affecting the industry or industries in which Tokai or Otic and their respective subsidiaries operate generally, except to the extent those changes or events have a disproportionate effect on Tokai or Otic and their respective subsidiaries relative to the other participants in the industry or industries in which Tokai or Otic and their respective subsidiaries;

 

    changes in generally accepted accounting principles or requirements applicable to Tokai or Otic and their respective subsidiaries, except to the extent those changes or events have a disproportionate effect on Tokai or Otic and their respective subsidiaries relative to the other participants in the industry or industries in which Tokai or Otic and their respective subsidiaries operate;

 

    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 Tokai or Otic and their respective subsidiaries relative to the other participants in the industry or industries in which Tokai or Otic and their respective subsidiaries operate;

 

    any natural disaster or any outbreak of major hostilities in which the United States, or in the case of Otic, Israel, is involved or any act of terrorism within the United States or in the case of Otic, Israel, or directed against their facilities or citizens wherever located, except to the extent those changes or events have a disproportionate effect on Tokai or Otic and their respective subsidiaries relative to the other participants in the industry or industries in which Tokai or Otic and their respective subsidiaries operate;

 

    any failure by Tokai or Otic to meet any internal guidance, budgets, plans or forecasts of its revenues, earnings or other financial performance or results of operations;

 

    with respect to Tokai, a change in the public trading price or trading volume of Tokai’s common stock or the implications thereof; and

 

    with respect to Tokai, any failure by Tokai to meet any public estimates or expectations of Tokai’s revenue, earnings or other financial performance or results of operations for any period.

If material adverse effects occur and Tokai and Otic still complete the transaction, the combined company’s stock price may suffer.

Tokai’s officers and directors have interests in the Otic Transaction that may be different from, or in addition to, your interests as a stockholder of Tokai may generally.

When considering the recommendation of the Tokai board of directors that Tokai stockholders approve the proposals described in this proxy statement, Tokai stockholders should be aware that officers and directors of Tokai have certain interests in the Otic Transaction that may be different from, or in addition to, the interests of Tokai stockholders more generally. These interests generally include, among others, the special treatment of outstanding stock options, the right to certain enhanced change in control severance compensation and benefits and continued indemnification, expense advancement and insurance coverage. For more information concerning the interests of Tokai executive officers and directors, see the section entitled “The Otic Transaction—Interests of Tokai’s Directors and Executive Officers,” beginning on page 83 of this proxy statement.

As a result of these interests, these officers and directors of Tokai might be more likely to support and to vote in favor of the proposals described in this proxy statement than if they did not have these interests.

 

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Tokai stockholders may not realize a benefit from the Otic Transaction commensurate with the ownership dilution they will experience in connection with the Otic Transaction.

Tokai stockholders will have a reduced ownership and voting interest in, and will exercise less influence over the management of, the combined company following the consummation of the Otic Transaction. Under the Share Purchase Agreement, upon the closing, Tokai stockholders are expected to hold approximately 40% of the outstanding common stock of the combined company. If the combined company is unable to realize the full strategic and financial benefits currently anticipated from the transaction, Tokai stockholders will have experienced substantial dilution of their ownership, voting and other interests in Tokai without receiving any commensurate benefit, or only receiving part of the commensurate benefit to the extent the combined company is able to realize only part of the strategic and financial benefits currently anticipated from the transaction.

During the pendency of the Otic Transaction, Tokai may not be able to enter into a business combination with another party under certain circumstances because of restrictions in the Share Purchase Agreement, which could adversely affect its business.

Covenants in the Share Purchase Agreement impede the ability of Tokai to make acquisitions or complete other transactions that are not in the ordinary course of business pending completion of the Otic Transaction. As a result, if the Otic Transaction is not completed, Tokai may be at a disadvantage to its competitors during that period. For more information on covenants that restrict Tokai’s ability to enter into such transactions during the pendency of the Share Purchase Agreement, see the section entitled “Terms of the Share Purchase Agreement—Covenants; Conduct of the Businesses,” beginning on page 104 of this proxy statement.

Certain provisions of the Share Purchase Agreement may discourage third parties from submitting alternative acquisition proposals, including proposals that may be superior to the arrangements contemplated by the Share Purchase Agreement.

The terms of the Share Purchase Agreement prohibit each of Tokai and Otic from soliciting alternative takeover proposals or cooperating with persons making unsolicited takeover proposals, except in limited circumstances when such party’s board of directors determines in good faith that an unsolicited alternative takeover proposal is or is reasonably likely to lead to a superior takeover proposal and is reasonably capable of being consummated. In addition, if Tokai or Otic terminates the Share Purchase Agreement under certain circumstances, including terminating because of a decision of the Tokai board of directors to recommend a superior proposal, Tokai would be required to pay a termination fee of $1.0 million to Otic. This termination fee may discourage third parties from submitting alternative takeover proposals to Tokai or Otic or their stockholders, and may cause the respective boards of directors to be less inclined to recommend an alternative proposal.

The combined company’s common stock could be delisted from NASDAQ if Tokai and Otic fail to comply with NASDAQ’s listing standards.

Pursuant to NASDAQ’s Listing Rules, consummation of the Otic Transaction requires the combined company to submit an initial listing application and, at the time of the transaction, meet all of the criteria applicable to a company initially requesting listing. While Tokai and Otic intend to obtain listing status for the combined company and maintain the same, no guarantees can be made about Tokai’s and Otic’s ability to do so. Approval of an initial listing application is a closing condition of the Share Purchase Agreement, and failure to have such listing approved may prevent the Otic Transaction from closing.

If the combined company’s common stock is delisted by NASDAQ, the common stock may be eligible to trade on the OTC Bulletin Board or another over-the-counter market. Any such alternative would likely result in it being more difficult for the company to raise additional capital through the public or private sale of equity securities and for investors to dispose of, or obtain accurate quotations as to the market value of, the common stock. In addition, there can be no assurance that the common stock would be eligible for trading on any such alternative exchange or markets.

 

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The announcement and pendency of the Otic Transaction, whether or not consummated, may adversely affect the trading price of Tokai’s common stock and its business prospects.

The announcement and pendency of the Otic Transaction, whether or not consummated, may adversely affect the trading price of Tokai’s common stock and its business prospects. In the event that the Otic Transaction is not completed, the announcement of the termination of the Share Purchase Agreement may also adversely affect the trading price of Tokai’s common stock and its business prospects.

Tokai and Otic may become involved in securities class action litigation or shareholder derivative litigation in connection with the Otic Transaction that could divert management’s attention and harm the combined company’s business and insurance coverage may not be sufficient to cover all costs and damages.

In the past, securities class action or stockholder derivative litigation has often followed the announcement of certain significant business transactions, such as the sale of a business division or announcement of a business combination transaction. The combined company may become involved in this type of litigation in the future. Litigation often is expensive and diverts management’s attention and resources, which could adversely affect the combined company’s business.

Failure to consummate the Otic Transaction may result in Tokai paying a termination fee to Otic and could harm the common stock price of Tokai and future business and operations of Tokai.

The Otic Transaction will not be consummated if the conditions precedent to the consummation of the transaction, as discussed more fully in the section entitled “Terms of the Share Purchase Agreement—Conditions to the Consummation of the Otic Transaction,” beginning on page 99 of this proxy, are not satisfied or waived, or if the Share Purchase Agreement is terminated in accordance with its terms, as described more fully in the section entitled “Terms of the Share Purchase Agreement—Termination of the Share Purchase Agreement,” beginning on page 110 of this proxy statement. If the Otic Transaction is not consummated, Tokai is subject to the following risks:

 

    if the Share Purchase Agreement is terminated under certain circumstances, Tokai will be required to pay Otic a termination fee of $1.0 million; and

 

    the price of Tokai common stock may decline and remain volatile.

If the Otic Transaction does not close for any reason, the Tokai board of directors may elect to, among other things, attempt to complete another strategic transaction, attempt to sell or otherwise dispose of the various assets of Tokai, dissolve or liquidate the assets of Tokai or seek to continue to operate the business of Tokai. If Tokai seeks another strategic transaction or attempts to sell or otherwise dispose of the various assets of Tokai, there is no assurance that Tokai will be able to do so, that the terms would be equal to or superior to the terms of the Otic Transaction or as to the timing of such transaction. If Tokai decides to dissolve and liquidate its assets, Tokai would be required to pay all of its debts and contractual obligations, and to set aside certain reserves for potential future claims, and there can be no assurance as to the amount or timing of available cash left to distribute to stockholders after paying the debts and other obligations of Tokai and setting aside funds for reserves.

If Tokai were to seek to continue its business, it would need to complete its assessment of its galeterone and ARDA programs to determine whether and how to continue one or both of these development programs or acquire one or more other product candidates. Tokai would also need to raise funds to support continued operations and re-assess its workforce requirements in consideration of its reduced workforce.

If Tokai does not successfully consummate the Otic Transaction, the Tokai board of directors may attempt to continue its business. Tokai will need substantial additional funding to continue its development of, and to commercialize, galeterone or any future product candidate, which funding may not be available on acceptable

 

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terms, or at all. If Tokai is unable to raise capital when needed, it may be forced to delay, reduce, terminate or eliminate product development programs.

As of September 30, 2016, Tokai had cash, cash equivalents and marketable securities of $34.7 million. Tokai has devoted a significant portion of its cash resources to the development of galeterone and its ARMOR3-SV trial. However, in July 2016, Tokai announced its plan to discontinue the ARMOR3-SV clinical trial. While Tokai has entered into the Share Purchase Agreement, Tokai’s operating plan may change or the consummation of the Otic Transaction may be delayed or may not occur at all. If the Otic Transaction with Otic is not consummated and Tokai decides to continue its historical business operations, Tokai may require substantial additional funding to operate.

Conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and Tokai may never generate the necessary data or results required to obtain regulatory approval and achieve product sales. In addition, galeterone and any future product candidates, if approved, may not achieve commercial success. Tokai’s commercial revenues, if any, will be derived from sales of products that Tokai does not expect to be commercially available for several years, if at all. Accordingly, Tokai will need to continue to rely on additional financing to achieve its business objectives. Additional financing may not be available to Tokai on acceptable terms, or at all. If adequate funds are not available to Tokai on a timely basis, Tokai may be required to curtail its operations.

If Tokai does not successfully consummate the transaction with Otic, the Tokai board of directors may dissolve or liquidate the assets to pursue a dissolution and liquidation of Tokai. In such an event, the amount of cash available for distribution to Tokai’s stockholders will depend heavily on the timing of such transaction or liquidation.

If the Otic Transaction does not close for any reason, the Tokai board of directors may elect to, among other things, dissolve or liquidate the assets of Tokai If Tokai decides to dissolve and liquidate its assets, Tokai would be required to pay all of its debts and contractual obligations, and to set aside certain reserves for potential future claims, and there can be no assurances as to the amount or timing of available cash left to distribute to stockholders after paying the debts and other obligations of Tokai and setting aside funds for reserves.

In the event of a dissolution and liquidation, the amount of cash available for distribution to Tokai’s stockholders will depend heavily on the timing of such decision and, ultimately, such liquidation, since the amount of cash available for distribution continues to decrease as Tokai funds its operations in preparation for the consummation of the Otic Transaction. Further, the Share Purchase Agreement contains certain termination rights for each party, and provides that, upon termination under specified circumstances, Tokai may be required to pay Otic a termination fee of $1.0 million, which would further decrease Tokai’s available cash resources. If the Tokai board of directors were to approve and recommend, and Tokai’s stockholders were to approve, a dissolution and liquidation of Tokai, Tokai would be required under Delaware corporate law to pay its outstanding obligations, as well as to make reasonable provision for contingent and unknown obligations, prior to making any distributions in liquidation to Tokai stockholders. Tokai’s commitments and contingent liabilities may include (i) regulatory and clinical obligations remaining under Tokai’s clinical trials; (ii) obligations under Tokai’s employment and separation agreements with certain employees that provide for severance and other payments following a termination of employment occurring for various reasons, including a change in control of Tokai; and (iii) potential litigation against Tokai, and other various claims and legal actions arising in the ordinary course of business. As a result of this requirement, a portion of Tokai’s assets may need to be reserved pending the resolution of such obligations. In addition, Tokai may be subject to litigation or other claims related to a dissolution and liquidation of Tokai. If a dissolution and liquidation were pursued, the Tokai board of directors, in consultation with its advisors, would need to evaluate these matters and make a determination about a reasonable amount to reserve. Accordingly, holders of Tokai common stock could lose all or a significant portion of their investment in the event of a liquidation, dissolution or winding up of Tokai.

 

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Risks Related to the Otic Business

Risks Related to Otic’s Financial Position and Need for Additional Capital

Otic has incurred significant losses since its inception.

Since inception, Otic has incurred significant operating losses. Otic’s net loss was $4.2 million for the year ended December 31, 2015 and $4.1 million for the nine months ended September 30, 2016. As of September 30, 2016, Otic had an accumulated deficit of $12.9 million. Otic has focused primarily on its discovery efforts and developing its product candidates. Otic is continuing or preparing for clinical development of its lead product candidates, OP-01, for the treatment of Acute Otitis Externa (“AOE”), and OP-02, for the treatment of Otitis Media (“OM”) and Eustachian Tube Dysfunction (“ETD”), and expects that it will be several years, if ever, before Otic has a product candidate ready for commercialization. To date, Otic has financed its operations primarily through private placements of its preferred stock.

Otic’s short operating history may make it difficult to evaluate the success of its business to date and to assess its future viability.

Otic is an early stage clinical development company. Otic commenced active operations in 2008. Its operations to date have been limited to organizing and staffing the company, business planning, raising capital, acquiring and developing technology, identifying potential product candidates, undertaking preclinical studies and early stage clinical studies of its most advanced product candidate, OP-01, which Otic is undertaking additional reformulation work for and preparing to repeat early-stage clinical development and studies. Additional operations related to Otic’s other technology, OP-02, includes arranging for a third party to manufacture material using current Good Manufacturing Procedures (“cGMP”) and preparing for a phase 1 clinical studies. Otic has not yet demonstrated its ability to successfully complete large-scale, pivotal clinical trials, obtain marketing approvals, manufacture a commercial scale product or arrange for a third party to do so on its behalf, or conduct sales and marketing activities necessary for successful product commercialization. It can take many years to develop a new medicine from the time it is discovered to when it is available for treating patients. Consequently, any predictions made about Otic’s future success or viability based on its short operating history to date may not be as accurate as they could be if Otic had a longer operating history.

In addition, as an early stage business, Otic may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors. To successfully market any of its product candidates, Otic will need to transition from a company with a clinical development focus to a company capable of supporting commercial activities. Otic may not be successful in such a transition.

Risks Related to the Development of Otic’s Product Candidates

Otic is early in its development efforts and has only two drug candidates, OP-01 and OP-02, in preclinical or clinical development. If Otic is unable to successfully develop and commercialize OP-01 or OP-02 or if it experiences significant delays in doing so, the business will be materially harmed.

Otic currently does not have any products that have gained regulatory approval. Otic has invested substantially all of its efforts and financial resources in product development and funding its preclinical and clinical studies. Otic’s ability to generate product revenues, which it does not expect will occur for several years, if ever, will depend heavily on the successful development and eventual commercialization of OP-01, OP-02 and additional product candidates. As a result, the business is substantially dependent on Otic’s ability to complete the development of and obtain regulatory approval for OP-01 and OP-02.

Otic has not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the pharmaceutical area. For example, to execute its business plan, Otic will need to successfully:

 

    execute OP-01 and OP-02 development activities;

 

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    in-license or acquire other product candidates and advance them through clinical development;

 

    obtain required regulatory approvals for the development and commercialization of OP-01, OP-02 or other product candidates;

 

    maintain, leverage and expand its intellectual property portfolio;

 

    build and maintain robust sales, distribution and marketing capabilities, either on its own or in collaboration with strategic partners;

 

    gain market acceptance for OP-01, OP-02 and other product candidates;

 

    obtain and maintain adequate product pricing and reimbursement;

 

    develop and maintain any strategic relationships Otic elects to enter into; and

 

    manage its spending as costs and expenses increase due to product manufacturing, preclinical development, clinical trials, regulatory approvals and commercialization.

If Otic is unsuccessful in accomplishing these objectives, Otic may not be able to successfully develop and commercialize OP-01, OP-02 or other product candidates, and its business will suffer.

Clinical drug development involves a lengthy and expensive process, with an uncertain outcome including failure to demonstrate safety and efficacy to the satisfaction of the FDA or similar regulatory authorities outside the United States. Otic may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of its product candidates.

Otic has recently commenced reformulation work for OP-01 in order to explore adding a second active ingredient to address the pain associated with infections. Repeated early-stage clinical work for OP-01 is expected once the reformulation work is concluded and there is a risk that subsequent studies will not match results seen in prior studies. OP-02 is preparing to enter phase 1 clinical development. Given the early stage of clinical development, the risk of failure for all of Otic’s product candidates is high. Before obtaining marketing approval from regulatory authorities for the sale of any product candidate, Otic must complete preclinical development and then conduct extensive clinical trials to demonstrate the safety and efficacy of its product candidates in humans. Clinical testing is expensive, difficult to design and implement and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. Further, the results of preclinical studies and early clinical trials of its product candidates as well as earlier generation formulations may not be predictive of the results of later-stage clinical trials, and interim results of a clinical trial do not necessarily predict final results. For instance, the results of Otic’s studies with earlier generation formulations of OP-01 may not be predictive of the results of studies conducted with a different formulation of OP-01. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval of their products. It is impossible to predict when or if any of Otic’s product candidates will prove effective or safe in humans or will receive regulatory approval.

Otic may experience delays in its clinical trials, and it does not know whether planned clinical trials will begin or enroll subjects on time, need to be redesigned or be completed on schedule, if at all. There can be no assurance that the European Medicines Agency (the “EMA”), Medicines & Healthcare Products Regulatory Agency (the “MHRA”), the UK regulatory authority, or U.S. Food and Drug Administration (the “FDA”) will not put any of its product candidates on clinical hold in the future. Otic may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent its ability to receive marketing approval or commercialize its product candidates. Clinical trials may be delayed, suspended or prematurely terminated for a variety of reasons, such as:

 

    delay or failure in reaching agreement with the EMA, MHRA, FDA or a comparable foreign regulatory authority on a trial design that Otic wants to execute;

 

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    delay or failure in obtaining authorization to commence a trial or inability to comply with conditions imposed by a regulatory authority regarding the scope or design of a clinical study;

 

    delays in reaching, or failure to reach, agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites;

 

    inability, delay, or failure in identifying and maintaining a sufficient number of trial sites, many of which may already be engaged in other clinical programs;

 

    delay or failure in recruiting and enrolling suitable subjects to participate in a trial;

 

    delay or failure in having subjects complete a trial or return for post-treatment follow-up;

 

    clinical sites and investigators deviating from trial protocol, failing to conduct the trial in accordance with regulatory requirements, or dropping out of a trial, including the possibility Otic could learn of additional subjects who were exposed by predecessor IND sponsors to investigational drugs outside of clinical protocols;

 

    lack of adequate funding to continue the clinical trial, including the incurrence of unforeseen costs due to enrollment delays, requirements to conduct additional clinical studies and increased expenses associated with the services of its contract research organizations (“CROs”) and other third parties;

 

    clinical trials of its product candidates may produce negative or inconclusive results, and Otic may decide, or regulators may require it, to conduct additional clinical trials or abandon product development programs;

 

    the number of patients required for clinical trials of its product candidates may be larger than Otic anticipates, enrollment in these clinical trials may be slower than it anticipates or participants may drop out of these clinical trials at a higher rate than it anticipates;

 

    Otic may experience delays or difficulties in the enrollment of patients that its product candidates are designed to target;

 

    its third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to it in a timely manner, or at all;

 

    Otic may have difficulty partnering with experienced CROs and study sites that can identify patients that its product candidates are designed to target and run its clinical trials effectively;

 

    regulators or institutional review boards (“IRBs”) may require that Otic or its investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or a finding that the participants are being exposed to unacceptable health risks;

 

    the cost of clinical trials of its product candidates may be greater than Otic anticipates;

 

    the supply or quality of its product candidates or other materials necessary to conduct clinical trials of its product candidates may be insufficient or inadequate; or

 

    there may be changes in governmental regulations or administrative actions.

If Otic is required to conduct additional clinical trials or other testing of its product candidates beyond those that it currently contemplates, if Otic is unable to successfully complete clinical trials of its product candidates or other testing, if the results of these trials or tests are not positive or are only modestly positive or if there are safety concerns, Otic may:

 

    be delayed in obtaining marketing approval for its product candidates;

 

    not obtain marketing approval at all;

 

    obtain approval for indications or patient populations that are not as broad as intended or desired;

 

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    obtain approval with labeling that includes significant use or distribution restrictions or safety warnings that would reduce the potential market for its products or inhibit its ability to successfully commercialize its products;

 

    be subject to additional post-marketing restrictions and/or testing requirements; or

 

    have the product removed from the market after obtaining marketing approval.

Otic’s product development costs will also increase if it experiences delays in testing or marketing approvals. Otic does not know whether any of its preclinical studies or clinical trials will need to be restructured or will be completed on schedule, or at all. Significant preclinical or clinical trial delays also could shorten any periods during which Otic may have the exclusive right to commercialize its product candidates or allow its competitors to bring products to market before it does and impair its ability to successfully commercialize its product candidates and may harm its business and results of operations.

If Otic experiences delays or difficulties in the enrollment of patients in clinical trials, its receipt of necessary regulatory approvals could be delayed or prevented and expenses for development of its product candidates could increase.

Otic may not be able to initiate or continue clinical trials for its product candidates if Otic is unable to locate and enroll a sufficient number of eligible patients to participate in these trials to demonstrate safety and efficacy. Otic has yet to initiate the first clinical studies of OP-02 and plans to reformulate and initiate the clinical studies of OP-01 in the future, and it does not know whether the planned or ongoing clinical trials will enroll subjects in a timely fashion, require redesign of essential trial elements or be completed on its projected schedule. In addition, competitors may have ongoing clinical trials for product candidates that treat related or same indications as its product candidates, and patients who would otherwise be eligible for its clinical trials may instead enroll in clinical trials of its competitors’ product candidates. Otic’s inability to enroll a sufficient number of patients for its clinical trials would result in significant delays and could require it to abandon one or more clinical trials altogether.

Patient enrollment is affected by other factors including:

 

    the eligibility criteria for the study in question;

 

    the perceived risks and benefits of the product candidate under study;

 

    the efforts to facilitate timely enrollment in clinical trials;

 

    the inability to identify and maintain a sufficient number of trial sites, many of which may already be engaged in other clinical trial programs, including some that may be for the same disease indication;

 

    the patient referral practices of physicians;

 

    the proximity and availability of clinical trial sites for prospective patients;

 

    ambiguous or negative interim results of its clinical trials, or results that are inconsistent with earlier results;

 

    feedback from the EMA, MHRA, FDA, IRBs, data safety monitoring boards, or a comparable foreign regulatory authority, or results from earlier stage or concurrent preclinical and clinical studies, that might require modifications to the protocol;

 

    decisions by the EMA, MHRA, FDA, IRBs, a comparable foreign regulatory authority or Otic, or recommendations by data safety monitoring boards, to suspend or terminate clinical trials at any time for safety issues or for any other reason; and

 

    unacceptable risk-benefit profile or unforeseen safety issues or adverse effects.

 

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Enrollment delays in Otic’s clinical trials may result in increased development costs for its product candidates, which would cause the value of its company to decline and limit its ability to obtain additional financing.

If serious adverse events or unacceptable side effects are identified during the development of its product candidates, Otic may need to abandon or limit its development of some of its product candidates.

If Otic’s product candidates are associated with undesirable effects in preclinical or clinical trials or have characteristics that are unexpected, Otic may need to interrupt, delay or abandon their development or limit development to more narrow uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective. OP-01 and OP-02 are early clinical phase product candidates, and the side effect profile in humans has not been fully established. Although the one reported serious adverse event in Otic’s Phase 2 study of OP-01 was determined not to be drug related, other adverse events may arise and the occurrence of adverse events, whatever the cause, may impact the conduct of future clinical studies. Though currently unknown, drug-related side effects may be identified through further clinical studies and, as such these possible drug-related side effects could affect patient recruitment, the ability of enrolled subjects to complete the trial, or result in potential product liability claims. Any of these occurrences may harm Otic’s business, financial condition and prospects significantly.

Risks Related to Regulatory Approval of Otic’s Product Candidates and Other Legal Compliance Matters

If Otic is not able to obtain, or if there are delays in obtaining, required regulatory approvals, or the approvals may be for a more narrow indication than expected, Otic will not be able to commercialize its product candidates, and its ability to generate revenue will be materially impaired.

Otic’s product candidates must be approved by the FDA pursuant to a new drug application (“NDA”) in the United States and by the EMA or similar regulatory authorities outside the United States prior to commercialization. The process of obtaining marketing approvals, both in the United States and abroad, is expensive and takes several years, if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity and novelty of the product candidates involved. Failure to obtain marketing approval for a product candidate will prevent Otic from commercializing the product candidate. Otic has not received approval to market any of its product candidates from regulatory authorities in any jurisdiction. Otic has no experience in filing and supporting the applications necessary to gain marketing approvals and may engage third-party consultants to assist in this process. Securing marketing approval requires the submission of extensive preclinical and clinical data and supporting information to regulatory authorities for each therapeutic indication to establish the product candidate’s safety and efficacy. Securing marketing approval also requires the submission of information about the product manufacturing process to, and inspection of manufacturing facilities by, the regulatory authorities. Otic’s product candidates may not be effective, may be only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude its obtaining marketing approval or prevent or limit commercial use. Regulatory authorities have substantial discretion in the approval process and may refuse to accept any application or may decide that its data are insufficient for approval and require additional preclinical, clinical or other studies. In addition, varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent marketing approval of a product candidate. Changes in marketing approval policies during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for each submitted product application, may also cause delays in or prevent the approval of an application.

Any marketing approval Otic ultimately obtains may be for fewer or more limited indications than requested or subject to restrictions or post-approval commitments that render the approved product not commercially viable or its market potential significantly impaired. In addition, regulatory agencies may not approve the labeling claims that are necessary or desirable for the successful commercialization of Otic’s product candidates.

 

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If Otic experiences delays in obtaining approval or if it fails to obtain approval of its product candidates, the commercial prospects for its product candidates may be harmed and its ability to generate revenues will be materially impaired.

Failure to obtain marketing approval in international jurisdictions would prevent Otic’s product candidates from being marketed abroad.

In order to market and sell its products in the European Union and many other jurisdictions, Otic or its third-party collaborators must obtain separate marketing approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval may differ substantially from that required to obtain EMA, MHRA or FDA approval. The regulatory approval process outside the European Union, United Kingdom and United States generally includes all of the risks associated with obtaining, respectively, EMA, MHRA or FDA approval. In addition, in many countries outside the United States, it is required that the product be approved for reimbursement before the product can be approved for sale in that country. Otic or these third parties may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all. Approval by the EMA, MHRA or FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA. Otic may not be able to file for marketing approvals and may not receive necessary approvals to commercialize its products in any market.

Any product candidate for which Otic obtains marketing approval will be subject to extensive post-marketing regulatory requirements and could be subject to post-marketing restrictions or withdrawal from the market, and Otic may be subject to penalties if it fails to comply with regulatory requirements or if it experiences unanticipated problems with its products, when and if any of them are approved.

Otic’s product candidates and the activities associated with their development and commercialization, including their testing, manufacture, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation by the EMA, MHRA, FDA and other regulatory authorities. In the United States, these requirements include submissions of safety and other post-marketing information and reports, registration and listing requirements, cGMP requirements relating to manufacturing, quality control, quality assurance and corresponding maintenance of records and documents, including periodic inspections by the FDA and other regulatory authorities, requirements regarding the distribution of samples to physicians and recordkeeping.

The FDA, or other regulatory authorities, may also impose requirements for costly post-marketing studies or clinical trials and surveillance to monitor the safety or efficacy of the product. The FDA closely regulates the post-approval marketing and promotion of drugs to ensure drugs are marketed only for the approved indications and in accordance with the provisions of the approved labeling. The FDA imposes stringent restrictions on manufacturers’ communications regarding use of their products and if Otic promotes its products beyond their approved indications, it may be subject to enforcement action for off-label promotion. Violations of the Federal Food, Drug, and Cosmetic Act relating to the promotion of prescription drugs may lead to investigations alleging violations of federal and state health care fraud and abuse laws, as well as state consumer protection laws.

In addition, later discovery of previously unknown adverse events or other problems with Otic’s products, manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may yield various results, including:

 

    restrictions on such products, manufacturers or manufacturing processes;

 

    restrictions on the labeling or marketing of a product;

 

    restrictions on product distribution or use;

 

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    requirements to conduct post-marketing studies or clinical trials;

 

    warning or untitled letters;

 

    withdrawal of the products from the market;

 

    refusal to approve pending applications or supplements to approved applications that it submits;

 

    recall of products;

 

    fines, restitution or disgorgement of profits or revenues;

 

    suspension or withdrawal of marketing approvals;

 

    refusal to permit the import or export of its products;

 

    product seizure; or

 

    injunctions or the imposition of civil or criminal penalties.

Non-compliance with European Union requirements regarding safety monitoring or pharmacovigilance, and with requirements related to the development of products for the pediatric population, can also result in significant financial penalties. Similarly, failure to comply with the European Union’s requirements regarding the protection of personal information can also lead to significant penalties and sanctions.

Recently enacted and future legislation may increase the difficulty and cost for Otic to obtain marketing approval of and commercialize its product candidates and affect the prices Otic may obtain.

In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval of its product candidates, restrict or regulate post-approval activities and affect its ability to profitably sell any product candidates for which Otic obtains marketing approval.

For example, in 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, (collectively, the “PPACA”). Among the provisions of the PPACA of importance to its potential product candidates are the following:

 

    an annual, nondeductible fee on any entity that manufactures or imports specified branded prescription drugs and biologic agents;

 

    an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program;

 

    expansion of healthcare fraud and abuse laws, including the False Claims Act and the Anti-Kickback Statute, new government investigative powers, and enhanced penalties for noncompliance;

 

    a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices;

 

    extension of manufacturers’ Medicaid rebate liability;

 

    expansion of eligibility criteria for Medicaid programs;

 

    expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;

 

    new requirements to report financial arrangements with physicians and teaching hospitals;

 

    a new requirement to annually report drug samples that manufacturers and distributors provide to physicians; and

 

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    a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research.

In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. These changes included aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, starting in 2013. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, reduced Medicare payments to several providers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. Further, while the healthcare reform agenda and policies of the new Trump administration are not fully known, it is possible that additional regulatory changes, as well as the repeal (in whole or in part) of the PPACA, could negatively affect insurance coverage and/or drug prices. These new laws may result in additional reductions in Medicare and other healthcare funding.

Otic expects that the PPACA, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that it receives for any approved product. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payers. The implementation of cost containment measures or other healthcare reforms may prevent Otic from being able to generate revenue, attain profitability, or commercialize its products.

Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. Additionally, legislation has been introduced to repeal the PPACA. Otic cannot be sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of its product candidates, if any, may be. In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject Otic to more stringent product labeling and post-marketing testing and other requirements.

Governments outside the United States tend to impose strict price controls, which may adversely affect its revenues, if any.

In some countries, particularly the countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, Otic may be required to conduct a clinical trial that compares the cost-effectiveness of its product candidate to other available therapies. If reimbursement of its products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, its business could be harmed, possibly materially.

Otic’s relationships with customers and third-party payers will be subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, which could expose Otic to criminal sanctions, civil penalties, program exclusion, contractual damages, reputational harm and diminished profits and future earnings.

Healthcare providers, physicians and third-party payers play a primary role in the recommendation and prescription of any product candidates for which Otic receives marketing approval. Otic’s future arrangements with third-party payers and customers may expose Otic to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which Otic markets, sell and distribute Otic’s products for which Otic receives marketing approval. Restrictions under applicable federal and state healthcare laws and regulations, include the following:

 

   

the federal healthcare anti-kickback statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash

 

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or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under federal and state healthcare programs such as Medicare and Medicaid;

 

    the federal False Claims Act imposes civil penalties, including civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government;

 

    the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;

 

    the federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services;

 

    the federal transparency requirements under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, require manufacturers of covered drugs, devices, biologics and medical supplies to report to the Department of Health and Human Services information related to physician payments and other transfers of value and physician ownership and investment interests; and

 

    analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payers, including private insurers, and some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring drug manufacturers to report information related to payments to physicians and other health care providers or marketing expenditures.

Some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government and may require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures. State and foreign laws also govern the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

Efforts to ensure that Otic’s business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that Otic’s business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If Otic’s operations are found to be in violation of any of these laws or any other governmental regulations that may apply to Otic, Otic may be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of Otic’s operations. If any of the physicians or other providers or entities with whom Otic expects to do business are found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.

If Otic fails to comply with environmental, health and safety laws and regulations, it could become subject to fines or penalties or incur costs that could harm its business.

Otic may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair its preclinical or clinical

 

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development or production efforts. Otic’s failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.

Risks Related to the Commercialization of Otic’s Product Candidates

Even if any of its product candidates receives marketing approval, Otic may fail to achieve the degree of market acceptance by physicians, patients, third-party payers and others in the medical community necessary for commercial success.

If any of its product candidates receives marketing approval, Otic may nonetheless fail to gain sufficient market acceptance by physicians, patients, third-party payers and others in the medical community. In addition, physicians, patients and third-party payers may prefer other novel products to Otic’s. If its product candidates do not achieve an adequate level of acceptance, Otic may not generate significant product revenues and Otic may not become profitable. The degree of market acceptance of Otic’s product candidates, if approved for commercial sale, will depend on a number of factors, including:

 

    the efficacy and safety and potential advantages and disadvantages compared to alternative treatments;

 

    the ability to offer its products for sale at competitive prices;

 

    the convenience and ease of administration compared to alternative treatments;

 

    the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;

 

    the strength of its marketing and distribution support;

 

    the availability of third-party coverage and adequate reimbursement, including patient cost-sharing programs such as copays and deductibles;

 

    the ability to develop or partner with third-party collaborators to develop companion diagnostics;

 

    the prevalence and severity of any side effects; and

 

    any restrictions on the use of its products together with other medications.

If OP-01, OP-02 or future product candidates receives marketing approval and Otic, or others, later discover that the product is less effective than previously believed or causes undesirable side effects that were not previously identified, the ability to market the product could be compromised.

Clinical trials are conducted in carefully defined subsets of patients who have agreed to enter into clinical trials. Consequently, it is possible that Otic’s clinical trials may indicate an apparent positive effect of a product candidate that is greater than the actual positive effect in a broader patient population or alternatively fail to identify undesirable side effects. If, following approval of a product candidate, Otic, or others, discover that the product is less effective than previously believed or causes undesirable side effects that were not previously identified, any of the following adverse events could occur:

 

    regulatory authorities may withdraw their approval of the product or seize the product;

 

    the product may be required to be recalled or changes to the way the product is administered;

 

    additional restrictions may be imposed on the marketing of, or the manufacturing processes for, the particular product;

 

    regulatory authorities may require the addition of labeling statements, such as a “black box” warning or a contraindication;

 

    the creation of a Medication Guide outlining the risks of the previously unidentified side effects for distribution to patients;

 

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    additional restrictions may be imposed on the distribution or use of the product via a Risk Evaluation and Mitigation Strategy;

 

    Otic could be sued and held liable for harm caused to patients;

 

    the product may become less competitive; and

 

    Otic’s reputation may suffer.

Any of these events could have a material and adverse effect on Otic’s operations and business. The commercial prospects for Otic’s product candidates may be harmed and its ability to generate revenues will be materially impaired.

Otic currently has no marketing and sales force. If Otic is unable to establish effective marketing and sales capabilities or enter into agreements with third parties to market and sell its product candidates, Otic may not be able to effectively market and sell its product candidates, if approved, or generate product revenues.

Otic currently does not have a marketing or sales team for the marketing, sales and distribution of any of its product candidates that are able to obtain regulatory approval. In order to commercialize any product candidates, Otic must build on a territory-by-territory basis marketing, sales, distribution, managerial and other non-technical capabilities or make arrangements with third parties to perform these services, and Otic may not be successful in doing so. If its product candidates receive regulatory approval, Otic intends to establish an internal sales and marketing team with technical expertise and supporting distribution capabilities to commercialize its product candidates, which will be expensive and time-consuming and will require significant attention of its executive officers to manage. Any failure or delay in the development of its internal sales, marketing and distribution capabilities would adversely impact the commercialization of any of its products that Otic obtains approval to market. With respect to the commercialization of all or certain of its product candidates, Otic may choose to collaborate, either globally or on a territory-by-territory basis, with third parties that have direct sales forces and established distribution systems, either to augment its own sales force and distribution systems or in lieu of its own sales force and distribution systems. If Otic is unable to enter into such arrangements when needed on acceptable terms or at all, Otic may not be able to successfully commercialize any of its product candidates that receive regulatory approval or any such commercialization may experience delays or limitations. If Otic is not successful in commercializing its product candidates, either on its own or through collaborations with one or more third parties, its future product revenue will suffer and Otic may incur significant additional losses.

Otic faces substantial competition, which may result in others discovering, developing or commercializing competing products before or more successfully than Otic does.

The development and commercialization of new drug products is highly competitive. Otic faces competition with respect to its current product candidates, and will face competition with respect to any product candidates that Otic may seek to develop or commercialize in the future, from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. There are a number of large pharmaceutical and biotechnology companies that currently market and sell products or are pursuing the development of products for the treatment of the disease indications for which Otic is developing its product candidates. Some of these competitive products and therapies are based on scientific approaches that are the same as or similar to Otic’s approach, and others are based on entirely different approaches. Potential competitors also include academic institutions, government agencies and other public and private research organizations that conduct research, seek patent protection and establish collaborative arrangements for research, development, manufacturing and commercialization.

Specifically, there are a large number of companies developing or marketing treatments for AOE, including many major pharmaceutical and biotechnology companies. Otic expects that OP-01 will face competition from numerous FDA-approved therapeutics, including CIPRODEX® and numerous other branded and generic ear anti-infectives.

 

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In OM, Otic expects that OP-02 will compete with antibiotics and a surgery where the tympanic membrane is perforated to improve drainage and ventilation of the middle ear (myringotomy or tympanostomy tube insertions). These therapies may continue to be the preferred therapies for treating OM.

In ETD, Otic expects that OP-02 will compete with a medical device that uses a small intranasal balloon inserted into the ET to treat persistent ETD in adults. Other similar and novel therapies may be developed and may become, or continue to be, the preferred therapies for treating ETD.

Otic’s commercial opportunity could be reduced or eliminated if its competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any products that Otic may develop. In addition, its ability to compete may be affected in many cases by insurers or other third-party payers seeking to encourage the use of generic products.

Generic products are currently available, with additional products expected to become available over the coming years, potentially creating pricing pressure. If its product candidates achieve marketing approval, Otic expects that they will be priced at a significant premium over competitive generic products.

Many of the companies against which Otic is competing or against which Otic may compete in the future have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than Otic does. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of its competitors. Smaller and other early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These third parties compete with Otic in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, Otic’s programs.

The insurance coverage and reimbursement status of newly approved products is uncertain. Failure to obtain or maintain adequate coverage and reimbursement for new or current products could limit its ability to market those products and decrease its ability to generate revenue.

The availability and extent of reimbursement by governmental and private payers is essential for most patients to be able to afford expensive treatments. Sales of Otic’s product candidates will depend substantially, both domestically and abroad, on the extent to which the costs of Otic’s product candidates will be paid by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or reimbursed by government health administration authorities, private health coverage insurers and other third-party payers. If reimbursement is not available, or is available only to limited levels, Otic may not be able to successfully commercialize its product candidates. Even if coverage is provided, the approved reimbursement amount may not be high enough to allow Otic to establish or maintain pricing sufficient to realize a sufficient return on its investment.

There is significant uncertainty related to the insurance coverage and reimbursement of newly approved products. In the United States, the principal decisions about reimbursement for new medicines are typically made by the Centers for Medicare & Medicaid Services (“CMS”), an agency within the U.S. Department of Health and Human Services, as CMS decides whether and to what extent a new medicine will be covered and reimbursed under Medicare. Private payers tend to follow CMS to a substantial degree. It is difficult to predict what CMS will decide with respect to reimbursement for fundamentally novel products such as Otic’s, as there is no body of established practices and precedents for these new products. Reimbursement agencies in Europe may be more conservative than CMS. Outside the United States, international operations are generally subject to extensive governmental price controls and other market regulations, and Otic believes the increasing emphasis on cost-containment initiatives in Europe, Canada, and other countries has and will continue to put pressure on the pricing and usage of its product candidates. In many countries, the prices of medical products are subject to

 

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varying price control mechanisms as part of national health systems. In general, the prices of medicines under such systems are substantially lower than in the United States. Other countries allow companies to fix their own prices for medicines, but monitor and control company profits. Additional foreign price controls or other changes in pricing regulation could restrict the amount that Otic is able to charge for its product candidates. Accordingly, in markets outside the United States, the reimbursement for its products may be reduced compared with the United States and may be insufficient to generate commercially reasonable revenues and profits.

Moreover, increasing efforts by governmental and third-party payers, in the United States and abroad, to cap or reduce healthcare costs may cause such organizations to limit both coverage and level of reimbursement for new products approved and, as a result, they may not cover or provide adequate payment for Otic’s product candidates. Otic expects to experience pricing pressures in connection with the sale of any of its product candidates, due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative changes. The downward pressure on healthcare costs in general, particularly prescription drugs and surgical procedures and other treatments, has become very intense. As a result, increasingly high barriers are being erected to the entry of new products into the healthcare market.

In addition, many private payers contract with commercial vendors who sell software that provide guidelines that attempt to limit utilization of, and therefore reimbursement for, certain products deemed to provide limited benefit to existing alternatives. Such organizations may set guidelines that limit reimbursement or utilization of its products.

Product liability lawsuits against Otic could cause it to incur substantial liabilities and to limit commercialization of any products that Otic may develop.

Otic faces an inherent risk of product liability exposure related to the testing of its product candidates in human clinical trials and will face an even greater risk if it commercially sells any products that it may develop. If Otic cannot successfully defend against claims that its product candidates or products caused injuries, it will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

 

    decreased demand for any product candidates or products that Otic may develop;

 

    injury to its reputation and significant negative media attention;

 

    withdrawal of clinical trial participants;

 

    significant costs to defend the related litigation;

 

    substantial monetary awards to trial participants or patients;

 

    loss of revenue;

 

    reduced resources of its management to pursue its business strategy; and

 

    the inability to commercialize any products that Otic may develop.

Otic currently holds $2 million in product liability insurance coverage in the aggregate, with a per incident limit of $2 million, which may not be adequate to cover all liabilities that Otic may incur. Otic may need to increase its insurance coverage as it expands its clinical trials or if it commences commercialization of its product candidates. Insurance coverage is increasingly expensive. Otic may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise.

Risks Related to Otic’s Dependence on Third Parties

Future development collaborations may be important to Otic. If Otic is unable to enter into or maintain these collaborations, or if these collaborations are not successful, its business could be adversely affected.

For some of its product candidates, Otic may in the future determine to seek to collaborate with pharmaceutical and biotechnology companies for development of products. Otic faces significant competition in

 

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seeking appropriate collaborators. Otic’s ability to reach a definitive agreement for any collaboration will depend, among other things, upon its assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. If Otic is unable to reach agreements with suitable collaborators on a timely basis, on acceptable terms, or at all, Otic may have to curtail the development of a product candidate, reduce or delay its development program or one or more of its other development programs, delay its potential development schedule or reduce the scope of research activities, or increase its expenditures and undertake discovery or preclinical development activities at its own expense. If it fails to enter into collaborations and do not have sufficient funds or expertise to undertake the necessary development activities, Otic may not be able to further develop its product candidates or continue to develop its product candidates, and its business may be materially and adversely affected.

Future collaborations Otic may enter into may involve the following risks:

 

    collaborators may have significant discretion in determining the efforts and resources that they will apply to these collaborations;

 

    collaborators may not perform their obligations as expected;

 

    changes in the collaborators’ strategic focus or available funding, or external factors, such as an acquisition, may divert resources or create competing priorities;

 

    collaborators may delay discovery and preclinical development, provide insufficient funding for product development of targets selected by Otic, stop or abandon discovery and preclinical development for a product candidate, repeat or conduct new discovery and preclinical development for a product candidate;

 

    collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with Otic’s products or product candidates if the collaborators believe that competitive products are more likely to be successfully developed than Otic’s products;

 

    product candidates discovered in collaboration with Otic may be viewed by its collaborators as competitive with their own product candidates or products, which may cause collaborators to cease to devote resources to the development of its product candidates;

 

    disagreements with collaborators, including disagreements over proprietary rights, contract interpretation or the preferred course of development, might cause delays or termination of the discovery, preclinical development or commercialization of product candidates, might lead to additional responsibilities for Otic with respect to product candidates, or might result in litigation or arbitration, any of which would be time-consuming and expensive;

 

    collaborators may not properly maintain or defend its intellectual property rights or intellectual property rights licensed to Otic or may use its proprietary information in such a way as to invite litigation that could jeopardize or invalidate its intellectual property or proprietary information or expose Otic to potential litigation;

 

    collaborators may infringe the intellectual property rights of third parties, which may expose Otic to litigation and potential liability; and

 

    collaborations may be terminated for the convenience of the collaborator and, if terminated, Otic could be required to raise additional capital to pursue further development or commercialization of the applicable product candidates.

Additionally, subject to its contractual obligations to Otic, if a collaborator is involved in a business combination, the collaborator might deemphasize or terminate the development of any of Otic’s product candidates. If one of Otic’s collaborators terminates its agreement with Otic, it may find Otic more difficult to attract new collaborators and Otic’s perception in the business and financial communities could be adversely affected.

 

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If Otic’s collaborations do not result in the successful development of products or product candidates, product candidates could be delayed and Otic may need additional resources to develop product candidates. All of the risks relating to product development, regulatory approval and commercialization described in this proxy statement also apply to the activities of its collaborators.

Otic contracts with third parties for the manufacture of its product candidates for preclinical and clinical testing and expects to continue to do so for commercialization. This reliance on third parties increases the risk that Otic will not have sufficient quantities of its product candidates or products at an acceptable cost and quality, which could delay, prevent or impair its development or commercialization efforts.

Otic has utilized, and intends to continue utilizing, third parties to manufacture, package and distribute clinical supplies of Otic’s drug candidates. Otic has no experience in manufacturing and does not have any manufacturing facilities. Currently, Otic has sole suppliers for one or more of its active pharmaceutical ingredients (“API”), and a different sole manufacturer for each of its product candidates. In addition, these materials are custom-made and available from only a limited number of sources. In particular, there may be a limited supply source for APIs for OP-02 or other future product candidates. Although Otic believes that Otic’s third-party suppliers maintain a significant supply of APIs on hand, any sustained disruption in this supply could adversely affect Otic’s operations. Otic does not have any long-term agreements in place with Otic’s current API suppliers. If Otic is required to change manufacturers, Otic may experience delays associated with finding an alternate manufacturer that is properly qualified to produce supplies of Otic’s products and product candidates in accordance with FDA requirements and Otic’s specifications. Any delays or difficulties in obtaining APIs or in manufacturing, packaging or distributing approved product candidates could negatively affect Otic’s sales revenues, as well as delay Otic’s clinical trials.

Otic expects to rely on third-party manufacturers or third-party collaborators for the manufacture of commercial supply of any other product candidates for which its collaborators or it obtains marketing approval. Despite drug substance and product risk management, this reliance on third parties presents a risk that Otic will not have sufficient quantities of its product candidates or products or such quantities at an acceptable cost or quality, which could delay, prevent or impair its development or commercialization efforts. Any performance failure on the part of its existing or future manufacturers of drug substance or drug products could delay clinical development or marketing approval. Otic does not currently have arrangements in place for redundant supply. If suppliers cannot supply Otic with its requirements, Otic may be required to identify alternative manufacturers, which would lead it to incur added costs and delays in identifying and qualifying any such replacement.

The formulation used in early studies is not a final formulation for commercialization. Additional, changes may be required by the FDA or other regulatory authorities on specifications and storage conditions. These may require additional studies, and may delay its clinical trials.

Otic also expects to rely on other third parties to store and distribute drug supplies for its clinical trials. Any performance failure on the part of its distributors could delay clinical development or marketing approval of its product candidates or commercialization of its products, producing additional losses and depriving it of potential product revenue.

Otic may be unable to establish any agreements with third-party manufacturers or to do so on acceptable terms. Even if Otic is able to establish agreements with third-party manufacturers, reliance on third-party manufacturers entails additional risks, including:

 

    reliance on the third party for regulatory compliance and quality assurance;

 

    the possible breach of the manufacturing agreement by the third party;

 

    the possible misappropriation of its proprietary information, including its trade secrets and know-how; and

 

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    the possible termination or nonrenewal of the agreement by the third party at a time that is costly or inconvenient for Otic.

The third parties Otic relies on for manufacturing and packaging are also subject to regulatory review, and any regulatory compliance problems with these third parties could significantly delay or disrupt Otic’s clinical or commercialization activities. Third-party manufacturers may not be able to comply with cGMP, regulations or similar regulatory requirements outside the United States. Otic’s failure, or the failure of its third-party manufacturers, to comply with applicable regulations could result in sanctions being imposed on Otic, including clinical holds, fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of its products. Additionally, macro-economic conditions may adversely affect these third parties, causing them to suffer liquidity or operational problems. If a key third-party vendor becomes insolvent or is forced to lay off workers assisting with Otic’s projects, Otic’s results and development timing could suffer.

Otic’s product candidates and any products that Otic may develop may compete with other product candidates and products for access to manufacturing facilities. There are a limited number of manufacturers that operate under cGMP regulations and that might be capable of manufacturing for Otic.

Otic’s current and anticipated future dependence upon others for the manufacture of its product candidates or products may adversely affect its future profit margins and its ability to commercialize any products that receive marketing approval on a timely and competitive basis.

Risks Related to Otic’s Intellectual Property

If Otic is unable to obtain and maintain intellectual property protection for its technology and products or if the scope of the intellectual property protection obtained is not sufficiently broad, its competitors could develop and commercialize technology and products similar or identical to Otic’s, and its ability to successfully commercialize its technology and products may be impaired.

Otic’s success depends in large part on its ability to obtain and maintain patent protection in the European Union, the United States and other countries with respect to its proprietary technology and products. Otic seeks to protect its proprietary position by filing patent applications in the United States and abroad related to its novel technologies and product candidates. This patent portfolio includes issued patents and pending patent applications covering pharmaceutical methods of use.

The patent prosecution process is expensive and time-consuming, and Otic may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. Otic may choose not to seek patent protection for certain innovations and may choose not to pursue patent protection in certain jurisdictions, and under the laws of certain jurisdictions, patents or other intellectual property rights may be unavailable or limited in scope. It is also possible that Otic will fail to identify patentable aspects of its discovery and preclinical development output before it is too late to obtain patent protection. Moreover, in some circumstances, it may not have the right to control the preparation, filing and prosecution of patent applications, or to maintain the patents, covering technology that Otic licenses from third parties. Therefore, these patents and applications may not be prosecuted and enforced in a manner consistent with the best interests of its business.

The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions and has in recent years been the subject of much litigation. In addition, the laws of foreign countries may not protect its rights to the same extent as the laws of the United States. For example, India and China do not allow patents for methods of treating the human body. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or

 

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in some cases not at all. Therefore, Otic cannot know with certainty whether it was the first to make the inventions claimed in its owned or licensed patents or pending patent applications, or that it was the first to file for patent protection of such inventions. As a result, the issuance, scope, validity, enforceability and commercial value of its patent rights are highly uncertain. Otic’s pending and future patent applications may not result in patents being issued which protect its technology or products, in whole or in part, or which effectively prevent others from commercializing competitive technologies and products. Changes in either the patent laws or interpretation of the patent laws in the European Union, the United States and other countries may diminish the value of its patents or narrow the scope of its patent protection.

Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of its patent applications and the enforcement or defense of its issued patents. On September 16, 2011, the Leahy-Smith America Invents Act (the “Leahy-Smith Act”), was signed into law. The Leahy-Smith Act includes a number of significant changes to United States patent law. These include provisions that affect the way patent applications are prosecuted and may also affect patent litigation. The United States Patent and Trademark Office (“USPTO”) recently developed new regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, only became effective on March 16, 2013. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of Otic’s business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of its patent applications and the enforcement or defense of its issued patents, all of which could have a material adverse effect on its business and financial condition.

Moreover, Otic may be subject to a third-party pre-issuance submission of prior art to the USPTO, or become involved in opposition, derivation, reexamination, inter partes review, post-grant review or interference proceedings challenging its patent rights or the patent rights of others. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, its patent rights, allow third parties to commercialize its technology or products and compete directly with Otic, without payment to it, or result in its inability to manufacture or commercialize products without infringing third-party patent rights. In addition, if the breadth or strength of protection provided by its patents and patent applications is threatened, it could dissuade companies from collaborating with Otic to license, develop or commercialize current or future product candidates.

Even if Otic’s owned and licensed patent applications issue as patents, they may not issue in a form that will provide it with any meaningful protection, prevent competitors from competing with it or otherwise provide it with any competitive advantage. Otic’s competitors may be able to circumvent its owned or licensed patents by developing similar or alternative technologies or products in a non-infringing manner.

The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and its owned and licensed patents may be challenged in the courts or patent offices in the United States and abroad. Such challenges may result in loss of exclusivity or freedom to operate or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit Otic’s ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of Otic’s technology and products. Given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, Otic’s owned and licensed patent portfolio may not provide it with sufficient rights to exclude others from commercializing products similar or identical to Otic’s.

The risks described elsewhere pertaining to its patents and other intellectual property rights also apply to the intellectual property rights that Otic licenses, and any failure to obtain, maintain and enforce these rights could have a material adverse effect on its business. In some cases, Otic may not have control over the prosecution, maintenance or enforcement of the patents that it licenses, and its licensors may fail to take the steps that Otic believes are necessary or desirable in order to obtain, maintain and enforce the licensed patents. Any

 

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inability on Otic’s part to protect adequately its intellectual property may have a material adverse effect on its business, operating results and financial position.

Obtaining and maintaining its patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and its patent protection could be reduced or eliminated for non-compliance with these requirements.

Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or applications will be due to be paid to the USPTO and various governmental patent agencies outside of the United States in several stages over the lifetime of the patents and/or applications. Otic has systems in place to remind it to pay these fees, and it employs an outside firm and relies on its outside counsel to pay these fees due to non-U.S. patent agencies. The USPTO and various non-U.S. governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. Otic employs reputable law firms and other professionals to help it comply, and in many cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. However, there are situations in which non-compliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, Otic’s competitors might be able to enter the market and this circumstance would have a material adverse effect on its business.

If Otic fails to comply with its obligations in the agreements under which it licenses intellectual property and other rights from third parties or otherwise experiences disruptions to its business relationships with its licensors, Otic could lose license rights that are important to its business.

Otic has acquired commercial rights to its OP-02 technology through a license agreement with Otodyne, Inc. and may in the future enter into other license agreements with third parties for other intellectual property rights or assets. These license agreements may impose various diligence, milestone payment, royalty, and other obligations on Otic. If Otic fails to comply with its obligations under these agreements, or it is subject to a bankruptcy, Otic may be required to make certain payments to the licensor, Otic may lose the exclusivity of its license, or the licensor may have the right to terminate the license, in which event Otic would not be able to develop or market products covered by the license. Additionally, the milestone and other payments associated with these licenses will make it less profitable for Otic to develop its drug candidates than if Otic had developed the licensed technology internally.

In some cases, patent prosecution of Otic’s licensed technology may be controlled solely by the licensor. If Otic’s licensors fail to obtain and maintain patent or other protection for the proprietary intellectual property Otic licenses from them, Otic could lose its rights to the intellectual property or its exclusivity with respect to those rights, and its competitors could market competing products using the intellectual property. In certain cases, Otic may control the prosecution of patents resulting from licensed technology. In the event Otic breaches any of its obligations related to such prosecution, Otic may incur significant liability to its licensing partners. If disputes over intellectual property and other rights that Otic has licensed prevent or impair its ability to maintain its current licensing arrangements on acceptable terms, Otic may be unable to successfully develop and commercialize the affected product candidates.

Otic may become involved in lawsuits to protect or enforce its patents or other intellectual property, which could be expensive, time-consuming and unsuccessful.

Because competition in Otic’s industry is intense, competitors may infringe or otherwise violate its issued patents, patents of its licensors or other intellectual property. To counter infringement or unauthorized use, Otic may be required to file infringement claims, which can be expensive and time-consuming. Any claims Otic asserts against perceived infringers could provoke these parties to assert counterclaims against it alleging that Otic infringes their patents. In addition, in a patent infringement proceeding, a court may decide that a patent of Otic’s is invalid or unenforceable, in whole or in part, construe the patent’s claims narrowly or refuse to stop the

 

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other party from using the technology at issue on the grounds that its patents do not cover the technology in question. An adverse result in any litigation proceeding could put one or more of its patents at risk of being invalidated or interpreted narrowly. Otic may also elect to enter into license agreements in order to settle patent infringement claims or to resolve disputes prior to litigation, and any such license agreements may require Otic to pay royalties and other fees that could be significant. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of its confidential information could be compromised by disclosure.

Otic may need to license certain intellectual property from third parties, and such licenses may not be available or may not be available on commercially reasonable terms.

A third party may hold intellectual property, including patent rights, that are important or necessary to the development of Otic’s products. It may be necessary for Otic to use the patented or proprietary technology of third parties to commercialize its products, in which case it would be required to obtain a license from these third parties on commercially reasonable terms, or its business could be harmed, possibly materially. Although Otic believes that licenses to these patents are available from these third parties on commercially reasonable terms, if it was not able to obtain a license, or were not able to obtain a license on commercially reasonable terms, its business could be harmed, possibly materially.

Third parties may initiate legal proceedings alleging that Otic is infringing their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on the success of its business.

Otic’s commercial success depends upon its ability, and the ability of its collaborators, to develop, manufacture, market and sell its product candidates and use its proprietary technologies without infringing the proprietary rights of third parties. There is considerable intellectual property litigation in the biotechnology and pharmaceutical industries. Otic may become party to, or threatened with, future adversarial proceedings or litigation regarding intellectual property rights with respect to its products and technology, including interference or derivation proceedings before the USPTO. Third parties may assert infringement claims against Otic based on existing patents or patents that may be granted in the future.

If Otic is found to infringe a third party’s intellectual property rights, Otic could be required to obtain a license from such third party to continue developing and marketing its products and technology. However, Otic may not be able to obtain any required license on commercially reasonable terms or at all. Even if Otic was able to obtain a license, it could be non-exclusive, thereby giving its competitors access to the same technologies licensed to it. Otic could be forced, including by court order, to cease commercializing the infringing technology or product. In addition, Otic could be found liable for monetary damages, including treble damages and attorneys’ fees if Otic is found to have willfully infringed a patent. A finding of infringement could prevent Otic from commercializing its product candidates or force it to cease some of its business operations, which could materially harm its business. Claims that Otic has misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on its business.

If Otic is unable to protect the confidentiality of its trade secrets, its business and competitive position would be harmed.

In addition to seeking patents for some of its technology and product candidates, Otic also relies on trade secrets, including unpatented know-how, technology and other proprietary information, to maintain its competitive position. Otic seeks to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as its employees, corporate collaborators, outside scientific collaborators, contract manufacturers, consultants, advisors and other third parties. Otic seeks to protect its confidential proprietary information, in part, by entering into confidentiality and invention or patent assignment agreements with its employees and consultants, however, it cannot be certain that such agreements have been entered into with all relevant parties. Moreover, to the extent Otic enters into such agreements, any of

 

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these parties may breach the agreements and disclose its proprietary information, including its trade secrets, and Otic may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any of its trade secrets were to be lawfully obtained or independently developed by a competitor, Otic would have no right to prevent them, or those to whom they communicate them, from using that technology or information to compete with Otic. If any of its trade secrets were to be disclosed to or independently developed by a competitor, Otic’s competitive position would be harmed.

Risks Related to Otic’s Employee Matters, Managing Growth and Macroeconomic Conditions

Otic’s future success depends on its ability to retain key executives and to attract, retain and motivate qualified personnel.

Otic is highly dependent on the product development, clinical and business development expertise of the principal members of its management, scientific and clinical team. Although Otic has entered into employment agreements with its key executive officers, each of them may terminate their employment with it at any time. Otic does not maintain “key person” insurance for any of its executives or other employees.

Recruiting and retaining qualified scientific, clinical, manufacturing, sales and marketing personnel will also be critical to Otic’s success. The loss of the services of its executive officers or other key employees could impede the achievement of Otic’s development and commercialization objectives and seriously harm Otic’s ability to successfully implement its business strategy. Furthermore, replacing executive officers and key employees may be difficult and may take an extended period of time because of the limited number of individuals in Otic’s industry with the breadth of skills and experience required to successfully develop, gain regulatory approval of and commercialize products. Competition to hire from this limited pool is intense, and Otic may be unable to hire, train, retain or motivate these key personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. Otic also experiences competition for the hiring of scientific and clinical personnel from universities and research institutions. In addition, Otic relies on consultants and advisors, including scientific and clinical advisors, to assist it in formulating its discovery and preclinical development and commercialization strategy. Otic’s consultants and advisors may be employed by employers other than Otic and may have commitments under consulting or advisory contracts with other entities that may limit their availability to provide services to Otic. If Otic is unable to continue to attract and retain high quality personnel, its ability to pursue its growth strategy will be limited.

Otic expects to expand its research and development function, as well as corporate operations, and as a result, Otic may encounter difficulties in managing its growth, which could disrupt its operations.

Otic expects to experience significant growth in the number of its employees and the scope of its operations, particularly in the areas of drug development, regulatory affairs and, if any of its product candidates receives marketing approval, sales, marketing and distribution. To manage its anticipated future growth, Otic must continue to implement and improve its managerial, operational and financial systems, expand its facilities and continue to recruit and train additional qualified personnel. Due to its limited financial resources, Otic may not be able to effectively manage the expansion of its operations or recruit and train additional qualified personnel. The expansion of its operations may lead to significant costs and may divert its management and business development resources. Any inability to manage growth could delay the execution of its business plans or disrupt its operations.

Otic may be subject to claims that its employees or directors have wrongfully used or disclosed alleged trade secrets of their former employers.

Many of Otic’s employees and certain of Otic’s directors were previously employed at universities or other biotechnology or pharmaceutical companies, including Otic’s competitors or potential competitors.

 

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Although Otic tries to ensure that Otic’s employees and directors do not use the proprietary information or know-how of others in their work for Otic, Otic may be subject to claims that Otic or these employees or directors have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such employee’s or director’s former employer. Litigation may be necessary to defend against these claims. If Otic fails in defending any such claims, in addition to paying monetary damages, Otic may lose valuable intellectual property rights or personnel. Even if Otic is successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.

Unfavorable global economic conditions could adversely affect its business, financial condition or results of operations.

Otic’s results of operations could be adversely affected by general conditions in the global economy and in the global financial markets. A severe or prolonged economic downturn, such as the recent global financial crisis, could result in a variety of risks to its business, including, its ability to raise additional capital when needed on acceptable terms, if at all. This is particularly true in Europe, where the United Kingdom’s vote to leave the European Union has created additional economic uncertainty. A weak or declining economy could also strain its suppliers, possibly resulting in supply disruption. Any of the foregoing could harm its business and Otic cannot anticipate all of the ways in which the current economic climate and financial market conditions could adversely impact its business.

Otic’s business and operations would suffer in the event of system failures.

Despite the implementation of security measures, its internal computer systems and those of its CROs, collaborators and third-parties on whom Otic relies are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. Furthermore, Otic has little or no control over the security measures and computer systems of its third-party collaborators. While Otic and, to its knowledge, its third-party collaborators have not experienced any such system failure, accident or security breach to date, if such an event were to occur and cause interruptions in its operations or its third-party collaborators, it could result in a material disruption of its drug development programs. For example, the loss of research data could delay development of its product candidates and the loss of clinical trial data from completed or ongoing or planned clinical trials could result in delays in its regulatory approval efforts and Otic may incur substantial costs to attempt to recover or reproduce the data. If any disruption or security breach resulted in a loss of or damage to its data or applications, or inappropriate disclosure of confidential or proprietary information, Otic could incur liability and/or the further development of its product candidates could be delayed.

Risks Related to the Combined Company

Tokai and Otic expect the combined company will incur losses over the next several years and may never achieve or maintain profitability.

Tokai and Otic expect the combined company will continue to incur significant expenses and increasing operating losses for the foreseeable future. The net losses the combined company incurs may fluctuate significantly from quarter to quarter. Tokai and Otic anticipate that the combined company’s expenses will increase substantially if and as it:

 

    continues clinical development of its product candidates;

 

    seeks to identify additional product candidates;

 

    acquires or in-licenses other products and technologies or enters into collaboration arrangements with regards to product discovery or development;

 

    develops manufacturing processes, conducts preclinical studies and initiates clinical trials for its product candidates;

 

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    seeks marketing approvals for any of its product candidates that successfully complete clinical trials;

 

    establishes a sales, marketing and distribution infrastructure to commercialize any products for which it may obtain marketing approval;

 

    maintains, expands and protects its intellectual property portfolio;

 

    hires additional personnel;

 

    adds operational, financial and management information systems and personnel, including personnel to support its product development and planned future commercialization efforts; and

 

    operates as a public company.

To become and remain profitable, the combined company must develop and eventually commercialize a product or products with significant market potential. This will require it to be successful in a range of challenging activities, including completing clinical trials of its product candidates, obtaining marketing approval for these product candidates and manufacturing, marketing and selling those products for which the combined company may obtain marketing approval. The combined company may never succeed in these activities and, even if it does, may never generate revenues that are significant or large enough to achieve profitability. If the combined company does achieve profitability, it may not be able to sustain or increase profitability on a quarterly or annual basis. The combined company’s failure to become and remain profitable would decrease the value of the company and could impair its ability to raise capital, maintain its preclinical and clinical development efforts, expand its business or continue its operations and may require it to raise additional capital that may dilute the ownership interest of common stockholders. A decline in the value of the combined company could also cause stockholders to lose all or part of their investment.

The combined company will need substantial additional funding. If the combined company is unable to raise capital when needed, it would be compelled to delay, reduce or eliminate its product development programs or commercialization efforts.

The combined company expects its expenses to increase in parallel with its ongoing activities, particularly as it continues its preclinical and clinical development, identifies new clinical candidates and initiates clinical trials of, and seek marketing approval for, its product candidates. In addition, if the combined company obtains marketing approval for any of its product candidates, it expects to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. If the combined company is unable to raise capital when needed or on attractive terms, it would be forced to delay, reduce or eliminate its preclinical and clinical development programs or any future commercialization efforts.

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 able to fund the operations of the combined company into the second half of 2018. The combined company will require additional capital to complete the development and commercialization of OP-01 and OP-02, if approved, and may also need to raise additional funds to pursue other development activities related to additional product candidates. The combined company’s funding needs may fluctuate significantly based on a number of factors, such as:

 

    the scope, progress, results and costs of compound discovery, preclinical development, laboratory testing and clinical trials for its product candidates;

 

    the extent to which it enters into additional collaboration arrangements with regard to product discovery, development, or acquires or in-licenses products or technologies;

 

    its ability to establish additional collaborations on favorable terms, if at all;

 

    the costs, timing and outcome of regulatory review of its product candidates;

 

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    the costs of future commercialization activities, including product sales, marketing, manufacturing and distribution, for any of its product candidates for which Otic receives marketing approval;

 

    revenue, if any, received from commercial sales of its product candidates, should any of its product candidates receive marketing approval; and

 

    the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing its intellectual property rights and defending intellectual property-related claims.

Identifying potential product candidates and conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and the combined company may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, its product candidates, if approved, may not achieve commercial success. The combined company’s commercial revenues, if any, will be derived from sales of products that it does not expect to be commercially available for several years, if at all. Accordingly, the combined company will need to continue to rely on additional financing to achieve its business objectives. Adequate additional financing may not be available to it on acceptable terms, or at all.

Raising additional capital may cause dilution to the combined company’s stockholders, restrict its operations or require it to relinquish rights to its technologies or product candidates.

Until such time, if ever, as the combined company can generate substantial product revenues, it expects to finance its cash needs through a combination of equity offerings and debt financings. The combined company does not have any committed external source of funds. To the extent that it raises additional capital through the sale of equity or convertible debt securities, the ownership interest of common stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of common stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting its ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

Tokai and Otic cannot be certain that additional funding will be available on acceptable terms, or at all. If the combined company is unable to raise additional funds when needed, it may be required to delay, limit, reduce or terminate its product development or future commercialization efforts.

Tokai and Otic expect the combined company’s stock price to be volatile, and the market price of its common stock may drop following the transaction.

The market price of the common stock of the combined company following the transaction could be subject to significant fluctuations. Market prices for securities of early-stage pharmaceutical, biopharmaceutical, and other life sciences companies have historically been particularly volatile. Some of the factors that may cause the market price of the common stock of the combined company to fluctuate include:

 

    the ability of the combined company to obtain regulatory approvals for OP-01, OP-02 or other product candidates, and delays or failures to obtain such approvals;

 

    failure of any of the combined company’s product candidates, if approved, to achieve commercial success;

 

    issues in manufacturing the combined company’s approved products, if any, or product candidates;

 

    the results of the combined company’s current and any future clinical trials of its product candidates;

 

    the entry into, or termination of, key agreements, including key commercial partner agreements;

 

    the initiation of, material developments in, or conclusion of litigation to enforce or defend any of the combined company’s intellectual property rights or defend against the intellectual property rights of others;

 

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    announcements by commercial partners or competitors of new commercial products, clinical progress or the lack thereof, significant contracts, commercial relationships or capital commitments;

 

    the introduction of technological innovations or new therapies that compete with potential products of the combined company;

 

    the loss of key employees;

 

    changes in estimates or recommendations by securities analysts, if any, who cover the combined company’s common stock;

 

    general and industry-specific economic conditions that may affect the combined company’s research and development expenditures;

 

    changes in the structure of healthcare payment systems; and

 

    period-to-period fluctuations in the combined company’s financial results.

Moreover, the stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may also adversely affect the trading price of the combined company’s common stock.

In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm the combined company’s profitability and reputation.

If securities analysts do not publish research or reports about the business of the combined company, or if they publish negative evaluations, the price of the combined company’s common stock could decline.

The trading market for the combined company’s common stock may be impacted by the availability or lack of research and reports that third-party industry or financial analysts publish about the combined company. There are many large, publicly traded companies active in the biopharmaceutical industry, which may mean it will be less likely that the combined company receives widespread analyst coverage. Furthermore, if one or more of the analysts who do cover the combined company downgrade its stock, its stock price would likely decline. If the combined company does not receive adequate coverage by reputable analysts that have an understanding of the combined company’s business and industry, it could fail to achieve visibility in the market, which in turn could cause its stock price to decline.

After the Otic Transaction, the combined company’s executive officers, directors and principal stockholders, if they choose to act together, will continue to have the ability to control all matters submitted to stockholders for approval.

Upon the closing of the Otic Transaction and the related Equity Financing, the combined company’s executive officers and directors, combined with its affiliates are expected to, in the aggregate, beneficially own shares representing approximately     % of its capital stock. As a result, if these stockholders were to choose to act together, they would be able to control all matters submitted to the combined company’s stockholders for approval, as well as its management and affairs. For example, these persons, if they choose to act together, would control the election of directors and approval of any merger, consolidation or sale of all or substantially all of its assets. This concentration of ownership control may:

 

    delay, defer or prevent a change in control;

 

    entrench its management and the board of directors; or

 

    impede a merger, consolidation, takeover or other business combination involving the combined company that other stockholders may desire.

 

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The failure to integrate successfully the businesses of Otic and Tokai in the expected timeframe could adversely affect the future results of the combined company following the completion of the transaction.

The success of the transaction will depend, in large part, on the ability of the combined company following the completion of the transaction to realize the anticipated benefits from combining the businesses of Tokai and Otic. The continued operation of the two companies will be complex.

The failure to integrate successfully and to manage successfully the challenges presented by the integration process may result in the combined company’s failure to achieve some or all of the anticipated benefits of the transaction.

Potential difficulties that may be encountered in the integration process include the following:

 

    using the combined company’s cash and other assets efficiently to develop the business of Otic;

 

    appropriately managing the liabilities of the combined company;

 

    potential unknown or currently unquantifiable liabilities associated with the transaction and the operations of the combined company;

 

    potential unknown and unforeseen expenses, delays or regulatory conditions associated with the transaction; and

 

    performance shortfalls at one or both of the companies as a result of the diversion of management’s attention caused by completing the transaction and integrating the companies’ operations.

The combined company will incur costs and demands upon management as a result of complying with the laws and regulations affecting public companies.

The combined company will incur significant legal, accounting and other expenses that Otic did not incur as a private company, including costs associated with public company reporting requirements. The combined company will also incur costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act and rules and regulations promulgated by the SEC and NASDAQ. These rules and regulations are expected to increase the combined company’s legal and financial compliance costs and to make some activities more time-consuming and costly. These rules and regulations may also make it difficult and expensive for the combined company to obtain directors’ and officers’ liability insurance. As a result, it may be more difficult for the combined company to attract and retain qualified individuals to serve on the combined company’s board of directors or as executive officers of the combined company, which may adversely affect investor confidence in the combined company and could cause the combined company’s business or stock price to suffer.

If the combined company fails to establish and maintain proper and effective internal control over financial reporting, its operating results and its ability to operate the combined company’s business could be harmed.

Ensuring that the combined company will have adequate internal financial and accounting controls and procedures in place so that it can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP.

Through the fiscal year ended December 31, 2015, Otic’s financial statements have been audited in accordance with generally accepted auditing standards in Israel. In connection with the auditor’s report included with this filing, the consolidated financial statements for the years ended December 31, 2015 and 2014 were audited in accordance with generally accepted auditing standards in the United States. Otic’s consolidated financial statements for the fiscal year ended December 31, 2016 will also be audited in accordance with generally accepted auditing standards in the United States.

 

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Beginning with the fiscal year ended December 31, 2017, Otic’s financial statements will be audited in accordance with the standards of the Public Company Accounting Oversight Board (United States). In addition, Otic will be required to be compliant with public company internal control requirements mandated under Section 302 and 906 of the Sarbanes-Oxley Act. Otic will be implementing measures designed to improve its internal controls over financial reporting, including the hiring of accounting personnel and establishing new accounting and financial reporting procedures to establish an appropriate level of internal controls over financial reporting. However, Otic is still in the process of implementing these measures and cannot provide assurances that it or the combined company will be successful in doing so. If Otic or the combined company is unable to successfully implement internal controls over financial reporting, the accuracy and timing of its financial reporting, and its stock price, may be adversely affected and it may be unable to maintain compliance with the applicable stock exchange listing requirements.

Implementing any appropriate changes to Otic’s or the combined company’s internal controls may distract the officers and employees of Otic or the combined company, entail substantial costs to modify its existing processes and take significant time to complete. These changes may not, however, be effective in maintaining the adequacy of the internal controls of the combined company, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase operating costs and harm the business. In addition, investors’ perceptions that the internal controls of Otic or the combined company are inadequate or that it is unable to produce accurate financial statements on a timely basis may harm the stock price of the combined company.

Provisions in the combined company’s corporate charter documents and under Delaware law could make an acquisition of the combined company, which may be beneficial to its stockholders, more difficult and may prevent attempts by its stockholders to replace or remove the combined company’s current management.

Provisions in the combined company’s corporate charter and the combined company’s bylaws may discourage, delay or prevent a merger, acquisition or other change in control of the combined company that stockholders may consider favorable, including transactions in which the combined company’s stockholders might otherwise receive a premium for their shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of the combined company’s common stock, thereby depressing the market price of its common stock. In addition, because the board of directors is responsible for appointing the members of the combined company’s management team, these provisions may frustrate or prevent any attempts by stockholders to replace or remove the current management by making it more difficult for stockholders to replace members of the board of directors. Among other things, these provisions:

 

    establish a classified board of directors such that not all members of the board are elected at one time;

 

    allow the authorized number of the combined company’s directors to be changed only by resolution of its board of directors;

 

    limit the manner in which stockholders can remove directors from the board;

 

    establish advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to the combined company’s board of directors;

 

    require that stockholder actions must be effected at a duly called stockholder meeting and prohibit actions by the combined company’s stockholders by written consent;

 

    limit who may call stockholder meetings;

 

    authorize the board of directors to issue preferred stock without stockholder approval, which could be used to institute a “poison pill” that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by the combined company’s board of directors; and

 

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    require the approval of the holders of at least 75% of the votes that all the combined company’s stockholders would be entitled to cast to amend or repeal certain provisions of the combined company’s charter or bylaws.

Moreover, because the combined company is incorporated in Delaware, the combined company is governed by the provisions of Section 203 of the DGCL, which prohibits a person who owns in excess of 15% of its outstanding voting stock from merging or combining with the combined company for a period of three years after the date of the transaction in which the person acquired in excess of 15% of the combined company’s outstanding voting stock, unless the merger or combination is approved in a prescribed manner.

Tokai and Otic do not anticipate that the combined company will pay any cash dividends in the foreseeable future.

The current expectation is that the combined company will retain its future earnings to fund the development and growth of the combined company’s business. As a result, capital appreciation, if any, of the common stock of the combined company will be the sole source of gain, if any, for any stockholders for the foreseeable future.

The Otic Transaction will result in changes to the combined company’s board of directors that may affect the combined company’s business strategy and operations.

The composition of the combined company’s board of directors will change as described in more detail in the section of this proxy statement entitled “Terms of the Share Purchase Agreement—Directors and Officers of Tokai Following the Otic Transaction” beginning on page 99. The newly comprised board of directors of the combined company may affect business strategies and operating decisions with respect to the combined company that may have an adverse impact on the combined company’s business, financial condition and results of operations following the completion of the transaction.

If the Otic Transaction is completed, the future success of the combined company depends on its ability to retain key members of its management team.

If the Otic Transaction is completed, the combined company will be highly dependent on principal members of its management team, which will include Mr. Flesher, Ms. Ocampo and Dr. Turkel of Otic as described in more detail in the section of this proxy statement entitled “Terms of the Share Purchase Agreement—Directors and Officers of Tokai Following the Otic Transaction” beginning on page 99. The loss of the services of any member of the combined company’s management team may adversely impact the achievement of its objectives. Although Otic has entered into employment agreements with Mr. Flesher, Ms. Ocampo and Dr. Turkel, any of them could leave the combined company’s employment at any time. The inability to recruit or the loss of the services of any executive or key employee may impede the progress of the combined company’s research, development and company objectives.

The success of the combined company will also depend on pre-existing relationships with third parties, which relationships may be affected by the Otic Transaction. Any adverse changes in these relationships could adversely affect the combined company’s business, financial condition or results of operations.

The combined company’s success will be dependent on the ability to maintain and renew relationships with pre-existing third-party relationships. There can be no assurance that the business of the combined company will be able to maintain pre-existing business relationships, or enter into or maintain new business relationships, on acceptable terms, if at all. The failure to maintain important pre-existing third-party relationships could have a material adverse effect on the business, financial condition or results of operations of the combined company.

The pro forma financial statements are presented for illustrative purposes only and may not be an indication of the combined company’s financial condition or results of operations following the completion of the transaction.

The pro forma financial statements contained in this proxy statement are presented for illustrative purposes only and may not be an indication of the combined company’s financial condition or results of

 

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operations following the Otic Transaction for several reasons. The pro forma financial statements have been derived from the historical financial statements of Tokai and Otic and adjustments and assumptions have been made regarding the combined company after giving effect to the transaction. The information upon which these adjustments and assumptions have been made is preliminary, and these kinds of adjustments and assumptions are difficult to make with accuracy. Moreover, the pro forma financial statements do not reflect all costs that are expected to be incurred by the combined company in connection with the transaction. For example, the impact of any incremental costs incurred in integrating the two companies is not reflected in the pro forma financial statements. As a result, the actual financial condition of the combined company following the Otic Transaction may not be consistent with, or evident from, these pro forma financial statements. The assumptions used in preparing the pro forma financial information may not prove to be accurate, and other factors may affect the combined company’s financial condition following the transaction. The pro forma financial statements can be found in the section entitled “Unaudited Pro Forma Combined Financial Information,” beginning on page 171 of this proxy statement.

Future sales of shares by existing stockholders could cause the combined company’s stock price to decline.

If existing stockholders of Tokai and Otic sell, or indicate an intention to sell, substantial amounts of the combined company’s common stock in the public market after the post-transaction lock-up and other legal restrictions on resale discussed in this proxy statement lapse, the trading price of the common stock of the combined company could decline. Upon completion of the Otic Transaction and the Equity Financing, without giving effect to the proposed reverse stock split, the combined company is expected to have approximately             million shares outstanding, including shares issued in connection with the Equity Financing. As of immediately following the closing of the Otic Transaction, without giving effect to the proposed reverse stock split, approximately 22.6 million shares of common stock will be freely tradable, without restriction, in the public market.

The Share Purchase Agreement contains a lock-up covenant from the Otic shareholders, which provides that for 180 days following the closing of the Otic Transaction, no Otic shareholder shall offer, sell, or otherwise dispose of, directly or indirectly, any securities of Tokai, or otherwise enter into a transaction that would have similar effect. Assuming a registration statement covering the resale of the shares of Tokai common stock issuable in connection with the Equity Financing is in effect and without giving effect to the proposed reverse stock split, up to an additional approximately             million shares of common stock will be eligible for sale in the public market, including shares issued in connection with the Equity Financing. Further, shares held by directors, executive officers of the combined company and other affiliates and will be subject to volume limitations under Rule 144 under the Securities Act.

Even if the combined company’s product candidates are successful in clinical trials, the combined company may not be able to successfully commercialize them, which may adversely affect the combined company’s future revenues and financial condition.

Otic has dedicated substantially all of its resources to the research and development of its product candidates. At present, Otic is focusing its resources on its primary product candidates, OP-01 and OP-02, which are currently in the early stages of clinical development. The combined company may not develop any other product candidates.

Prior to commercialization, each product candidate will require significant additional research, development and preclinical testing and extensive clinical investigation before submission of any regulatory application for marketing approval. Potential products that appear to be promising at early stages of development may not reach the market for a number of reasons, including that they may:

 

    be found ineffective or cause harmful side effects during clinical trials;

 

    fail to receive necessary regulatory approvals;

 

    be difficult to manufacture on a large scale;

 

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    be uneconomical to produce;

 

    fail to achieve market acceptance; or

 

    be precluded from commercialization by proprietary rights of third parties.

The combined company’s product development efforts or the combined company’s collaborative partners’ efforts may not be successfully completed for any product candidate, and the combined company may not obtain any required regulatory approvals or successfully commercialize a product candidate even if clinical development for such product candidate is successfully completed. Any products, if introduced, may not be successfully marketed nor achieve customer acceptance, which may adversely affect the combined company’s future revenues and financial condition.

Because the merger will result in an ownership change under Section 382 of the Internal Revenue Code, or the Code, for Tokai, Tokai’s pre-merger net operating loss carryforwards and certain other tax attributes may be subject to limitations. The net operating loss carryforwards and other tax attributes of Otic and of the combined company may also be subject to limitations as a result of ownership changes.

If a corporation undergoes an “ownership change” within the meaning of Section 382 of the Code, the corporation’s net operating loss carryforwards and certain other tax attributes arising from before the ownership change are subject to limitations on use after the ownership change. In general, an ownership change occurs if there is a cumulative change in the corporation’s equity ownership by certain stockholders that exceeds fifty percentage points over a rolling three-year period. Similar rules may apply under state tax laws. The transaction will result in an ownership change for Tokai and, accordingly, Tokai’s net operating loss carryforwards and certain other tax attributes may be subject to limitations (or disallowance) on their use after the transaction. Otic’s net operating loss carryforwards may also be subject to limitation as a result of prior shifts in equity ownership and/or the transaction. Additional ownership changes in the future could result in additional limitations on Tokai’s, Otic’s and the combined company’s net operating loss carryforwards. Consequently, even if the combined company achieves profitability, it may not be able to utilize a material portion of Tokai’s, Otic’s or the combined company’s net operating loss carryforwards and other tax attributes, which could have a material adverse effect on cash flow and results of operations.

Risks Related to the Proposed Reverse Stock Split

The reverse stock split may not increase the combined company’s stock price over the long term and could potentially lead to a decrease in the combined company’s overall market capitalization.

The principal purpose of the reverse stock split is to increase the per share market price of Tokai common stock. However, the reverse stock split may not accomplish this objective for any meaningful period of time. While it is expected that the reduction in the number of outstanding shares of common stock will proportionally increase the market price of Tokai common stock, the reverse stock split may not increase the market price of Tokai common stock by a multiple of the proposed reverse stock split ratio, or result in any permanent or sustained increase in the market price of Tokai common stock, which is dependent upon many factors, including the combined company’s business and financial performance, general market conditions, and prospects for future success. Thus, while the stock price of the combined company might meet the initial listing requirements for NASDAQ initially, it may not continue to meet the continued listing requirements for NASDAQ.

Should the market price of the combined company’s common stock decline after the reverse stock split, the percentage decline may be greater, due to the smaller number of shares outstanding, than it would have been prior to the reverse stock split. A reverse stock split may be viewed negatively by the market and, consequently, can lead to a decrease in the combined company’s overall market capitalization.

 

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The reverse stock split may decrease the liquidity of the combined company’s common stock.

Although the Tokai board of directors believes that the anticipated increase in the market price of the combined company’s common stock could encourage interest in its common stock and possibly promote greater liquidity for its stockholders, such liquidity could also be adversely affected by the reduced number of shares outstanding after the reverse stock split. The reduction in the number of outstanding shares may lead to reduced trading and a smaller number of market makers for Tokai common stock. Additionally, the reverse stock split may result in some Tokai stockholders owning “odd lots” of fewer than 100 shares on a post-split basis. Such stockholders would be able to sell the odd lots, but odd lot sales may be more difficult to sell or result in higher transaction costs per share than “board lot” sales, which are sales of even multiples of 100 shares.

 

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CAUTIONARY STATEMENT REGARDING

FORWARD-LOOKING INFORMATION

This proxy statement and information included in oral statements or other written statements made or to be made by Tokai or on Tokai’s behalf may contain predictions, estimates and other information that may be considered “forward-looking statements,” within the meaning of the Private Securities Litigation Reform Act of 1995 (which is applicable to Tokai, but not Otic, because Tokai, unlike Otic, is a public company subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Such forward-looking statements include, without limitation: statements regarding the structure, timing and completion of the proposed transaction; Tokai’s continued listing on The NASDAQ Global Market prior to and after the proposed transaction; expectations regarding the capitalization, cash balances and working capital, resources and ownership structure of the company after the transaction; expectations regarding the sufficiency of the company’s resources to fund the advancement of any development program or the completion of any clinical trial; the nature, strategy and focus of the company after the transaction; the safety, efficacy and projected development timeline and commercial potential of any product candidates; and the expectations regarding voting by Tokai stockholders. You can typically identify forward-looking statements by the use of forward-looking terminology including “believe,” “expect,” “may,” “will,” “should,” “could,” “seek,” “intend,” “plan,” “pro forma,” “estimate,” “project,” “continue,” “potential,” “forecast” or “anticipate” or the negative of these words and phrases or other variations of these words and phrases or comparable terminology. Stockholders are cautioned that any forward-looking statements are not guarantees of future performance. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including: risks and uncertainties associated with stockholder approval of and the ability to consummate the proposed transaction; whether the anticipated cash resources will be sufficient to fund operations for the period anticipated and to conduct the anticipated studies; whether the necessary approvals to commence clinical trials of Otic’s product candidates can be obtained on a timely basis or at all; and whether the results of clinical trials will warrant submission for regulatory approval, any such submission will receive approval from the United States Food and Drug Administration or equivalent foreign regulatory agencies and, if any of such product candidates obtains such approval, it will be successfully distributed and marketed.

For a further discussion of the factors that may cause Tokai or the combined company’s actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied in such forward-looking statements, or for a discussion of risks associated with the ability of Tokai and Otic to complete the Otic Transaction and the effect of the Otic Transaction on the business of Tokai and the combined company, see the section entitled “Risk Factors,” beginning on page 29 of this proxy statement.

If any of these risks or uncertainties materializes or any of these assumptions proves incorrect, the results of Tokai, Otic or the combined company could differ materially from the forward-looking statements. All forward-looking statements in this proxy statement are current only as of the date on which the statements were made. Tokai and Otic expressly disclaim any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

 

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INFORMATION ABOUT THE SPECIAL MEETING

General

This proxy statement is being provided to Tokai stockholders as part of a solicitation of proxies by the board of directors of Tokai for use at a special meeting of Tokai stockholders and at any adjournments or postponements of such special meeting. This proxy statement provides Tokai stockholders with information about the special meeting and should be read carefully in its entirety.

Date, Time and Place

Tokai will hold the special meeting on                 , 2017, at          local time, at the offices of Wilmer Cutler Pickering Hale and Dorr LLP, 60 State Street, Boston, Massachusetts 02109, unless postponed to a later date. On or about                 , 2017, Tokai commenced mailing this proxy statement and the enclosed form of proxy to Tokai’s stockholders entitled to vote at Tokai’s special meeting.

Purposes of the Tokai Special Meeting

The purposes of the special meeting are to consider and vote upon the following:

Proposal 1: to approve the related issuances of Tokai common stock pursuant to (i) the terms of the Share Purchase Agreement and (ii) the terms of the Tokai Stock Purchase Agreement (the “Share Issuances Proposal”);

Proposal 2: 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, which split may be effected at any time within          months of the date of the special meeting (the “Reverse Stock Split Proposal”);

Proposal 3: 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 (the “Adjournment Proposal”); and

Any other business that may properly come before the special meeting and any adjournments or postponements thereof.

Only the approval of Proposal 1 (the Share Issuances Proposal) is required for completion of the Otic Transaction.

Recommendation of the Tokai Board of Directors

 

    The Tokai board of directors has determined and believes that the related issuances of Tokai common stock pursuant to the Share Purchase Agreement and pursuant to the Tokai Stock Purchase Agreement are fair to, advisable, and in the best interests of, Tokai and its stockholders and has approved such items. The Tokai board of directors recommends that Tokai stockholders vote “FOR” the Share Issuances Proposal.

 

    The Tokai board of directors has determined and believes that it is fair to, advisable, and in the best interests of, Tokai and its stockholders to effect a reverse stock split at a ratio ranging from              :1 to             :1, as determined by the Tokai board of directors, which split may be effected at any time within          months of the date of the special meeting. The Tokai board of directors recommends that Tokai stockholders vote “FOR” the Reverse Stock Split Proposal.

 

   

The Tokai board of directors has determined and believes that adjourning the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of the Share

 

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Issuances Proposal or the Reverse Stock Split Proposal is fair to, advisable, and in the best interests of, Tokai and its stockholders and has approved and adopted the proposal. The Tokai board of directors recommends that Tokai stockholders vote “FOR” the Adjournment Proposal.

Stockholders Entitled to Vote; Record Date

To be entitled to vote, you must have been a stockholder of record at the close of business on                 , 2017, the record date for the special meeting. There were                  shares of Tokai common stock outstanding and entitled to vote at the special meeting as of the record date.

Each share of Tokai common stock that you own as of the record date will entitle you to one vote on each matter considered at the special meeting. See the section entitled “Security Ownership of Certain Beneficial Owners and Management of Tokai” beginning on page 169 of this proxy statement for information regarding the stock ownership of persons known to the management of Tokai to be the beneficial owners of more than 5% of the outstanding shares of Tokai common stock and of Tokai’s directors and officers.

Quorum and Broker Non-Votes

A majority of Tokai shares of common stock outstanding at the record date must be present in person or represented by proxy to hold the special meeting. This is called a quorum. For purposes of determining whether a quorum exists, Tokai counts as present any shares that are voted over the Internet, by telephone or by completing and submitting a proxy card by mail or that are represented in person at the meeting. Further, for purposes of establishing a quorum, Tokai will count as present shares that a stockholder holds even if the stockholder votes to abstain or only votes on one of the proposals. In addition, Tokai will count as present shares held in “street name” by brokers who indicate on their proxies that they do not have authority to vote those shares. If a quorum is not present, Tokai expects to adjourn the special meeting until it obtains a quorum.

Banks, brokerage firms and other nominees who hold shares for the accounts of their clients may vote such shares either as directed by their clients or in their own discretion on “discretionary” matters. None of the Share Issuances Proposal, the Reverse Stock Split Proposal or the Adjournment Proposal is a “discretionary” matter. When a broker does not receive instructions from a non-record owner on how to vote shares with respect to a “non-discretionary” matter, a broker “non-vote” occurs. Broker “non-votes” will be treated as present for purposes of determining whether a quorum is present, but will not be counted as votes cast “FOR” or “AGAINST” any matter.

Required Vote

The votes required for each proposal are as follows:

Proposal 1 (Share Issuances Proposal). Approval of the Share Issuances Proposal requires the affirmative vote of a majority of the shares of Tokai common stock, present in person or represented by proxy and entitled to vote on the subject matter. Broker non-votes and abstentions will have no effect on Proposal 1 (Share Issuances Proposal).

Proposal 2 (Reverse Stock Split Proposal). Approval of the Reverse Stock Split Proposal requires the affirmative vote of a majority of the shares of Tokai common stock outstanding and entitled to vote at the special meeting. Because the vote on the Reverse Stock Split Proposal is based on the total number of shares outstanding, rather than the number of actual votes cast, abstentions and “broker non-votes” will have the same effect as voting against Proposal 2 (Reverse Stock Split Proposal).

Proposal 3 (Adjournment Proposal). Approval of the Adjournment Proposal requires the affirmative vote of a majority of the shares of Tokai common stock, present in person or represented by proxy and entitled to vote on the subject matter. Broker non-votes and abstentions will have no effect on Proposal 3 (Adjournment Proposal).

 

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Each of the Share Issuances Proposal, Reverse Stock Split Proposal and Adjournment Proposal is an independent proposal; none of the foregoing is conditioned upon the approval of any other proposal. The approval of the Share Issuances Proposal is required to consummate the Otic Transaction. The Otic Transaction may be consummated regardless of whether the Tokai stockholders approve or do not approve the Reverse Stock Split Proposal or the Adjournment Proposal. If the Share Issuances Proposal is not approved and the Otic Transaction is not consummated, Tokai’s board of directors may determine to proceed with the reverse stock split if the Reverse Stock Split Proposal is approved.

Voting by Stockholders

If you are the “record holder” of your shares, meaning that your shares are registered in your name in the records of Tokai’s transfer agent, Continental Stock Transfer & Trust Company, you may vote your shares at the meeting in person or by proxy as follows:

 

  1. Over the Internet: To vote over the Internet, please go to the following website: www.proxypush.com/tkai, and follow the instructions at that site for submitting your proxy electronically. If you vote over the Internet, you do not need to complete and mail your proxy card or vote your proxy by telephone. You must specify how you want your shares voted or your Internet vote cannot be completed, and you will receive an error message. You must submit your Internet proxy before 11:59 p.m., Eastern Time, on                 , 2017, the day before the special meeting, for your proxy to be valid and your vote to count.

 

  2. By Telephone: To vote by telephone, please call (866) 206-4382, and follow the instructions provided on the proxy card. If you vote by telephone, you do not need to complete and mail your proxy card or vote your proxy over the Internet. You must specify how you want your shares voted and confirm your vote at the end of the call or your telephone vote cannot be completed. You must submit your telephonic proxy before 11:59 p.m., Eastern Time, on                 , 2017, the day before the special meeting, for your proxy to be valid and your vote to count.

 

  3. By Mail: To vote by mail, you must mark, sign and date the proxy card and then mail the proxy card in accordance with the instructions on the proxy card. If you vote by mail, you do not need to vote your proxy over the Internet or by telephone. Mediant Communications, Inc. must receive the proxy card not later than                 , 2017, the day before the special meeting, for your proxy to be valid and your vote to count. If you return your proxy card but do not specify how you want your shares voted on any particular matter, they will be voted in accordance with the recommendations of the Tokai board of directors.

 

  4. In Person at the Meeting: If you attend the speicial meeting, you may deliver your completed proxy card in person or you may vote by completing a ballot, which Tokai will provide to you at the meeting.

If your shares are held in “street name,” meaning they are held for your account by an intermediary, such as a broker, then you are deemed to be the beneficial owner of your shares and the broker that actually holds the shares for you is the record holder and is required to vote the shares it holds on your behalf according to your instructions. The proxy materials, as well as voting and revocation instructions, should have been forwarded to you by the broker that holds your shares. In order to vote your shares, you will need to follow the instructions that your broker provides you. Many brokers solicit voting instructions over the Internet or by telephone.

If you do not give instructions to your broker, your broker will not be able to vote your shares with respect to “non-discretionary” items. The Share Issuances Proposal, the Reverse Stock Split Proposal and the Adjournment Proposal are each “non-discretionary” items. Accordingly, if you do not give your broker voting instructions on any of these proposals, your broker may not vote your shares with respect to such matter and your shares will be counted as “broker non-votes” with respect to such proposal. A “broker non-vote” occurs when shares held by a broker are not voted with respect to a particular proposal because the broker does not have or did not exercise discretionary authority to vote on the matter and has not received voting instructions from its clients.

 

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Regardless of whether your shares are held in street name, you are welcome to attend the meeting. You may not vote shares held in street name in person at the meeting, however, unless you obtain a legal proxy, executed in your favor, from the holder of record (i.e., your broker). A legal proxy is not the form of proxy included with this proxy statement.

All properly executed proxies that are not revoked will be voted at the special meeting and at any adjournments or postponements of the special meeting in accordance with the instructions contained in the proxy. If a holder of Tokai common stock executes and returns a proxy and does not specify otherwise, the shares represented by that proxy will be voted “FOR” the Share Issuances Proposal; “FOR” the Reverse Stock Split Proposal; and “FOR” the Adjournment Proposal in accordance with the recommendation of the Tokai board of directors.

Revocation of Proxies

Tokai stockholders of record, other than those Tokai stockholders who have executed the Support Agreement, may change their vote at any time before their proxy is voted at the special meeting in any of the following ways.

If your shares are registered directly in your name, you may revoke your proxy and change your vote at any time before the vote is taken at the special meeting. To do so, you must do one of the following:

 

  1. Vote over the Internet or by telephone as instructed above. Only your latest Internet or telephone vote is counted.

 

  2. Sign and return a new proxy card. Only your latest dated and timely received proxy card will be counted.

 

  3. Attend the special meeting and vote in person as instructed above. Attending the special meeting will not alone revoke your Internet vote, telephone vote or proxy card submitted by mail, as the case may be.

 

  4. Give Tokai’s corporate secretary written notice before or at the meeting that you want to revoke your proxy.

If your shares are held in “street name,” you may submit new voting instructions by contacting your broker or other nominee. You may also vote in person at the special meeting if you obtain a legal proxy as described in the answer above.

Voting by Tokai’s Directors, Executive Officers and Certain Stockholders

As of December 31, 2016, certain directors and executive officers of Tokai and entities associated with Apple Tree Partners (“Apple Tree”), Tokai’s largest stockholder, collectively owned approximately 36.3% of the outstanding shares of Tokai stock entitled to vote at the Tokai special meeting. These directors, executive officers of Tokai and Apple Tree are subject to a Support Agreement. Each stockholder that entered into the Support Agreement has agreed, solely in its capacity as an equityholder, to vote all of the shares of Tokai common stock held by such stockholder in favor of the issuance of Tokai common stock in the Otic Transaction and against any “acquisition proposal,” as defined in the Share Purchase Agreement and described in the section entitled, “Terms of the Share Purchase Agreement—No Solicitation; Third Party Competing Proposal,” beginning on page 101 of this proxy statement. As of                 , 2017, Tokai is not aware of any affiliate of Otic owning any shares of Tokai common stock entitled to vote at the Tokai special meeting.

Solicitation of Proxies

Tokai will bear the cost of soliciting proxies. In addition to solicitation by mail, Tokai’s directors, officers and employees may solicit proxies by telephone, e-mail, facsimile, and in person without additional

 

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compensation. Tokai may reimburse brokers or persons holding stock in their names, or in the names of their nominees, for their expenses in sending proxies and proxy material to beneficial owners.

No Appraisal Rights

Holders of Tokai common stock are not entitled to appraisal rights under Delaware law with respect to any of the proposals to be voted on at the special meeting. For more information about appraisal rights, see the provisions of Section 262 of the DGCL.

Householding

Some brokers and other nominee record holders may be “householding” Tokai’s proxy materials. This means a single notice and, if applicable, the proxy materials, will be delivered to multiple stockholders sharing an address unless contrary instructions have been received. Tokai will promptly deliver a separate copy of the notice and, if applicable, the proxy materials, to you if you write or call Tokai at Tokai Pharmaceuticals, Inc., 255 State Street, 6th Floor, Boston, Massachusetts 02109, Attention: Investor Relations, telephone: (617) 225-4305. If you would like to receive separate copies of Tokai’s proxy materials and annual reports in the future, or if you are receiving multiple copies and would like to receive only one copy for your household, you should contact your bank, broker, or other nominee record holder, or you may contact Tokai at the above address and telephone number.

Tabulation of Votes

The votes will be counted, tabulated and certified by Mediant Communications, Inc.

Adjournments and Postponements

If at the special meeting, the Tokai board of directors determines that it is necessary or appropriate to seek to adjourn or postpone the special meeting to seek additional proxies to approve any of the Share Issuances Proposal or the Reverse Stock Split Proposal, then the Tokai board of directors will move to vote on the Adjournment Proposal. If the stockholders approve the Adjournment Proposal, Tokai may adjourn or postpone the meeting. If the special meeting is adjourned or postponed, Tokai is not required to give notice of the time and place of the adjourned or postponed meeting if it is to take place within 30 days and if the time and place of the adjourned or postponed meeting are announced at the special meeting, unless the Tokai board of directors fixes a new record date for the special meeting.

Attending the Special Meeting

Regardless of whether your shares are held in street name, you are welcome to attend the meeting. You may not vote shares held in street name in person at the meeting, however, unless you obtain a legal proxy, executed in your favor, from the holder of record (i.e., your broker). A legal proxy is not the form of proxy included with this proxy statement.

 

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THE OTIC TRANSACTION

The Transaction Structure

Upon the terms and subject to the conditions set forth in the Share Purchase Agreement, Tokai will acquire all of the ordinary and preferred shares of Otic in exchange for the issuance to the Sellers of a specified number of shares of Tokai common stock and will assume all outstanding share options and warrants of Otic.

Based on the outstanding share capital of Otic as of the date of the Share Purchase Agreement and the shares issuable upon exercise of warrants to purchase shares of Otic and the conversion of certain outstanding debt facilities of Otic into shares of Otic that are expected to be exercised or converted prior to the closing of the Otic Transaction, Tokai expects to issue              shares of Tokai common stock in the Otic Transaction. If all of Otic’s outstanding options and warrants are exercised prior to closing, Tokai will issue a total of 36,911,631 shares of Tokai common stock in the Otic Transaction. Following the closing of the Otic Transaction, the stockholders of Otic are expected to hold approximately 60% of the outstanding shares of Tokai common stock, excluding for this purpose the effect on ownership of the issuance of shares in the Equity Financing. The relative percentage ownership of the combined company was derived using a stipulated value of Otic of approximately $50.0 million and of Tokai of approximately $33.0 million.

The issuance of Tokai common stock to the Sellers will be issued in transactions exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act, and Regulation D or Regulation S promulgated thereunder and may not be offered or sold by the holders of those shares absent registration or an applicable exemption from registration requirements.

Consideration

The number of shares to be issued to Otic shareholders in total is based on an exchange ratio of 4.255 shares of Tokai common stock for each Otic ordinary and preferred share, as described in the section entitled “Terms of the Share Purchase Agreement—Exchange Ratio,” beginning on page 98 of this proxy statement. The relative percentage ownership of the combined company was derived using a stipulated value of Otic of approximately $50.0 million and of Tokai of approximately $33.0 million and therefore following the closing of the Otic Transaction, the stockholders of Otic are expected hold approximately 60% of the outstanding shares of Tokai common stock.

Additionally, in connection with the Otic Transaction, Tokai has entered into the Tokai Stock Purchase Agreement dated January     , 2017 with Otic and certain purchasers set forth therein pursuant to which the purchasers have agreed to purchase          shares of Tokai common stock at a price of $        per share. The Tokai Stock Purchase Agreement provides that the purchase and sale of the Tokai common stock will occur immediately following the closing of the Otic Transaction.

Effect of the Otic Transaction on Otic Share Options, Otic Warrants and Tokai Stock Options

Otic Share Options and Otic Warrants

Pursuant to the Share Purchase Agreement, at closing Tokai will assume the then outstanding share option awards and warrants of Otic (other than warrants of Otic that are exercised in connection with the Otic Transaction). Each of these options and warrants will be adjusted to reflect a ratio of          shares of Tokai common stock for each Otic share. Accordingly, at closing, each of Otic’s outstanding share option awards and warrants will become exercisable, as the case may be, for or into          shares of Tokai common stock for each Otic share it was previously exercisable for into, at a correspondingly adjusted exercise price, provided that the exercise price of such stock options and warrants will be rounded down to the nearest whole share and the exercise prices will be rounded up to the nearest cent, and no cash payment will be made in respect of such

 

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rounding. After giving effect to the ratio, and assuming no exercise of, or other change in, the number of outstanding share option awards and warrants of Otic, Tokai will assume options to purchase              shares of Tokai common stock at a weighted average exercise price of $         per share and warrants to purchase              shares of Tokai common stock at a weighted average exercise price of $         per share. If all of these options and warrants were exercised prior to the closing of the Otic Transaction, Tokai would issue 36,911,631 shares of common stock and the Otic shareholders would own approximately 62% of the outstanding shares of Tokai common stock.

Tokai Options

Upon closing of the Otic Transaction, all of Tokai’s outstanding stock options will remain outstanding and in effect. Tokai’s board of directors has determined that the Otic Transaction constitutes a change in control for purpose of Tokai’s stock options. As a result, if any holder of Tokai stock options (other than Tokai’s non-employee directors) is terminated without cause or resigns for good reason following the closing, such holder’s stock options will immediately vest in full. Stock options held by Tokai’s non-employee directors will vest in full immediately upon the closing.

Expected Timing of the Otic Transaction

Unless the Share Purchase Agreement is earlier terminated pursuant to its terms, the Otic Transaction will be consummated, as promptly as practicable, but in no event later than the second business day, following the satisfaction or waiver of the conditions to the consummation of the Otic Transaction, including stockholder approval of the Share Issuances Proposal at this special meeting, as described in the section entitled “Terms of the Share Purchase Agreement—Conditions to the Consummation of the Otic Transaction,” beginning on page 99 of this proxy statement.

Background of the Otic Transaction

On July 25, 2016, the independent Data Monitoring Committee (“DMC”) for Tokai’s pivotal Phase 3 ARMOR3-SV trial of its lead product candidate, galeterone, met to review safety and efficacy data from the trial. Following the conclusion of the DMC meeting, the chairman of the DMC called Karen Ferrante, MD, Tokai’s chief medical officer, to inform her that, based on a review of all available safety and efficacy data, the DMC had determined that the ARMOR3-SV trial would likely not succeed in meeting its primary endpoint of demonstrating an improvement in radiographic progression-free survival for galeterone versus enzalutamide in men with AR-V7 positive mCRPC and recommended that enrollment in the trial be discontinued. In making its recommendation, the DMC did not cite any safety concerns with galeterone in the trial.

Later on July 25, 2016, the Tokai board of directors (the “Board”) held a telephonic meeting at which Dr. Ferrante reviewed the meeting of the DMC and the recommendations of the DMC with respect to the ARMOR3-SV trial. After a lengthy discussion, the Board agreed that Tokai should accept the DMC’s recommendation and discontinue the trial. Jodie P. Morrison, president and chief executive officer, then reviewed plans for public disclosure of the trial discontinuation and for further analysis of the data from the trial. Ms. Morrison also discussed Tokai’s current cash resources. The Board agreed to meet again on July 28, 2016 to discuss possible cost-cutting measures.

On July 26, 2016, prior to the opening of trading, Tokai issued a press release announcing the recommendation of the DMC and Tokai’s plan to discontinue the ARMOR3-SV trial. Tokai’s common stock closed at $1.10 per share on July 26, 2016 as compared to a closing price of $5.20 per share on July 25, 2016.

On July 28, 2016, the Board held a telephonic meeting at which it reviewed development options for galeterone and Tokai’s preclinical ARDA program, Tokai’s cash resources and actions that could be taken to

 

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conserve Tokai’s cash resources while Tokai conducted its review of the galeterone and ARDA programs. After a discussion, the Board approved a plan to reduce the size of Tokai’s workforce by approximately 60% to a total of ten full-time equivalent employees and the departure of certain members of Tokai’s management. The Board also reviewed a range of possible strategic alternatives, including continuing the development of galeterone and/or the ARDA program, licensing or otherwise monetizing galeterone and/or the ARDA program, engaging in a reverse merger transaction or winding up operations and distributing existing net cash to Tokai’s stockholders in a liquidation. The Board also directed management to initiate discussions with potential financial advisory firms in order to identify a firm to engage to assist the Board in evaluating Tokai’s strategic alternatives.

Between July 28, 2016 and August 16, 2016, Tokai’s management continued its analysis of the development programs for galeterone and the ARDA program and engaged in discussions with several financial advisory firms, including Wedbush, regarding assisting the Board with its evaluation of strategic alternatives. During this period, Tokai management routinely updated the Board through informal telephonic status update calls and email correspondence.

On August 16, 2016, the Board held a telephonic meeting at which Tokai management provided an update on its review of the data from the ARMOR3-SV trial and of the galeterone and ARDA development programs and recommended that Tokai discontinue enrollment in its ongoing Phase 2 ARMOR2 clinical trial of galeterone. At the meeting, Tokai management also reviewed Tokai’s current cash resources and the impact of the reduction in force and trial discontinuations on Tokai’s cash burn forecast, described the discussions that it had had with financial advisory firms and recommended that the Board engage Wedbush as Tokai’s financial advisor. Following a discussion of these matters, the Board directed Tokai management to negotiate an engagement letter with Wedbush and to discontinue enrollment in the ongoing Phase 2 ARMOR2 trial. The Board also discussed the establishment of a committee of independent directors to oversee and guide a strategic transaction process and potential conflicts that certain directors could have if companies affiliated with them were participants in the strategic transaction process.

On August 30, 2016, the Board, acting by written action, authorized the Tokai management to enter into an engagement letter with Wedbush, and on August 31, 2016, Tokai formally engaged Wedbush to advise on strategic alternatives for Tokai to maximize stockholder value.

On September 6, 2016, the Board held a telephonic meeting in which representatives of Wedbush and Wilmer Cutler Pickering Hale and Dorr LLP, counsel to Tokai (“WilmerHale”), participated. At the meeting, representatives of Wedbush reviewed a recommended process for exploring strategic alternatives and a proposed timeline for a possible transaction. As part of this review, the representatives of Wedbush proposed criteria to be used to screen potential counterparties, including biopharmaceutical companies with product candidates in clinical trials or expected to be in clinical trials in 2017 and late-stage medical device companies, the valuations of which would warrant Tokai pre-combination stockholders continuing to own a double-digit percentage of the surviving company. Ms. Morrison then described a press release that Tokai proposed to issue announcing that the Board had formally initiated a review of strategic alternatives for Tokai focused on maximizing stockholder value and announcing that Tokai had engaged Wedbush as its financial advisor as part of its strategic review. After a discussion, the Board authorized the initiation of the strategic review and directed management to issue the press release as described.

At the September 6, 2016 meeting of the Board, the Board also established an independent transaction committee of the Board consisting of Cheryl Cohen and Stephen Buckley, as independent directors as defined in the NASDAQ Listing Rules, to oversee and guide the strategic transaction process (the “Transaction Committee”). The members of the Transaction Committee were selected by the Board based primarily on the members’ knowledge of, and experience with, strategic transactions, experience in evaluating the prospects and relative value of potential strategic partners, operational and executive experience relative to the required diligence of the potential strategic partners, diversity of professional experience and ability to meet the time commitments of service on such committee. The Board delegated to the Transaction Committee the primary

 

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authority to review and evaluate proposals for strategic transactions, to review and evaluate the prospects for the strategic partners, to interface with Wedbush and to act on behalf of the Board in facilitating the review, analysis, evaluation, monitoring and exercise of general oversight of all proceedings and activities related to any strategic transaction proposal. The Transaction Committee was not delegated the authority to approve any particular transaction but was directed to provide recommendations to the Board with regards to the various proposals and/or strategic partners.

Following the conclusion of the September 6, 2016 Board meeting, the Transaction Committee held a telephonic meeting with representatives of Wedbush and WilmerHale. At the meeting, the representatives of Wedbush led a discussion regarding the process by which Tokai would explore potential strategic transactions, the criteria for screening potential counterparties and the process for conducting diligence on potential counterparties. After a discussion, the Transaction Committee directed Tokai management and Wedbush to commence the agreed upon process.

On September 8, 2016, upon confirmation that no companies affiliated with Apple Tree Partners would participate in the strategic transaction process, the Board appointed Seth Harrison, the Managing Director of Apple Tree Partners, to, and as chairman of, the Transaction Committee.

On September 8, 2016, Tokai issued a press release announcing that its Board had initiated a review of strategic alternatives for the company focused on maximizing stockholder value, that it had engaged Wedbush to act as its financial advisor and that Tokai anticipated that all patients enrolled in the ARMOR3-SV trial would discontinue treatment by the end of the year.

As described in greater detail below, between September 1, 2016 and December 21, 2016, members of Tokai management and representatives of Wedbush, acting at the direction and under the supervision of the Transaction Committee, conducted a process of identifying and evaluating potential strategic transactions with pharmaceutical and biotechnology companies. Working with Wedbush, Tokai identified and screened approximately 145 companies, held meetings or calls with the management of 40 companies, received written non-binding indications of interest from 24 companies, provided draft merger agreements to ten companies, received revised drafts of the draft merger agreement from four companies and entered into negotiations of the draft merger agreement with Otic, Company A and Company B. During the process, substantially all of the parties with which Tokai had discussions only expressed an interest in pursuing a reverse merger transaction, and none of these parties expressed an interest in acquiring galeterone or the ARDA program. As a result, the Transaction Committee primarily focused on a reverse merger transaction.

In evaluating potential parties for a transaction and narrowing the list of potential parties throughout the process, Tokai utilized a broad set of criteria that focused on a range of attributes and characteristics of such parties. This set of criteria was initially discussed by Tokai’s Board in connection with its engagement of Wedbush and was refined by the Transaction Committee during the course of the process. In evaluating potential counterparties, the Transaction Committee considered (i) the depth of the counterparty’s product pipeline and stage of development, (ii) risks relating to the clinical success of the counterparty’s product candidates and operational risks, (iii) the market opportunity for the counterparty’s product candidates if approved, (iv) the anticipated scope and timing of development and commercialization milestones, (v) the counterparty’s management team, (vi) the counterparty’s cash resources and the sufficiency of the expected financial resources of a combined company with the counterparty to achieve potentially meaningful milestones, either through resources to be obtained through financing activities consummated prior to the effectiveness of a transaction with Tokai or through the resources that would result from a transaction with Tokai, (vii) the counterparty’s interest in Tokai’s existing assets, management team, facilities and business, (viii) the expected board composition following a transaction, (ix) the availability of audited financial statements or the capability to produce such audited financial statements in order to satisfy applicable Exchange Act and/or Securities Act requirements, (x) valuation estimate and prospects for the counterparty and (xi) the counterparty’s ability to expeditiously consummate a transaction with Tokai and risks related thereto. Tokai also requested information from each potential strategic partner as to its interest in continuing the development of galeterone or the ARDA program.

 

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In evaluating the proposed terms of potential transactions with counterparties and narrowing the list of potential counterparties throughout such process, the Transaction Committee also analyzed (i) the proposed valuation of the counterparty, (ii) the valuation of Tokai ascribed by such counterparty, (iii) the anticipated relative ownership of the combined entity immediately following the consummation of a transaction by Tokai’s pre-combination stockholders and the stockholders of such counterparty and (iv) the counterparty’s ability to consummate a transaction.

On September 1, 2016, representatives of Wedbush began contacting companies to gauge interest in a strategic transaction with Tokai. One of the companies contacted on September 1, 2016 was Otic. Based on an initial expression of interest by Greg Flesher, the chief executive officer of Otic, Wedbush sent Otic a confidentiality agreement on September 6, 2016. Tokai and Otic executed the confidentiality agreement on September 15, 2016.

On September 6, 2016, a member of the board of directors of Company A contacted Wedbush and expressed interest in exploring a possible strategic transaction with Tokai. Company A is a clinical stage company focused on respiratory disorders. Later that day, representatives of Wedbush spoke with the chief executive officer of Company A and, following that call, sent Company A a confidentiality agreement. The parties executed the confidentiality agreement on September 12, 2016. On September 12, 2016, representatives of Wedbush spoke further with the chief executive officer of Company A regarding the timing of a possible transaction, issues related to Tokai’s ongoing shareholder litigation and Tokai’s projected cash balance at the anticipated time of the closing of a transaction.

On September 21, 2016, the Board held a telephonic meeting in which representatives of Wedbush and WilmerHale participated. At the meeting, the representatives of Wedbush reviewed the process that had been adopted by the Transaction Committee and updated the Board on the number of counterparties that had been contacted and that had signed confidentiality agreements and, after a discussion, left the meeting. The Tokai management then updated the Board on Tokai’s projected uses of cash and cash burn forecast, the status of the ARMOR2 and ARMOR3-SV clinical trials, and the exploration of strategic alternatives to maximize the value of galeterone. The Board then discussed and authorized Tokai management to enter into a consulting agreement with Apple Tree Life Sciences, Inc., an affiliate of Apple Tree Partners, under which Apple Tree agreed to provide consulting, advisory and related services to and for Tokai from time to time, including assisting Tokai in connection with its review of strategic alternatives and conducting diligence of potential counterparties. Under the agreement, there is no fee for Apple Tree’s services except for reimbursement of out of pocket expenses.

On September 22, 2016, Tokai management participated in conference calls with the management teams of Otic and Company A. During each of these calls, the parties discussed a potential strategic transaction and the management of the potential counterparties presented a summary of their plans and activities.

On September 23, 2016, representatives of Wedbush contacted Company B, a clinical stage company focused on dermatologic disorders, to explore the possibility of a potential strategic transaction between Tokai and Company B. In response to a positive indication of interest, representatives of Wedbush sent Company B a confidentiality agreement and requested to schedule an initial meeting between the management teams of Tokai and Company B. The parties executed the confidentiality agreement on September 26, 2016.

On September 27, 2016, the Transaction Committee held a telephonic meeting in which representatives of Wedbush and WilmerHale participated. At the meeting, representatives of Wedbush updated the Transaction Committee on the strategic transaction process, including the 18 companies that had completed management presentations prior to the meeting. The Transaction Committee then discussed the draft process letter that had been circulated to the Transaction Committee encouraging potential counterparties to provide a written non-binding indication of interest with respect to a possible strategic transaction involving Tokai and directed Wedbush to deliver the process letter to each of the companies that had completed management presentations as of such date. Representatives of Wedbush noted that it had received an unsolicited indication of interest for a

 

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business combination transaction involving Tokai from one of the companies that had completed a management presentation, and the Transaction Committee agreed that the Transaction Committee would include the bidder in the strategic transaction process and consider the bidder’s indication of interest with the other indications of interest received by Tokai. The Transaction Committee also agreed that as additional companies completed management presentations it would consider authorizing the delivery of process letters by email.

From the September 27, 2016 meeting until December 21, 2016, Wedbush sent process letters to 32 companies, including 30 companies prior to October 13, 2016 including Otic, Company A and Company B. Wedbush sent process letters to Otic and Company A on September 28, 2016.

On September 30, 2016, Tokai management participated in a conference call with the management team of Company B. During the call, the parties discussed a potential strategic transaction and the management team of Company B presented a summary of its plans and activities. Later that day, with the approval of the Transaction Committee, Wedbush sent a process letter to Company B.

On October 3, 2016, the management teams of Tokai and Company A met at Tokai’s offices in Boston, Massachusetts, with representatives of Wedbush and Apple Tree Partners participating telephonically. During the meeting, Company A’s management shared additional details regarding its plans and activities and responded to questions from Tokai management and its advisors.

Between October 6, 2016 and October 13, 2016, representatives of Wedbush received written non-binding indications of interest from 22 parties, including Otic, Company A and Company B, each detailing proposed terms for a strategic transaction between the parties and Tokai.

On October 10, 2016, Otic delivered to representatives of Wedbush its written non-binding indication of interest. In the indication of interest, Otic proposed a stock-for-stock transaction with current Otic shareholders receiving shares of Tokai common stock representing approximately 60% of the combined company and Tokai stockholders retaining ownership of approximately 40% of the Tokai common stock based on an ascribed value of $33 million for Tokai and an assumed minimum amount of cash at closing. The indication of interest also noted the key areas of diligence to be performed, that Tokai would retain three of the planned seven board seats, the status of Otic’s financial statements, that Otic’s shareholders had indicated a willingness to invest in the combined company and that Otic’s shareholders would agree to a 180-day lock up.

On October 13, 2016, the Transaction Committee held a meeting at the offices of Apple Tree Partners in New York, New York in which representatives of Wedbush, Apple Tree Partners and WilmerHale participated. At the meeting, representatives of Wedbush provided the Transaction Committee with an update regarding the strategic transaction process and the written non-binding indications of interests that Wedbush had received. Representatives of Wedbush reviewed for the Transaction Committee the key terms of each written indication of interest, including the ascribed valuation of each such party, the valuation ascribed to Tokai by each such party including the cash resources assumed to be held by Tokai upon the closing of a transaction, the anticipated ownership of the combined entity by Tokai’s existing stockholders following the closing of a transaction, the cash resources that the combined entity was expected to have following a transaction, including the need for a concurrent financing, if any, and the number of members of the board of directors of the combined entity that Tokai would be entitled to designate. The Transaction Committee also considered and discussed the businesses of each such party using the criteria previously identified by the Tokai Board and the Transaction Committee (and previously summarized above), with the assistance and advice of representatives of Wedbush, Apple Tree Partners and Tokai management, including, among other things, the parties’ products, the status and progress of clinical trials, the anticipated scope and timing of the commercialization of such parties’ products, market opportunity and the experience of the management team of such party.

On this basis, the Transaction Committee categorized the potential counterparties into categories labeled high priority, medium priority and low priority, and directed Tokai’s management and representatives to prioritize resources on exploring a potential strategic transaction with five of the high priority potential counterparties, including Company A and Company B, by circulating an initial draft of a merger agreement to

 

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such parties and organizing in-person diligence sessions which members of the Transaction Committee could attend, while continuing to review potential strategic transactions with other parties. The Transaction Committee directed Tokai management to conduct additional diligence regarding the financial resources of Otic and the willingness of Otic to conduct a concurrent financing before proceeding with Otic.

On October 14, 2016, representatives of Wedbush contacted Company B to schedule an in-person diligence session. In anticipation of this meeting, Wedbush requested access for Tokai and its advisors to Company B’s virtual data room, which was provided on October 17, 2016.

On October 19, 2016, Wedbush delivered to Company B the initial draft of the merger agreement. The initial draft contemplated a reverse triangular merger of the counterparty and a wholly owned subsidiary of Tokai pursuant to which the stockholders of the counterparty would receive a number of shares of Tokai common stock based on a fixed exchange ratio (the amount of which was left undefined in the initial draft).

On October 20, 2016, Wedbush sent to Otic a list of diligence questions prepared by Tokai management and its advisors relating to intellectual property and business development matters. Otic reverted with a series of responses to the diligence questions on October 21, 2016.

On October 21, 2016, Tokai management held a due diligence call with advisors to Company B regarding Tokai’s cash burn forecast.

On October 22, 2016, a representative of Brock Capital, the financial advisor for Company C, emailed Ms. Morrison to express Company C’s interest in exploring a possible business combination between Company C and Tokai. Company C is a clinical stage company focused on developing cancer therapeutics. On October 31, 2016, Wedbush sent Company C a copy of the confidentiality agreement. The parties executed the confidentiality agreement on November 8, 2016.

Between October 26, 2016 and November 2, 2016, Tokai management and its advisors and members of the Transaction Committee held in-person diligence meetings with eight companies, including Otic and Company B. In connection with these meetings, Wedbush delivered the initial draft of the merger agreement to the eight companies.

On October 31, 2016, representatives of Wedbush contacted Otic to schedule an in-person diligence session. In anticipation of the diligence session, Wedbush requested access for Tokai and its advisors to Otic’s virtual data room, which was provided on October 31, 2016. Otic continued to add requested diligence items to its virtual data room from October 31, 2016 to December 21, 2016. The in-person diligence session with Otic was held on November 2, 2016.

On November 4, 2016, a representative of Company C informed Wedbush that the audit of Company C’s financial statements for 2014 and 2015 had not yet been completed and that the audited financial statement would not be available until February 2017.

On November 7, 2016, the Transaction Committee held a telephonic meeting in which representatives of Wedbush, Apple Tree Partners and WilmerHale participated. At the meeting, the Transaction Committee reviewed the in-person diligence meetings that Tokai management and the Transaction Committee had held with potential counterparties, and directed Tokai management and Wedbush to prioritize discussions with three of the counterparties: Otic, Company A and Company B.

On November 9, 2016, Otic delivered to Wedbush a list of diligence questions and requested diligence calls with Tokai management and the appropriate representatives of Tokai.

On November 10, 2016, Tokai management participated in a conference call with the management team of Company C. During the call, the parties discussed a potential strategic transaction, and the management team of Company C presented a summary of its plans and activities.

 

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On November 11, 2016, representatives of Otic and Tokai conducted diligence calls regarding general and administrative matters and the galeterone and ARDA programs.

On November 14, 2016, representatives of Otic and Tokai and their legal counsel conducted a diligence call regarding Tokai’s outstanding litigation.

In addition, on November 14, 2016, Otic delivered to Wedbush a revised draft of the merger agreement, which Wedbush then delivered to Tokai management and to representatives of WilmerHale. The revised draft of the merger agreement received from Otic indicated Otic’s preference to structure the transaction as a share purchase pursuant to which Tokai would acquire Otic’s outstanding shares of capital stock directly from Otic shareholders rather than through a merger transaction in exchange for a number of shares of Tokai common stock to be issued to Otic shareholders equal to the number of shares necessary to cause the pre-combination stockholders of Tokai to own a specified percentage of the combined entity on a fully-diluted basis and the pre-combination equityholders of Otic to own a specified percentage of the combined entity on a fully-diluted basis. Other notable terms in the draft included (i) the elimination of all negative operating covenants that would apply to Otic between signing of the share purchase agreement and the closing of the transaction, (ii) the imposition of a strict limit on the pre-closing expenditures of Tokai, (iii) the requirement that Tokai seek stockholder approval for a reverse stock split if required for Tokai to maintain its listing on The NASDAQ Global Market and (iv) a termination fee, payable by Tokai, in the event, among other events, that Tokai terminated the share purchase agreement following any material breach of Tokai’s representations, warranties or covenants in the share purchase agreement.

On November 17, 2016, with the approval of the Transaction Committee, Wedbush sent a process letter to Company C.

On November 18, 2016, Company C provided representatives of Tokai and its advisors with access to its virtual data room. Company C continued to add requested diligence items to its virtual data room from November 18, 2016 to December 7, 2016.

Between November 18, 2016 and November 21, 2016, Tokai management and Tokai’s advisors held due diligence calls with Company B management and its advisors regarding legal, human resource and tax matters.

Between November 21, 2016 and November 23, 2016, Wedbush and representatives of Company C had multiple communications regarding the strategic transaction process, the desired timing of the close of a transaction and the status of the audit of Company C’s financial statements.

Between November 21, 2016 and December 12, 2016, Tokai management and its advisors had multiple meetings and other communications with Otic regarding Otic’s product development plans and intellectual property matters and conducted diligence regarding the market potential of OP-02, Otic’s lead product.

On November 22, 2016, representatives of Wilmer Hale held a conference call with representatives of Gibson Dunn & Crutcher LLP, counsel to Otic (“Gibson Dunn”), to discuss the proposed revisions to the structure of the transaction referenced in Otic’s draft share purchase agreement and to discuss other terms in the share purchase agreement, including the limitations on expenditures of Tokai, the inclusion of negative operating covenants applicable to Otic and the circumstances under which Tokai would owe a termination fee to Otic.

In addition, on November 22, 2016, Company B delivered to representatives of Wedbush a revised draft of the merger agreement, which Wedbush then delivered to Tokai management and to representatives of WilmerHale. The revised merger agreement did not specify the proposed exchange ratio but provided for an adjustment to the exchange ratio based on Tokai’s net cash at closing and for a reciprocal and equal termination fee.

 

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On November 23, 2016, the management teams of Tokai and Company C held a diligence call regarding financial and research and development matters and the logistics and timing of a possible transaction.

On November 28, 2016, Company C submitted a written non-binding indication of interest.

On November 29, 2016, representatives of Tokai and Otic held an in-person meeting at the offices of Apple Tree Partners in New York. The attendees included Ms. Morrison, Dr. Harrison, Mr. Flesher and Keith Katkin, the chairman of the board of directors of Otic. At the meeting, the parties discussed the terms of Otic’s offer, the potential composition of the board of directors following the closing of a transaction, requirements for a concurrent financing and potential investors with which Otic had already held meetings and which might have interest in participating in a concurrent financing. The representatives of Otic also provided the Tokai representatives with additional information regarding Otic’s development plans for its lead product candidates, OP-01 and OP-02. After a discussion, the Otic representatives proposed that the companies enter into a period of exclusive negotiation, which was rejected by Tokai upon authorization of the Transaction Committee.

On November 29, 2016, a member of the board of directors of Company A contacted a representative of Wedbush to advise the Wedbush representative that there had been a change in the management of the Company A and that the Company A board of directors was reconsidering the terms of the non-binding indication of interest that it had provided to Tokai on October 10, 2016.

In addition, on November 29, 2016, representatives of WilmerHale held a call with Morrison Foerster, counsel to Company B, to discuss the revised draft of the merger agreement that had been provided by Company B.

On December 1, 2016, the management of Tokai held an update call with members of Company A’s board of directors and management during which Company A informed Tokai management of the change in its management and provided additional information about its clinical development program and its partnering efforts for its lead product. After a discussion, the parties agreed to hold an in-person diligence meeting, which meeting occurred on December 5, 2016 at Tokai’s offices in Boston, Massachusetts. Representatives of Wedbush and Apple Tree Partners participated in the meeting telephonically.

On December 1, 2016, the Transaction Committee held a telephonic meeting in which representatives of Wedbush and WilmerHale participated. At the meeting, the representatives of Wedbush described the status of discussions with Otic, Company B and Company C and noted that diligence with three other companies, including Company A, was ongoing. The Transaction Committee then discussed the potential transaction with Company A. Representatives of WilmerHale then advised the Transaction Committee on the status of the negotiations of the share purchase agreement with Otic and the merger agreement with Company B, noting that approaches to resolving the principal legal issues in the agreements had largely been agreed upon, and that both parties had agreed that they would accept a covenant from Tokai that its pre-closing expenditures would be consistent with the financial model that Tokai had provided to both parties as part of their diligence with a basket to address overages on planned expenditures and with permitted deviations from the model for matters outside Tokai’s control. The representatives of WilmerHale also outlined the differences in timing of a transaction with Otic due to the ability to not have to file a registration statement on Form S-4. After a discussion, the committee directed WilmerHale to revise the agreement with Otic and deliver it to Otic and Gibson Dunn, but not to revise the Company B draft until further diligence of Company B was conducted and until Company B had improved its valuation terms and the proposed ownership percentage of the pre-combination Tokai stockholders following the closing of the transaction. The Transaction Committee also directed Tokai management team and the Wedbush representatives to continue the diligence and discussions with Company A and to provide Company A a draft of the merger agreement. On December 1, 2016, Wedbush delivered to Company A the draft merger agreement.

On December 1, 2016, a representative of WilmerHale delivered to representatives of Otic and Gibson Dunn a revised share purchase agreement.

In addition, on December 5, 2016, a representative of WilmerHale delivered to Morrison Foerster a revised draft of the merger agreement.

 

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On December 5, 2016, representatives of Company C informed representatives of Wedbush that Company C had selected a new auditing firm and that Company C expected that its audited financial statements could be available in early January 2017.

On December 6, 2016, the Transaction Committee held a telephonic meeting in which representatives of Wedbush and WilmerHale participated. At the meeting, the Transaction Committee discussed the non-binding indication of interest that Tokai had been advised that it would receive from Company A, the findings of the additional diligence that Tokai and its representatives had conducted on the business of Company A and the possible timing of a transaction with Company A given the level of diligence conducted and that Tokai had not yet received the revised indication of interest or a draft of the merger agreement from Company A. The Transaction Committee also discussed the status of discussions with Otic, the financing plan that Otic had proposed and the Otic business opportunity and the remaining diligence to be conducted. Following a discussion of the status of Tokai’s interactions with Company B, Company C and other potential counterparties, the Transaction Committee directed Tokai management and the Wedbush representatives to prioritize efforts towards the execution of a transaction with Otic while continuing to conduct diligence regarding Company A and Company C. The Transaction Committee also directed the Wedbush representatives to advise Company B that it needed to improve its valuation terms and the proposed ownership percentage of the pre-combination Tokai stockholders following the closing of the transaction in order to remain in the process.

On December 6, 2016, a representative of Morrison Foerster delivered to WilmerHale a revised draft of the merger agreement. In connection with the delivery of the revised merger agreement, Morrison Foerster advised WilmerHale that Company B considered the revised draft to be final.

On December 7, 2016, Gibson Dunn delivered a revised Otic share purchase agreement to representatives of WilmerHale.

On December 7, 2016, Company A submitted a revised written non-binding indication of interest that was consistent with the proposal that had been described at the meeting of the Transaction Committee and that provided for, among other things, Ms. Morrison to be retained as President and Chief Executive Officer of the combined company.

On December 9, 2016, representatives of Company C submitted a revised written non-binding indication of interest on behalf of Company C that outlined Company C’s proposal for a concurrent financing and the ownership split among Company C and Tokai’s pre-combination stockholders following the closing of a transaction and the concurrent financing, provided for an adjustment to the exchange ratio in the event that Tokai’s cash position at closing was less than agreed upon and set forth a number of matters that were to be the subject of Company C’s diligence.

From December 10, 2016 through December 21, 2016, the management teams of Tokai and Otic engaged in numerous discussions regarding the timing of the execution and delivery of a share purchase agreement and the documentation and timing for a concurrent financing.

On December 11, 2016, WilmerHale delivered a revised Otic share purchase agreement to Gibson Dunn.

On December 13, 2016, representatives of WilmerHale held a call with representatives of Cooley LLP, counsel to Company A, regarding the transaction structure and the terms of the support agreements to be entered into in connection with the merger agreement.

On December 14, 2016, Gibson Dunn delivered a revised Otic share purchase agreement to WilmerHale.

On December 14, 2016, the Board held a meeting at the offices of Tokai in Boston, Massachusetts in which representatives of Wedbush and WilmerHale participated. At the meeting, the Tokai management

 

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provided the Board with an update on Tokai’s outstanding litigation, the ARMOR2 and ARMOR3-SV clinical trials, management’s analysis of the galeterone and ARDA development programs and possible next steps in those programs and Tokai’s cash resources and cash burn forecast. Ms. Morrison and the representatives of Wedbush then reviewed the status of discussions with the potential counterparties on the Transaction Committee’s high priority list, including Otic, Company A and Company C, and noted that Company B had not agreed to improve its valuation terms and was no longer part of the strategic transaction process. The Board then discussed with Tokai management and the Wedbush representatives concerns regarding the business prospects of Company A and regarding the uncertainties of a transaction with Company C given the diligence still to be conducted, the fact that Company C had not yet provided its comments on the merger agreement and the timing of Company C’s financial statements. The Board then discussed with Tokai management and the Wedbush representatives the additional diligence that had been conducted regarding Otic’s business, the additional financing that Otic would be able to raise and the anticipated timing of a transaction with Otic. The representatives of WilmerHale then reviewed with the Board its fiduciary duties in connection with considering and approving a transaction with Otic and summarized the terms of the proposed share purchase agreement and the related agreements. Next, the representatives of Wedbush reviewed the strategic transaction process that had been conducted since September 1, 2016 and its preliminary analysis of the financial terms of the proposed transaction with Otic. Representatives of WilmerHale and Wedbush also responded to a number of questions from the Board regarding the fiduciary duties of directors, the terms of the proposed transaction, the terms of the share purchase agreement and the related agreements, the strategic process, the methodologies used by Wedbush in preparing its financial analysis and next steps.

On December 15, 2016, the management teams of Tokai and Otic held a telephonic meeting to discuss the calculation of the exchange ratio and the timing of execution of definitive agreements for a concurrent financing.

On December 15, 2016, representatives of Company A delivered to the Tokai management team a revised draft of the merger agreement.

On December 21, 2016, the Board held a telephonic meeting in which representatives of Wedbush and WilmerHale participated. Representatives of WilmerHale reviewed the final form of the share purchase agreement to be entered into with Otic and the related agreements, including the agreements relating to the financing of the combined company following the closing of the transaction. Representatives of Wedbush reviewed with the Board its analysis of the financial terms of the proposed transaction and delivered to the Board its oral opinion to the effect that, as of December 21, 2016, and based upon and subject to various considerations and assumptions set forth in its written opinion, the exchange ratio was fair to the holders of Tokai common stock from a financial point of view. The Wedbush representatives subsequently confirmed Wedbush’s oral opinion by delivering its written opinion, dated December 21, 2016, to the Board. The written opinion of Wedbush is attached hereto as Annex D. Representatives of WilmerHale and Wedbush then responded to a number of questions from the Board regarding the fiduciary duties of directors, the terms of the proposed transaction, the terms of the share purchase agreement and the related agreements, the strategic process, Wedbush’s financial analysis and next steps. Following these discussions, and review and discussion among the members of the Board, including the relative merits of executing the share puchase agreement versus remaining a standalone company, the Board, among other actions, unanimously (a) determined that the Otic Transaction, the Share Purchase Agreement, the issuances of shares of Tokai common stock pursuant to the Share Purchase Agreement and the Tokai Stock Purchase Agreement and the other transactions contemplated by the Share Purchase Agreement, are fair to, advisable and in the best interest of Tokai and its stockholders, (b) approved the Otic Transaction, the Share Purchase Agreement, the Tokai Stock Purchase Agreement, the issuance of shares of Tokai common stock pursuant to the Share Purchase Agreement and the Tokai Stock Purchase Agreement and the other transactions contemplated by the Share Purchase Agreement, (c) authorized Tokai to enter into and perform its obligations under the Share Purchase Agreement and (d) resolved to recommend that the Tokai stockholders vote to approve the issuances of shares of Tokai common stock pursuant to the terms of the Share Purchase Agreement and the Tokai Stock Purchase Agreement.

 

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Following the adjournment of the meeting of the Board on December 21, 2016, Tokai, Otic and the Otic shareholders executed and delivered the share purchase agreement and the related agreements. The signing of the share purchase agreement was publicly announced on December 22, 2016 prior to the opening of trading of the Tokai common stock on The NASDAQ Global Market.

Recommendation of the Tokai Board of Directors

The Tokai board of directors has determined and believes that each of the Share Issuances Proposal, the Reverse Stock Split Proposal and the Adjournment Proposal is fair to, advisable, and in the best interests of Tokai and its stockholders and has approved such items. The Tokai board of directors recommends that Tokai stockholders vote “FOR” each of the Share Issuances Proposal, the Reverse Stock Split Proposal and the Adjournment Proposal. For more information on the Tokai board of directors’ recommendations see the section entitled “Information About the Special Meeting—Recommendation of the Tokai Board of Directors,” beginning on page 65 of this proxy statement and the section entitled “Terms of the Share Purchase Agreement—Changes to Board Recommendation,” beginning on page 103 of this proxy statement.

Reasons for the Otic Transaction

The Tokai board of directors and executive management team have regularly reviewed and discussed Tokai’s operating and strategic plans, both near-term and long-term, as well as potential partnerships and strategic transactions, in an effort to enhance stockholder value. These reviews and discussions have focused, among other things, on the opportunities and risks associated with Tokai’s business and financial condition and strategic relationships and other strategic options. In September 2016, Tokai announced that its board of directors had initiated a review of strategic alternatives for the company focused on maximizing stockholder value. Potential strategic alternatives that were explored or evaluated as part of this review included a sale of Tokai, a reverse merger, a business combination or a sale, license or other disposition of corporate assets of Tokai. In conjunction with this process, Tokai continued to assess the best path forward for its galeterone clinical trial program.

In the course of its evaluation of the Otic Transaction and the Share Purchase Agreement, the Tokai board of directors held numerous meetings, consulted with Tokai’s senior management, legal counsel, financial advisor, and certain significant stockholders, and reviewed and assessed a significant amount of information and, in reaching its unanimous decision to approve Share Purchase Agreement, the issuance of Tokai common stock pursuant to the Share Purchase Agreement and the other transactions contemplated by the Share Purchase Agreement, the Tokai board of directors considered a number of factors, including, among others, the following:

 

    The Tokai board of directors’ belief, based in part on the judgment, advice and analysis of Tokai management with respect to the potential strategic, financial and operational benefits of the Otic Transaction (which judgment, advice and analysis was informed in part by the business, technical, financial, accounting and legal due diligence investigation performed by Tokai and its advisors on Otic), that Otic’s portfolio of products for ENT disorders may provide new medical benefits for patients and returns for investors.

 

    The Tokai board of directors’ view, following a review with Tokai’s management of Otic’s current plans for developing its product portfolio, of the likelihood that the combined company would possess sufficient financial resources to allow the management team to focus on the continued development and anticipated commercialization of Otic’s product candidates for ENT disorders. The Tokai board of directors’ analysis included the new capital to be invested prior to or upon the closing of the Otic Transaction through the Equity Financing. The Tokai board of directors also considered the possibility that the combined company would be able to take advantage of the potential benefits resulting from the combination of the Tokai public company structure with the Otic business to raise additional funds in the future, if necessary.

 

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    The Tokai board of directors’ consideration of the valuation and business prospects of all the potential strategic transaction candidates. After considering the comprehensive diligence review that Tokai management had completed of ten other prospective transaction candidates, the board concluded that the transaction with Otic would create a publicly traded company focused on improving patient access to important medicines that could create more value for Tokai’s stockholders than any of the other proposals that the board had received.

 

    The Tokai board of directors’ conclusion that given the ownership position of the Tokai stockholders following the transaction, the Otic Transaction would provide existing Tokai stockholders a significant opportunity to participate in the potential growth of the combined company following the Otic Transaction.

 

    The Tokai board of directors’ consideration of the strength of the balance sheet of the combined company resulting from Otic’s current cash reserves, the new capital to be invested prior to or upon the closing of the Otic Transaction through the Equity Financing and the approximately $20.0 million net cash that was expected to be retained by Tokai upon completion of the Otic Transaction.

 

    The Tokai board of directors’ view that the combined company will be led by an experienced senior management team and a board of directors with representation from each of the current boards of directors of Tokai and Otic.

 

    The Tokai board of directors’ consideration of the financial analyses of Wedbush, including its opinion to the board of directors as to the fairness to the Tokai stockholders, from a financial point of view and as of the date of the opinion, of the exchange ratio in connection with the Otic Transaction, as more fully described below under the caption “The Otic Transaction—Opinion of Tokai’s Financial Advisor,” beginning on page 86 in this proxy statement.

The Tokai board of directors also reviewed the recent results of operations and financial condition of Tokai, including:

 

    Tokai’s decision to discontinue its ARMOR3-SV pivotal Phase 3 clinical trial of galeterone, following the recommendation made by the trial’s independent data monitoring committee;

 

    Tokai’s decision to discontinue enrollment in its Phase 2 ARMOR2 expansion trial of galeterone;

 

    Tokai’s workforce reduction announced in July 2016;

 

    the loss of the operational capabilities of Tokai, and the risks associated with continuing to operate Tokai on a stand-alone basis, including the need to rebuild infrastructure and management to continue its operations;

 

    the results of substantial efforts made over a significant period of time by Tokai’s management and financial advisors to solicit strategic alternatives for Tokai to the transaction, including the discussions that Tokai management, Tokai’s representatives and the Tokai board of directors had in 2016 with other potential strategic transaction candidates;

 

    current financial market conditions and historical market prices, volatility and trading information with respect to Tokai common stock; and

 

    the risks, costs and timing associated with a potential liquidation of Tokai.

The Tokai board of directors also reviewed the terms of the Share Purchase Agreement and associated transactions, including:

 

    the number of shares of Tokai common stock to be issued in the Otic Transaction;

 

    the number and nature of the conditions to Otic’s obligation to consummate the Otic Transaction and the limited risk of non-satisfaction of such conditions as well as the likelihood that the Otic Transaction will be consummated on a timely basis;

 

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    the rights of, and limitations on, Tokai under the Share Purchase Agreement to consider certain unsolicited acquisition proposals under certain circumstances should Tokai receive a superior proposal;

 

    the reasonableness of the potential termination fee of $1.0 million, which could become payable by Tokai if the Share Purchase Agreement is terminated in certain circumstances;

 

    the agreement by all of the Otic shareholders to enter into the Share Purchase Agreement and sell their Otic shares to Tokai in exchange for Tokai shares pursuant to the Share Purchase Agreement; and

 

    the belief that the terms of the Share Purchase Agreement, including the parties’ representations, warranties and covenants, and the conditions to their respective obligations, are reasonable under the circumstances.

In the course of its deliberations, the Tokai board of directors also considered a variety of risks and other countervailing factors related to entering into the Otic Transaction, including:

 

    the potential effect of the $1.0 million termination fee payable by Tokai upon the occurrence of certain events in deterring other potential acquirors from proposing an alternative transaction that may be more advantageous to Tokai stockholders;

 

    the substantial expenses to be incurred in connection with the transaction;

 

    the possible volatility, at least in the short term, of the trading price of the Tokai common stock resulting from the announcement of the transaction;

 

    the risk that the Otic Transaction might not be consummated in a timely manner or at all and the potential adverse effect of the public announcement of the Otic Transaction or on the delay or failure to complete the Otic Transaction on the reputation of Tokai;

 

    the risk to the business of Tokai, operations and financial results in the event that the Otic Transaction is not consummated;

 

    the strategic direction of the continuing entity following the completion of the transaction, which will be determined by Otic’s management and a board of directors initially comprised of a majority of the members of the current Otic board of directors; and

 

    various other risks associated with the combined company and the transaction, including those described in the section entitled “Cautionary Statement Regarding Forward-Looking Information” in this proxy statement.

The foregoing information and factors considered by the Tokai board of directors are not intended to be exhaustive but are believed to include all of the material factors considered by the Tokai board of directors. In view of the wide variety of factors considered in connection with its evaluation of the Otic Transaction and the complexity of these matters, the Tokai board of directors did not find it useful, and did not attempt, to quantify, rank or otherwise assign relative weights to these factors. In considering the factors described above, individual members of the Tokai board of directors may have given different weight to different factors. The Tokai board of directors conducted an overall analysis of the factors described above, including thorough discussions with, and questioning of, the Tokai management team and the legal and financial advisors of Tokai, and considered the factors overall to be favorable to, and to support, its determination.

Interests of Tokai’s Directors and Executive Officers

In considering the recommendation of the Tokai board of directors with respect to the related issuances of shares of Tokai common stock pursuant to the Share Purchase Agreement and the Tokai Stock Purchase Agreement and the other matters to be voted upon by Tokai stockholders at the Tokai special meeting, Tokai

 

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stockholders should be aware that certain members of the Tokai board of directors and executive officers of Tokai have interests in the Otic Transaction that may be different from, or in addition to, interests they have as Tokai stockholders generally. The members of the Tokai board of directors were aware of the different or additional interests and considered these interests, among other matters, in evaluating and negotiating the Share Purchase Agreement and the Otic Transaction, and in recommending to the stockholders that the Share Issuances Proposal be approved. See the sections entitled “The Otic TransactionRecommendation of the Tokai Board of Directors” and “The Otic TransactionReasons for the Otic Transaction,” each beginning on page 81 of this proxy statement. The stockholders should take these interests into account in deciding whether to vote “FOR” the Share Issuances Proposal and the other matters to be voted upon by Tokai stockholders at the Tokai special meeting. These interests are described in more detail below, and certain of them are quantified in the narrative and the table below.

Indemnification of Directors and Officers

Tokai has entered into indemnification agreements with each of its directors and executive officers. These agreements, among other things, require Tokai to indemnify these individuals and, in certain cases, affiliates of such individuals, to the fullest extent permitted by Delaware law, against liabilities that may arise by reason of their service to Tokai or at Tokai’s direction, and to advance expenses incurred as a result of any proceeding against them as to which they could be indemnified. Further, pursuant to the Share Purchase Agreement, Tokai, Otic and the Sellers agreed that, from the closing of the Otic Transaction through the sixth anniversary of the closing, Tokai will indemnify and hold harmless each person who as of the date of the Share Purchase Agreement is, or who becomes prior to the closing, or has been at any time prior to the closing of the Otic Transaction, a director or officer of Tokai or Otic.

Tokai also maintains an insurance policy that insures its directors and officers against certain liabilities, including liabilities arising under applicable securities laws and Tokai has agreed to maintain in effect for six years after the closing of the Otic Transaction Tokai’s existing directors’ and officers’ insurance policies in place as of the date of the Share Purchase Agreement, or prior to the closing, to purchase a six-year “tail” policy under its own existing directors’ and officers’ liability insurance policy.

Vesting of Director Stock Options

Pursuant to the stock option agreements evidencing the stock options held by each of Tokai’s non-employee directors, upon a change in control of Tokai, such non-employee director’s stock options will vest in full. Tokai’s board of directors has determined that the Otic Transaction constitutes a change in control for purpose of Tokai’s stock awards.

Quantification of Payments and Benefits to Tokai’s Named Executive Officers

This section sets forth the information required by Item 402(t) of Regulation S-K regarding the compensation for each of Tokai’s named executive officers that is based on or otherwise relates to the Otic Transaction. This compensation is referred to as “golden parachute” compensation by the applicable SEC disclosure rules, and in this section Tokai uses such term to describe the transaction-related compensation payable to Tokai’s named executive officers.

Employment Agreement with Ms. Morrison

Tokai’s employment agreement with Ms. Morrison provides for certain benefits upon termination of her employment under specified conditions. Under the terms of the employment agreement with Ms. Morrison, if Ms. Morrison’s employment is terminated by Tokai without cause or by Ms. Morrison for good reason prior to a change in control, each as defined in her employment agreement, and subject to Ms. Morrison’s execution of a general release of potential claims against Tokai, Tokai has agreed to continue to pay Ms. Morrison her then-current base salary for a period of 12 months and to provide medical and dental benefits (to the extent that she was receiving them at the time she ceased to be employed by us) for a period of up to 12 months.

 

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In lieu of receiving the benefits described above in connection with a termination of employment, if Ms. Morrison’s employment is terminated by Tokai without cause or by Ms. Morrison for good reason upon or within one year following a change in control, and subject to Ms. Morrison’s execution of a general release of potential claims against Tokai, Tokai has agreed to continue to pay Ms. Morrison her then-current base salary for a period of 18 months and to provide medical and dental benefits (to the extent that she was receiving them at the time she ceased to be employed by Tokai) for a period of up to 18 months and to pay her an amount equal to her target bonus for the year in which the termination occurs.

In addition, with respect to each stock option that Tokai has granted Ms. Morrison that has not yet vested, Tokai has agreed that if Ms. Morrison is terminated without cause or resigns for good reason in connection with or within one year after a change in control of Tokai (as defined in the applicable stock option agreement), then that stock option will vest in full.

The Otic Transaction constitutes a change in control under the employment agreement and the stock option agreements entered into with Ms. Morrison.

Employment Agreement with Mr. McBride

Tokai’s employment agreement with Mr. McBride provides for certain benefits upon termination of his employment under specified conditions. Under the terms of Mr. McBride’s employment agreement, if Mr. McBride’s employment is terminated by Tokai without cause, and subject to Mr. McBride’s execution of a general release of potential claims against Tokai, Tokai has agreed to continue to pay Mr. McBride’s then-current base salary for a period of six months and to provide medical and dental benefits (to the extent that he was receiving them at the time he ceased to be employed by us) for a period of up to six months.

In lieu of receiving the benefits described above in connection with a termination of employment, if Mr. McBride’s employment is terminated by Tokai without cause or by Mr. McBride for good reason upon or within one year following a change in control, and subject to Mr. McBride’s execution of a general release of potential claims against Tokai, Tokai has agreed to continue to pay Mr. McBride his then-current base salary for a period of 12 months and to provide medical and dental benefits (to the extent that he was receiving them at the time he ceased to be employed by Tokai) for a period of up to 12 months and to pay him an amount equal to his target bonus for the year in which the termination occurs.

In addition, under each stock option agreement that Tokai has entered into with Mr. McBride and has not yet vested, Tokai has agreed that if Mr. McBride is terminated without cause or resigns for good reason in connection with or within one year after a change in control of Tokai (as defined in the applicable stock option agreement), then that stock option will vest in full.

The Otic Transaction constitutes a change in control under the employment agreement and the stock option agreements entered into with Mr. McBride.

Quantification of Change in Control and Termination Payments and Benefits to Tokai’s Named Executive Officers

In accordance with Item 402(t) of Regulation S-K, the table below sets forth the amount of payments and benefits that each of Tokai’s named executive officers may receive in connection with the transaction, assuming that the Otic Transaction was consummated and such executive officer experienced a qualifying termination on January 20, 2017. Dr. Karen Ferrante, Tokai’s former Chief Medical Officer, retired from Tokai effective August 31, 2016, and Gerald Quirk, Tokai’s former Executive Vice President, Business Operations and General Counsel, ceased employment with Tokai effective August 31, 2016. Neither Dr. Ferrante nor Mr. Quirk will receive any additional compensation as a result of the Otic Transaction. The amounts below are determined using a per share price of the Tokai closing price of $1.09, which represents the average closing market price of Tokai’s securities over the first five business days following the first public announcement of the transaction. As

 

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a result of the foregoing assumptions, the actual amounts, if any, to be received by a named executive officer may materially differ from the amounts set forth below.

 

  Name                 

   Cash
(1)
     Equity
Awards
(2)
     Perquisites/
Benefits
    Total  

  Jodie Morrison

   $ 1,050,000         —         $ 44,284 (3)    $ 1,094,284   

  John McBride

   $ 550,530         —           —        $ 550,530   

 

  (1) Amounts in this column represent the total cash severance payment to be paid to each executive upon a termination of employment without “cause” or a termination for “good reason” (as defined in each executive’s respective employment arrangement), subject to the execution and non-revocation of a general release of claims in favor of Tokai, including amounts equal to each executive’s target bonuses assuming the termination occurs in 2017.

 

  (2) All outstanding stock options for the named executive officers have exercise prices above $1.09 and therefore are disregarded for this purpose.

 

  (3) Under Ms. Morrison’s executive agreement, upon a “double trigger” qualifying termination within the period of time commencing on the closing of the Otic Transaction and ending one year following the closing of the transaction, Ms. Morrison is entitled to continue to receive medical and dental benefits to the same extent provided by Tokai prior to such qualifying termination for up to 18 months.

Opinion of Tokai’s Financial Advisor

Scope of the Assignment

In August 2016, the Tokai board of directors engaged Wedbush to provide financial advisory and investment banking services in connection with evaluating and considering potential strategic transactions, and ultimately requested that Wedbush render an opinion as to whether the exchange ratio in connection with the transaction, as provided in the Share Purchase Agreement, was fair to the stockholders of Tokai from a financial point of view. At the December 21, 2016 meeting of the Tokai board of directors, Wedbush rendered its oral opinion, subsequently confirmed by delivery of a written opinion dated December 21, 2016, to the Tokai board of directors that, as of the date of such opinion, and based upon the assumptions made, procedures followed, matters considered, and qualifications and limitations of the review set forth in its written opinion, the exchange ratio in connection with the transaction was fair to the stockholders of Tokai from a financial point of view.

The full text of Wedbush’s written opinion, which sets forth the procedures followed, assumptions made, matters considered, and qualifications and limitations of the review undertaken in connection with such opinion, is attached to this proxy statement as Annex B. Wedbush’s opinion was intended for the use and benefit of the Tokai board of directors (in its capacity as such) in connection with its evaluation of the transaction. Wedbush’s opinion was not intended to be used for any other purpose without Wedbush’s prior written consent in each instance, except as Tokai’s counsel advises is required by law. Wedbush has consented to the use of Wedbush’s opinion in this proxy statement. Wedbush’s opinion did not address Tokai’s underlying business decision to enter into the Share Purchase Agreement or complete the transaction or the relative merits of the transaction compared to any alternative transactions or strategies that were or may be available to Tokai, or as to the likelihood of the consummation of the transaction, and did not constitute a recommendation to the Tokai board of directors as to how to act or to any Tokai stockholder or any other person as to how to vote with respect to the transaction or any other matter (including the amount of consideration to be paid). The following summary of Wedbush’s opinion is qualified in its entirety by reference to the full text of such opinion.

 

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For purposes of its opinion and in connection with its review of the exchange ratio in connection with the transaction, Wedbush, among other things:

 

    reviewed a draft of the Share Purchase Agreement dated December 21, 2016;

 

    reviewed certain publicly available business and financial information relating to Tokai and Otic, respectively;

 

    reviewed certain internal information, primarily financial in nature, including financial and operating data furnished to Wedbush by the managements of Tokai and Otic, respectively, and approved for Wedbush’s use by Tokai;

 

    reviewed certain publicly available information with respect to other companies in the biopharmaceutical industry that Wedbush believed to be comparable in certain respects to Tokai and to Otic;

 

    considered the financial terms, to the extent publicly available, of selected recent business combinations and initial public offerings involving companies in the biopharmaceutical industry that Wedbush believed to be comparable in certain respects to Tokai and to Otic, in whole or in part, and to the transaction; and

 

    made inquiries regarding and discussed the Share Purchase Agreement and other matters related thereto with Tokai and its legal counsel.

In addition, Wedbush held discussions with the management of Tokai and Otic concerning their views as to the financial and other information described in the bullet points above. Wedbush also conducted such other analyses and examinations and considered such other financial, economic and market criteria as Wedbush deemed appropriate to arrive at its opinion.

In rendering its opinion, Wedbush 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 Wedbush by Tokai, Otic or any other party to the Share Purchase Agreement or otherwise reviewed by Wedbush. With respect to information provided to or reviewed by it, Wedbush was advised by management of Tokai and Otic that such information was reasonably prepared on bases reflecting the best currently available estimates and judgments of management of Tokai or Otic, as applicable. Wedbush did not express any view as to the reasonableness of such financial information or the assumptions on which it was based.

Wedbush further relied on the assurances of Tokai’s management that they were unaware of any facts that would make the information provided to Wedbush 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 and estimated equity values of Tokai upon liquidation prepared by management of Tokai, Wedbush did not make and was not 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 did Wedbush make any physical inspection of the properties or assets, of Tokai or Otic. Further, as the Tokai board of directors was aware, Otic’s management did not provide Wedbush with, and Wedbush did not otherwise have access to, financial forecasts regarding Otic’s business, other than certain expense forecasts for the five years ended December 31, 2021, and, accordingly, Wedbush 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, Wedbush assumed that such projections were 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. Wedbush further assumed no responsibility for and expressed no view as to any such projections or the assumptions on which they are based. Wedbush did not evaluate the solvency or fair value of Tokai, Otic, or any of their subsidiaries (or the impact of the transactions contemplated by the Share Purchase Agreement thereon) under any law relating to bankruptcy, insolvency or similar matters.

 

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Wedbush’s opinion was based on economic, market and other conditions as in effect on, and the information made available to Wedbush as of, the date of such opinion. Wedbush also relied on the accuracy and completeness of Tokai’s and Otic’s representations and warranties in the Share Purchase Agreement, without regard to any qualifications that may be set forth in disclosure schedules or any other such qualifications. In addition, Wedbush assumed that the transaction will be consummated in accordance with the terms set forth in the Share Purchase Agreement without any waiver, amendment or delay of any terms or conditions that would be material to Wedbush’s analysis. Representatives of Tokai advised Wedbush that, and Wedbush further assumed that, the final terms of the Share Purchase Agreement would not differ from the terms set forth in the draft reviewed by Wedbush in any respect material to Wedbush’s analysis. Wedbush noted that events occurring after the date of its opinion could materially affect the assumptions used in preparing its opinion. Wedbush did not undertake any obligation to reaffirm or revise its opinion or otherwise comment upon any events occurring after the date of such opinion.

Wedbush is not a legal, tax or regulatory advisor, and did not express any opinion as to any tax or other consequences that may arise from the transactions contemplated by the Share Purchase Agreement, nor does its opinion address any legal, regulatory or accounting matters, as to which Wedbush understood that Tokai had obtained such advice as it deemed necessary from qualified professionals. Wedbush is a financial advisor only and 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. Wedbush assumed that the transaction will have the tax effects contemplated by the Share Purchase Agreement.

Wedbush is an investment banking firm and a 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. Wedbush was selected by Tokai based on Wedbush’s experience, expertise and reputation and its familiarity with Tokai. The Tokai board of directors did not impose any limitations on Wedbush with respect to the investigations made or procedures followed in rendering its opinion. Wedbush’s opinion was approved by a fairness committee at Wedbush in accordance with the requirements of FINRA Rule 5150.

In rendering its opinion, Wedbush expressed 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.

Wedbush was not asked to, nor did it, offer any opinion as to the terms, other than the exchange ratio in connection with the transaction to the extent expressly set forth in Wedbush’s opinion, of the Share Purchase Agreement, the amount of consideration to be paid or the form of the transaction. Wedbush did not express any opinion with respect to the terms of any other agreement entered into or to be entered into in connection with the transaction. Wedbush expressed 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. Wedbush 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 Wedbush’s analysis.

Tokai paid Wedbush a $50,000 retainer upon execution of its engagement letter and has agreed to pay Wedbush a fee of $0.5 million for rendering its opinion, which became payable upon the delivery of Wedbush’s opinion. Tokai has also agreed to pay Wedbush as additional fee of $1 million, contingent upon closing of the transaction and against which the $50,000 retainer and $0.5 million opinion fee will be credited. In addition, Tokai has agreed to indemnify Wedbush for certain liabilities arising out of its engagement and has agreed to reimburse Wedbush for its expenses, including attorney’s fees and disbursements. In the two years prior to the date of its opinion, Wedbush has not provided any services to Tokai or Otic. Wedbush may in the future provide investment banking and financial advisory services to Tokai, Otic and their respective affiliates for which services Wedbush would expect to receive compensation.

 

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In the ordinary course of its business, Wedbush and its affiliates may actively trade the common stock of Tokai or other instruments or obligations of Tokai for their own accounts and for the accounts of their customers and, accordingly, Wedbush and its affiliates may at any time hold a long or short position in the common stock of Tokai or such other instruments or obligations of Tokai.

Summary of Analyses

The following is a summary of the material financial analyses performed by Wedbush in connection with reaching its opinion:

 

    Public Market Equity Value Analysis with respect to Tokai;

 

    Liquidation Value Analysis with respect to Tokai;

 

    Public Company Market Valuation Analysis with respect to Otic;

 

    Precedent Merger and Acquisition Transaction Analysis with respect to Otic; and

 

    Precedent Initial Public Offering Analysis with respect to Otic.

The following summaries are not a comprehensive description of Wedbush’s opinion or the analyses and examinations conducted by Wedbush, and the preparation of an opinion necessarily is not susceptible to partial analysis or summary description. Wedbush believes that such analyses and the following summaries must be considered as a whole and that selecting portions of such analyses and of the factors considered, without considering all such analyses and factors, would create an incomplete view of the process underlying the analyses. The order in which the analyses are described below does not represent the relative importance or weight given to the analyses by Wedbush. Some of the summaries of financial analyses below include information presented in tabular format. In order to fully understand the analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of Wedbush’s analyses. Considering the data described below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of the analyses.

Additionally, the relative percentage ownership of the combined company was derived using respective stipulated values of Otic of approximately $50.0 million and Tokai of approximately $33.0 million. These amounts were negotiated by the parties as the respective valuations of each party and are not specifically set forth in the Share Purchase Agreement. Based on the outstanding share capital of Otic as of the date of the Share Purchase Agreement and the shares issuable upon exercise of warrants to purchase shares of Otic and the conversion of certain outstanding debt facilities of Otic into shares of Otic that are expected to be exercised or converted prior to the closing of the Otic Transaction, Tokai expects to issue                      shares of Tokai common stock in the Otic Transaction. If all of Otic’s outstanding options and warrants are exercised prior to closing, Tokai will issue a total of 36,911,631 shares of Tokai common stock in the Otic Transaction. Following the closing of the Otic Transaction, the stockholders of Otic are expected to hold approximately 60% of the outstanding shares of Tokai common stock, excluding for this purpose the effect on ownership of the issuance of shares in the Equity Financing.

Depending on the total number of shares of Otic capital stock outstanding as of immediately prior to the closing (which is subject to change primarily due to the potential exercise of convertible securities prior to the closing), the relative percentage ownership of the combined company following the consummation of the Transaction could be in the range of approximately 58% to 62% by the Otic securityholders and approximately 38% to 42% by the Tokai securityholders. The data described below assumes that the relative percentage ownership of the combined company following the consummation of the Transaction will be approximately 60% by the Otic securityholders and approximately 40% by the Tokai securityholders.

In performing its analyses, Wedbush made numerous assumptions with respect to industry performance and general business and economic conditions such as industry growth, inflation, interest rates and many other

 

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matters, many of which are beyond the control of Tokai, Otic and Wedbush. Any estimates contained in Wedbush’s analyses are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by such analyses.

Wedbush noted that it was Tokai management’s view that a discounted cash flow analysis was not an appropriate method of valuing Tokai because Tokai had ceased all product research and development and therefore did not have any anticipated future revenues to form a basis for such an analysis. Accordingly, Wedbush did not conduct a discounted cash flow analysis and instead relied on the other analyses described herein.

Wedbush did not perform a discounted cash flow analysis or any multiples-based analyses for Otic because Wedbush was not provided, and Wedbush did not otherwise have access to, financial forecasts regarding Otic’s business, other than certain expense forecasts for the five years ending December 31, 2021. Further, Wedbush believed that such analyses were not appropriate because Otic is a clinical stage company with no marketed products and it will not have any revenues until its product candidates are approved for marketing by the FDA, which will require the successful completion of ongoing or planned Phase 2 trials and future Phase 3 trials.

Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before December 20, 2016 and is not necessarily indicative of current market conditions.

Public Market Equity Value Analysis—Tokai

Using publicly available information, Wedbush noted that the volume weighted average trading price for the Tokai common stock was $1.02 per share on December 20, 2016, $1.03 per share for the one week ended December 20, 2016 and $1.07 per share for the one month ended December 20, 2016. Based upon these volume weighted average trading prices for the Tokai common stock and the number of fully diluted outstanding shares of Tokai common stock as provided by management of Tokai, Wedbush calculated Tokai’s equity value as approximately $23.2 million to $24.3 million.

Liquidation Value Analysis—Tokai

Wedbush reviewed information prepared by Tokai management regarding Tokai’s liquidation value. Based upon Tokai’s cash balance of approximately $38.3 million as of August 31, 2016 and Tokai management’s estimates of future liabilities with respect to clinical obligations, pending litigation, insurance and legal costs, other corporate expenses, lease expenses, compensation and severance expenses and debt repayment expenses, Wedbush noted that Tokai management estimated that Tokai would have a liquidation value of approximately $19.3 million as of August 31, 2017.

Public Company Market Valuation Analysis—Otic

Wedbush reviewed publicly available information relating to the following publicly-traded companies with an aggregate market capitalization between $33 million and $1 billion in the biopharmaceutical industry with Phase 1 product candidates (and no product candidates beyond Phase 1 or Phase 1/2) that as of December 20, 2016 did not have human efficacy data (the “Phase 1 Companies”), which criteria were applied to select for companies similar to Otic:

 

    Regenxbio Inc.;

 

    Protagonist Therapeutics, Inc.;

 

    Voyager Therapeutics;

 

    Ra Pharmaceuticals, Inc.;

 

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    Proteostasis Therapeutics, Inc.;

 

    Madrigal Pharmaceuticals, Inc.;

 

    Applied Genetic Technologies Corporation;

 

    KalVista Pharmaceuticals, Inc.; and

 

    Dimension Therapeutics, Inc.

Wedbush noted that, although such companies had certain financial and operating characteristics that could be considered similar to those of Otic, none of the companies had the same management, make-up, technology, size or mix of business as Otic and, accordingly, there were inherent limitations on the applicability of such companies to the valuation analysis of Otic.

Wedbush calculated the aggregate market capitalization of each of the selected companies based upon the closing price of the common stock of each selected company on December 20, 2016 and the fully-diluted number of shares outstanding, using the treasury stock method. The results of this analysis are summarized as follows:

 

     Market Capitalization at
December 20, 2016
($ in millions)
 
     Phase 1 Companies  

  Mean

   $ 287.2   

  Median

   $ 302.0   

Wedbush calculated the implied ownership of holders of Tokai common stock in the combined company based upon the approximate $33.0 million value attributed to the Tokai common stock and the approximate $50.0 million value attributed to the Otic common stock pursuant to the exchange ratio in connection with the transaction, and the mean and median values described above.

The results of this analysis are summarized as follows:

 

     Public Company Market Valuation Analysis  
     Equity Value
($ in millions)
     Ownership               

  Otic Equity Value per Share Purchase Agreement

   $ 50.0         60     

  Tokai Equity Value per Share Purchase Agreement

   $ 33.0         40     
  

 

 

    

 

 

      

  Aggregate Value per Share Purchase Agreement

   $ 83.0         100 %       
     Mean     Median  
     Equity Value
($ in millions)
     Ownership     Equity Value
($ in millions)
     Ownership  

  Otic Equity Value per Public Company Market Valuation Analysis

   $ 287.2         90   $ 302.0         90 %

  Tokai Equity Value per Share Purchase Agreement

   $ 33.0         10   $ 33.0         10 %
  

 

 

    

 

 

   

 

 

    

 

 

 

  Implied Aggregate Value

   $ 320.2         100 %     $ 335.0         100 %  

Wedbush noted that the implied ownership percentage of holders of Tokai common stock based upon the approximate $33.0 million value attributed to the Tokai common stock and the approximate $50.0 million

 

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value attributed to the Otic common stock pursuant to the exchange ratio in connection with the transaction was higher than the implied ownership percentages derived based upon the mean and median equity values attributed to Otic described above.

Precedent Merger and Acquisition Transaction Analysis—Otic

Wedbush reviewed publicly available information relating to the following acquisitions of private companies in the biopharmaceutical industry considered by Wedbush to be similar to Otic, which had Preclinical and Phase 1 product candidates (and no product candidates beyond Phase 1 or Phase 1/2) that did not have human efficacy data at the time of announcement of the transaction, with an aggregate valuation (based solely upon upfront payments and excluding contingent value rights or other post-closing payments) of between $33 million and $1.0 billion and announced between May 2014 and September 2016 (the “Selected Transactions”):

 

  Announcement Date

   Target    Acquiror

  September 6, 2016

   RetroSense Therapeutics    Allergan plc

  August 1, 2016

   Bamboo Therapeutics    Pfizer

  July 5, 2016

   Cormorant Pharmaceuticals    Bristol-Myers Squibb

  December 23, 2015

   PhosImmune    Agenus

  October 21, 2015

   Admune Therapeutics    Novartis AG

  October 9, 2015

   Adheron Therapeutics    Roche Holding AG

  July 28, 2015

   cCAM Biotherapeutics    Merck & Co.

  May 1, 2014

   Fibrotech Therapeutics Pty    Shire plc

Wedbush noted that although the companies that were acquired in the Selected Transactions had certain financial and operating characteristics that could be considered similar to those of Otic, none of such companies had the same management, make-up, technology, size or mix of business as Otic and, accordingly, there were inherent limitations on the applicability of such companies to the valuation analysis of Otic. Wedbush also noted that market conditions have varied over the precedent time periods.

Wedbush calculated the aggregate value of each of the target companies in the Selected Transactions (based solely upon upfront payments and excluding contingent value rights or other post-closing payments). The results of this analysis are summarized as follows:

 

     Valuation ($ in millions)  

  Mean

   $ 89.1   

  Median

   $ 85.0   

Wedbush calculated the implied ownership of holders of Tokai common stock in the combined company based upon the approximate $33.0 million value attributed to the Tokai common stock and the approximate $50.0 million value attributed to the Otic common stock pursuant to the exchange ratio in connection with the transaction, and the mean and median values described above.

The results of this analysis are summarized as follows:

 

     Merger and Acquisition Transaction Analysis  
     Equity Value      Ownership               

  Otic Equity Value per Share Purchase Agreement

   $ 50.0         60     

  Tokai Equity Value per Share Purchase Agreement

   $ 33.0         40     
  

 

 

    

 

 

      

  Aggregate Value per Share Purchase Agreement

   $ 83.0         100 %       

 

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     Mean     Median  
     Equity Value
($ in millions)
     Ownership     Equity Value
($ in millions)
     Ownership  

  Otic Equity Value per Merger and Acquisition Transaction Analysis

   $ 89.1         73   $ 85.0         72 %

  Tokai Equity Value per Share Purchase Agreement

   $ 33.0         27   $ 33.0         28 %
  

 

 

    

 

 

   

 

 

    

 

 

 

  Implied Aggregate Value

   $ 122.1         100 %     $ 118.0         100 %  

Wedbush noted that the implied ownership percentage of holders of Tokai common stock based upon the approximate $33.0 million value attributed to the Tokai common stock and the approximate $50.0 million value attributed to the Otic common stock pursuant to the exchange ratio in connection with the transaction was higher than the implied ownership percentages derived based upon the mean and median equity values attributed to Otic described above.

Precedent Initial Public Offering Analysis—Otic

Wedbush reviewed publicly available information relating to the following initial public offerings of companies in the biopharmaceutical industry which had Phase 1 product candidates (and no product candidates beyond Phase 1 or Phase 1/2) that did not have human efficacy data at the time of initial public offering, which raised a minimum of $20.0 million in gross proceeds, and which priced between January 2014 and November 2016 (the “Phase 1 IPOs”), which criteria were applied to select for companies similar to Otic:

 

  Pricing Date

   Issuer

  August 10, 2016

   Protagonist Therapeutics, Inc.

  October 25, 2016

   Ra Pharmaceuticals, Inc.

  March 22, 2016

   Corvus Pharmaceuticals, Inc.

  February 10, 2016

   Proteostasis Therapeutics, Inc.

  November 10, 2015

   Voyager Therapeutics, Inc.

  October 28, 2015

   MyoKardia, Inc.

  October 21, 2015

   Dimension Therapeutics, Inc.

  June 16, 2015

   Nivalis Therapeutics, Inc.

  May 6, 2015

   aTyr Pharma, Inc.

  July 31, 2014

   Loxo Oncology, Inc.

Wedbush noted that although such companies had certain financial and operating characteristics that could be considered similar to those of Otic, none of the companies had the same management, make-up, technology, size or mix of business as Otic and, accordingly, there were inherent limitations on the applicability of such companies to the valuation analysis of Otic. Wedbush also noted that market conditions have varied over the precedent time periods.

Wedbush calculated the fully diluted pre-money valuation of each of the companies that participated in the Phase 1 IPOs at the time of pricing of its initial public offering using the treasury stock method, which (i) includes the conversion of all outstanding in-the-money warrants, options and convertible preferred stock into common stock and (ii) excludes the conversion of any employee stock incentive plans, employee stock option plans or other stock awarded to employees or directors of such companies. The results of this analysis are summarized as follows:

 

     Pre-Money Valuation
($ in millions)
 
     Phase 1
IPOs
 

  Mean

   $ 191.6   

  Median

   $ 187.7   

 

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Wedbush calculated the implied ownership of holders of Tokai common stock in the combined company based upon the approximate $33.0 million value attributed to the Tokai common stock and the approximate $50.0 million value attributed to the Otic common stock pursuant to the exchange ratio in connection with the transaction, and the mean and median values described above.

The results of this analysis are summarized as follows:

 

     Initial Public Offering Analysis  
     Equity Value      Ownership               

  Otic Equity Value per Share Purchase Agreement

   $ 50.0         60     

  Tokai Equity Value per Share Purchase Agreement

   $ 33.0         40     
  

 

 

    

 

 

      

  Aggregate Value per Share Purchase Agreement

   $ 83.0         100 %       
     Mean     Median  
     Equity Value
($ in millions)
     Ownership     Equity Value
($ in millions)
     Ownership  

  Otic Equity Value per Initial Public Offering Analysis

   $ 191.6         85   $ 187.7         85 %

  Tokai Equity Value per Share Purchase Agreement

   $ 33.0         15   $ 33.0         14 %
  

 

 

    

 

 

   

 

 

    

 

 

 

  Implied Aggregate Value

   $ 224.6         100 %     $ 220.7         100 %  

Wedbush noted that the implied ownership percentage of holders of Tokai common stock based upon the approximate $33.0 million value attributed to the Tokai common stock and the approximate $50.0 million value attributed to the Otic common stock pursuant to the exchange ratio in connection with the transaction was higher than the implied ownership percentages derived based upon the mean and median equity values attributed to Otic described above.

Miscellaneous

This summary is not a complete description of Wedbush’s opinion or the underlying analyses and factors considered in connection with Wedbush’s opinion. The preparation of a fairness opinion is a complex process involving the application of subjective business and financial judgment in determining the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, is not readily susceptible to partial analysis or summary description. Wedbush believes that its analyses described above must be considered as a whole and that considering any portion of such analyses and of the factors considered without considering all analyses and factors could create a misleading view of the process underlying its opinion. Selecting portions of the analyses or summary set forth above, without considering the analyses as a whole, could create an incomplete view of the processes underlying the Wedbush opinion. In arriving at its fairness determination, Wedbush considered the results of all of its analyses and did not attribute any particular weight to any factor or analysis. Rather, it made its fairness determination on the basis of its experience and professional judgment after considering the results of all of its analyses. No company or transaction in the analyses described above is identical to Tokai, Otic or the transaction.

In conducting its analyses and arriving at its opinion, Wedbush utilized a variety of valuation methods. The analyses were prepared solely for the purpose of enabling Wedbush to provide its opinion to the Tokai board of directors as to the fairness of the exchange ratio in connection with the transaction, from a financial point of view, to the stockholders of Tokai as of the date of the opinion and do not purport to be an appraisal or necessarily reflect the prices at which businesses or securities actually may be sold, which are inherently subject to uncertainty.

 

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The terms of the transaction were determined through arm’s-length negotiations between Tokai and Otic and were approved by the Tokai board of directors. Although Wedbush provided advice to the Tokai board of directors during the course of these negotiations, the decision to enter into the Share Purchase Agreement was solely that of the Tokai board of directors. Wedbush did not recommend any specific consideration to Tokai or the Tokai board of directors, or that any specific amount or type of consideration constituted the only appropriate consideration for the transaction. As described above, the opinion of Wedbush and its presentation to the Tokai board of directors were among a number of factors taken into consideration by the Tokai board of directors in making its determination to approve the Share Purchase Agreement, the transaction and the other transactions contemplated by the Share Purchase Agreement.

Material U.S. Federal Income Tax Consequences of the Transaction to Tokai Stockholders

Neither the Otic Transaction nor the related Equity Financing will result in any taxable gain or loss for U.S. federal income tax purposes to any Tokai stockholder in his, her or its capacity as a Tokai stockholder. Tokai stockholders who are also stockholders of Otic should consult their own tax advisors as to the tax consequences of them participating in the Otic Transaction with respect to their Otic stock.

Regulatory Approvals

Neither Tokai nor Otic is required to make any filings or to obtain approvals or clearances from any regulatory authorities in the United States or other countries to consummate the Otic Transaction contemplated by the Share Purchase Agreement. In Israel, Otic is required to prepare, file and receive all Israeli tax rulings with respect to the Otic Transaction, and Tokai is required to deliver to Otic an executed copy of an undertaking in the standard form required by the Office of the Chief Scientist from non-Israeli residents investing in Israeli companies which have received support from the OCS. In the United States, Tokai must comply with applicable federal and state securities laws and NASDAQ rules and regulations in connection with the issuance of shares of Tokai common stock in the Otic Transaction and the issuance of shares of Tokai common stock in the Equity Financing, including the filing with the SEC of this proxy statement.

Anticipated Accounting Treatment

Accounting Standards Codification Topic 805, Business Combinations (“ASC 805”) requires the use of the acquisition method of accounting for business combinations. In applying the acquisition method, it is necessary to identify both the accounting acquiree and the accounting acquirer. Otic management has determined that Otic represents the accounting acquirer in the Otic Transaction based on an analysis of the criteria outlined in ASC 805 and the facts and circumstances specific to the transaction, including: (1) stockholders of Otic are expected to own approximately 60% of the voting interests of the combined company immediately following the closing of the Otic Transaction; (2) the majority of the board of directors of the combined company will be composed of directors designated by Otic, pursuant to the terms of the Share Purchase Agreement; and (3) existing members of Otic management will be the management of the combined company.

Because Otic has been determined to be the accounting acquirer in the Otic Transaction, but not the legal acquirer, the Otic Transaction is deemed a reverse acquisition under the guidance of ASC 805. As a result, upon consummation of the Otic Transaction, (1) the historical financial statements of Otic will become the historical financial statements of the combined company and (2) Otic will record the business combination in its financial statements and will apply the acquisition method to account for the acquired assets and assumed liabilities of Tokai as of the closing date of the transaction. Applying the acquisition method includes recording the identifiable assets acquired and liabilities assumed at their fair values, and recording goodwill for the excess of the purchase price over the aggregate fair value of the identifiable assets acquired and liabilities assumed, if any, or recording a bargain purchase gain if the aggregate fair value of the identifiable assets acquired and liabilities assumed exceeds the purchase price for the acquisition.

 

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The application of the acquisition method of accounting is dependent upon certain valuations and other studies that have yet to commence or progress to a stage where there is sufficient information for a definitive measurement of Tokai’s assets to be acquired and liabilities to be assumed. A final determination of these estimated fair values, which cannot be made prior to the completion of the Otic Transaction, will be based on the actual net tangible and intangible assets of Tokai that exist as of the closing date of the Otic Transaction.

No Appraisal Rights

Holders of Tokai common stock will not be entitled to any dissenters’ rights or appraisal rights with respect to any of the proposals to be voted on at the special meeting.

 

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TERMS OF THE SHARE PURCHASE AGREEMENT

The following is a summary of the material terms of the Share Purchase Agreement. A copy of the Share Purchase Agreement is attached as Annex A to this proxy statement. The Share Purchase Agreement has been attached to this proxy statement to provide you with information regarding its terms. It is not intended to provide any other factual information about Tokai, Otic, or the Sellers. The following description does not purport to be complete and is qualified in its entirety by reference to the Share Purchase Agreement. You should refer to the full text of the Share Purchase Agreement for details of the Otic Transaction and the terms and conditions of the Share Purchase Agreement.

Explanatory Note Regarding the Share Purchase Agreement

The Share Purchase Agreement contains representations and warranties that Tokai, on the one hand, and Otic and the Sellers, on the other hand, have made to one another as of specific dates. These representations and warranties have been made for the benefit of the other parties to the Share Purchase Agreement and may be intended not as statements of fact but rather as a way of allocating the risk to one of the parties if those statements prove to be incorrect. Moreover, certain of those representations and warranties may not be accurate or complete as of any specified date, may be subject to a contractual standard of materiality different from those generally applicable to SEC filings or may have been used for purposes of allocating risk among the parties to the Share Purchase Agreement, rather than establishing matters of fact. In addition, the assertions embodied in the representations and warranties are qualified by information in confidential disclosure schedules exchanged by the parties in connection with signing the Share Purchase Agreement. While Tokai, Otic and the Sellers do not believe that these disclosure schedules contain information required to be publicly disclosed under applicable securities laws, other than information that has already been so disclosed, the disclosure schedules do contain information that modifies, qualifies and creates exceptions to the representations and warranties set forth in the attached Share Purchase Agreement. Accordingly, you should not rely on the representations and warranties as current characterizations of the actual state of facts or conditions of Tokai, Otic or the Sellers, because they were made as of specific dates, may be intended merely as a risk allocation mechanism among Tokai, Otic and the Sellers and are modified by the disclosure schedules.

The Otic Transaction Structure

Upon the terms and subject to the conditions set forth in the Share Purchase Agreement, Tokai will acquire all of the ordinary and preferred shares of Otic in exchange for the issuance to the Sellers of a number of shares of Tokai common stock determined pursuant to the exchange ratio set forth in the Share Purchase Agreement and below in the section entitled “Terms of the Share Purchase Agreement—Exchange Ratio,” beginning on page 98 of this proxy statement.

The issuance of Tokai common stock to the Sellers will be issued in transactions exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act, and Regulation D or Regulation S promulgated thereunder and may not be offered or sold by the holders of those shares absent registration or an applicable exemption from registration requirements.

Subject to the terms and conditions of the Share Purchase Agreement, it is currently anticipated that at closing, the Sellers will collectively receive approximately                      shares of Tokai common stock. Also in connection with the Otic Transaction, Tokai will assume the (i) outstanding share options of Otic, and (ii) outstanding warrants of Otic, each of which will be adjusted to reflect the exchange ratio for the Otic Transaction, as described below in the section entitled “Effect of the Otic Transaction on Otic Share Options, Otic Warrants and Tokai Stock Options—Otic Share Options and Otic Warrants,” beginning on page 98 of this proxy statement. Following the Otic Transaction, Otic will be a wholly owned subsidiary of Tokai, and the Sellers are expected to hold approximately 60% of the outstanding shares of Tokai common stock, and the current Tokai stockholders are expected to own approximately 40% of the outstanding shares of Tokai common stock.

 

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Consideration

At the closing of the Otic Transaction, each Seller will deliver to Tokai its Otic share certificates (or an affidavit for any lost, stolen, destroyed or never issued share certificate(s)) and related documents necessary for transfer of such share certificates in respect of Otic shares, and in exchange therefor, Tokai will deliver to each Seller stock certificates representing the number of shares of Tokai common stock that the Seller has the right to receive pursuant to the terms of the Share Purchase Agreement.

The number of shares of Tokai common stock that the Sellers in the aggregate will have the right to receive will be determined pursuant to the exchange ratio set forth in the Share Purchase Agreement as described below in the section entitled “Terms of the Share Purchase Agreement—Exchange Ratio,” beginning on page 98 of this proxy statement.

The market value of the shares of Tokai common stock issued pursuant to the Share Purchase Agreement will depend on the market value of the shares of Tokai common stock at the time the Otic Transaction closes, and could vary significantly from the market value on the date of this proxy statement.

No fractional shares of Tokai common stock will be issuable pursuant to the Share Purchase Agreement to the Sellers, and no certificates or scrip for any fractional shares will be issued. Any fractional shares shall be rounded down to the nearest whole share, and no cash payment will be made in respect of such rounding.

Exchange Ratio

The number of shares of Tokai common stock that the Sellers in the aggregate will receive at closing in exchange for such Sellers’ Otic shares is determined pursuant to the exchange ratio as set forth in the Share Purchase Agreement, and which was calculated based upon the relative stipulated values of each of Tokai and Otic.

The exchange ratio is 4.255. Accordingly, at closing, the Sellers in the aggregate will receive 4.255 shares of Tokai common stock for each Otic ordinary and preferred share. The actual number of shares of Tokai common stock that a Seller will receive at closing depends on an allocation schedule that Otic will deliver to Tokai prior to closing. The exchange ratio does not reflect the proposed reverse stock split

Effect of the Otic Transaction on Otic Share Options, Otic Warrants and Tokai Stock Options

Otic Share Options and Otic Warrants

Pursuant to the Share Purchase Agreement, at closing Tokai will assume the outstanding share option awards and warrants of Otic (other than warrants of Otic that are exercised in connection with the Otic Transaction). Each of these options and warrants will be adjusted to reflect a ratio of          shares of Tokai common stock for each Otic share. Accordingly, at closing, each of Otic’s outstanding share option awards and warrants will become exercisable, as the case may be, for or into          shares of Tokai common stock for each Otic share it was previously exercisable for, at a correspondingly adjusted exercise price, provided that the exercise price of such stock options and warrants will be rounded down to the nearest whole share and the exercise prices will be rounded up to the nearest cent, and no cash payment will be made in respect of such rounding. After giving effect to the exchange ratio, and assuming no exercise of, or other change in the number of, outstanding share option awards and warrants of Otic, Tokai will assume options to purchase          shares of Tokai common stock at a weighted average exercise price of $         per share and warrants to purchase          shares of Tokai common stock at a weighted average exercise price of $         per share. If all of these options and warrants were exercised prior to the closing of the Otic Transaction, Tokai would issue 36,911,631 shares of common stock and the Otic shareholders would own approximately 62% of the outstanding shares of Tokai common stock.

 

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Tokai Options

Upon closing of the Otic Transaction, all of Tokai’s outstanding stock options will remain outstanding and in effect. Tokai’s board of directors has determined that the Otic Transaction constitutes a change in control for purposes of Tokai’s stock options. As a result, if any holder of Tokai stock options (other than Tokai’s non-employee directors) is terminated without cause or resigns for good reason following the closing, such holder’s stock options will immediately vest in full. Stock options held by Tokai’s non-employee directors will vest in full immediately upon the change in control.

Directors and Officers of Tokai Following the Otic Transaction

Immediately following the completion of the Otic Transaction, the executive management team of the combined company is expected to be composed of the current executive team of Otic: Gregory J. Flesher, serving as President and Chief Executive Officer, Christine G. Ocampo, serving as Chief Financial and Compliance Officer, and Dr. Catherine C. Turkel, Chief Development Officer.

In accordance with Tokai’s certificate of incorporation and by-laws, the Tokai board of directors currently consists of seven directors divided into three staggered classes, with one class to be elected at each annual meeting to serve for a three-year term. The staggered structure of the board of directors will remain in place for the combined company following the consummation of the Otic Transaction. At Tokai’s most recent annual stockholders meeting, held in 2016, Class II directors were elected. As a result, the term of the Class II directors of the combined company is set to expire upon the election and qualification of successor directors at the Tokai annual stockholders meeting in 2019, and the terms of the Class III and Class I directors will expire upon the election and qualification of successor directors at the annual stockholders meetings in 2017 and 2018, respectively.

The director classes for Tokai are currently as follows:

 

    Class I directors (term ending in 2018): Cheryl L. Cohen, Jodie P. Morrison and Joseph A. Yanchik, III;

 

    Class II directors (term ending in 2019): David A. Kessler.; and

 

    Class III director (term ending in 2017): Seth L. Harrison and Stephen Buckley, Jr.

The combined company’s board of directors will initially be fixed at seven members, consisting of (i) four members designated by Otic: Keith A. Katkin as Chairman, Gregory J. Flesher, Gary A. Lyons and Erez Chimovits and (ii) three board members designated by Tokai, which may include existing board members and up to one new member designated by Tokai.

Pursuant to the terms of the Share Purchase Agreement, it is anticipated that these directors will be appointed to the three staggered director classes of the combined company’s board of directors as follows:

 

    Class I directors (term ending 2018):

 

    Class II directors (term ending 2019):

 

    Class III directors (term ending 2017):

Conditions to the Consummation of the Otic Transaction

Each party’s obligation to consummate the Otic Transaction is subject to the satisfaction or waiver by each of the parties, at or prior to the Otic Transaction, of various conditions, which include the following:

 

    the approval of the issuance of Tokai common stock in the Otic Transaction by the requisite vote of stockholders under applicable law and stock market regulation;

 

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    the filing, obtainment or occurrence of all authorizations and consents, including Israeli tax rulings set forth in the Share Purchase Agreement, orders or approvals of, or declarations or filings with, or expirations of waiting periods imposed by any governmental entity in connection with the Otic Transaction, the failure of which to file, obtain or occur is reasonably likely to have a Tokai Material Adverse Effect or an Otic Material Adverse Effect (as such terms are defined in the Share Purchase Agreement) shall have been filed, been obtained or occurred on terms that would not reasonably be likely to have a Tokai Material Adverse Effect or an Otic Material Adverse Effect;

 

    the absence of any order, executive order, stay, decree, judgment or injunction (preliminary or permanent) or statute, rule, or regulation which is in effect and has the effect of making the Otic Transaction illegal or otherwise prohibiting consummation of the Otic Transaction; and

 

    the approval of the NASDAQ Listing Application—For Companies Conducting a Business Combination that Results in a Change of Control with respect to the shares of Tokai common stock to be issued pursuant to the Share Purchase Agreement.

In addition, the obligation of Tokai to consummate the Otic Transaction is further subject to the satisfaction or waiver of the following conditions:

 

    the truth and correctness of all representations and warranties of Otic and the Sellers in the Share Purchase Agreement on the date of the Share Purchase Agreement and on the closing date of the Otic Transaction with the same force and effect as if made on the date on which the Otic Transaction is to be completed or, if such representations and warranties address matters as of a particular date, then as of that particular date, except where the failure of these representations and warranties to be true and correct, individually or in the aggregate, would not reasonably be expected to have an Otic Material Adverse Effect;

 

    the performance or compliance in all material respects of Otic and the Sellers with all of its or their covenants and obligations in the Share Purchase Agreement;

 

    the absence of any continuing Otic Material Adverse Effect;

 

    the delivery by Otic of resignations of each director of Otic and its subsidiaries; and

 

    the delivery by Otic of certain customary closing deliverables required under the Share Purchase Agreement.

In addition, the obligations on the part of Otic to consummate the Otic Transaction are further subject to the satisfaction or waiver of the following conditions:

 

    the truth and correctness of all representations and warranties of Tokai in the Share Purchase Agreement on the date of the Share Purchase Agreement and on the closing date of the Otic Transaction with the same force and effect as if made on the date on which the Otic Transaction is to be completed or, if such representations and warranties address matters as of a particular date, then as of that particular date, except where the failure of these representations and warranties to be true and correct, individually or in the aggregate, would not reasonably be expected to have a Tokai Material Adverse Effect;

 

    the performance or compliance in all material respects of Tokai with all of its covenants and obligations in the Share Purchase Agreement;

 

    the absence of any continuing Tokai Material Adverse Effect;

 

    the delivery by Tokai of resignations of each director of Tokai who will not continue to serve in such roles after closing;

 

    the preparation, filing and receipt by Otic of all Israeli tax rulings with respected to the transactions contemplated by the Share Purchase Agreement;

 

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    the delivery by Tokai to Otic an executed copy of an undertaking in the standard form required by the Office of the Chief Scientist from non-Israeli residents investing in Israeli companies which have received support from the Office of the Chief Scientist, substantially in the form attached to the Share Purchase Agreement; and

 

    the delivery by Tokai of certain customary closing deliverables required under the Share Purchase Agreement.

Representations and Warranties

The Share Purchase Agreement contains representations and warranties of Tokai and Otic customary for a transaction of this type relating to, among other things: corporate organization, standing, power and similar corporate matters; capitalization; subsidiaries; authority; no conflict; required filings and consents; financial statements and information provided, and with respect to Tokai, documents filed with the SEC and the accuracy of information contained in those documents; no undisclosed liabilities; absence of certain changes or events; taxes; owned and leased real properties; intellectual property; contracts; litigation; environmental matters; employee benefit plans; compliance with laws; permits and regulatory matters; employees; insurance; the inapplicability of section 203 of the DGCL; broker fees; controls and procedures, certifications and other matters; books and records; and the absence of representations and warranties of the other parties except for those representations and warranties contained in the Share Purchase Agreement; for Tokai, the opinion of its financial advisor; and for Otic, the absence of a fairness opinion; business relationships with affiliates; government funding; export control laws; privacy and data security; and ownership of Tokai common stock.

In addition, the Share Purchase Agreement contains representations and warranties of the Sellers relating to, among other things: corporate organization, authority, power and similar corporate matters; legal and beneficial ownership of and good title to the Otic shares; litigation; broker fees; entry into the Share Purchase Agreement on each Seller’s own account, without a view toward resale or distribution; status as accredited investor or a non-“U.S. person” under Regulation S of the Securities Act, sophistication and ability to bear the economic risk of investing in the Otic Transaction; access to information about Tokai and Otic; resale restrictions; and the absence of representations and warranties of the other parties except for those representations and warranties contained in the Share Purchase Agreement.

The representations and warranties are, in many respects, qualified by materiality and knowledge, and will not survive the Otic Transaction, but their accuracy forms the basis of one of the conditions to the obligations of Tokai, Otic and the Sellers to consummate the Otic Transaction.

No Solicitation; Third Party Competing Proposal

Each of Tokai and Otic agreed that, except as described below, Tokai and Otic will not, nor will either party authorize or permit any of the officers, directors, employees, financial advisors, attorneys, accountants, consultants, agents and other authorized representatives of such party, acting in such capacity (collectively, “representatives”), to, directly or indirectly:

 

    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” (as defined below);

 

    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 Tokai or Otic, 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;

 

    take any action to make the provisions of any takeover statute inapplicable to any transactions contemplated by an acquisition proposal; or

 

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    publicly propose to do any of the foregoing.

An “acquisition proposal” means, with respect to Tokai or Otic:

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);

 

    any proposal for the issuance by such party of 15% or more of its equity securities; or

 

    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 the Share Purchase Agreement.

However, Tokai and its representatives may:

 

    furnish non-public information to, and may enter into discussions or negotiations with, any “qualified person” (as defined below) and its representatives, pursuant to a confidentiality agreement not materially less restrictive with respect to the confidentiality obligations of the qualified person than the confidentiality agreement between Tokai and Otic;

 

    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

 

    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.

A “qualified person” means any person making an unsolicited acquisition proposal that the Tokai board of directors 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,” (as defined below) and such acquisition proposal has not resulted from a material breach by Tokai of its “no solicitation” obligations under the Share Purchase Agreement.

A “superior proposal” means, with respect to Tokai, 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 the Share Purchase Agreement (after consultation with its financial and legal advisors), taking into account all the terms and conditions of such proposal and the Share Purchase 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 the Share Purchase 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 by the Share Purchase Agreement).

The Share Purchase Agreement also provides that each party will promptly advise the other party of its receipt of any acquisition proposal and 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 the acquisition proposal, and copies of all written communications with such person making

 

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such 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:

 

    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;

 

    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 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;

 

    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

 

    promptly (and in any event within twenty-four 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

Changes to Board Recommendation

Pursuant to the Share Purchase Agreement, the Tokai board of directors has agreed to recommend that Tokai’s stockholders vote to approve the issuance of Tokai common stock in the Otic Transaction and to take all action that is both reasonable and lawful to solicit from its stockholders proxies in favor of the issuance of Tokai common stock in the Otic Transaction. Further, prior to the earlier to occur of (a) the closing, and (b) the time at which the Share Purchase Agreement is terminated in accordance with its terms:

 

    the Tokai board of directors shall not withhold, withdraw or modify, or publicly propose to withdraw or modify, its approval or recommendation with respect to the issuance of Tokai common stock in the Otic Transaction (a “recommendation change”);

 

    each of Tokai and Otic shall not enter into any letter of intent, memorandum of understanding, agreement in principle, acquisition agreement, merger agreement or similar agreement providing for the consummation of a transaction contemplated by any acquisition proposal (other than a confidentiality agreement referred to above entered into in the circumstances referred to above); and

 

    each of the Tokai board of directors and the Otic board of directors, and each committee thereof, shall not, except as set forth below, 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 the Share Purchase Agreement, at any time prior to the approval of the issuance of Tokai common stock in the Otic Transaction, Tokai’s board of directors may effect a recommendation change if:

 

    Tokai’s board of directors shall have determined in good faith (after consultation with outside legal counsel) that the failure to effect a recommendation change could reasonably be expected to be inconsistent with its fiduciary obligations under applicable law;

 

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    Tokai has provided at least four business days prior written notice to Otic that it intends to effect a 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;

 

    Tokai has complied in all material respects with the requirements of the Share Purchase Agreement’s “no solicitation” section in connection with any potential superior proposal; and

 

    if Otic shall have delivered to Tokai a written, binding and irrevocable offer to alter the terms or conditions of the Share Purchase Agreement during the four business day period referred to above, the Tokai board of directors shall have determined in good faith (after consultation with outside legal counsel), after considering the terms of such offer by Otic, that the failure to effect a 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 Tokai’s stockholders would receive as a result of such potential superior proposal), Tokai shall be required to provide Otic 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 the “recommendation change” section of the Share Purchase Agreement and Tokai’s board of directors shall not make a recommendation change prior to the end of any such period as so extended.

Meeting of Tokai Stockholders

The Share Purchase Agreement requires Tokai to take all actions in accordance with applicable laws, its certificate of incorporation and by-laws and NASDAQ rules to duly call, give notice of, convene and hold as promptly as practicable, after this proxy statement is cleared for mailing by the SEC, the meeting of the holders of Tokai common stock to vote on the issuance of Tokai common stock in the Otic Transaction. Tokai is further required to take all action that is both reasonable and lawful to solicit proxies from its stockholders in favor of the issuance of Tokai common stock in the Otic Transaction.

Covenants; Conduct of the Businesses

Otic agreed that during the period prior to the closing of the Otic Transaction, it will conduct its business in the ordinary course in accordance with past practices and in compliance with all applicable laws, regulations, and certain contracts, pay its debts and taxes and perform other obligations when due (subject to good faith disputes), 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 have business dealings with it, and to take other agreed-upon actions. Otic also agreed that, subject to certain limited exceptions, without the written consent of Tokai, it will not, during the period prior to closing of the Otic Transaction:

 

    declare, set aside or pay any dividends on, or make any other distributions in respect of, any of its capital stock; 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 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;

 

   

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’s ordinary shares upon the exercise of Otic

 

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share options or warrants outstanding on the date of the Share Purchase Agreement in accordance with their present terms (including cashless exercises) or Otic share options granted as contemplated by the Share Purchase Agreement;

 

    amend its certificate of incorporation, by-laws or other comparable charter or organizational documents;

 

    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 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 any assets that are material, in the aggregate, to Otic and its subsidiaries, taken as a whole;

 

    except in the ordinary course of business, sell, lease, license, pledge, or otherwise dispose of or encumber any properties or assets of Otic or of any of its subsidiaries;

 

    whether or not in the ordinary course of business, sell, dispose of or otherwise transfer any assets material to Otic 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);

 

    incur or suffer to exist any indebtedness for borrowed money other than such indebtedness that existed as of September 30, 2016 to the extent disclosed to Tokai 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 shall have the right, in its sole discretion, to incur up to an aggregate of $3,000,000 of additional indebtedness from the Sellers on the terms disclosed to Tokai, issue, sell or amend any debt securities or warrants or other rights to acquire any debt securities of Otic 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, make any loans, advances (other than routine advances to employees of Otic in the ordinary course of business) or capital contributions to, or investment in, any other person, other than Otic or any of its direct or indirect wholly owned subsidiaries or enter into any hedging agreement or other financial agreement or arrangement designed to protect Otic or its subsidiaries against fluctuations in commodities prices or exchange rates;

 

    make any capital expenditures or other expenditures with respect to property, plant or equipment, other than as set forth in Otic’s budget for capital expenditures previously made available to Tokai or the specific capital expenditures disclosed to Tokai;

 

    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;

 

    except in the ordinary course of business or for terminations as a result of the expiration of any contract that expires in accordance with terms, modify or amend in any material respect, or terminate, any material contract or agreement to which Otic or any of its subsidiaries is party; or knowingly waive, release or assign any material rights or claims (including any write-off or other compromise of any accounts receivable of Otic of any of its subsidiaries);

 

    except in the ordinary course of business, 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 or any of its subsidiaries or license any material intellectual property rights to or from any third party;

 

   

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Purchase Agreement to be disclosed, take any action with respect to 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, increase in any material respect the compensation or fringe benefits of, or pay any material bonus to, any director, officer, employee or consultant, amend or accelerate the payment, right to payment or vesting of any compensation or benefits, including any outstanding options or restricted stock awards, pay any material benefit not provided for as of the date of the Share Purchase Agreement under any benefit plan, grant any awards under any bonus, incentive, performance or other compensation plan or arrangement or benefit plan, or 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;

 

    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;

 

    commence any offering of shares of Otic ordinary shares pursuant to any Employee Stock Purchase Plan;

 

    initiate, compromise or settle any material litigation or arbitration proceeding;

 

    open or close any facility or office;

 

    fail to use commercially reasonable efforts to maintain insurance at levels substantially comparable to levels existing as of the date of the Share Purchase Agreement;

 

    fail to pay accounts payable and other obligations in the ordinary course of business;

 

    suspend any clinical trials sponsored by Otic or involving any products marketed or in development by Otic;

 

    permit the exercise of any Otic share options or Otic warrants by any person who is not a signatory to the Share Purchase Agreement, unless such person first executes a joinder agreement agreeing to be bound by the terms of the Share Purchase Agreement in form and substance reasonable acceptable to Tokai; or

 

    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 in the Share Purchase Agreement untrue or incorrect in any material respect, or would materially impair or prevent the satisfaction of conditions in the Share Purchase Agreement.

Tokai agreed that during the period prior to the closing of the Otic Transaction, it will conduct its business in the ordinary course in accordance with past practices and in compliance with all applicable laws, regulations, and certain contracts, pay its debts and taxes and perform other obligations when due (subject to good faith disputes), 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 have business dealings with it, and to take other agreed-upon actions. Tokai also agreed that, subject to certain limited exceptions, without the written consent of Otic, it will not, during the period prior to closing of the Otic Transaction:

 

    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 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;

 

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    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 Tokai common stock upon the exercise of Tokai options or warrants outstanding on the date of the Share Purchase Agreement in accordance with their present terms (including cashless exercises));

 

    amend its certificate of incorporation, by-laws or other comparable charter or organizational documents;

 

    except for purchases of inventory and raw materials in the ordinary course of business, acquire 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 any assets that are material, in the aggregate, to Tokai and its subsidiaries, taken as a whole;

 

    except in the ordinary course of business, sell, lease, license, pledge, or otherwise dispose of or encumber any properties or assets of Tokai or of any of its subsidiaries;

 

    whether or not in the ordinary course of business, sell, dispose of or otherwise transfer any assets material to Tokai 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);

 

    incur or suffer to exist any indebtedness for borrowed money or guarantee any such indebtedness of another person, issue, sell or amend any debt securities or warrants or other rights to acquire any debt securities of Tokai 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, make any loans, advances (other than routine advances to employees of Tokai in the ordinary course of business) or capital contributions to, or investment in, any other person, other than Tokai or any of its direct or indirect wholly owned subsidiaries or enter into any hedging agreement or other financial agreement or arrangement designed to protect Tokai or its subsidiaries against fluctuations in commodities prices or exchange rates;

 

    make any capital expenditures or other expenditures, other than those contemplated by the Tokai financial model provided to Otic on the date of the Share Purchase Agreement; 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 follows), additional expenditures not exceeding 10% of the amount of aggregate expenditures shown in the model and expenditures incurred by the Tokai as a result of events or circumstances involving the Tokai’s ongoing clinical trials that arise outside of the Tokai’s control;

 

    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;

 

    except in the ordinary course of business or for terminations as a result of the expiration of any contract that expires in accordance with its terms, modify or amend in any material respect, or terminate, any material contract or agreement to which Tokai or any of its subsidiaries is party, or knowingly waive, release or assign any material rights or claims;

 

    except in the ordinary course of business, 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, Tokai or any of its subsidiaries or license any material intellectual property rights to or from any third party;

 

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    except as required to comply with applicable law or agreements, plans or arrangements existing on the date of the Share Purchase Agreement and either disclosed to Otic, not required by the Share Purchase Agreement to be so disclosed or disclosed in Tokai’s SEC filings or furnished prior to the date of the Share Purchase Agreement, 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, increase in any material respect the compensation or fringe benefits of, or pay any material bonus to, any director, officer, employee or consultant, amend or accelerate the payment, right to payment or vesting of any compensation or benefits, including any outstanding options or restricted stock awards, pay any material benefit not provided for as of the date of the Share Purchase Agreement under any benefit plan, grant any awards under any bonus, incentive, performance or other compensation plan or arrangement or benefit plan, hire any additional officers or other employees, or any consultants or independent contractors, in each case, other than as disclosed to Otic 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 the Share Purchase Agreement, or 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;

 

    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;

 

    commence any offering of shares of Tokai’s common stock pursuant to any Employee Stock Purchase Plan;

 

    open or close any facility or office;

 

    initiate, compromise or settle any material litigation or arbitration proceeding;

 

    fail to use commercially reasonable efforts to maintain insurance at levels substantially comparable to levels existing as of the date of the Share Purchase Agreement;

 

    fail to pay accounts payable and other obligations in the ordinary course of business; or

 

    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 Tokai in the Share Purchase Agreement untrue or incorrect in any material respect, or would materially impair or prevent the satisfaction of conditions in the Share Purchase Agreement.

Indemnification and Insurance

Pursuant to the Share Purchase Agreement, Tokai, Otic and the Sellers agreed that, from the closing of the Otic Transaction through the sixth anniversary of the closing, Tokai will indemnify and hold harmless each person who as of the date of the Share Purchase Agreement is, or who becomes prior to the closing, or has been at any time prior to the consummation of the Otic Transaction, a director or officer of Tokai or Otic or any of their respective subsidiaries 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 such director or officer is or was an officer or director of Otic, Tokai or any of their respective subsidiaries, whether asserted or claimed prior to, at or after the closing, to the fullest extent permitted by applicable law. Each such director or officer will be entitled to advancement of expenses (including attorneys’ fees) incurred in the defense of any such claim, action, suit, proceeding or investigation from Tokai following

 

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receipt by Tokai from the director or officer 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 by-laws of Tokai 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 by-laws of Tokai on the date of the Share Purchase Agreement.

Tokai shall either maintain in effect for six years after the closing of the Otic Transaction Tokai’s existing directors’ and officers’ insurance policies in place as of the date of the Share Purchase Agreement, or 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 Tokai 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 Tokai be required to expend pursuant to this section of the Share Purchase Agreement more than an amount equal to 200% of the current annual premiums paid by Tokai for such insurance; provided, further, that during the term of the “tail” policy, Tokai 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.

Tokai 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 of the Share Purchase Agreement.

Tokai and Otic 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 Tokai, Otic 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 Otic Transaction and shall continue in full force and effect. The provisions of this section of the Share Purchase Agreement are intended to be in addition to the rights otherwise available to the current officers and directors of Tokai, Otic 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 officers or directors, their heirs and their representatives. The obligations set forth in this section of the Share Purchase Agreement shall not be terminated, amended or otherwise modified in any manner that adversely affects any officer or director, or any person who is a beneficiary under the policies referred to in this section of the Share Purchase Agreement and their heirs and representatives, without the prior written consent of such affected director or officer or other person.

If Tokai, Otic 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 indemnification and insurance obligations of such person set forth in this section of the Share Purchase Agreement.

Other Agreements

Tokai and Otic have additionally agreed to use commercially reasonable efforts to 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 by the Share Purchase Agreement, and to:

 

    use commercially reasonable efforts to obtain, as promptly as practicable, each consent, if any, required to be obtained pursuant to any applicable law, any of Otic’s material contracts, or otherwise, by such party in connection with any of the transactions contemplated by the Share Purchase Agreement or in order for any of Otic’s material contracts to remain in full force and effect;

 

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    give all notices, if any, and use commercially reasonable efforts to make all necessary filings and other submissions required to be made and given in connection with the transactions contemplated by the Share Purchase Agreement, if any, as promptly as practicable; and

 

    use commercially reasonable efforts to execute or deliver any additional instruments necessary to consummate the transactions contemplated by, and to fully carry out the purposes of, the Share Purchase Agreement.

In addition, Tokai, Otic and the Sellers have agreed that:

 

    Tokai will use its commercially reasonable efforts to continue its existing listing on NASDAQ and to cause the shares of Tokai common stock being issued in the Otic Transaction to be approved for listing, subject to notice of issuance, on NASDAQ at or prior to the closing of the Otic Transaction;

 

    Tokai will take all action necessary to reconstitute the Tokai board of directors and appoint executive officers pursuant to the terms of the Share Purchase Agreement, including appointing the individuals identified in the section entitled “Terms of the Share Purchase Agreement—Directors and Officers of Tokai Following the Otic Transaction,” beginning on page 99 of this proxy statement;

 

    promptly after the closing, Tokai shall take all action necessary to cause its certificate of incorporation to be amended to reflect a change in Tokai’s name to OticPharma, Inc.; and

 

    Tokai and Otic 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 such party’s employees regarding the Share Purchase Agreement, the Otic Transaction or its effects on the employment, compensation or benefits of its employees.

Lock-up Agreements

Pursuant to the Share Purchase Agreement, each of the Sellers agreed not to, except in limited circumstances, sell or transfer, or engage in swap or similar transactions with respect to, any shares of Tokai common stock or any securities exercisable or exchangeable for Tokai common stock including, as applicable, shares and other securities received in the transaction from the closing of the Otic Transaction until 180 days following the closing of the Otic Transaction.

Termination of the Share Purchase Agreement

The Share Purchase Agreement may be terminated before the consummation of the Otic Transaction, whether before or after the required stockholder approvals to complete the Otic Transaction have been obtained, as set forth below:

 

    by mutual written consent of Tokai and Otic;

 

    by either Tokai or Otic, if the Otic Transaction has not been consummated by April 30, 2017 (the “Outside Date”); provided, however, that this right to terminate the Share Purchase Agreement will not be available to a party if such party’s failure to fulfill any obligation under the Share Purchase Agreement has been a principal cause of or resulted in the failure of the Otic Transaction to occur on or before the Outside Date;

 

    by Tokai or Otic, if a court of competent jurisdiction or governmental entity has issued a final and nonappealable order, decree or ruling or taken any other action that permanently restrains, enjoins or otherwise prohibits the Otic Transaction; provided, that this right to terminate will not be available to a party if the issuance of 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 the Share Purchase Agreement required to be performed by such party (or any affiliate of such party) at or prior to closing;

 

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    by Tokai, if Otic has knowingly and materially breached its non-solicitation obligations in the Share Purchase Agreement;

 

    by Otic, if at any time prior to the approval by Tokai’s stockholders of the issuance of the shares of Tokai common stock in the Otic Transaction, Tokai’s board of directors fails to recommend that the stockholders of Tokai vote to approve the issuance of Tokai common stock or withdraws or modifies its recommendation, Tokai’s board of directors (or any committee thereof) approves or recommends to the Tokai stockholders an acquisition proposal, a tender or exchange offer for outstanding shares of Tokai’s common stock is commenced and Tokai’s board of directors recommends that the Tokai stockholders tender or exchange their shares in such offer or Tokai’s board of directors fails to recommend against such offer within ten business days of its commencement, or Tokai has knowingly and materially breached its no solicitation obligations in to the Share Purchase Agreement;

 

    by Tokai, if there has been a material breach of or failure to perform any representation, warranty, covenant or agreement set forth in the Share Purchase Agreement on the part of Otic, which breach would cause a closing condition in the Share Purchase Agreement not to be satisfied; provided that Tokai is not then in material breach of the Share Purchase Agreement; and provided further, that if such breach or failure to perform is curable by Otic, then the Share Purchase Agreement shall not terminate as a result of such breach or failure until the earlier of the Outside Date or the expiration of a 30-day period commencing upon delivery of written notice from Tokai to Otic of such breach, it being understood that the Share Purchase Agreement shall not so terminate if such breach or violation is cured prior to termination becoming effective;

 

    by Otic, if there has been a material breach of or failure to perform any representation, warranty, covenant or agreement set forth in the Share Purchase Agreement on the part of Tokai, which breach would cause a closing condition in the Share Purchase Agreement not to be satisfied; provided that Otic is not then in material breach of the Share Purchase Agreement; and provided further, that if such breach or failure to perform is curable by Tokai, then the Share Purchase Agreement shall not terminate as a result of such breach or failure until the earlier of the Outside Date or the expiration of a 30-day period commencing upon delivery of written notice from Otic to Tokai of such breach, it being understood that the Share Purchase Agreement shall not so terminate if such breach or violation is cured prior to termination becoming effective; or

 

    by Tokai, if at any time prior to the approval by Tokai’s stockholders of the issuance of the shares of Tokai common stock in the Otic Transaction, each of the following occur: Tokai receives a superior proposal (as such term is defined in the section entitled, “Terms of the Share Purchase Agreement—No Solicitation; Third Party Competing Proposal” in this proxy statement beginning on page 101); Tokai has complied in all material respects with its non-solicitation obligations in the Share Purchase Agreement in order to accept such superior proposal; the Tokai Board of Directors approves, and Tokai concurrently with termination of the Share Purchase Agreement enters into, a definitive agreement with respect to such superior proposal; and prior to or concurrently with such termination, Tokai pays to Otic the “Tokai termination fee” (as defined below).

In the event that Tokai or Otic terminates the Share Purchase Agreement before the Otic Transaction is consummated, the Share Purchase Agreement will be of no further force or effect, except the Share Purchase Agreement’s provisions regarding termination fees and certain other miscellaneous provisions specified in the Share Purchase Agreement, as well as the confidentiality agreement between Tokai and Otic, shall remain in full effect. However, terminating the Share Purchase Agreement cannot relieve from liability any party to the Share Purchase Agreement for any knowing and intentional breach of the Share Purchase Agreement.

 

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Termination Fee and Expenses

Except as otherwise set forth in the Share Purchase Agreement, all fees and expenses incurred in connection with the Share Purchase Agreement are to be paid by the party incurring such expenses, regardless of whether the Otic Transaction is consummated.

However, Otic must pay Tokai a termination fee of $1.5 million if:

 

    Tokai has terminated the Share Purchase Agreement as a result of a knowing and material breach by Otic of its non-solicitation obligations in the Share Purchase Agreement; or

 

    Tokai has terminated the Share Purchase Agreement as a result of a material breach or failure to perform by Otic of any representation, warranty, covenant or agreement set forth in the Share Purchase Agreement, which breach has caused a closing condition in the Share Purchase Agreement not to be satisfied; provided that Tokai was not then in material breach of the Share Purchase Agreement; and provided further, that such breach or failure to perform was not been cured by Otic, as applicable, prior to the earlier of the Outside Date and the expiration of a 30-day period commencing upon delivery of written notice from Tokai to Otic of such breach.

Tokai must pay Otic a termination fee of $1.0 million (the “Tokai termination fee”) if:

 

    Tokai has terminated the Share Purchase Agreement at any time prior to the approval by Tokai’s stockholders of the issuance of the shares of Tokai common stock in the Otic Transaction and each of the following has occurred: Tokai receives a superior proposal (as such term is defined in the section entitled, “Terms of the Share Purchase Agreement—No Solicitation; Third Party Competing Proposal” in this proxy statement beginning on page 101); Tokai has complied in all material respects with its non-solicitation obligations in the Share Purchase Agreement in order to accept such superior proposal; the Tokai Board of Directors approves, and Tokai concurrently with termination of the Share Purchase Agreement enters into, a definitive agreement with respect to such superior proposal;

 

    so long as prior to the termination of the Share Purchase Agreement, any person makes an acquisition proposal or amends an acquisition proposal made prior to the date of the Share Purchase Agreement with respect to Tokai and within 12 months after such termination Tokai enters into a definitive agreement to consummate, or consummates, any acquisition proposal (provided that for purposes of this termination section, references to 15% in the definition of “acquisition proposal” shall be deemed to be 50%) and:

 

    either Otic or Tokai has terminated the Share Purchase Agreement and the Otic Transaction has not been consummated prior to the outside date; provided, such terminating party did not cause such failure to fulfill any obligation under the Share Purchase Agreement and was not a principal cause of or resulted in the failure of the Otic Transaction to so occur prior to the outside date; or

 

    Otic has terminated the Share Purchase Agreement as a result of a material breach or failure to perform by Tokai of any representation, warranty, covenant or agreement set forth in the Share Purchase Agreement, which breach has caused a closing condition in the Share Purchase Agreement not to be satisfied; provided that Otic was not then in material breach of the Share Purchase Agreement; and provided further, that such breach or failure to perform was not been cured by Otic, as applicable, prior to the earlier of the Outside Date and the expiration of a 30-day period commencing upon delivery of written notice from Otic to Tokai of such breach; or

 

   

Otic has terminated the Share Purchase Agreement at any time prior to the approval by Tokai’s stockholders of the issuance of the shares of Tokai common stock in the Otic Transaction due to the occurrence of any of the following: Tokai’s board of directors failed to recommend that the stockholders of Tokai vote to approve the issuance of Tokai common stock in the Otic Transaction

 

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or withdrew or modified its recommendation, Tokai’s board of directors (or any committee thereof) approved or recommended to the Tokai stockholders an acquisition proposal, a tender or exchange offer for outstanding shares of Tokai’s common stock was commenced and Tokai’s board of directors recommended that the Tokai stockholders tender or exchange their shares in such offer or Tokai’s board of directors failed to recommend against such offer within ten business days of its commencement, or Tokai has knowingly and materially breached its no solicitation obligations in to the Share Purchase Agreement.

Otic, the Sellers and Tokai agreed that the termination fee and expense reimbursements described in this section of this proxy statement are the sole and exclusive remedy of Tokai and Otic, as applicable in connection with the termination of the Share Purchase Agreement.

Regulatory Approvals

Neither Tokai nor Otic is required to make any filings or to obtain approvals or clearances from any regulatory authorities in the United States or other countries to consummate the Otic Transaction contemplated by the Share Purchase Agreement. In Israel, Otic is required to prepare, file and receive all Israeli tax rulings with respect to the Otic Transaction, and Tokai is required to deliver to Otic an executed copy of an undertaking in the standard form required by the Office of the Chief Scientist from non-Israeli residents investing in Israeli companies which have received support from the OCS. In the United States, Tokai must comply with applicable federal and state securities laws and NASDAQ rules and regulations in connection with the issuance of shares of Tokai common stock in the Otic Transaction and the issuance of shares of Tokai common stock in the Equity Financing, including the filing with the SEC of this proxy statement.

Pursuant to the terms of the Share Purchase Agreement, Tokai and Otic must use commercially reasonable efforts to file or otherwise submit, as promptly as practicable after the date of the Share Purchase Agreement, all necessary filings with respect to the transactions contemplated by the Share Purchase Agreement, to make any required submissions, and to execute or deliver any additional instruments necessary to consummate the transactions contemplated by, and to fully carry out the purposes of, the Share Purchase Agreement.

Amendments and Waivers

The Share Purchase Agreement may be amended by the parties by action taken or authorized by their respective boards of directors, and with respect to the Sellers, by action taken by the Sellers holding a majority of the issued and outstanding Otic share capital, at any time before or after approval by the Tokai stockholders of the issuance of Tokai common stock in the transaction, but after such approval, no amendment shall be made which by law requires further approval by such stockholders without such further approval. All amendments of the Share Purchase Agreement require an instrument in writing signed on behalf of each of Tokai, Otic, and the Sellers holding a majority of the issued and outstanding Otic share capital.

Any agreement on the part of a party to the Share Purchase Agreement to extension or waiver is valid only if set forth in a written instrument signed on behalf of such party. The failure of any party to the Share Purchase Agreement to assert any of its rights under the Share Purchase Agreement shall not constitute a waiver of such rights.

Specific Performance

Tokai, Otic and the Sellers agreed that irreparable damage would occur in the event that any of the provisions of the Share Purchase Agreement were not performed in accordance with their specific terms or were otherwise breached. Accordingly, Tokai, Otic or any Seller, as the case may be, is entitled to an injunction or injunctions to prevent breaches of the Share Purchase Agreement and to enforce specifically the terms and provisions thereof, this being in addition to any other remedy to which such party is entitled at law or in equity.

 

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Third Party Beneficiaries

Nothing in the Share Purchase Agreement confers upon any other person, other than Tokai, Otic and the Sellers, and to a limited extent related to indemnification, certain directors and officers of Tokai and Otic, any right, benefit or remedy of any nature whatsoever under or by reason of the Share Purchase Agreement.

 

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AGREEMENTS RELATED TO THE SHARE

PURCHASE AGREEMENT

Support Agreement

As a condition and inducement to, and in consideration for, Otic’s and the Sellers’ willingness to enter into the Share Purchase Agreement, certain stockholders, directors and officers of Tokai entered into a Support Agreement with Otic pursuant to which, among other things, each of these equityholders agreed, solely in its capacity as an equityholder, to vote all of its shares of Tokai common stock in favor of the issuance of Tokai common stock in the Otic Transaction and against any “acquisition proposal,” as defined in the Share Purchase Agreement and described in the section entitled, “Terms of the Share Purchase Agreement—No Solicitation; Third Party Competing Proposal,” beginning on page 101 of thi